The telecommunication services sector is expected to see a return to stability in 2003 as it continu...
The telecommunication services sector is expected to see a return to stability in 2003 as it continues to move away from expansion and focuses more on corporate restructuring.
Over the first two weeks of January, MMO2 and Vodafone were among the 10 best performers in the FTSE 100, returning 12.99% and 7.95% respectively.
Over the same period, the telecommunications services sub-sector of the FTSE All-Share was the second best performer in the UK market, rising 10.04%.
UK portfolio manager at JP Morgan Fleming Asset Management Alan Custis says: 'We think 2003 will be a year of growth in the telecommunications sector. The whole expansionary strategy is reversing and there is a real focus on management.'
Ralph Brook-Fox, investment manager at Britannic, agrees with this assessment.
'The telecoms industry has been far too optimistic in the past, both in terms of the amount of money it thought it could generate and by promising too much too soon, which impacted upon the sector across Europe. It is only beginning to crawl its way out so there is potential for stocks to surprise on the upside,' he said.
Custis expects a 15%-20% increase in dividends for BT and Vodafone in 2003. He says: 'There should be a return to the shareholder this year with BT driving down its debts and Vodafone buying back shares. Dividend growth will be at the forefront over the next few years.'
Brook-Fox feels revenue expectations for 2003 are much more realistic, citing BT as a good example of this. Six months ago, he notes, the company's management had set itself ambitious targets, which it has since abandoned in favour of more realistic models.
Brook-Fox predicts growth in dividends for BT and Vodafone, although he remains unconvinced about MMO2's ability to pay dividends because it is less established than others in the market.
He says: 'MM02 is pretty cheap compared to Vodafone and there are potential catalysts for consolidation. A merger of its German operations could crystallise quite a lot of value and people may be pleasantly surprised at how much could be extracted.
'That could send shares up quite a bit but MM02 is the company most at risk from regulation. If it can get through that, it is the stock with the most potential upside.'
Both Brook-Fox and Custis see risks from Oftel's plan for regulating mobile call charges. Brook-Fox notes: 'MMO2 is most exposed to this because its most profitable business is currently in the UK, while its German operation is losing money and its Irish business is small.'
The company's heavy reliance on the UK market means it will be harder hit by Oftel's plans than its more global competitors, he adds.
The other potential obstacle to the sector as a whole is the impact a new competitor could have on the market.
'Hutchinson is to launch in the UK imminently,' says Brook-Fox. 'That will be a fifth player in the market, which is already fairly competitive.'
Other companies offering potential for growth include Cable & Wireless, although the firm remains a high-risk investment compared to other telecom services companies due to its debt problems, Brook-Fox says.
Return to stability within the sector.
Return to dividend growth in 2003.
Potential for strong upswing.
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