Shares in Brazil's Oi Slump as Firm Reports Surprise Loss, Cuts Dividend

   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 [e-mail]

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