Nomura has reiterated an 'underweight' rating for Spanish telecom Telefonica and lowered its price target to 10 euros from 10.90 euros in spite of the company's lower credit risk.

Analysts said that they remain cautious towards Telefonica because the domestic economy could worsen and the stock price remains unattractive even though recent divestments and refinancing activity significantly reduced balance sheet risk.

Nomura assured that Telefonica's liquidity risk has declined following recent events. However, it sustains that there is no light at the end of the tunnel in Spain.

Due to increased competition in the telecom sector, it expects a 17.4% decline in mobile revenue and 9% decline in fixed telephony revenue for the third quarter.

As such, Nomura does not consider the estimated Q3 EBITDA (earnings before income tax, depreciation, and amortisation) decline of 12.5% to be a significant improvement from the 13% decline of the second quarter.

Considering that the estimated free cash flow-to-equity (FCFE) is 11.8% compared to 11.9% for the sector, investors are not compensated for accepting a higher risk profile, Nomura concludes.

Telefonica will report results on November 7th.

JM

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