Spanish Unicorns

It’s been a busy week for coverage at New Street, having initiated on five companies across the telco, media and tech space: Softbank (Japan), Chorus (New Zealand), MultiChoice (South Africa) and MASMOVIL and Euskaltel in Spain.

We aim to have something different to say on all the names but in the case of Spain it’s more a case of pointing out the obvious whilst reassuring investors that recent fears are overdone.

Spain is almost unique in Europe for containing that rare mythical of beasts, a unicorn – of a type, a telco that’s actually growing: MASMOVIL (Buy, TP: EUR26). And not just growing slightly, but expanding revenue in great leaps and bounds. Revenue should increase well over 20% in 2019 as it plays on market penetration growth and share gains in converged FTTH services.

For those who’ve looked at the sector for a long time it’s almost too good to be true. During late 2016 and early-17, the stock ramped on a succession of earnings beats but since then the concerns have crept in. Principally, this is around capex. The 2019/20 investment guide was higher than expected, largely because they’re passing more attractive-IRR homes (it’s very cheap in Spain). If growth continues - as we think it should – then this is good capex and will translate into better mid-term EBITDA.

For telco investors this perhaps feels all too familiar – more FCF downgrades and, watch this space, stock underperformance?

We think not, the company is confident in build-out economics, and we think the equity should be priced principally off its ability to grow top line, in which case FCF will follow. Our long-term market share assumption is actually fairly prosaic (13.5% of broadband subs) compared to what other challengers in the sector such as Iliad, Fastweb, TalkTalk have achieved. This target share is close to the same level where Jazztel was bought out by Orange in 2015…let’s park that thought for now, but consolidation is of course possible or even likely further down the line.

We also think that share price outperformance at MASMOVIL is compatible with ongoing equity strength at Telefonica. They occupy different ends of the telco segment in Spain; rather, it’s the middle which is being squeezed and we think Telefonica (Buy) can grow Spanish service revenue this year (just).

Telefonica presented on the rather dry issue of IFRS 16 in London this week but reminded us also of its cash deliverance in recent quarters. Leverage needs to come down, reasons the CFO, but even with some well-flagged German auction costs expected in 2019, solid Spain FCF, less regional FX headwinds (fingers crossed), further M&A possibilities and the odd piece of serendipity – a tax gain in Spain was announced today of over EUR700m – management can continue to chip away at the 3.2x hybrid adjusted leverage and support a stronger equity.

For the full weekly review and updated comp sheets, see HERE

Full 12-month historical recommendation changes are available on request

Reports produced by New Street Research LLP. 52 Cornhill, London EC3V 3PD Tel: +44 20 7375 9111.

New Street Research LLP is authorised and regulated in the UK by the Financial Conduct Authority and is registered in the United States with the Securities and Exchange Commission as a foreign investment adviser.

Regulatory Disclosures: This research is directed only at persons classified as Professional Clients under the rules of the Financial Conduct Authority (‘FCA’), and must not be re-distributed to Retail Clients as defined in the rules of the FCA.

This research is for our clients only. It is based on current public information which we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Most of our reports are published at irregular intervals as appropriate in the analyst's judgment. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.

All our research reports are disseminated and available to all clients simultaneously through electronic publication to our website.

New Street Research LLC is neither a registered investment advisor nor a broker/dealer. Subscribers and/or readers are advised that the information contained in this report is not to be construed or relied upon as investment, tax planning, accounting and/or legal advice, nor is it to be construed in any way as a recommendation to buy or sell any security or any other form of investment. All opinions, analyses and information contained herein is based upon sources believed to be reliable and is written in good faith, but no representation or warranty of any kind, express or implied, is made herein concerning any investment, tax, accounting and/or legal matter or the accuracy, completeness, correctness, timeliness and/or appropriateness of any of the information contained herein. Subscribers and/or readers are further advised that the Company does not necessarily update the information and/or opinions set forth in this and/or any subsequent version of this report. Readers are urged to consult with their own independent professional advisors with respect to any matter herein. All information contained herein and/or this website should be independently verified.

All research is issued under the regulatory oversight of New Street Research LLP.

© Copyright 2021 New Street Research LLP

No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of New Street Research LLP.