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

JPMorgan has upgraded Telecom Argentina SA (ADR) (NYSE: 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$250 million per quarter in revenues (+1.8 percent) as well as in EBITDA (+7.4 percent), 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, we do not expect a significant increase in fixed line disconnections, as Argentinean tariffs will remain the lowest by a wide margin within LatAm, at $2.5/month (versus $8 on average)," Baggio said.

Related Link: Telecom Argentina S.A. Announces Consolidated First Quarter Results For Fiscal Year 2016

"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 Telecom will pay P2.06/TECO2, equivalent to $0.7/ADR (4 percent yield). The analyst highlighted Telecom'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.