2023-03-10 03:40:52 ET
Summary
- Telefônica Brasil S.A. has a proven track record of consistent revenue growth and profitability margins, cementing its position as a leading player in the Brazilian telecommunications market.
- VIV stock has a strong focus on generating cash and investing in infrastructure while also returning value to its shareholders.
- The company's valuation analysis indicates that it is currently undervalued compared to its peers and has promising upside potential.
Telefônica Brasil S.A. ( VIV ), also known as Vivo, is a Brazilian telecommunications company that offers a wide range of fixed-line and mobile telecommunications services to residential and corporate customers throughout Brazil. While the stock had been performing well over the last year, it began underperforming the market in July and is currently down -21.2% on a 1-year basis, compared to the S&P500's decline of -5.8%.
Investment Thesis
In 2022, Telefônica Brasil experienced revenue growth that exceeded the inflation rate as a result of its robust operating performance, indicating its ability to pass costs onto customers while generating additional profits. Furthermore, the company is presently expanding its fiber optic infrastructure, and its number of connected homes has currently reached 24 million and is expected to rise to 29 million by 2024. The company's potential for strong revenue growth is linked to its participation in the rapidly expanding fintech market and the anticipated growth in mobile payments. This potential for growth is anticipated to yield significant returns both in the near future and over the next decade. Despite being undervalued when compared to other telecommunication giants based on metrics such as EV/Revenue and EV/EBIT, the company has a distinct position to lead in 4G, 5G, and fiber technologies, making it an attractive investment prospect.
User growth, a strong indicator of market demand
Telefônica Brasil's user base has experienced a consistent growth trajectory over the past few years, with over 97.98 million mobile accesses and over 58.67 million fixed-line customers as of 4Q22 . The impressive 16.8% increase in mobile customers and 18.2% increase in fixed-line customers compared to the previous year can be attributed to the high demand for mobile data services in Brazil. Moreover, the company has invested significantly in its mobile network infrastructure to meet this demand, resulting in higher customer acquisition and retention rates.
Telefônica Brasil Mobile accesses (Company filings (Created by author))
Telefônica Brasil's prepaid user base has experienced fluctuations over the years; however, the company's postpaid segment has been a significant driver of growth, contributing approximately 50% of the company's total revenue. In 2022, the postpaid segment has grown at a double-digit rate, leading to increased revenue for the company.
Telefônica Brasil is actively expanding its fiber optic infrastructure, with the goal of passing 29 million homes by the end of 2024. As of the end of 2022, the company had already passed 23.3 million homes with FTTH, an increase of 3.7 million new premises from the previous year. This leaves the company with a target of increasing its footprint by an additional 5 million homes in the coming years (approximately 2.5 million per year, which is feasible based on the previous growth trend). The deployment of fiber infrastructure is a key driver of the company's growth strategy, as it allows for faster and more reliable internet connectivity for both residential and corporate customers.
In 2022, Telefônica Brasil acquired a portion of Oi's mobile assets, with an estimated creation of R$5.4 billion ($1.09 billion) in value, taking into account efficiencies in costs, investments, and incorporation costs. As a result of this acquisition, Telefônica Brasil's 2022 capital expenditures increased by 9.7% year-on-year, totaling R$9,530 million, with R$0.5 billion being attributed specifically to the acquisition. The company aims to complete the migration of Oi Movel's clients to its base by the end of Q1 2023.
Telecom in Brazil, a growing industry
The Brazilian telecom market has been experiencing significant growth, driven by the country's increasing population, demand for communication services, and rising adoption of smartphone services. This growth is expected to be supported further by regulatory authorities, who are expected to play a vital role in the transition to the 5G network.
According to the GSMA report , Brazil is expected to have additional 14 million new mobile subscribers by 2025, with the adoption of 5G networks on the rise as 3G and 4G customers gradually migrate. This transition is supported by the expansion of new networks and the device ecosystem.
Subscriber and technology trends in Brazil (GSMA Report -The Mobile Economy Latin America)
On the other hand, Statista 's data shows that over 167.54 million people accessed the internet through mobile devices in 2022. It is projected that this figure will increase by approximately 12.7% to reach roughly 188.8 million mobile internet users by 2027. In addition, it is expected that around 85.38% of mobile users in Brazil will have access to the internet via their mobile phones by 2027.
In terms of market share, Vivo, owned by Telefónica, was the largest wireless operator in Brazil in the second quarter of 2022, holding 38% of wireless subscribers. TIM and Claro followed with 32% and 28% of the market share, respectively.
Based on the strong fundamentals mentioned above, Vivo's growth prospects in the upcoming period appear promising. Now, let's move on to the financial and valuation aspects of the company.
Robust Cash Generation and Shareholder
Remuneration Strategy
Telefônica Brasil's strong cash generation capacity is reflected in its closing free cash flow of BRL 7.3 billion, which allowed the company to distribute over BRL 5 billion in dividends and interest on capital, as well as invest BRL 600 million in share buybacks. The company believes its shares to be undervalued and has launched a new share buyback program targeting BRL 500 million over the next 12 months. In 2022, the company delivered an 11.3% free cash flow yield, among the best in the sector, indicating the resilience of its business under any circumstance.
Overall, Telefônica Brasil's strong cash generation capacity positions it well for future growth and shareholder remuneration.
Robust financial performance
Profitability metrics outperforming peers
In addition to its strong profitability metrics, Telefônica Brasil's focus on high investment in its networks, cost efficiency, and strategic acquisitions have contributed to its superior performance compared to its sector peers. This has resulted in better-than-average EBIT, EBITDA, and net income margins, indicating the company's ability to generate higher profits from its operations. Overall, these factors demonstrate Telefônica Brasil's commitment to maintaining a strong financial position and its ability to sustain its profitability in the long run.
Telefônica Brasil - Profitability Grade (SeekingAlpha)
Valuation
Telefônica Brasil's valuation can be analyzed using various metrics, including P/E, Price/Sales, Price/Book, EV/Sales, and EV/EBITDA. By comparing these multiples to its regional and international peers, it is possible to gain insights into the company's relative valuation.
Telefônica Brasil Peers - Multiples (Data from SeekingAlpha - Table by Author)
To determine the fair value of the company, I calculated the average valuation multiples of its peers. Accordingly, the estimated fair value of Telefônica Brasil based on each of the mentioned metrics is:
- P/E TTM: 6.62
- Price/Sales: 7.18
- EV/Sales: 11.29
- EV/EBITDA: 10.74
- Price/Book: 13.28
Therefore, the fair value of Telefônica Brasil is estimated to be between $6.62 and $13.28, depending on the multiple used, with an average fair value of $10.48.
Investment risks
Investors who are considering investing in Telefônica Brasil should be aware of the potential investment risks associated with the company. One major risk to consider is the high level of competition in the Brazilian telecommunications sector. With major players such as América Móvil and TIM Participações vying for market share, Telefônica Brasil may face challenges such as price wars, reduced margins, and lower profitability.
Another risk factor is the level of indebtedness, which increased significantly over the last few years, which is a cause for concern as increasing global interest rates may impact the cost of borrowing and the cost of implementing expansion projects. This could result in higher interest expenses and lower profits, which could negatively affect the company's financial performance.
Additionally, the company is also exposed to currency risks, as a significant portion of its debt is denominated in foreign currency. Any significant fluctuations in the Brazilian real or foreign currencies could impact the company's financial performance and profitability.
Key Takeaway
To sum up, after conducting this analysis, it appears that Telefônica Brasil S.A. is undervalued in comparison to its peers, indicating a promising upside potential for investors. The company's robust financial performance, consistent revenue growth, and profitability margins, along with its commitment to investing in network infrastructure and digital services, position it as a strong player in the telecommunications industry in Brazil. With a well-established infrastructure, the company has the potential to capitalize on its strengths and increase its market share. However, investors should be aware of the potential risks associated with investing in a competitive and rapidly evolving industry, and carefully consider their investment decisions.
For further details see:
Telefonica Brasil: A Promising Investment Opportunity In Latin America's Telecommunications Market