2023-11-01 23:07:02 ET
Summary
- Telefônica Brasil maintains market leadership in Brazil's telecommunications industry, surpassing competitors Claro, Tim, and Oi.
- The company's Q3 earnings results were robust, with strong performance in key indicators such as mobile accesses, postpaid market share, and revenue growth.
- Telefônica Brasil's dividend distribution policy and potential for undervaluation make it an attractive investment, with a projected dividend yield of 7.1% and potential for stock price increase.
Telefônica Brasil ( VIV ), the Brazilian subsidiary of the Spanish telecommunications company Telefónica ( T ), operates under the Vivo brand in Brazil and holds the leading market share, surpassing Claro, Tim, and Oi.
My thesis regarding Telefonica Brasil, as previously outlined in my articles , revolves around maintaining the company within the dividend portfolio. This is primarily due to its consistent and aggressive history of substantial dividend distributions, aligning with its commitment to providing returns to its Spanish parent company. This strategy is supported by the company's ability to maintain market leadership in Brazil, even with historically higher plan prices than competitors, offset by the high quality of services delivered.
Recently, Telefonica Brasil released its third-quarter earnings results, which, in my view, were robust, reaffirming my thesis that Telefonica Brasil is an excellent addition to the portfolio due to its robust dividend payments. Despite the nearly 24% increase in its share price over the year, my valuation analysis suggests there is still potential for further upside, especially considering that it's still nearly 40% below its historical peak from five years ago. This presents an attractive margin of safety, encouraging the continued acquisition of more shares to achieve a yield of over 7% this year and potentially even higher in the next two years.
Telefônica Brasil’s Q3 results
Telefônica Brasil reported another strong quarter, with no significant surprises, maintaining strong performance across most of the company's key indicators.
In Q3 2023, Telefônica Brasil continued asserting its telecommunications market dominance, boasting 98 million mobile accesses. The postpaid segment witnessed an impressive increase in market share, reaching 43.6%, marking a growth of 1.9 percentage points from the previous year. Furthermore, the churn rate remained notably low at 1.09% during Q3 2023.
The company significantly expanded its fiber optic network (FTTH) to cover 439 cities, providing service to 25.1 million households, with 6.0 million already connected. Net revenue continued its upward trajectory, exceeding inflation rates, driven primarily by the remarkable 9% growth in mobile service revenue compared to the previous year. This growth was mainly propelled by postpaid revenue, which saw a noteworthy increase of 12.7% year-over-year, benefitting from a more extensive customer base, annual price adjustments, and the historically low churn rate.
On the other hand, prepaid revenue experienced a 5.8% decline year-over-year, attributed to the migration of prepaid accesses to control plans, which positively impacted the overall dynamics of mobile service revenue. Despite the decrease in revenue, prepaid ARPU accelerated by 4.8% year-on-year.
Fixed revenues exhibited a positive performance with a 3.1% increase, driven by robust growth in FTTH revenues (15.1% growth) and Corporate Data, ICT, and Others (14.7% growth).
Cost of Goods Sold (COGS) increased by 4.6% compared to the previous year's period but remained below the 7.5% increase in total revenues. Operating costs closed at R$5 million, reflecting a 3.9% year-over-year increase, below net operating revenue.
EBITDA witnessed a substantial 11.7% year-over-year growth, achieving a margin of 42.2%, thanks to the strong performance of core revenues and effective cost control, which increased by 4.6% in the quarter. Additionally, the company recorded a net positive effect of R$175 million in the third quarter of 2023 related to the price adjustment after purchasing part of Oi Móvel's ( OIBZQ ) assets.
Over the first nine months of 2023, Operating Cash Flow reached R$8,901 million, signifying a 27.1% increase compared to the previous year, with a margin of 23.1% in net revenue.
Total investments amounted to R$6,665 million, remaining below the company's guidance, while net income reached R$3,429 million, marking a significant increase of 15.9% year-over-year. The investments were primarily directed toward strengthening the mobile network, activating 5G services in cities with populations exceeding 200,000 inhabitants, and expanding the fiber network.
Attractive returns to shareholders and the potential for undervaluation
At the core of my optimistic outlook for the company lies Telefônica Brasil's capacity to provide substantial returns to its shareholders through appealing dividends and share repurchases.
Telefônica Brasil maintains an ongoing share buyback program until February 2024. The company has repurchased R$308 million from January to October 2023. Over the past twelve months, the gross value per share declared stood at R$2.58, yielding an impressive 6.6% for the year, accounting for the Share Buyback Program. This distribution over the year reflects a robust payout of 104%, aligning with the company's historical average over the last decade.
In the first nine months of this year, Telefônica Brasil's board has already approved dividends totaling R$827 million for the 2022 fiscal year and interest on equity (JCP) grossing R$1,586 million for the 2023 fiscal year. For context, JCP is a practice specific to the Brazilian tax system and corporate finance, involving companies paying interest to their shareholders based on the equity invested in the company. This practice has distinct tax implications in Brazil, and unlike dividends, JCP is accounted for as an "expense" for companies, thereby reducing taxable net income.
However, Telefônica Brasil's shares do not necessarily trade at significantly discounted valuation multiples when compared to its peers, such as Tim Brasil ( TIMB ) and América Móvil ( AMX ) (which operates in Brazil under the name Claro), both of which trade at more attractive forward P/E multiples. However, Telefônica Brasil's EV/EBITDA multiple is lower than its peers when factoring in net debt.
However, even with a close comparison to its peers, I still view Telefônica Brasil's excellent dividend capacity as setting a high ceiling price for the company. This makes me quite comfortable with buying it at current levels.
When considering the consensus among analysts for 2023, Telefônica Brasil is expected to report EPS growth of 17%, which translates to approximately $0.55 annually. If the company achieves this growth, which is quite likely given its recent strong performance in revenue generation and cost control, it will result in a net profit of about $902.9 million for the year. Assuming the same 104% payout recorded in the first nine months of this year is maintained, this would generate an annual dividend per share of $0.56 for Telefônica Brasil's shareholders, equating to a dividend yield of 7.1%, which I find very attractive.
When estimating a conservative ROI of 5%, dividing the dividend per share results in a fair value of $11.26 for Telefônica Brasil. This suggests that there is potential for the stock to increase by 26%, which makes me more comfortable with buying shares at current levels, especially with a focus on dividends.
Considering the sector's long-term prospects and Telefônica Brasil's significant market share in Brazil, the consensus estimates are that these distributions could become more substantial in 2024 and 2025, potentially reaching an 8% and 9% yield, respectively.
However, I believe it may be premature to definitively predict these figures, given the competitive landscape among domestic players and the possibility of stricter regulations in the Brazilian market. Telephony is currently classified as an essential service, which could lead to increased price controls. Additionally, there are potential changes in the Brazilian government's policy regarding JCP (interest on equity), which could impact earnings distribution.
Conclusion
Telefônica Brasil had a robust quarter with few concerns that meet my expectations. The company exhibited consistent performance, with nearly double-digit year-over-year revenue growth in its mobile and fixed segments. Additionally, the strong EBITDA results were a product of effective cost-containment measures by the company in Q3.
Furthermore, the historically low churn rate has played a significant role in helping the company maintain its market share and dominant position in the Brazilian telecom market.
My bullish thesis on the company remains centered on its robust dividend distribution policy, reflecting its commitment to providing value to shareholders, including its parent company, Telefónica. Given the significant returns to shareholders throughout the year, I believe that achieving a dividend yield of 7% is both feasible and credible if the company maintains similar results in Q4. Furthermore, when comparing Telefônica Brasil to its peers and accounting for lower forward EV/EBITDA multiples, I calculate a fair price of $11.26 per share, which is 26% below the current share price, reinforcing my bullish stance on Telefônica Brasil as an attractive income stock.
For further details see:
Telefonica Brasil Q3 Earnings: Hardly Anything To Fault