We recently met with the main telco players in Brazil and Mexico. In Brazil we conclude that:
1) macro is hurting prepaid mobile in particular, but competition remains rational;
2) capex should remain high for the foreseeable future as the battle for the primary SIM means an increasing focus on network quality and BRL depreciation increases the size of the bill; and
3) a positive change in fixed concession terms seems a given but it is unlikely to happen before end H1 16, delaying consolidation.
In Mexico, TEF needs to become more competitive to preserve its number two spot vs an ambitious AT&T. For TI we move -2% below consensus EBITDA 16e, due to TIMP. With high leverage (3.5x YE 15e), no positive trigger in the short term and a full valuation, we see it as a relative underperformer and downgrade to UW. We believe TEF B (OW, PT USD13) remains best positioned in Brazil but is a drag for TEF (EW, EUR12.1) due to forex. Right-sizing capex
rather than dividend coverage should be the debate for TEF’s investment case.