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Telefónica O2 C.R. Czech Hold 'e m with attractive dividend. Target: CZK 398 HOLD. University of Economics, Prague CFA Institute Research Challenge 2012 London, UK 1 5 March 2012. University of Economics, Prague 1 5 March. 69,41%. Integrated telco operator. Telef ónica S.A .

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Target czk 398 hold

Telefónica O2 C.R.

Czech Hold'em with attractive dividend

Target: CZK 398 HOLD

University of Economics, Prague

CFA Institute Research Challenge 2012

London, UK

15 March 2012


Target czk 398 hold

University of Economics, Prague

15March

69,41%

Integrated telco operator

Telefónica S.A.

Major shareholder (2006)

Service breakdown

Czech incumbent

SKmarket entry

1Q 2007

Fix: 2,8 mil.

Mobile: 4,9 mil.

Mobile: 1,1 mil.

Stagnant market

Growing market

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks

2


Target czk 398 hold

University of Economics, Prague

15March

Stable company with shares quoted on PSE and LSE

Performance in 2010

1,9

Revenues (GBP bn.)

41

OIBDA Margin (%)

10,4

Dividend yield (%)

Source: Reuters

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Stable company with shares quoted on PSE and LSE

PX

Telefónica 02

Stable price in last 3 years

Source: Bloomberg

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Stable company with shares quoted on PSE and LSE

PX

Telefónica 02

Profitability&Stable dividends

CZK

Slovak market potential

Adaptation to trends

Recommendation HOLDTarget priceCZK 398

Falling market & Rising competition

Spanish motherproblems

Current price 374 CZK

Regulation

Source: Bloomberg

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks

Target price on 23/12/2012


Target czk 398 hold

University of Economics, Prague

15March

Valuation drivers

Market development

Profitability&Stable dividends

Analytical

Peers comparison

Slovak market potential

Adaptation to trends

Regulation

Recommendation HOLDTarget priceCZK 398

Falling market & Rising competition

Profitability

Technical

Spanish motherproblems

Discount

factor

Regulation

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Saturated Czech market with potential in new services

Market

Development

Industryrevenues (CZK bn.)

Market shares (%)

-12%

2010

Peers comparison

2009

CZ Telco

Regulation

Others

Traditional servicespenetration (%)

Broadbandservicespenetration (%)

Financial

plan

Discount

factor

Source: Team analysis & estimations, ARs, Regulatory reports

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Slovak market represents a dynamic part of portfolio

Telefónica Slovakrevenues (EUR mil.)

Market

Development

Halfsizeofthe Czech market

35%

Similardynamics (2Y delay)

28%

21%

11%

  • Falingrevenues

Peers comparison

  • New upcomingtrends

Regulation

Mobile market revenues (%)

Telco market shares (%)

Financial

plan

Discount

factor

Others

Source: Team analysis & estimations, ARs, Regulatory reports

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Peer comparison highlightsstrongandweakareas

Peers comparison

Peers comparison

Regulation

Financial

plan

Discount

factor

Source: Team analysis & estimations, data for 2010, Reuters, 34 Europe telco companies

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Revenues and profitability impacted by Regulatory Measures

MTR

Revenues

Profit

Mobile Termination Rates

Regulatory

Roaming Regulation

Regulation

Frequency Spectrum Auction

  • Opportunity to extend to 4G

  • Threat of new operator entry

?

?

Dividends & FCFF

Wholesale Mobile Origination Market

  • Threat of new virtual operators entry

  • Network release for regulated prices

WACC

Source: Team analysis & estimations, ARs & Press Releases

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Despitestabilizedrevenuesdividendsin decreasing trend

Peers comparison

OPEX

Revenues

FCFF ≈ Dividends

Regulation

Profitability

Financial

plan

WACC

Source: Team analysis & estimations, ARs

Target: CZK 398 HOLD

Risks

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Despitestabilizedrevenuesdividendsin decreasing trend

Peers comparison

OPEX

Revenues

FCFF ≈ Dividends

Regulation

OIBDA margin ≈ 39%

Profitability

Financial

plan

WACC

Further restructuralizationsteps will help keeping profitability at the same level

Source: Team analysis & estimations, ARs

Target: CZK 398 HOLD

Risks

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Despitestabilizedrevenuesdividendsin decreasing trend

Peers comparison

OPEX

Revenues

FCFF ≈ Dividends

Regulation

x

Profitability

Financial

plan

WACC

Depreciation follows decreasing trend & higher CAPEX are supported by cash from WC

Source: Team analysis & estimations, ARs

Target: CZK 398 HOLD

Risks

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Despitestabilizedrevenuesdividendsin decreasing trend

Peers comparison

OPEX

Revenues

FCFF ≈ Dividends

Regulation

- 16%

x

Profitability

Financial

plan

WACC

Source: Team analysis & estimations, ARs

Target: CZK 398 HOLD

Risks

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Discountratemustcovercurrentchanges in telco

Peers comparison

Regulation

Revenues forecast

Notablylowinterestrates in medium run

Major changes in EuropeanandCzechtelco sector

Discount factor

WACC

Source: Team analysis & estimations, Reuters, Mařík, M.: Company´s ValuationMethods

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Discountratemustcovercurrentchanges in telco

Peers comparison

Regulation

Revenues forecast

1st phase

Discount factor

WACC

Source: Team analysis & estimations, Reuters, Mařík, M.: Company´s ValuationMethods

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Discountratemustcovercurrentchanges in telco

Peers comparison

Regulation

50y govt bond

Revenues forecast

Low ratesadjustment

5,04%

Discount factor

WACC

Source: Team analysis & estimations, Reuters, Mařík, M.: Company´s ValuationMethods

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Discountratemustcovercurrentchanges in telco

Peers comparison

HistoricalEuropean telco Beta

Regulation

2009

Eurozone problems affecting Spanish market

Revenues forecast

Stable development

Regulatory changes on bothEuropeanandCzech level

0,80

0,13

0,22

0,44

Discount factor

WACC

Unlevered beta

Leverage effect

Resulting beta

Business risk adjustments

Source: Team analysis & estimations, Reuters, Mařík, M.: Company´s ValuationMethods

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

University of Economics, Prague

15March

Discountratemustcovercurrentchanges in telco

Peers comparison

8,93%

Regulation

5,91%

5,79%

5,75%

5,41%

Revenues forecast

Discount factor

Contribution to total value

Average WACC

32%

1st phase (2012 – 2015)

≈8,0%

WACC

68%

2nd phase (2016 – ∞)

Source: Team analysis & estimations, Reuters, Mařík, M.: Company´s ValuationMethods

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

Team F Student research

15 March

Our final recommendation is set toHOLD

CZK bn.

Share price

570

Discounted Cash Flow Entity Model

399

520

470

Discounted

Dividend Model

398

52-week

average

420

DCF

398

DDM

Market price

370

374

Market

MultiplesAnalysis

329

568

All excessive cash is paid out in the form of dividends

320

Source: Team analysis & estimations, ARs

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

Team F Student research

15 March

Our final recommendation is set toHOLD

Market multiples

Share price

570

Discounted Cash Flow Entity Model

399

Divi yield

520

EV/

EBITDA

470

Discounted

Dividend Model

398

P/BV

52-week

average

420

DCF

398

DDM

Market price

370

374

Market

MultiplesAnalysis

329

568

P/E

320

Source: Team analysis & estimations, ARs

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

Team F Student research

15 March

Our final recommendation is set toHOLD

Share price

570

Discounted Cash Flow Entity Model

399

HOLDTarget priceCZK 398

520

470

Discounted

Dividend Model

398

52-week

average

420

DCF

398

DDM

Upside

potential 6,7%

Market price

370

374

Market

MultiplesAnalysis

329

568

320

Source: Team analysis & estimations, ARs

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks

Target price on 23/12/2012


Target czk 398 hold

Team F Student research

15March

Alternative scenarios with possible impact on future price

Impact

Successful frequency auction

+

  • Potential for 4G network

Auction

  • Payment transactions

  • Internet TV

  • Advertising services

New technologies

New tech

Likelihood

Regulatory pressures

Parental

company

  • New competitor

  • Virtual operators

Regulatory

Spanish problems

-

  • Excessivedividends

  • Spin-offoptions

Source: Team analysis & estimations, ARs

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

Team F Student research

15March

Investment risks might form up in unexpectedscenarios

Share price CZK

Successful frequency auction

Spanish problems

Regulatory pressures

450

425

  • Potential for 4G network

Auction

  • Excessive dividends

  • Spin-off options

  • New competitor

  • Virtual operators

400

Parental

company

 427 CZK

 427 CZK

Regulatory

375

374

Market price

 372 CZK

398 Target price

 372 CZK

350

 339 CZK

 339 CZK

325

Source: Team analysis & estimations, ARs

Target: CZK 398 HOLD

Company overview

Valuation drivers

Valuation

Risks


Target czk 398 hold

Q & A

Thank you for your attention

Team of University of Economics, Prague