Telefónica celebrates its Investor Day this Wednesday, the first in the last 12 years, where it will unveil its new strategic plan 2023-2026. As this newspaper has been able to survey from market sources, there are four pillars that are presumed decisive in an event that, traditionally, has resulted in increases in stock market value: growth in its main businesses, is committed to cash generation, lower investment requirements and austerity in spending.
Given these expectations, the telecom will launch this Wednesday a battery of messages in which the company’s internal shareholder tensions, latent for two months, do not transpire. None of this will affect the strategies of a group that, for now, will make a positive assessment of the decisions adopted in the last strategic plan, from November 2018. Then, the multinational began its transformation with the aim of promoting its most relevant markets. (Spain, Brazil, Germany and the United Kingdom), as well as take advantage of the opportunities with the greatest potential, such as Telefónica Tech and Telefónica Infra. These arguments remain valid, as does the increase in operational agility and improved efficiency.
Just 1,440 days after the last action plan, the president of Telefónica, José María Álvarez-Pallete, will make it clear that his group has already carried out most of the duties related to the deployment of fiber optic and 5G infrastructures in Spain, Germany and Brazil. The investment peak is behind us, something that many other traders cannot say. Until a few months ago, investment forecasts for organic sales stood at 14% and the company was optimistic regarding FCF generation for the year. “We expect to be above the latest consensus estimates and generate free cash flow for the entire year that should not be far from the €4 billion marknot counting spectrum purchases.” However, this cash flow will take a while in Germany, whose next auction of 5G frequencies will start late.
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The entry of Saudi Telecom (STC) into Telefónica’s shareholding, with 4.9% of the capital with political rights and another 5% in derivatives, will not divert the attention of the multinational. Nor does Sepi’s manifest interest in exploring its emergence within the company cause any interference. None of these issues will appear in the business plan, but they will come up during investor question time. It remains to be seen if Telefónica has updated its spreadsheets after the days of boiling in the sector in Spain, with the purchase of Vodafone Spain by Zegona and the merger of Orange España-MásMóvil in its alleged final stretch. The performance of both players will influence the Spanish subsidiary of Telefónica, with collateral effects related to the foreseeable strength of low-price offers and the boost of Digi, as a possible recipient of possible remedies for competition that Brussels will assess to authorize the consolidation of the Spanish market. Telefónica’s wholesale business will also suffer from the merger of its rivals, since it could lose Digi, its largest mobile customer, with a loss in income of 300 million euros less as soon as Digi acquires its own frequencies. The cheap brand Lowi and the replica of the model of the defunct Virgin Telco from Zegona will also tilt the sector towards the deterioration of the competitive situation, caused by particularly aggressive commercial proposals.
The reduction in investment intensity in the Spanish subsidiary will affect a greater profitability of the company, with oibda margins close to 11%, once the fiber deployment is almost finished in the domestic market and the copper network blackout is expected for the next quarter.
Santander analysts will be interested in Telefónica’s intentions with its 50% stake in Virgin Media O2 (VMo2) starting next summer, once the permanence commitments disappear. They are also curious about the dividend that this British subsidiary could distribute, as well as the wholesale business in Germany, where dark clouds threaten due to the decision of the operator 1&1 to abandon the Telefónica Deutschland network and its consequent impact on cash flow generation.
Telefónica’s transparency exercise should be applauded by investors, pending the fate of the telecom company in Hispam, considered a non-priority four years ago. Will it continue along the same path or will the 2019 decision be reconsidered?
Telefónica too will elaborate on the objectives of debt and shareholder remuneration, concepts that are presumed sacred. For this reason, analysts agree that Telefónica will maintain the qualitative objective of being “investment grade.” Santander believes that the cash shareholder remuneration of 0.30 euros will be stable and sustainable, which would allow the company to allocate at least 40% of the clean cash flow to reduce debt. Regarding sanitation, Telefónica should make a nod in favor of reducing leverage both through organic means and through the possible divestment of assets of high interest in the market, as is the case of Telefónica Tech.
The cash shareholder remuneration of 0.30 euros will be stable and sustainable, which would allow debt reduction with 40% of the cash flow
In the last conference with analysts, held after the results of the first half of the year, Telefónica already ventured that “it continues to explore sources of efficiency, both from OpEx and other initiatives, such as the dismantling of legacy, the softwarization of networks, CRM (automated customer management) driven by Artificial Intelligence and content optimization.”
In addition, Investors will pay attention this Wednesday to possible updates, upward or downward, to the group’s forecasts for this year. After the close of the first half, Telefónica improved expectations from “low single-digit growth”, both in revenue and OIBDA, as well as year-on-year growth in organic revenue of around 4% and an organic improvement in OIBDA of around at 3%.
