JPMorgan Upgrades Telecom Argentina, Sees 6% Upside Due To Unfrozen Wireline Tariffs

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JPMorgan has upgraded Telecom Argentina SA (ADR)
TEO
to Neutral from Underweight, saying "unfrozen wireline tariffs will lead to real EBITDA growth." Argentina will see the first increase in residential wireline tariffs on May 15 after 14 years of freeze, and monthly rates will increase by 200 percent to A$38 from A$13. Analyst Andre Baggio expects the rate hike to generate "incremental A$250m per quarter in revenues (+1.8%) as well as in EBITDA (+7.4%), resulting in EBITDA finally expanding in real terms in 2016E, vs contractions in the last four years." Despite the 200 percent hike in residential tariffs, the analyst do not expect a "significant increase" in fixed line disconnections, as Argentinean tariffs still remain the lowest by a wide margin within Latin America at $2.5/month (versus $8 on average). "In fact, we expect further hikes to be allowed by the government after 2016 to bring tariffs closer to the international average. As a result, we model lines in service contracting 0.6% q/q in the following quarters," Baggio noted. In addition, Baggio expects EBITDA to expand in "real terms" in 2016, at +1.6 percent versus -1.6 percent in 2015. The analyst added that dividends should also support the stock, as TEO will pay P2.06/TECO2, equivalent to $0.7/ADR (4 percent yield). The analyst highlighted TEO's dividend yield now stands at 4.7 percent for 2017, second only to Vivo (5.1 percent) in LatAm. Baggio also raised the price target on the stock to $20 from $15.5. The new price target implies an upside of 6 percent from the Wednesday's closing price of $18.83.
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