Telefonica Aims for Low-Single-Digit Growth in 2023

No-moat Telefonica’s TEF revenue grew by 3.9% organically year over year in the fourth quarter, while EBITDA increased by 3.5% as management controlled inflation well in its cost base. Spain continues to see declines in EBITDA (down 2.1% in the quarter) despite flat revenue growth due to cost pressures, although the declining trend is easing as the year progresses. This decline has been compensated by the remainder of its geographies. In Germany, Telefonica’s strongest performer in the past two years, sales and EBITDA grew by 6.6% in the fourth quarter. In the U.K, after the joint venture with Virgin Media, EBITDA grew by 9.9% as merger synergies were realized, while Brazil had a 6.6% increase. We are maintaining our EUR 4.90 fair value estimate.

In Spain, Telefonica, Vodafone, and Orange have all announced price increases across most of their product portfolios, something we believe will be positive for 2023 financials. However, mobile virtual network operators keep behaving aggressively on prices and data allowances, something we believe will cause some customer migrations, offsetting the positive impact of price hikes. For 2023 Telefonica has guided for low-single-digit growth in revenue and EBITDA, a target we believe is achievable, although it will mainly depend on how the Spanish business performs. Capital expenditure will decline slightly, from around 15% of sales in 2022 to almost 14%.