The UK telecom sector remains under pressure, with the FTSE All-Share telecom index down 26.95% for ...
The UK telecom sector remains under pressure, with the FTSE All-Share telecom index down 26.95% for the year to 27 November.
Ralph Brook Fox, investment manager at Britannic Asset Management, says he is cautious on the sector. Britannic is underweight telecoms by 1%.
He says: "It has been a horrible 12 months. One reason the sector got so high last year is that everyone was obsessed with high growth rates and people were generally ignoring the increased competition. Competition is very intense. It will depress profit margins and delay the time it takes for companies to become profitable."
Brook Fox is particularly concerned about the high levels of debt some telecom companies have built up.
He says: "On the fixed line side I am worried that new entrants look expensive. Their cash flows are likely to remain negative for some time, in selected cases the level of debt is quite substantial."
He points out that Telewest has high borrowings with no forecast of any significant cash flow for a number of years. While Atlantic Telecom has borrowings of around £400m and a market capitalisation of £400m.
The market is waiting for data to become a larger portion of revenue than voice, he says.
Trevor Green, UK fund manager for Credit Suisse Asset Management, says: "Voice is a commodity product now but there is no added value. Everyone is doing voice now and there are plenty of alternatives with lots of new entrants to the market. In terms of an unique selling point, with voice it is only price but with data it is bandwidth."
Green notes that at the beginning of the year, the market became very excited about bandwidth but interest has since waned while at the same time voice prices are going down faster than expected.
He says: "There has been a change in expectations, which were too high before. Share prices are coming down, there are other side issues but this is the big one. Everyone agrees that WAP was a big disappointment. The market wants to see evidence of increased revenue from data before it regains interest in the sector."
Credit Suisse is also underweight telecoms and Green anticipates it will remain so until data revenues come through, when it may increase its exposure to the sector. At the moment Vodafone is its preferred stock in the sector, along with Cable & Wireless. Cable & Wireless has a healthy balance sheet and its management is engaged in disposals to refocus the business, Green says.
Britannic finds Cable & Wireless the only interesting stock in the sector but also holds Vodafone, BT and Colt.
According to Green, BT faces a number of problems. It is struggling in the new technology age and its core domestic market is under pricing pressure and is moving to other carriers.
He says: "The student population is a case in point. They are more likely to have a mobile than a fixed line, so it is progressively losing its audience."
Green adds that BT's management is trying to be creative by attempting to refocus the business and the stock market will like the increased clarity.
Smoking biggest culprit; obesity second
Average earner will gain £840 in 2018
Will also move heritage items
Responding to letter from Treasury Committee chair Nicky Morgan