Telecom Argentina Kept On Hold

We reiterate our Hold rating on Telecom Argentina SA (TEO), the leading provider of communications in Buenos Aires, Northern Argentina and Paraguay. The company’s recent operating results are being driven by the growing domestic cellular telephony market, the largest in Latin America in terms of mobile penetration.

Although Telecom Argentina’s wireless and Internet subscriber base continues to increase at a respectable pace, frozen fixed-line tariff and inflationary conditions impacting the cost structure may limit profitability levels for the remainder of 2008. Additionally, the uncertain economic outlook and challenging competitive environment are considerations that we believe may limit valuation levels. Moreover, capital spending for the full year 2008 is expected to increase on a year-over-year basis due to cellular and broadband infrastructure requirements.

Telecom Argentina is trading at 6.6x estimated earnings for fiscal year 2008, which represents a significant discount to the forward P/E ratio of the peer group and S&P 500 averages. The company’s stock price fell by approximately 25% since our last reporting time and is currently near the lower limit of its 52-week range. Our six-month target price of $15.00 is based on a 2008 P/E multiple of 7.2.

Anindya Barman contributed to the report.

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