Target: CZK 398 HOLD University of Economics, Prague CFA Institute Research Challenge 2012 London, UK 15 March 2012 Telefónica O2 C.R. Czech Hold 'em with.

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Presentation transcript:

Target: CZK 398 HOLD University of Economics, Prague CFA Institute Research Challenge 2012 London, UK 15 March 2012 Telefónica O2 C.R. Czech Hold 'em with attractive dividend

Czech incumbent Fix: 2,8 mil. Mobile: 4,9 mil. SK market entry 1Q 2007 Mobile: 1,1 mil. Growing market Stagnant market University of Economics, Prague 15 March Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Service breakdown Telefónica S.A. Major shareholder (2006) 69,41% Integrated telco operator 2

Stable company with shares quoted on PSE and LSE Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Reuters 3 University of Economics, Prague 15 March Revenues (GBP bn.) Dividend yield (%) Performance in 2010 OIBDA Margin (%) 1, ,4

Stable company with shares quoted on PSE and LSE Stable price in last 3 years Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Telefónica 0 2 PX Source: Bloomberg 4 University of Economics, Prague 15 March

Stable company with shares quoted on PSE and LSE Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Telefónica 0 2 PX Source: Bloomberg 5 University of Economics, Prague 15 March Falling market & Rising competition Spanish mother problems Regulation Profitability & Stable dividends Slovak market potential Adaptation to trends Recommendation HOLD Target price CZK 398 Target price on 23/12/2012 Current price 374 CZK CZK

Market development Peers comparison Regulation Profitability Discount factor Valuation drivers Technical Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Falling market & Rising competition Spanish mother problems Regulation Profitability & Stable dividends Slovak market potential Adaptation to trends Recommendation HOLD Target price CZK 398 Analytical University of Economics, Prague 15 March 6

Market Development Peers comparison Regulation Financial plan Discount factor Traditional services penetration (%)Broadband services penetration (%) Saturated Czech market with potential in new services Others Industry revenues (CZK bn.)Market shares (%) Company overviewValuation driversValuationRisks Target: CZK 398 HOLD -12% University of Economics, Prague 15 March CZ Telco Source: Team analysis & estimations, ARs, Regulatory reports 7

Slovak market represents a dynamic part of portfolio Telco market shares (%) Mobile market revenues (%) 11% 21% 28% 35% Telefónica Slovak revenues (EUR mil.) Market Development Peers comparison Regulation Financial plan Discount factor Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, ARs, Regulatory reports University of Economics, Prague 15 March Half size of the Czech market Similar dynamics (2Y delay) Faling revenues New upcoming trends Others 8

Peers comparison Regulation Financial plan Discount factor Peers comparison Peer comparison highlights strong and weak areas Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, data for 2010, Reuters, 34 Europe telco companies University of Economics, Prague 15 March 9

Regulation Dividends & FCFF WACC Regulatory Revenues and profitability impacted by Regulatory Measures Mobile Termination Rates Roaming Regulation Frequency Spectrum Auction Wholesale Mobile Origination Market Opportunity to extend to 4G Threat of new operator entry Threat of new virtual operators entry Network release for regulated prices RevenuesProfit ?? MTR Source: Team analysis & estimations, ARs & Press Releases Company overviewValuation driversValuationRisks Target: CZK 398 HOLD University of Economics, Prague 15 March 10

Risks Financial plan WACC Peers comparison Regulation Profitability Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, ARs Revenues OPEX FCFF ≈ Dividends University of Economics, Prague 15 March Despite stabilized revenues dividends in decreasing trend 11

Risks Financial plan WACC Peers comparison Regulation Profitability Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, ARs Revenues OPEX FCFF ≈ Dividends Further restructuralization steps will help keeping profitability at the same level OIBDA margin ≈ 39% University of Economics, Prague 15 March Despite stabilized revenues dividends in decreasing trend 12

Risks Financial plan WACC Peers comparison Regulation Profitability Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, ARs Revenues OPEX FCFF ≈ Dividends x Depreciation follows decreasing trend & higher CAPEX are supported by cash from WC University of Economics, Prague 15 March Despite stabilized revenues dividends in decreasing trend 13

Risks Financial plan WACC Peers comparison Regulation Profitability Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, ARs Revenues OPEX FCFF ≈ Dividends x - 16% University of Economics, Prague 15 March Despite stabilized revenues dividends in decreasing trend 14

Discount rate must cover current changes in telco Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, Reuters, Mařík, M.: Company´s Valuation Methods Revenues forecast WACC Peers comparison Regulation Discount factor University of Economics, Prague 15 March Notably low interest rates in medium run Major changes in European and Czech telco sector 15

Discount rate must cover current changes in telco Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, Reuters, Mařík, M.: Company´s Valuation Methods Revenues forecast WACC Peers comparison Regulation Discount factor 1st phase University of Economics, Prague 15 March 16

Discount rate must cover current changes in telco Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, Reuters, Mařík, M.: Company´s Valuation Methods Revenues forecast WACC Peers comparison Regulation Discount factor 50y govt bond Low rates adjustment 5,04% University of Economics, Prague 15 March 17

Discount rate must cover current changes in telco Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, Reuters, Mařík, M.: Company´s Valuation Methods Revenues forecast WACC Peers comparison Regulation Discount factor Historical European telco Beta Stable development Eurozone problems affecting Spanish market Regulatory changes on both European and Czech level ,44 0,22 0,13 0,80 Unlevered betaBusiness risk adjustments Leverage effectResulting beta University of Economics, Prague 15 March 18

5,41% 5,75% 5,79% 5,91% 8,93% Contribution to total value 1st phase (2012 – 2015) 2nd phase (2016 – ∞ ) 32% 68% Average WACC ≈ 8,0% Discount rate must cover current changes in telco Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, Reuters, Mařík, M.: Company´s Valuation Methods Revenues forecast WACC Peers comparison Regulation Discount factor University of Economics, Prague 15 March 19

Our final recommendation is set to HOLD Discounted Cash Flow Entity Model Discounted Dividend Model Market Multiples Analysis 52-week average Market price 374 DCF DDM – 568 – All excessive cash is paid out in the form of dividends Company overviewValuation driversValuationRisks Target: CZK 398 HOLD CZK bn. Share price Team F Student research 15 March Source: Team analysis & estimations, ARs 20

Our final recommendation is set to HOLD Discounted Cash Flow Entity Model Discounted Dividend Model Market Multiples Analysis 52-week average Market price 374 Market multiples Divi yield P/E P/BV EV/ EBITDA DCF DDM – 568 Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Share price Team F Student research 15 March Source: Team analysis & estimations, ARs 21

Our final recommendation is set to HOLD Discounted Cash Flow Entity Model Discounted Dividend Model Market Multiples Analysis Upside potential 6,7% 52-week average Market price 374 DCF DDM – 568 – Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Share price HOLD Target price CZK 398 Team F Student research 15 March Source: Team analysis & estimations, ARs 22 Target price on 23/12/2012

Team F Student research 15 March Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Source: Team analysis & estimations, ARs Spanish problems Excessive dividends Spin-off options Regulatory pressures New competitor Virtual operators Regulatory Parental company Impact Payment transactions Internet TV Advertising services Successful frequency auction New technologies Potential for 4G network New tech Auction + Likelihood - Alternative scenarios with possible impact on future price 2323

Company overviewValuation driversValuationRisks Target: CZK 398 HOLD Share price CZK Source: Team analysis & estimations, ARs Investment risks might form up in unexpected scenarios Team F Student research 15 March Market price Target price  372 CZK  339 CZK Regulatory pressures Spanish problems New competitor Virtual operators Excessive dividends Spin-off options  372 CZK  339 CZK Successful frequency auction  427 CZK Potential for 4G network Regulatory Parental company Auction 2424

Thank you for your attention Team of University of Economics, Prague Q & A