After the crash of technology, media and telecoms in 2001, the telecoms sector has recovered to beco...
After the crash of technology, media and telecoms in 2001, the telecoms sector has recovered to become the strongest performer of the Dow Jones Euro Stoxx Index over the 12 months to 7 April.
With investors avoiding telecoms owing to high debt levels among member stocks, companies were forced to rethink their strategies and abandon aggressive growth plans.
Companies like BT and Dutch telecoms operator KPN set a trend in the market of financing their debt with rights issues to increase their cashflow. Most of the major European companies followed suit and began to cut costs.
Aaron Barnfather, director of investment management for European equities at Newton Investment Management, says this restructuring of balance sheets has left the European telecoms sector as one of the most frequent upgrades in terms of earnings forecasts.
He says a focus by management, often newly installed, on increasing cashflow while cutting debt and capital expenditure made the industry less price competitive and so small players were unable to survive, increasing market share for those left standing.
But if too many sector participants fail and price competition is substantially reduced, there are fears individual country regulators could intervene.
Nigel Masding, global technology and telecommunications analyst at First State, says: 'Europe tends to be regulator- specific so each country would have a designated regulator which is looking for areas to impose more regulation upon. If there are one or two operators or dominant players per market then there will be a need for intervention by regulators.' By contrast Barnfather believes in most European countries the regulatory environment has already been established and it is not likely to change in the near future.
Governments also remain key shareholders of many privatised telecoms, and a desire to protect the value of their investment means they may be unlikely to encourage more regulation.
European telecoms have shown a marked reduction in capital expenditure since 2001, when billions were being spent on third generation mobile and fibre-optic technology. Masding says: 'There are three types of capital expenditure for telecom companies. Expenditure to support new infrastructure like geographical coverage or third generation technology, expenditure to support rising capacity with the increase in subscribers and maintenance expenses.
'Maintenance charges never cease but they are low compared to the other two. The industry's capital expenditure is falling because wireless companies have delayed the roll-out of third generation technology. The growth rate of subscriptions has been falling so there has been a lesser need for capital expenditure.'
Masding adds that because the market has fallen substantially last year, some of the stocks in the European telecom sector are reasonable value.
Some companies like BT cut their dividends last year in order to use cashflow for debt repayments but have reinstated dividends this year. Wireless companies, many of which have no history dividend payment, are also beginning to pay out.
Successful restructuring in European telecoms.
Attractive valuations in the sector.
Dividends regenerated in fixed line businesses.
Cautious, Balanced & Dynamic Growth
Cowardly, boring or sensible
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