Market unfazed by Embratel?s third-quarter loss

Despite announcing a loss of 549.649 million Brazilian Reals in the third quarter, or 182% more than the loss posted in the corresponding period of last year, Embratel hasn?t taken a beating from investors so far. On Wednesday, October 23, its preferred stock gained a healthy 6.11% on the São Paulo Stock Exchange (Bovespa), closing the day on 2.43 BRL. The Q3 performance once again reflected the effect of currency depreciation on the long-distance carrier?s dollar debt, only part of which is hedged, as well as a 5.1% drop in EBITDA year over year to 370m BRL on revenue of 1.778bn BRL, down 1.8%. In data service, considered the most promising segment, revenue has been stagnant for 12 months.

Upside

Just before the Q3 earnings announcement, Fator Doria Atherino said its target price for EBTP4 was 10 BRL, equivalent to upside potential of no less than 311%. Rodrigo Magela, an analyst with Banco Pactual, explains this week?s rally as due to the cheap price combined with the fact that the Q3 earnings report was better than expected. Revenue in domestic long distance beat analysts? forecasts, for example. Although Embratel?s share fell in the residential segment, this was more than offset by an increase in its share of the corporate segment. Additionally, interconnection costs fell from 46.3% to 45.3% of net expenses thanks to investment in new points of presence. Indeed, this investment explains the fall in EBITDA margin, he argues. As for Embratel?s large debt and the problems of its parent WorldCom, analysts say cash in hand (756m BRL) is sufficient to ensure debt rollover in acceptable conditions.

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