February 24, 2012 / 10:03 AM / 8 years ago

UPDATE 4-Telefonica sets modest targets as 2011 profit halves

* Revenue 62.8 bln euros vs 62.6 bln in Rtrs poll

* Profit 5.40 bln euros vs 4.46 bln in poll

* Forecasts 2012 revenue growth of more than 1 pct

* Says will reduce debt this year by at least 1.5 bln euros

* Shares almost flat vs sector just in positive territory (Adds board member comments from conference call, closing shares)

By Elisabeth O’Leary

MADRID, Feb 24 (Reuters) - Telefonica SA turned more cautious on growth prospects in the year ahead after restructuring costs and slowing revenue contributed to a halving of net profit for 2011.

Under pressure to reduce a 57 billion euros ($76 billion)debt mountain in a sluggish economic climate, the Spanish telecom group said on Friday it now saw revenue growing at least 1 percent in the year ahead, at the bottom end of a 1 to 4 percent three-year range set a year ago.

It also kept its closely-watched dividend unchanged and its debt-to-core earnings (OIBDA) ratio target at 2.35 times. At present, net debt to OIBDA is at 2.46 times, just within a target range.

Profit at the euro zone’s largest telecom group fell 47 percent to 5.40 billion euros, versus a forecast 4.46 billion in a Reuters poll, thanks to an unexpected accounting gain related to last year’s purchase of Brazil’s Vivo. Revenue was in line with expectations, up 3.5 percent.

Telefonica is struggling to convince sceptical investors that a dividend cut announced in December is enough for it to meet a tough debt reduction programme while revenue growth is weak.

On a conference call with analysts, the company said it would reduce debt this year by at least 1.5 billion euros, thanks to a restructuring of its Colombian business and this week’s announced sale of a stake in satellite operator Hispasat.

Telefonica Finance Director Angel Vila also said the group had already “substantially refinanced” this year’s debt maturities, which total around 7 billion euros.

Telefonica shares were off earlier lows and closed almost flat, while the European telecoms sector was just in positive territory.

Vila said credit ratings agencies, who had cut the company’s rating twice in the past six months, were aware of the group’s progress. “We are committed to reducing leverage and in the first two months of the year we have made substantial progress.”

Some analysts noted the company had slightly rejigged its debt guidance and had barely met its previously stated criteria for net debt plus commitments to be no more than 2.5 times OIBDA.


“We would not expect a positive reaction to these numbers, if anything because of the change in criteria of the net financial debt/OBITDA ratio vs. the previous formulation in order to meet guidance, the weak guidance in 2012, and the worsening of key performance indicators in Spain,” said JB Capital markets in a note to clients.

Others were more upbeat, however, arguing negative sentiment had been overdone.

“We suspect investors have been excessively bearish on Telefonica, especially on their domestic market, and (these results) should offer some relief,” said Societe Generale credit analyst Juliano Hiroshi Torii, highlighting a slightly better performance in Spain.

“The guidance for leverage, especially, sees some deleveraging this year, which is also better than a lot of investors expect,” he added. SocGen has a “buy” recommendation on Telefonica’s bonds.

Profit at the telecom group was dampened by the unflattering comparison with a one-off gain of 3.5 billion euros in 2010, an accounting profit after the purchase of the remainder of Brazilian mobile unit Vivo.

The former Spanish monopoly last year shelled out 2.7 billion euros to cut 20 percent of its Spanish workforce, an attempt to offset a decline in revenue driven by the defection of hundreds of thousands of clients to cheaper competitors.

With Spanish unemployment at 23 percent and the economy headed for recession, Telefonica will remain under pressure in its home market, which accounts for 27 percent of revenue.

“Consumer trends remain weak in the first two months ... for the time being there are no signs (of change) there,” said Jose Maria Alvarez-Pallete, chairman of Telefonica Europe.

Spanish revenue fell 7.6 percent in 2011, offset by a 13.5 percent rise in Latin America.

Amid the difficulty of paying down its large debt, analysts have begun again to talk about the need for asset sales.

However, given the weakness of the European economy and the difficulty of getting a good price for assets — as the postponed sale of call centre unit Atento last year demonstrates — some think further dividend reduction is inevitable.

Some other European telecom companies have resorted to cutting payouts, as Telefonica did in December, given the poor outlook as the euro zone struggles with a debt crisis.

France Telecom earlier this week cut its dividend and put off a share buyback and Dutch operator KPN made similar adjustments. Deutsche Telekom however stuck with its dividend promise despite a profit warning. ($1 = 0.7511 euros) (Editing by Nigel Davies and David Holmes)

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