Goldman Cuts Telecom Argentina To Sell: Here's Why

• Telecom Argentina SA (ADR) TEO shares have plummeted 23 percent year-to-date, declining from $26.39 on March 18 to below $15 on September 25.
• Goldman Sachs analyst Vera Rossi downgraded the rating on the company from Neutral to Sell, while reducing the price target from $18 to $14.
• Rossi expects deceleration in revenue growth to result in further margin contraction at the company in the forthcoming years.

Analyst Vera Rossi believes that Telecom Argentina would witness a decline in revenue growth and EBITDA margin contraction over the next couple of years. The reasons cited are:

1. Disconnections in contract users – The company has already suffered disconnections in contracts users in 4 of the last 6 quarters. Rossi expects this trend to continue in 2016 and 2017 due to the weak macro environment.
2. An estimated 6.8 percent y/y decline in SMS revenues and a 9.9 percent y/y decline in interconnection revenues – This is expected due to consumers shifting from contract to lower ARPU prepaid services.
3. Risk of accelerating inflation on opex – Inflation rates in Argentina have been at or above 23 percen per annum and could continue to hike the company’s costs.

In the report Goldman Sachs noted, “We expect to see annual margin declines resume in 2016 to 23.2% (~26% in 2014/15), as inflation driven opex growth (22% in 2016) is likely to surpass revenue growth, which we see slowing to 17.2% in 2016 (from 21.4% in 2015) driven by rising disconnections and falling SMS growth.”

While high inflation rates negative impacts purchasing power, thereby lowering customer spending, they also result in opex climbing, which has historically increased in line with inflation, Rossi added.

The EPS estimates for 2016 and 2017 have been reduced from $2.10 to $1.79 and from $2.11 to $1.50, respectively. The price target reduction reflects “reduced target multiple for the fundamental component of our price target,” Rossi added.