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Investing.com -- Telefonica (BME:TEF) Brasil (NYSE:VIV) has received an upgrade from Barclays (LON:BARC), reflecting strong financial trends and potential growth stemming from regulatory changes.
The brokerage raised its rating on the stock to “overweight,” citing the company’s improved revenue outlook and the benefits of a recently approved transition from a concession model to an authorization framework.
According to Barclays, the Brazilian telecom market remains robust, with the three main industry players experiencing an average revenue increase of about 7% in the fourth quarter of 2024.
Telefonica Brasil, which operates under the Vivo brand, has demonstrated solid revenue and commercial growth, leading to an expected three-year compound annual growth rate of 5% in revenue and 8% in EBITDA.
This growth is supported by price increases in mobile services, the upselling of fiber-to-the-home services, and continued expansion in broadband subscriptions.
One of the key drivers behind the upgrade is the regulatory shift from a concession to an authorization model, approved by Brazil’s National Telecommunications Agency at the end of 2024.
The transition provides multiple financial benefits for Telefonica Brasil, including the elimination of concession fees, reduced operational and capital expenditure due to the decommissioning of copper networks, and the potential sale of 120,000 tons of copper and real estate assets.
While the company has committed to investing in underserved areas as part of the regulatory change, Barclays estimates the net present value of these obligations at BRL 4.5 billion.
However, the brokerage notes that a portion of these investments was likely already planned within Telefonica Brasil’s long-term strategy, minimizing their incremental financial impact.
Telefonica Brasil’s financial position has also been strengthened by a healthy increase in postpaid mobile subscribers and stable churn rates, indicating customer retention.
In the fixed-line segment, the company’s broadband market has expanded, with 2.6 million net additions in 2024 and a 7% year-over-year growth rate in subscribers. FTTH services, in particular, have seen steady demand, which is expected to contribute to sustained revenue growth.
Despite these positives, Barclays has slightly lowered its price target for Telefonica Brasil from $11.80 to $11.50 per share, largely due to the depreciation of the Brazilian real against the U.S. dollar.
Analysts, however, believe the stock remains undervalued, with a potential upside of over 35% from its current $8.17 price.
Telefonica Brasil is trading at a lower enterprise value-to-EBITDA multiple compared to its Latin American peers, which Barclays attributes to its low leverage and strong free cash flow yield.
Barclays also highlighted risks that could impact Telefonica Brasil’s outlook, including macroeconomic volatility in Brazil and ongoing competition in the FTTH market.
While the fiber broadband sector is currently experiencing consolidation, excessive infrastructure duplication remains a concern.
However, the brokerage remains optimistic that Telefonica Brasil is well-positioned to navigate these challenges due to its strong market presence and operational efficiencies.
With a commitment to maintaining a 100% payout ratio of net income, Telefonica Brasil is expected to deliver significant cash returns to shareholders.