Scottish Daily Mail

Ring­ing the changes in tele­coms in­dus­try

Stock pick­ers show a lit­tle more love for mo­bile firms

- By Anne Ash­worth Business · Investing · Vodafone · Deutsche Telekom · BT Group · Everything Everywhere Limited · iPhone · Apple Inc · Huawei · Frankfurt · Hong Kong · Nigeria · Virgin Media · Talk Talk · Talk Talk · Fidelity Investments · Telefonica

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.

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