Investors have punished Portugal Telecom’s shares for the sins of its government. Indeed, the Lisbon stock exchange has underperformed the FTSE by 25% over the past 15 months. Yet with Portugal Telecom, the City is missing a key point.
From next month, this former state monopoly will transact most of its business overseas (55% of revenues). That’s after concluding the €3.7bn purchase of a 22.4% stake in Brazilian telecoms outfit Oi. In addition to being the number-one telecoms player in Portugal, the firm also owns a whole host of attractive minority interests in overseas locations (15% of sales) such as Namibia, Timor, Macau and Angola. In two weeks’ time the board can add South America (40%) to the list.
Oi is a rapidly expanding Brazilian network provider with 62 million customers, of whom 37 million are mobile customers. At one stroke, Oi provides Portugal Telecom with a great springboard to introduce its acclaimed “quadruple play” service to a country whose GDP is being propelled by the plentiful supply of natural resources. The deal also gives Portugal Telecom right of first refusal in the event of any major transaction in Oi’s capital base.
What’s more, it isn’t all doom-and-gloom on its home turf either. Yes, the government’s austerity measures are affecting disposable incomes. Yet much of the firm’s local telecoms unit provides non-discretionary services, such as mobile and internet. Its clever investment in ‘fibre-to-the-home’ and next-generation wireless platforms means its pay-TV and ultra-fast broadband products should continue to expand, regardless of any prolonged double dip.
Portugal Telecom (LSE: PTC), rated a BUY by Grupo Santander
Portugal Telecom is a nice emerging-market play funded by a strong cash cow. That’s a blend that, given current geopolitical jitters, could become more attractive to fund managers seeking to avoid risk. Portugal Telecom has such confidence in its future cash generation that it has committed to increase the juicy €0.65 dividend (yield 7.7%) by 3%-5% per year until 2014. How many companies can offer that level of return?
So how much is the group worth on a sum-of-the-parts basis? The stake in Oi was acquired on an earnings before interest, tax, depreciation and amortisation (EBITDA) multiple of 6.3. So, conservatively, the €3.7bn figure looks fine. I would value the other foreign stakes at €1.4bn, with its Portugese division on a five-times EBITDA multiple (worth some €6.9bn). Totting all this up and deducting €3.6bn of net debt, one arrives at an intrinsic worth of about €9.30 per share.
Before buying, though, there are three downsides to consider. First, cut-throat competition and pricing pressure. Second, the difficulty of extracting value from its minority stakes. Third, the impact of a sovereign debt default in Portugal. These aspects aside, the firm’s management team, led by CEO Zeinal Bava, is among the best in the industry. Equally, there is a chance that Oi may buy TIM Brasil from Telecom Italia. That would create huge synergies across the two networks.
Grupo Santander has a €10.30 price target.
Recommendation: BUY at €8.25