Scottish Daily Mail
Ringing the changes in telecoms industry
Stock pickers show a little more love for mobile firms
Millions of us check our phone as many as 150 times a day, and this dependency is deepening. Vodafone reports that during lockdown, customers used a third more mobile data – they also made 20pc more calls.
But there is a disconnect between our reliance on the telecoms companies that supply us with mobiles, landlines and broadband and our feelings towards their shares.
since pandemic alarm took hold in February, the stoxx Europe Telecommunications index has fallen by 19pc.
The index’s key constituents are Deutsche Telekom, Ericsson, nokia, orange, Telefonica (the spanish owner of o2), BT and Vodafone, whose shares are down 15pc since February.
lately, however, the index has edged upwards.
is this a signal for a change of heart towards these companies? Are the revenues from the roll-out of the new 5G network, with its rapid download speeds, a reason to reconsider the sector?
Currently there is a more upbeat stance towards telecoms than for some time.
BT – whose mobile brand is EE – reports ‘very, very strong’ sales of the new iPhone 12, which supports 5G. But Apple’s sleek design is the main reason why this device will be a popular Christmas present and anyone thinking of taking a bet on BT or any other company should be aware of the array of challenges they face.
The firms must upgrade networks before Brexit and remove equipment from the banned Chinese telecoms group Huawei from 5G systems. As we learnt this week, tough new cyber- security rules will be set by the Government rather than the industry.
Customers are hanging onto their phones for longer, opting for less lucrative siM-only deals, while lockdown store closures have meant fewer impulse purchases of the latest models. Roaming charge revenue has tumbled because hardly anyone has been travelling.
To boost profit margins, operators are resorting to a favourite tactic, offering bundles of services – mobile, broadband, entertainment, smart devices – to customers. But this strategy, known as convergence or ‘triple play’, is not the silver bullet that will ensure telecoms are seen less as utilities and more as glamorous tech stocks, with their lofty valuations.
Transformation, however, is taking place, as Richard Hunter of interactive investor emphasises.
He cites the €20bn plan for a listing in Frankfurt of a stake in Vantage Towers – the company that holds Vodafone’s 68,000 European cell towers in which space is leased out to other operators.
‘This could raise €5bn to pay down some of Vodafone’s €44bn in debts,’ he says.
Hong Kong group CK Hutchison, owner of Three, has shrunk its debt by selling its own European towers to the spanish group Cellnex, whose shares have risen by a third this year. HunTER also points out that Vodafone is payi ng a dividend and offers a yield of 6.56pc, the reason most analysts consider it a buy.
BT needs cash to resume dividend payments, to fund its infrastructure arm openreach – which is under order to bring gigabit broadband to more households – and also to sort i ts pension scheme deficit.
When BT featured in investment Extra in september, there was talk of a bid. This has not yet materialised, but the sale next year of a stake in openreach is a possibility. A slice of the proceeds could help plug the pensions hole. But an openreach sale remains politically fraught. it sits at the heart of the nation’s defence telecoms network. its clientele includes most mobile operators, whose services have enabled home working. This protected over £200bn of uK economic output during the first lockdown, according to Telefonica.
The spanish company’s transformation project was the merger of its uK mobile arm o2 with liberty Global’s Virgin Media. But now that deal is to be investigated by the competition watchdog, the CMA, a blow for Telefonica – yes, it too is heavily indebted – whose shares have nearly halved since February. Yet they are still rated a hold by most analysts, underlining the more positive perception of telecoms businesses.
You may find this optimism overdone, especially since Talk Talk may succumb to a 97p-a-share bid from Toscafund, the hedge fund, which, only last year, was willing to pay as much as 135p.
But you may already have a stake in the reassessment of the sector if you are an investor in Fidelity special situations, or the Fidelity special Values trust.
They hold Ericsson, Vodafone and also Zegona Communications whose mission is to acquire European telecoms businesses.
All the operators will be keen to find out which companies are on Zegona’s Christmas list.