By Matthew Cowley
Shares in one of Brazil's largest telecoms firms, Oi SA (OIBR,
OIBR4.BR), slumped Wednesday as the firm reported a surprise loss
for the second quarter, as investors braced for the possibility of
more pain ahead and the firm lowered its dividend payments to shore
up its finances.
Oi is facing a long-standing problem typical of legacy telephone
companies. Its old fixed-line business is shrinking, and the firm
must invest to build new, more profitable business lines such as
mobile, Internet and pay TV. But it took on heavy debts to build
out its mobile network from scratch and buy a rival operator in
2008, and it now faces a tricky balancing act between paying down
debts and investing for growth.
Partly to tackle that problem, the firm on Wednesday said that
it has altered its dividend policy, lowering the expected annual
payment to shareholders to 500 million Brazilian reais ($215
milion) per year for the next four years, from the previous BRL2
billion. This would provide greater "financial flexibility" for the
company to be able to develop its business while maintaining its
long-term competitive position, Oi said.
"We continue to see that Brazil is a market where penetration
will increase substantially in the future. We want to take
advantage of that growth," said Zeinal Bava, the firm's incoming
chief executive.
Some analysts were skeptical.
"Even after the dividend cut, we fail to see how Oi can
simultaneously reduce leverage whilst investing heavily for
growth," said analysts at UBS, in a research note. "Given these
results we remain skeptical, as further underinvestment risks put
turnaround plans in peril. We maintain our cautious view and
neutral rating [on the firm's shares]."
The second-quarter results were the first to be presented by Mr.
Bava, who took over in June, as Oi's turnaround plan struggled to
produce concrete results. Mr. Bava was previously the chief
executive at Portugal Telecom SGPS (PT, PTC.LB), which is part of
the shareholder group that controls Oi.
The firm reported a second-quarter net loss of 124 million
Brazilian reais ($54 million), reversing a net profit of BRL347
million in the same quarter a year ago. Most analysts had been
expecting a profit.
On Wednesday, Oi's shares ended 7.4% lower at BRL4.13. Oi is
valued at a significant discount to its main competitors in Brazil.
The firm's shares trade at around nine times future earnings, while
Telefonica Brasil SA (VIVT4.BR, VIV) is trading at 13.4 times
earnings, and TIM Participacoes SA (TIMP3.BR) is trading at 14.8
times earnings, according to Factset.
A fourth operator, Claro, is wholly owned by Mexico's America
Movil SA (AMX, AMOV, AMX.MX).
Revenues were up 2.4% at BRL7.1 billion in the second quarter,
from a year ago, but operating costs and expenses soared 10.8% to
BRL5.3 billion. The company attributed the increase in costs
largely to a spike in provisions for bad debts, and higher
personnel and marketing costs.
"Operating costs and expenses are running at a level that we
think is unacceptable. We need to bring those down, and we have a
number of initiatives that we are implementing to ensure that we
can make that happen," Mr. Bava said during a conference call with
analysts.
Provisions for bad debt were "very high" and "should come down
in the next few quarters," Mr. Bava said.
The firm ended the second quarter with net debt of BRL29.5
billion, up from BRL23.5 billion a year ago. The firm attributed
the increase to the cost of purchasing radio spectrum licenses for
its mobile operations, as well as fees and taxes paid to the
government.
Mr. Bava said investments this year should be around BRL6
billion, which was in line with what the company has previously
indicated, but would be lower next year. Moreover, the company will
focus on bringing down costs.
--Rogerio Jelmayer contributed to this article.
Write to Matthew Cowley at matthew.cowley@wsj.com
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