TELEFONICA : TEF Brasil (NC) 1Q26 - Revenue beat, EBITDA miss, with solid mobile/broadband net adds

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TELEFONICA : TEF Brasil (NC) 1Q26 - Revenue beat, EBITDA miss, with solid mobile/broadband net adds

ng inorganic deleveraging.

To the downside:

Challengers and alt-nets could be even more successful than we anticipate in Spain,

particularly if additional remedies are made available. Steeper than expected wholesale

revenue declines, FX deterioration and higher interest rates/ refinancing costs are also

risks to the downside.

Telefónica ADR (Underperform, Target Price USD3.60)

Investment case

We see a number of challenges for TEF: 1) Competition remains high in Spain and

Germany, 2) TEF DE is yet to see the full impact of 1&1 MVNO losses and 3) TEF's

balance sheet position appears unsustainable with fully adjusted leverage at ~3.7x.

The CMD on November 4th will doubtless address these issues - and local press

reports have suggested a capital raise is likely with potential for Telefonica to pursue

telco consolidation deals in Spain and/or Germany, plus tech acquisitions. This brings

with it the risk of 1) overpaying and 2) incurring greater regulatory uncertainty as we

wait for telco consolidation deals to be approved and 3) the risk of TEF pursuing non-

core interested (in tech) without the support of minority shareholders (ex STC, SEPI

etc). Having ruled out a NetCo deal for the VMO2 joint venture with Liberty Global,

which is now ~5.5x leveraged with no EBITDA growth, believe the dividend upstream

from this asset may need to be cut as well. Ultimately, therefore, we see more downside

risk at the upcoming CDM event - though this could also be the opportunity for TEF to

'push the reset button' and finally fix their debt position, if managed well.

Valuation methodology

We value Telefonica using a sum-of-the-parts (SOTP) approach based on a DCF for the