We are keeping our Hold recommendation on Telecomunicações de Sao Paulo S.A. or Telesp (TSP). Telesp has been growing in its broadband business, and the PayTV segment is quite encouraging. The company is well run and has decent operating margins. However, the core wireline business has stagnated, and competition has been increasing. Finally, Telesp's current valuation is not particularly attractive if compared to other Brazilian operators like Telemar (TNE) and Brasil Telecom (BRP).
TSP is trading at 9.7x our 2007 EPS estimate, below the industry mean and median, and an enterprise value to EBITDA (a more common valuation metric for the telecom industry) of just 4.0x our 2008 estimate, within the historical range of 3.0x to 6.0x for most of the wireline Latin American telecom operators.
We do not believe the current valuation of the stock in terms of EV/2008 EBITDA is particularly attractive either, mainly considering the weak results during 2007 and the lower expected future growth. However, the company still has a decent operating margin, a low P/E and an attractive dividend yield. All considered, we are rating TSP as a Hold. Our target price is US$30.75, which is based on an EV/2007 estimated EBITDA of 4.3x, in line with the company s historical standards.
Read the full analyst report on TSP.
Read the full analyst report on TNE.
Read the full analyst report on BRP.
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