(VIV) Telesp S.A. – ADR – Bull of the Day

We are upgrading our recommendation to Outperform from Neutral on Telesp S.A. (VIV) following its merger with the mobile phone provider Vivo Participacoes. We believe the merger will boost its existing operations and its competitive position. The combined entity is now a full-service operator offering competitive bundled (fixed-line and wireless) services.

Vivo reported a solid first quarter, with net income soaring 270% year over year. The company gained 1.7 million subscribers, bringing its total customer base to 62.1 million. On the other hand, Telesp’s fixed-line operation is struggling with disappointing first quarter net income, which was down 13% year over year. The company lost 38,000 customers bringing the total subscriber base to 15.06 million.

Thus, we believe the Vivo integration would bring back the company’s profitability through its strong mobile service business. Hence, we are recommending an Outperform rating with a price target of $34, based on 12.6x our 2011 EPADS estimate.

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