After more than two years of declines, European fund managers say that select telecommunications sto...
After more than two years of declines, European fund managers say that select telecommunications stocks now look attractive.
A key reason for the positive outlook is that the prolonged sector falls have led to attractive valuations even when taking companies' debts into account. The Bloomberg European Telecoms index, for example, has fallen by around 80% in euro terms since the peak on 3 March 2000. Alister Hibbert, manager of the Invesco Perpetual European Growth fund is marginally underweight telecoms. He says while the sector is sound, with valuations fair to marginally cheap, better opportunities are to be found elsewhere.
The Invesco Perpetual European Growth fund holds KPN, Telecom Italia Mobile, and its parent company Telecom Italia.
Head of European equities at Newton, Raj Shant, has moved overweight in telecoms believing fundamentals to be attractive.
He says: 'First, cashflows have improved. Telecom companies are reducing and deferring capital expenditure wherever they can. Many companies have also had a change in chief executives, and this has led to a change in their perspectives on the world.
'Second, the sector has started to stabilise. Many smaller competitors are going out of business, meaning there is less competition. Times are tough for the big incumbents, but even tougher for smaller, poorly-funded competitors who set up in the late 1990s.'
Among telecom stocks, Shant prefers the incumbents that have good cashflows and decent balance sheets. 'Many of the alternative carriers have been set up quite recently with weak business plans and a lot of debt. Therefore they are not equipped to deal with a prolonged period of weak growth,' he says.
Shant is also optimistic about the prospects for mobile telephony, based on very low expectations for non-voice use.
'Manufacturers are producing new generation handsets and the operators are now developing services for them. Operators will probably be advertising quite heavily. This would be good for the growth of the mobile industry if the demand takes off,' Shant says.
'The point is that nobody expects very much from it. Expectations are so low that the results only have to be mediocre to better them.'
Like Shant, Hibbert is positive on the mobile telephony. Meanwhile, he considers fixed line companies to be extremely dull.
'Unless you have aggressive restructuring stories like we have seen with KPN this year, the revenue outlook for fixed line businesses will be flat. In mobile businesses we are more optimistic than our peers. I expect mobile companies will continue to grow RPU (revenue per user) rates at reasonable levels going forward,' Hibbert says.
'There has been a tariff convergence between the mobile and fixed line telephony so more people are using the mobile phones. In addition there is still some reasonable growth in SMS volumes, even now. Then, maybe if it really takes off then picture messaging might become material too, that may be a bit early to say it's a great growth area.'
The risk to growth in this sector, Shant adds, is that if relative performance does improve, then the management could slacken off and stop focusing on cost cutting and improving cash flow.
Fundamentals remain positive.
Valuations looking cheap.
Revenue per user is increasing.
Some telecoms heavily indebted.
Fixed line looks dull.
Weak balance sheets at present.
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