Right now, one market everyone hates is Spain. But if European Central Bank boss Mario Draghi can bring down borrowing costs for European governments, this could be one of the contrarian trades of the decade. Falling yields are very helpful for Spanish companies with stretched balance sheets, like telecommunications giant Telefnica (owner of O2). At last count it had a net €58.3bn of borrowings (equivalent to 2.7 times EBITDA) with a blended interest rate of 5.5%.
In July, it suspended its dividend, a measure not taken since the 1930s civil war. Director salaries were hacked by 20%-30%, and a series of asset sales started. A 4.6% stake in China Unicom went for €1.1bn in June. Preparations are also underway for the partial flotation of its German unit. Non-core assets such as Atento, its call-centre business, are likely to be chopped too.
But as the launch of the iPhone5 testifies, there's a lot of life left in mobile, especially in emerging markets such as Latin America (50% of profits): Telefnica is the lead operator in Argentina, Brazil, Chile and Peru. Even in Britain, Germany and Spain, cashflows are predictably solid, as most of the group's network build-outs are complete. Yes, 4G spectrum is being sold off in the UK, but this outlay should be more than offset by the annuity-type returns of its 312-million customer base.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Telefnica (Madrid: TEF), rated a BUY by AlphaValue
The one weeping wound, accounting for 32% of profits, is the domestic market. Telefnica is suffering as an already weak economy gets even worse. But management is cutting costs and slashing subsidies for handsets across the board. With overseas units ticking along nicely, it shouldn't take much of a rebound in Spain to boost the stock. For 2012, analysts expect €21.4bn of EBITDA on turnover of €62.7bn, with net debt falling to a manageable 2.4 times by December.
There is execution risk around the debt-cutting plan. The industry is also being hit by fierce competition, falling termination fees and deregulation. There's also Argentina to worry about not content with seizing a controlling stake in YPF from Repsol (the Spanish energy group), the government recently fined Telefnica for failing to prevent a wireless outage.
But the company is adamant none of this will affect the €0.75 dividend planned for 2013 (forward yield of 6.4%). AlphaValue has a €17.20 price target. Third-quarter results are scheduled for 7 November.
Rating: BUY at €11.20 (market cap €52bn)
Paul writes the Precision Guided Investments newsletter. See moneyweek.com/PGI or call 020-7633 3634.
-
M&S and Tesco among those warning of a £7bn Budget hitSeventy-nine UK retailers have written to Chancellor Rachel Reeves about possible price rises and job cuts - here is what it means
-
How much does it cost to move home under the Labour government?Home-moving costs are rising and could get more expensive once stamp duty thresholds drop in April 2025
-
Somero: trading this overlooked bargainFeatures Mechanical-screed maker Somero dominates its niche and is attractively valued. Matthew Partridge picks the best way to trade it.
-
How to find big profits in small companiesCover Story The small- and micro-cap sectors are risky and volatile. But with careful research and patience, investors could make huge gains. Matthew Partridge explains how to find the market’s top tiddlers.
-
The hidden gems on Aim, London's junior marketFeatures Aim, London’s junior market, is risky – but you can find solid stocks at low prices. Scott Longley reports.
-
Is Aim finally coming of age?Features The Aim market of mostly smaller companies has traditionally been seen as a bit of a backwater. Is it time to change that view? Matthew Partridge talks to Paul Latham and Richard Power of fund management company Octopus.
-
Three Aim-listed firms that will thrive in a post-Brexit worldOpinion Matt Tonge and Victoria Stevens of the Liontrust UK Smaller Companies Fund pick three Aim-listed firms that will survive Brexit turmoil.
-
Fetch! The Chinese small-cap stocks to buy in the Year of the Dog
Opinion Each week, a professional investor tells us where she’d put her money. This week: Tiffany Hsiao of Matthews Asia selects three Chinese small-cap stocks with exciting potential.
-
Small and mid-cap stocks with big potential
Opinion Professional investor Guy Anderson of the Mercantile Investment Trust selects three small and medium-sized firms with promising prospects that the market has missed.
-
Get cheap, reliable growth from smaller companiesFeatures One of the most reliable long-term investment trends is the long-term outperformance of smaller companies over blue chips. Max King picks some of the best ways to buy into this growth.
