Telefonica’s Positive Outlook

Investing.com — Spain’s Telefonica (BME:TEF) stands to benefit from a more “benign” interest rate cycle and a “much improved” market position for its Brazilian operations, according to analysts at HSBC.

In a note to clients upgrading their rating of the stock to “Hold” from “Reduce,” the analysts said the prospect of decreasing borrowing costs may mean that Telefonica’s “relatively higher” debt obligations “may be less under the spotlight.”

Meanwhile, the HSBC analysts noted the “demise” of local player Oi in Brazil, which filed for a second bankruptcy protection process last year, should give Telefonica a “much improved” market structure in the country.

Telefonica has embarked on a push to focus its business on Spain, Brazil, Britain, and Germany, while reducing its exposure to other markets in Latin America, where costs have been elevated but returns weaker.

As part of that effort, Telefonica announced talks to dispose of its segment in Colombia to New York-listed peer Millicom (NASDAQ:TIGO), which provides telecom services in various Latin American countries under the Tigo name. Millicom has indicated it would pay $400 million in cash for Telefonica’s stake in the Colombian division.

If completed, this move would “finally [show] some tangible progress in tackling” Telefonica’s non-core assets exposure in Latin America, according to HSBC analysts.

The comments follow Telefonica’s report that the Spanish government owns a 10% stake and that its second-quarter profit and sales topped expectations. Chief Executive Jose Maria Alvarez Pallete stated that growth accelerated across the company compared to the previous quarter, with expansion seen “in all our large business units.”

Net profit during the period was €447 million, well above company-provided analyst forecasts of €336 million, while revenue of €10.26 billion also beat projections of €10.05 billion.

The company noted that its half-year returns also put it on track to meet its annual financial targets, according to Reuters.

Shares in Telefonica have risen by over 17% this year.

(Reuters contributed reporting.)