October 26, 2017 / 7:49 AM / a year ago

UPDATE 1-Telefonica core profit falls as Spanish market weighs

* Q3 core profit down 1.9 pct, sales down 2.5 pct

* Buoyant commercial trends in Spain not translating into profit

* Ahead of 2017 sales target, reiterates dividend

* But margin, capex objective under pressure

* Shares down 2 pct (Adds details, background)

By Julien Toyer and Andrés González

MADRID, Oct 26 (Reuters) - Telefonica on Thursday reported a 1.9 percent fall in third-quarter core profit to 4.1 billion euros, missing forecasts and showing the impact of a weak home market plus negative currency effects in Britain and Latin America.

In July, Telefonica launched cheaper offerings in Spain in a departure from an earlier focus on the mid- to high-end market that had left the group exposed to stiff competition from Orange , Vodafone and MasMovil.

This has helped the group to increase its client base in mobile phones, pay TV and bundled offers of fast internet, mobile and fixed phone and television services.

But domestic revenues and core profit were down both quarter on quarter and year on year. Margins were also under pressure falling 1.3 and 1.2 percentage points year-on-year in the third quarter and in the January-September period respectively.

Shares in Telefonica were down 2 percent at 8.67 euros at 0715 GMT, lagging Spain’s blue-chip index Ibex.

Kepler Cheuvreux analyst Javier Borrachero said the results were “uninspiring.”

“Certainly Telefonica is ahead of peers on the capex cycle, but the downside risk to Spanish macro, the inherent volatility of Latin American markets, the high debt and the strategic issues (two large mobile-only assets in Europe) - does not make it a compelling equity story,” Borrachero said in a note.

In the first nine months, core operating income before depreciation and amortisation (OIBDA) at group level was up 2.9 percent from the same period last year to 12.27 billion euros ($14.5 billion), mainly the result of a stronger Brazilian real in the first half of 2017.

But this effect started to revert in the third quarter, when other Latin American currencies and sterling also impacted profit negatively.

The group’s nine-month sales reached 38.85 billion euros, up 1.4 percent from the same period in 2016. Without the impact of currencies and one-off items, sales growth was 2.9 percent, ahead of a year-end target of at least a 1.5 percent growth.

The company aims to increase its core profit margin by 1 percentage point, compared to an expansion of 0.3 percentage point in the first nine months of 2017, and to have a capital expenditure to sales ratio of 16 percent, versus 14.1 percent at end-September.

The company reiterated its intention to pay a 0.4 euro per share dividend fully in cash. ($1 = 0.8458 euros) (Reporting by Julien Toyer and Andres Gonzalez; Editing by Paul Day and Jane Merriman)

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