Telesp Upgraded to Outperform - Analyst Blog

We are upgrading our recommendation on Brazilian fixed-line carrier Telecomunicacoes de Sao Paulo SA (TSP), better known as Telesp, to Outperform from Neutral. Currently, the stock has Zacks # 1 (Strong Buy) Rank.

Telesp, the Brazilian subsidiary of Spanish telecom giant Telefonica (TEF), has been investing in businesses, especially in broadband Internet and Pay TV, given the limited opportunity in its highly matured local and long-distance phone operations.

The outlook for the broadband business in Brazil remains positive for the short term. Brazil is one of the countries where Internet connections have been growing rapidly and this trend is expected to continue in the foreseeable future. Moreover, lower broadband penetration in Brazil offers ample scope for growth.

The company is investing heavily in the expansion of broadband network that suffered from poor quality in the recent past. This business is expected to deliver respectable growth going forward driven by the company's investments to improve service quality. Telesp's “Speedy” broadband service (offering top speeds of 30 Mbps) continues to lead the domestic market.

Third quarter earnings outpaced the Zacks Consensus Estimate by 6 cents. Net income climbed 7.2% year over year on higher revenues driven by increased commercial activity. Higher broadband and data transmission revenue partially offset by the erosion in legacy telephony business led to the 0.3% year-over-year increase in total revenue.

Telesp registered 165,000 net additions to its broadband service (offered under the “Speedy” and “Ajato” brands) in the last reported quarter, bringing the total subscriber base to roughly 3.14 million (up 21.7% year over year). However, on a year-over-year basis, the Pay TV subscriber base declined 8.4% to 466,000 customers and fixed access lines in service dropped 0.4% to 11.30 million.

Further, Telesp continues to maintain a solid balance sheet and reduce debt. At the end of the third quarter, total debt reduced substantially to R$1.93 billion ($1.11 billion) from R$3.39 billion in the year-ago quarter.

 
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