Recommendation Buy 150 shares

Telecommunication sector – Team 5

Description• Spanish based company

• Integrated operator in telecom:• Fixed-line & mobile phone• Internet & data transmission services• Pay TV

• 4th position in Telecom sector worldwide (by market cap)

• 1st as European integrated operator

• 245 million customers (June 2008)

• 60% business international

Market Size

Summary statisticsTelefonica America

MovilFrance Telecom

S&P Global Tel

Price 53.67 36.13 25.63 49.78

52 week range

53.22 -

103.50 28.58 - 67.65

20.88 – 39.70

40.36 – 83.13

Beta 0.99 1.34 0.83 1.12

Market cap.

88.80B 62.23B 49.55B 185.8B

P/E 8.78 13.61 9.02 11.01

EPS 7.43 2.66 2.69 N.A

Dividend yield

5.7% 1.4% 10.7% 5.99%

Price chart - Competitors

Price chart - Industry

Industry trends

• Main growth in broadband, mobile phones and pay per view

• Growth by acquisitions

• Heavily capital-intensive• Infrastructure• Market share

• Intense competition among few companies. Especially in Europe.

Investment positives• Strong market positions

• Spain (Telefonica S.A.)

• Latin America (Brazil: Telesp & Vivo)

• Europe (UK: O2)

• Very attractive growth profile due to:

• Latin America

• Eastern Europe

• Diversified portfolio of assets

• Economies of scale and efficiencies

• Dividends & share buyback

• Part of DJSI

High Organic growth preserving margins

News• Nov 4, 2008: TEF Successfully completes tender

offer for Chilean Telecom.

• June 11, 2008: TEF to sell iPhone to 16 countries (Spain, UK, Ireland, Brazil, Argentina…)

• Telefonica signs global agreement with Facebook to incorporate direct access from its mobile portals

• TEF chosen by Microsoft to provide voice over IP services to Windows Live Messenger customers in Argentina, Brazil, Chile, Colombia, Peru, the United States, and Venezuela.

Revenues – 2nd Quarter 2008

Reported revenues rose 1.2% compared to the first half of 2007

Organic Revenue Growth

Region Organic Revenue Growth

Contribution to Organic Growth

Guidance 08

Telefonica Group

6.7% 6% - 8%

Latin America 12.2% 4.3% 11% - 14%

Europe 6.2% 1.6% 4% - 7%

Spain 2.1% 0.5% 2% - 3.5%

Period Jan-Jun 2008

Risks• Increasing price competition in

Europe and some countries in Latin America (Brazil)

• Acquisitions & high levels of debt

• Political risks• Argentina

• Currency risk (ADR)

• New regulatory measures and policies

Valuation

Telefonica America Movil France Telecom

P/E 8.78 13.61 9.02

PEG 0.97 0.32 0.84

Price/Book 3.52 4.66 1.77

Profit margin 18.93% 17.74% 10.62%

Debt/Equity 2.69 0.69 1.39

Current Ratio 0.79 0.65 0.55

Valuation - DCF• WACC:

• WACC = 8.69%• Cost of Equity: Ke = 12.93%• Cost of Debt: Kd = 4.86%• Market Value of Equity: E/(D+E) = 55.32%• Market Value of Debt: D/(D+E) = 44.68%• Tax Rate = 29.00%

• Growth rate: 1.2% - 1% - 2% - 5%...

• Terminal growth rate: 3%

• Intrinsic value: € 25.27 (current: € 14.03)

Valuation - DDM

Valuation – Other references

Conclusion• Buy 125 shares

• Summary reason:• Strong results and organic revenue

growth• Diversification and integrated

management• High growth potential (Latin America,

China)• Prioritizing shareholders returns (good

dividend + share buyback)• Undervalued

R&D• Spent 4.5 billion euros in R+D

Revenue Growth

Ratios

Competitors

Europe LatAm US Asia Africa

Telefonica Yes Yes - - -

Telmex + A. Movil

- Yes Yes - -

France Telecom

Yes - Yes Yes Yes

Vodafone Yes Yes Yes Yes Yes

Telecom Italia Yes Brazil - - -

AT&T - - Yes - -

Verizon Italy - Yes - -

Deutsche Tel. Yes - - - -

BT Yes Yes - Yes Yes

Currency Risk• Volatile market

• Interest rate cut from ECB (potentially strengthening euro vs. dollar)

• Euro expected to stay between $1.2 and $1.3

Earnings Estimates

Credit Ratings