Telecoms in Latin America are benefiting from a strong wave of recovery, following the Nasdaq correc...
Telecoms in Latin America are benefiting from a strong wave of recovery, following the Nasdaq correction, which led to underperformance in this sector.
Philip Ehrmann, emerging markets fund manager at Gartmore says telecom stocks, and to a lesser extent technology companies, are starting to recover, after being knocked around somewhat from March to early June, led by the shockwaves caused by Nasdaq.
Ehrmann says after the mid-March correction, emerging market investors flooded into cyclical stocks, such as paper and steel companies, leading to further declines in the telecom sector.
Gartmore, however did not follow this view and continued to show faith in the Latin America telecoms sector, which has since recovered in line with the pick up in Latin American economies.
He says: "Many companies are starting to see strong growth rates as a result of the increased uptake of cellular phones."
Another factor contributing to the recovery is that management has become more shareholder focused and is now delivering returns to investors.
Meanwhile, valuations are reasonable, Ehrmann says, noting some Brazilian telecoms are trading at six to seven times cash flow, compared to telecoms in Europe, which are trading at 11 to 12 times cash flow.
Gavin Grant, fund manager at Deutsche Asset Management, agrees with Ehrmann that telecoms in Latin America are under valued relative to their US and European peers, yet earnings growth is strong.
He adds: "Telecoms in Latin America are valued at around $1,000 to $1,500 per subscriber, compared to Europe, where they are valued at $4,200 per subscriber and Japan at $8,600 per subscriber."
In Brazil, one of the advantages in the sector is rapid consolidation among companies, which Grant expects will spread throughout Latin America. The expectations of consolidation are already starting to be realised and cellular companies in Brazil are already up 60% in dollar terms since the mid-March Nasdaq lows.
Negatives for the Latin American telecoms sector, according to Grant, are that valuations are untested, particularly for cellular phones. Additionally, while much of the growth expectations in telecoms is determined by valuations relative to subscribers, in Brazil, 80% of cellular phone usage is through prepaid phone users, which are less profitable than contract customers, Grant says.
One of Deutsche's key holdings in the Latin American telecoms sector is Tele Nordeste Cellular, a global cellular company which is benefiting from strong growth in cellular phone usage and a likely candidate for consolidation.
Ehrmann's two key overweight positions are Carso Global Telecom in Mexico and Tele Norte Leste in Brazil. He says Carso Global Telecom is an extremely well managed company, which offers significant top line growth, reflecting the current growth in the Mexican economy.
Ehrmann added: "Tele Norte Leste is a good regional operator in Brazil which is benefiting from a high demand for fixed wire, after a previous lack of readily available access to telephones when the telecoms were privatised."
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