Telemar a Core Brazil Holding

We are reiterating our Buy recommendation on the shares of Tele Norte Leste Participações or Telemar (TNE - Analyst Report). The company posted positive first quarter 2008 results, and we continue to have a positive view on the Brazilian economic outlook, mainly now after the country has been upgraded to investment grade by Standard & Poor's.

Additionally, the stock has a solid dividend yield and attractive valuation. In October 2007, TNE acquired wireless licenses to expand to Sao Paulo and to increase its frequency range in many other states in order to enhance the company's capacity to handle traffic.

Finally, the merger with Brasil Telecom (BRP - Analyst Report) was announced. At present, Telemar is trading at a P/E of 6.2x our estimated 2007 earnings estimates, a huge discount to the industry mean and median, and an enterprise value to EBITDA (a more common valuation metric for the wireless industry) of 3.1x our 2008 estimate. This is close to the low-end of the 3x to 6x range for most of the Latin American wireline telecom operators, thus the current valuation seems to be attractive.

It is also important to note that the company has an interesting dividend yield, which is expected to increase in the short-term. The uncertainties surrounding the deal with Brasil Telecom has been creating short-term problems for the stock; however we consider that current valuation remains highly attractive, thus we should see this current situation as a buy opportunity.

All considered, we maintain our Buy recommendation on the stock. Our target price is US$31.50 per ADR, which represents an enterprise value to EBITDA ratio around 4x, between the industry median and mean.

Read the full analyst report on TNE.

Read the full analyst report on BRP.