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UBS Investment Research
UBS Global Telecommunications
Changes to our most and least preferreds
„ Adding Bezeq to our most preferred list
Bezeq has pulled back c.8% from its highs in recent days, partly due to concern
around events unfolding in the Middle East. We see earnings upside from the
renewed Union deals, network efficiencies from the move to fibre, and expect the
mobile market to stay rational despite recent MTR cuts. The announcement of a
series of special dividends provides for a 13-14% annual cash return.
„ Replacing Bharti with Idea as a most preferred
We remain positive on the Indian market, due to stabilising price competition, a
more visible regulatory outlook given the new Minister of Telecoms, and prospects
for consolidation. We have changed our exposure from Bharti to Idea for pure play
exposure to India. Also, Idea could be a consolidation candidate, in our view.
„ Replacing VimpelCom with MTS as most preferred.
Given the ongoing issues between VimpelCom and Telenor, we are changing our
Russian exposure into MTS. We still have exposure to upside at VimpelCom
through our inclusion of Telenor. We are also removing Turkcell from the least
preferred list due to the recent weak performance.
„ Our picks remain biased to market structure, cable, dividend upside
We now have 11 most preferred names, six are GEM, two have significant
exposure to emerging markets, and five are likely to positively surprise on
dividends in our view. Our least consensus calls remain AMX, Indosat, Unicom.
Changes to our portfolio
Q Most preferred: Replacing VimpelCom with MTS;
Q Most preferred: Replacing Bharti with Idea;
Q Most preferred: Add Bezeq;
Q Least preferred: Remove Turkcell.
Replacing VimpelCom with MTS as most preferred
Although we think VimpelCom remains cheap both on current and pro-forma
post-deal numbers, due to delay in the completion of the deal, and the ongoing
dispute between Telenor and Altimo and its potential ramifications for the deal,
we believe there is a risk that the stock remains cheap until there is increased
clarity on whether the deal is going through and how the relationship between
the key shareholders will be resolved. MTS has slightly underperformed
VimpelCom over the last three months and is only on a modest premium of c.
10-15% on most valuation multiples, which we believe is reasonable given the
uncertainties surrounding VimpelCom. We upgraded the stock to a Buy on 18th
January.
Removing Turkcell from least preferred list
Although Turkcell remains among our least preferred EMEA telcos, we have
removed it from our global bottom picks following a period of weakness both in
the share price and the Turkish lira. 2011 guidance released by the company at
its recent analyst day targets high single digit revenue and EBITDA growth,
both of which are slightly above our current forecasts. It is possible that margins
could improve, depending on the competitive dynamics of the market. At this
point we do not see this happening yet, but view it as a possible upside risk.
Other changes that would make us more positive would be an increase in the
payout ratio, and/or moves to buy back shares under new legislation allowing
for this.
Adding Bezeq to the most preferred list
Bezeq has pulled back c.8% from its highs in recent days, partly due to concern
around events unfolding in the Middle East. We see earnings upside from the
renewed Union deals, network efficiencies from the move to fibre, and expect
the mobile market to stay rational despite recent MTR cuts. The announcement
of a series of special dividends provides for a 13-14% annual cash return.
Replacing Bharti with Idea as a most preferred name
We remain positive on the Indian market, due to stabilising price competition, a
more visible regulatory outlook given the new Minister of Telecoms, and
prospects for consolidation. We have changed our exposure from Bharti to Idea
for pure play exposure to India. Also, Idea could be a consolidation candidate, in
our view.
A reminder of our view on Global Telecoms
Q The sector remains cheap, but with growth scarce – and competitive,
regulatory and technological risks evident – it pays to be selective.
Q Our themes and stock picks for 2011 focus on the remaining drivers of
growth – mobile data, superfast broadband, and TV.
Q We also look for instances where higher-than-expected dividends may
surprise the market positively.
Telecoms in a global context
Versus the wider market, the telecoms sector as a whole is characterised by
lower growth, cheaper valuations and higher yields. Globally, we expect 2.5%
revenue growth from the telcos compared to 6.4% for the wider market. Telcos
in every region offer a premium dividend yield; globally our yield of 5.3%
compares to the market at 2.8% and the next highest sector, utilities, at 4.3%.
Be selective: growth, market structure, dividend upside
However, with growth opportunities scarce, we see few catalysts for a wholesale
sector re-rating, and prefer to be selective. Our themes focus on the growth areas
in telcos – namely mobile data, TV and superfast broadband – and the
companies that offer the best exposure to these themes. We pick names that
operate in good underlying market structures, and with upside, or at least limited
downside, from superfast broadband. Within our top 10, we believe at least five
can surprise significantly on cash returns.
Wireless data – it’s all about market structure
Globally, we expect penetration of smartphones to rise from 16% at end 2009 to
21% at end 2010 and 27% by the end of 2011. For some operators, this should
result in improved revenue trends and additional EBITDA, with capex
remaining manageable. For others, we continue to see falling revenues,
accelerated declines in EBITDA due to subsidies, and upward pressure on capex
as attempts to introduce tiered data pricing are thwarted by competitive
pressures.
Market structure and market position will be the critical determinants of which
path the individual operators follow. We think China Unicom and Indosat are
best placed to benefit from data growth in Asia, given that low voice pricing
limits downside. In Europe, we like the market structure enjoyed by KPN and
Telenor in particular. We believe that robust market structure should favour both
America Movil and Telefonica in Latin America. In the US, we see continued
marginalisation as a risk for T-Mobile (DT) and Sprint.
Positive on cable, cautious on copper
Fibre rollouts aside, cable networks are generally better placed to offer superfast
broadband than the traditional incumbent businesses. This dynamic has been
evident in Europe, where cable has consistently gained share in markets where it
has a presence. In the US, competition from online providers and the weak
economy has resulted in weaker trends recently, but we expect these to turn
around.
We regard Virgin Media as the best play on this theme in Europe, with Telenor
also well protected by its ownership of cable. In the US, we favour Comcast. We
remain cautious on a number of fixed line businesses that face competition from
cable, including BT, Deutsche Telekom and Bell Aliant (Canada).
Upside to dividends for several of our top 10
Telecoms already offers premium yields in most markets, but we believe some
stocks could have further opportunity to enhance cash returns, as well as FCF
yields, through more cash returns. As we show in the following section, which
illustrates our forecasts versus consensus, we see more than 8% upside to
dividend forecasts at five of our top picks. We expect buybacks at two.
We expect only modest M&A
We expect M&A to be relatively limited, and to fit into a few broad categories.
Firstly, we think we could see interest from mobile operators in providers of
alternative fixed infrastructure as a means to reduce churn and optimise network
usage. Secondly, scarcity of spectrum could provoke some transactions,
especially in the US. Thirdly, we are likely to see companies continue to attempt
to rationalise their portfolios of non-core or non-controlled assets. Finally, we
may see some limited footprint deals.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
UBS Global Telecommunications
Changes to our most and least preferreds
„ Adding Bezeq to our most preferred list
Bezeq has pulled back c.8% from its highs in recent days, partly due to concern
renewed Union deals, network efficiencies from the move to fibre, and expect the
mobile market to stay rational despite recent MTR cuts. The announcement of a
series of special dividends provides for a 13-14% annual cash return.
„ Replacing Bharti with Idea as a most preferred
We remain positive on the Indian market, due to stabilising price competition, a
more visible regulatory outlook given the new Minister of Telecoms, and prospects
for consolidation. We have changed our exposure from Bharti to Idea for pure play
exposure to India. Also, Idea could be a consolidation candidate, in our view.
„ Replacing VimpelCom with MTS as most preferred.
Given the ongoing issues between VimpelCom and Telenor, we are changing our
Russian exposure into MTS. We still have exposure to upside at VimpelCom
through our inclusion of Telenor. We are also removing Turkcell from the least
preferred list due to the recent weak performance.
„ Our picks remain biased to market structure, cable, dividend upside
We now have 11 most preferred names, six are GEM, two have significant
exposure to emerging markets, and five are likely to positively surprise on
dividends in our view. Our least consensus calls remain AMX, Indosat, Unicom.
Changes to our portfolio
Q Most preferred: Replacing VimpelCom with MTS;
Q Most preferred: Replacing Bharti with Idea;
Q Most preferred: Add Bezeq;
Q Least preferred: Remove Turkcell.
Replacing VimpelCom with MTS as most preferred
Although we think VimpelCom remains cheap both on current and pro-forma
post-deal numbers, due to delay in the completion of the deal, and the ongoing
dispute between Telenor and Altimo and its potential ramifications for the deal,
we believe there is a risk that the stock remains cheap until there is increased
clarity on whether the deal is going through and how the relationship between
the key shareholders will be resolved. MTS has slightly underperformed
VimpelCom over the last three months and is only on a modest premium of c.
10-15% on most valuation multiples, which we believe is reasonable given the
uncertainties surrounding VimpelCom. We upgraded the stock to a Buy on 18th
January.
Removing Turkcell from least preferred list
Although Turkcell remains among our least preferred EMEA telcos, we have
removed it from our global bottom picks following a period of weakness both in
the share price and the Turkish lira. 2011 guidance released by the company at
its recent analyst day targets high single digit revenue and EBITDA growth,
both of which are slightly above our current forecasts. It is possible that margins
could improve, depending on the competitive dynamics of the market. At this
point we do not see this happening yet, but view it as a possible upside risk.
Other changes that would make us more positive would be an increase in the
payout ratio, and/or moves to buy back shares under new legislation allowing
for this.
Adding Bezeq to the most preferred list
Bezeq has pulled back c.8% from its highs in recent days, partly due to concern
around events unfolding in the Middle East. We see earnings upside from the
renewed Union deals, network efficiencies from the move to fibre, and expect
the mobile market to stay rational despite recent MTR cuts. The announcement
of a series of special dividends provides for a 13-14% annual cash return.
Replacing Bharti with Idea as a most preferred name
We remain positive on the Indian market, due to stabilising price competition, a
more visible regulatory outlook given the new Minister of Telecoms, and
prospects for consolidation. We have changed our exposure from Bharti to Idea
for pure play exposure to India. Also, Idea could be a consolidation candidate, in
our view.
A reminder of our view on Global Telecoms
Q The sector remains cheap, but with growth scarce – and competitive,
regulatory and technological risks evident – it pays to be selective.
Q Our themes and stock picks for 2011 focus on the remaining drivers of
growth – mobile data, superfast broadband, and TV.
Q We also look for instances where higher-than-expected dividends may
surprise the market positively.
Telecoms in a global context
Versus the wider market, the telecoms sector as a whole is characterised by
lower growth, cheaper valuations and higher yields. Globally, we expect 2.5%
revenue growth from the telcos compared to 6.4% for the wider market. Telcos
in every region offer a premium dividend yield; globally our yield of 5.3%
compares to the market at 2.8% and the next highest sector, utilities, at 4.3%.
Be selective: growth, market structure, dividend upside
However, with growth opportunities scarce, we see few catalysts for a wholesale
sector re-rating, and prefer to be selective. Our themes focus on the growth areas
in telcos – namely mobile data, TV and superfast broadband – and the
companies that offer the best exposure to these themes. We pick names that
operate in good underlying market structures, and with upside, or at least limited
downside, from superfast broadband. Within our top 10, we believe at least five
can surprise significantly on cash returns.
Wireless data – it’s all about market structure
Globally, we expect penetration of smartphones to rise from 16% at end 2009 to
21% at end 2010 and 27% by the end of 2011. For some operators, this should
result in improved revenue trends and additional EBITDA, with capex
remaining manageable. For others, we continue to see falling revenues,
accelerated declines in EBITDA due to subsidies, and upward pressure on capex
as attempts to introduce tiered data pricing are thwarted by competitive
pressures.
Market structure and market position will be the critical determinants of which
path the individual operators follow. We think China Unicom and Indosat are
best placed to benefit from data growth in Asia, given that low voice pricing
limits downside. In Europe, we like the market structure enjoyed by KPN and
Telenor in particular. We believe that robust market structure should favour both
America Movil and Telefonica in Latin America. In the US, we see continued
marginalisation as a risk for T-Mobile (DT) and Sprint.
Positive on cable, cautious on copper
Fibre rollouts aside, cable networks are generally better placed to offer superfast
broadband than the traditional incumbent businesses. This dynamic has been
evident in Europe, where cable has consistently gained share in markets where it
has a presence. In the US, competition from online providers and the weak
economy has resulted in weaker trends recently, but we expect these to turn
around.
We regard Virgin Media as the best play on this theme in Europe, with Telenor
also well protected by its ownership of cable. In the US, we favour Comcast. We
remain cautious on a number of fixed line businesses that face competition from
cable, including BT, Deutsche Telekom and Bell Aliant (Canada).
Upside to dividends for several of our top 10
Telecoms already offers premium yields in most markets, but we believe some
stocks could have further opportunity to enhance cash returns, as well as FCF
yields, through more cash returns. As we show in the following section, which
illustrates our forecasts versus consensus, we see more than 8% upside to
dividend forecasts at five of our top picks. We expect buybacks at two.
We expect only modest M&A
We expect M&A to be relatively limited, and to fit into a few broad categories.
Firstly, we think we could see interest from mobile operators in providers of
alternative fixed infrastructure as a means to reduce churn and optimise network
usage. Secondly, scarcity of spectrum could provoke some transactions,
especially in the US. Thirdly, we are likely to see companies continue to attempt
to rationalise their portfolios of non-core or non-controlled assets. Finally, we
may see some limited footprint deals.
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