Chile’s top two fund managers say a stock rally that has made Empresa Nacional de Telecomunicaciones SA the country’s best performer in the past year isn’t over as investors seek shelter from global turmoil.
An estimated dividend yield that’s double the Chilean benchmark’s average and a debt-to-equity ratio that’s half the index’s average boost the shares’ appeal amid signs of a faltering global economic recovery, according to Tomas Langlois and Jose Luis Luarte, who manage the two best-performing local equity funds this year, according to data compiled by Bloomberg.
“Excellent management, a lot of cash, very little debt make it one of the most recommended companies in these turbulent times,” Langlois, who manages $550 million in Latin American stocks at Larrain Vial SA, said by telephone from Santiago.
Entel, as Chile’s second-largest mobile operator is known, rose 3.4 percent today, the most in three weeks, to 9,738.5 pesos. The stock has surged 23 percent this year as the Ipsa index slumped 20 percent. Entel fetches 12 times trailing earnings, versus 15 for the Ipsa, while its estimated dividend yield of 5 percent compares with an average 2.3 percent for Ipsa members, according to data compiled by Bloomberg.
The company, sold by Telecom Italia SpA (TIT) to local business group Almendral SA (ALMEN) in 2005, has banked on data services and post-paid contracts to boost growth. First-half profit jumped 32 percent to 104 billion pesos ($203 million) from a year earlier, while active clients rose 22 percent to 8.3 million and mobile broadband customers more than doubled to 813,000.
Entel’s total debt represents 50.3 percent of equity compared with the Ipsa average’s 108 percent, according to data compiled by Bloomberg.
“It’s a defensive stock and pays good dividends,” said Luarte, who manages $92 million of local equities for Euroamerica Administradora General de Fondos SA. “It’s a stock that makes us really happy in times like these when the market is down.”
Luarte’s Euroamerica Ventaja Local fund first bought Entel shares about five months ago and the stock now accounts for about 9 percent of holdings. The fund has declined 18 percent this year, the second-best performance after the 13 percent drop by Larrain Vial’s Beagle among funds that have solely Chilean stocks, according to data compiled by Bloomberg. The peer average is a decline of 26 percent. Beagle returned 82 percent last year, beating all other Chile-based funds.
Beagle focuses on small-cap stocks and doesn’t own Entel. Larrain Vial’s Acciones Beneficio and Acciones Nacionales funds have added to their holdings of Entel, and the shares accounted for 7.3 percent of Beneficio’s holdings and 7.5 percent of Nacionales as of last month, up from 3 percent and 4.6 percent in May, according to data from the securities regulator.
Entel plans to invest $673 million this year, as part of a budgeted $2 billion capital expenditure over three years, after spending $576 million last year. The company aims to increase mobile broadband customers fivefold to 3 million by 2014, Chairman Juan Hurtado said April 26. Entel registered in July to sell as much as $470 million in inflation-linked bonds.
Entel has a “buy” recommendation by seven of 11 analysts, according to data compiled by Bloomberg. The other four rate the stock “hold.” Chief Executive Officer Antonio Buchi and Chief Financial Officer Felipe Ureta didn’t respond to requests seeking comment.
The stock’s outperformance this year can be explained by its underperformance in previous years, Rodrigo Rojas, a fund manager at Celfin Capital SA, said in a Sept. 6 interview.
Entel rose 12 percent last year while the Ipsa surged 38 percent. The stock climbed 5.7 percent in 2009 against the index’s 51 percent jump. This year’s gain has reduced the discount that Entel trades relative to the index to the lowest level in two years, according to data compiled by Bloomberg.
Last year “was a good entry point, but the low hanging fruit isn’t there anymore,” Eric Conrads, who manages $1.2 billion in Latin American stocks at ING Groep NV said by phone from New York. “You probably have some better stories within Chile from a relative point of view.”
The company faces rising competition in a country where there is already more than one mobile phone per person. VTR Globalcom SA, a unit of Englewood, Colorado-based Liberty Global Inc. (LBTYA) and Chile’s Saieh Group, and Reston, Virginia-based NII Holdings Inc. plan to start mobile operations in Chile this year. Also Grupo GTD, a data services and cable TV provider, is preparing to begin virtual mobile operations.
“There’s no certainty on the effect that the entry of the new rivals will have,” German Guerrero, a partner at Santiago- based MBI Corredores de Bolsa SA, said in a Sept. 7 telephone interview. “They may want to gain market share through a price war and that will reduce margins for the whole industry.”
Entel may be able to more easily wrest customers from competitors with the government’s plans to start introducing number portability by the end of this year, Luarte said.
“They are very interested in providing a good client service,” he said. “Number portability may be seen as a cause of uncertainty but they have said that they look forward to it. And it’s good for us as we own the stock.”
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