#Telcos #Investing One sector which we have heavy exposure to across all of our portfolios are the Telcos. We have built and maintained a large position in the sector based on a number factors including attractive valuations, high dividend yield, and defensive earnings. Growth is now coming through from a once “steady state sector” with the explosive demand for data and not to mention the transitioning multimedia landscape. The journey over the past 14 years for the sector is pretty incredible when you think about. Hark back to the days of dotcom mania around the turn of the century, and telco stocks became caught up in the tech boom and were the glamour stocks of the day. Valuations reached crazy heights and levels generally not seen since 2000. After the dust settled, traditional telecoms started to be viewed as highly cash generative businesses but priced as utilities if more than anything. Many analysts fretted over the decline in old revenue streams such as landlines, but failed to see the green shoots coming through and the advent of new revenue streams Then of course with the rapid evolution and spread of the mobile phone, fears set in that a collapse in fixed line revenues would be the death of the traditional telco. We have generally taken the opposite view, giving the telcos credit for finding ways to leverage new technologies to their advantage. This has generally played out with many telcos reinventing themselves, and driving growth through broadband, services, cloud technologies, as well as other means. As such we have had long standing holdings in Telstra Spark, Amcom and M2 in Australia, BT Group and Vodafone in the UK. In China we have a large position in China Mobile – which will potentially be the juggernaut of them all. British Telecom has led the path to recovery amongst the commonwealth Telcos There has been a pattern of reinvention within the Telco sector which has played out globally. I was intrigued that many analysts would get caught up in the intricacies of individual Telecom companies, completely missing the bigger picture. One by one, each company began to turnaround, yet this has not been obvious to many until only recently. In terms of the stocks we hold, in the UK BT was one of the first to transition. BT was then followed by Telstra and now Spark in NZ and China Mobile. Just as Telstra has followed British Telecom in transforming and in being rerated by the market… With their robust cash flows, and high growth prospects, the Telcos generally have become fantastic dividend payers. This has also enabled the sector to weather the storm better than they used to, especially during times of volatility. Demand has been high for Telco stocks in recent years with investors attracted to yield in a low interest rate environment, however I believe the sector is now being rerated and priced for growth. Recently an increasing number of institutional analysts have looked at the telcos as being ‘ex-growth’ and not the best investment in a highly competitive environment. However I think the herd may well be making the same mistake again, and not giving sector participant’s credit for reinventing themselves. Particularly when many have strong brands, powerful market positioning, and buckets of cash. A case in point is Spark (formerly Telecom) New Zealand, which our research team first recommended at A$2.11 last year. What was interesting about Spark is that it was actually highly correlated to the other Telco’s such as Telstra, but lagging in terms of relative performance by a few years. We believed the Telco would follow a similar successful transformation, and close the gap with the rest of the sector. Technically, Spark is following the same trajectory as Telstra, only a year or 2 behind. Major historical resistance has now been cleared at NZ$2.95. Spark has embarked upon a major rebranding and repositioning of which the name change was one part. The rebranding is a reflection of the multi-faceted provider that Telecom is now becoming which will override traditional biases by investors and customers alike, many of which still see it as a clunky, once stated-owned, Telco. But that is yesterday’s story. Interestingly, many in the analyst fraternity were sceptical about the transformation of Spark, and were very slow to give the telco any credit. However I think that the penny may finally be dropping yet again, with Spark putting the wood on the table in terms of it rebranding initiatives. The rebranding was also scoffed at by large swathes of the media, but many are also being made to eat humble pie. At Spark’s AGM last week the CEO said that We are seeing an increase in foot traffic into retail stores, and an increase in online traffic to our websites. He also said that it was absolutely unquestionable that the name change had proved to be the right move. Certainly shareholders can’t argue with a return of over 50 percent (including dividends) since the name change earlier this year. It’s of course not just about a change in name, but the process that Spark is going through. Costs are being taken out in areas which need to be made leaner, but investment is occurring in others where there are excellent growth prospects. Spark is also taking on Vodafone in mobile, where there are really only three players (the other being 2Degrees) in the NZ market. Spark has bought up four lots of 4G spectrum which leaves it well positioned compared to competitors Vodafone and 2Degrees who have 3 and 2 lots respectively. The company has over 2 million mobile connections and is closing in on Vodafone. Spark also has over 800,000 fixed and mobile internet and broadband customers across NZ. Spark is also beefing up its presence in the cloud services space through acquisition. Meanwhile a push into online entertainment also could offer up significant earnings growth over the medium to longer term. We believe it can leverage its offering to that provided by the existing dominant player, Sky. Spark also has the cloud in mind in its collaboration with Telstra and Vodafone on a second optical-fibre link between New Zealand and Australia. Interestingly many are also still sceptical on the push into internet TV, which brings me to another one of our portfolio holdings BT Group (held in the Concentrated UK portfolio) in the UK. Many scoffed at BT’s move into TV, and sports in particular, a few years ago. This strategy is now paying dividends (and the share price has risen around 200% over the last 5 years). Last quarter TV revenues were ahead by 17 percent and added 38,000 TV customers added. The BT Sport channel saw Premier League audiences rise an impressive 45 percent on average over the same quarter last year. And scepticism with respect to the Telcos is nothing new. We well recall the day when you couldn’t give Telstra (we still hold TLS as one our largest Australian holdings) shares away at $2.65. Today they are north of $5.75 and at 7 year highs. Many are still mystified as to how the Australia’s largest Telco did it. Another example is Vodafone which we also hold in the UK. The company is cash rich following the sale of Verizon Wireless. Yet again much of the ‘herd’ in the UK are bemoaning that the European mobile market is ‘too competitive’ and ex growth. Just today Vodafone announced it is planning to move into home internet and TV. Early indications are that this is also being scoffed at. I suspect it will be a while before the penny drops here as well. In our minds, what the market continually misses, is the ability of the Telco’s to reinvent themselves in a dynamic changing environment. Convergence (of Telco’s, internet, and TV) is seen by many as a big risk, when in reality it is an opportunity with the Telco’s having a prime seat at the table on the back of strong brands, distribution, and balance sheets. For a free investment report from @FatProphets Please click here: fatprophets.au/brand4?ref=social_media_AUS Show less
Posted on: Wed, 12 Nov 2014 03:12:59 +0000
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