UPDATE 3-Telefonica bets on Latam to overcome weak spots

Thu Apr 14, 2011 11:55am EDT

* Spain could see 20 pct workforce reduction

* Mobile and data penetration seen booming in Latam

* Share price dips

(Recasts lead, adds analyst reaction at end of investor conference)

By Elisabeth O'Leary and Sarah Morris

MADRID, April 14 (Reuters) - Telefonica is betting on lucrative smartphones and a Latin American data boom to continue to fuel growth but investors were uninspired on Thursday by the operator's earnings targets and dividend guidance.

In Spain, it will slash costs by reducing its workforce and its wages bill, boosting productivity along the way, the ex-state monopoly told a two-day investors conference in London on Thursday.

Executives told investors on Wednesday it was aiming for 1-4 percent compound annual growth in group revenue from 2010-2013, primarily based on expected 30-35 percent growth in mobile data services. [ID:nLDE73C1E0] It reported group revenues of almost 61 billion euros in 2010.

It did not give detailed guidance to 2013 by country.

The stock closed down 1.06 percent on Thursday at 17.81 euros, compared with the STOXX Europe 600 telecoms sector index .SXKP which was down 0.29 percent.

"We've heard nothing fundamentally new and there is a realisation that Spain is going to be bad for a long time," said Robin Bienenstock, analyst at Bernstein Research.

The traditionally bullish company said it is not now expecting the tough competitive backdrop in Spain to get worse.

Telefonica employs about 32,000 people in Spain, and says it has flexibility to cut that figure by 20 percent over 3 years.

Its Spanish market share has declined as unemployment has soared to affect one in five and customers have looked to save on mobile and internet bills by signing up with cheaper rivals. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on r.reuters.com/baf88r

Graphic on r.reuters.com/fyj98r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

In Brazil, which accounts for half of its Latam revenues, Telefonica is hoping to make the most of an expected 8 percentage point gain in mobile broadband smartphone penetration by 2013, while mobile data use is expected to expand 23 percentage points in the same period.

"The data explosion is already here but we also tend to take the opportunity to exploit the growth of traditional services," said Jose Maria Alvarez-Pallete, head of Telefonica's Latam unit. "The good news is that in Latam, growth is everywhere."

POSTIVE, BUT SHORT ON SPECIFICS

Brazil's economy grew 7.5 percent last year, although it is expected to slow to around 4.5 percent in 2011 according to the International Monetary Fund, as interest rate hikes and sizeable cuts to the country's 2011 budget kick in.

That compares with a paltry 0.7 percent economic growth in Spain this year, according to an average of private economists.

Telefonica's main attraction to investors at present is its high dividend yield, around 9.6 percent on 2012 estimates, according to Datastream, versus a sector average of 6.4 percent.

Telefonica pledged on Wednesday to keep shareholder returns at an equivalent of 1.75 euros per share minimum beyond 2012.

"I think that the market was underwhelmed by the mix in terms of dividend-share buyback," said one Madrid-based senior analyst.

"I don't see it collapsing dramatically mainly because the yield support is there."

However, some analysts are still sceptical that the dividend Telefonica has offered is justified at its current share price given a tough operating outlook in Europe.

"TEF is guiding for a growth profile that will not be materially different from peers', we believe, and has now created a (remuneration) cap and some uncertainty on the DPS (dividend per share) after 2012. By then, we think other names could offer similar cash returns," Exane BNP Paribas said in a note to clients. (Writing by Elisabeth O'Leary and Sarah Morris, graphics by Vincent Flasseur; Editing by Mike Nesbit and Jon Loades-Carter)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.