MS sees tough competition in Spain telecoms, prefers Zegona over Digi

** Competition is expected to remain high amongst Spanish telecommunication companies due to Digi Spain's aggressive growth strategy, Morgan Stanley says

** The brokerage initiates Zegona ZEG.L at "overweight" and Digi Spain DIGIS.MC at "equal-weight" as it considers Digi's "exceptional growth" already reflected in the share price

** "Digi has the better positioned business (but) on current valuations we believe Zegona's 'cash now' proposition offers a superior risk-reward to Digi's 'cash later', MS says

** The brokerage believes Zegona's cashflow generation is "underappreciated", adding that momentum is building for its unit Vodafone Spain

** MS also resumes coverage on Telefonica TEF.MC at "equal-weight" but lowers its PT by about 12% to €3.80

** "To turn more positive on Telefonica we would need to see ... operational improvement in Germany and a stabilisation and return to growth in the UK," MS says