Covid-19 Sector Reviews: Telecommunications

3rd Sep '20 by Keelan Cooper

10 comments 4227 reads

Over the last decade, the Telecommunications sector has gone through a period of rapid structural change. The development of new communication systems, such as Voice over Internet Protocol (VoIP), by the world’s largest and most innovative technology companies, has chipped away at the revenues generated by the traditional Telecoms stalwarts.

The impact of intense cross-sector competition has led to the Telecommunications sector being one of the worst performing sectors over the last 5 years. The FTSE All Share Telecommunications benchmark has fallen by a staggering -61.86% over this timeframe, as opposed to a -4.18% fall in the FTSE All Share. This has similarly been reflected across the world, with many large Telecoms operators diversifying their operations into other sectors to try and cope with the unfavourable market dynamics.

However, after a lacklustre performance for the best part of this decade and a prolonged period of secular stagnation, the development of 5G communications could change the fortunes of many companies within the sector. An excellent research paper published by IHS Markit estimates that the total 5G value chain will contribute $3.5 trillion in output and support over 22 million jobs in 2035. In fact, over the period from 2020-2035, IHS believes that the total contribution of 5G to world GDP will be similar to an economy the size of India.

In this article, we will explore the impacts of the pandemic on the Telecommunications sector and assess the performance of the industry groups within the sector in more detail. The article will also evaluate some valuation metrics of the industry groups and take a closer look at some of the top-ranking stocks in the sector, highlighting how these companies have responded to the pandemic and what may possibly lie ahead.

Performance of the Industry Groups

Of the two industry groups within the broader Telecommunications sector, the Fixed Line Telecommunications industry has fared far worse, with the benchmark almost halving since the start of the year. The benchmark tracks the performance of BT, TalkTalk and Telecom Plus and the former two have suffered from an accelerated deterioration in performance since the outbreak of Covid-19.

In recent years, fixed line telecommunications companies have suffered from the shift away from landline telephones to other means of communication. According to…

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AnonymousUser30701

3rd Sep '20

5G will need lots of antennas.. so is MWE sending out a powerful signal?

peterthegreat

Is the author aware of Gamma Communications? Shares are up about 500% over the past 5 years and the company is a beneficiary of COVID-19. It would have been interesting to understand how this telecom company managed such a good performance when the sector as a whole performed so badly.

Robert W

I was going to make the same point - Gamma is a great company (as is Telecom Plus). They have been able to serve the SME market in a way that <all> of the network operators have utterly failed - primarily by employing bright people, having good IT and a great customer service culture. (I work in a tangentially related industry so come across them reasonably often). I just wish I owned some shares in them - every time I have looked at them, I have judged them to a be a little too expensive and every time I was wrong!

aflash

The telecoms have been traders' territory for the past two years or so.

Most are listed on New York so I was able to make constant comparisons.

Fundamentals are similar. Some have too much debt. Dividends are an item.

I bought and sold the U.S., Chinese and U.K. incumbents but the Brazilian (VIV) and Singapore ones had interesting moves too.

It was an attempt to get away from B.T.'s reputation for poor service, copper wiring and pension deficit but buying when the stock was oversold and selling soon afterwards provided as good profits as those with a better reputation.

VZ and T and CHU and CHL, even TEF have all contributed but investors are generally suspicious and you cannot hold for long. I thought the Chinese advantage of not having to remove Huwaie components would help. It avoided the drops seen in BT and VOD, helped NOK and ERIC but did little for CHL, CHU and CHA.

All in all a bit of a minefield and not a Value alternative to Nasdaq Hi-Tech.

Metatron

4th Sep '20

Welcome any views on Singapore Telecom?

.........SGAPY on New York.

Stockopedia does not pick up the ADRs ending in 'Y'.

From another data base fundamentals do not stand out. Growth rate is negative, Morningstar thinks it is fully valued. Earnings yield 7,26. P/E 13,78. Dividend poor.

Average daily volume is the killer only 81 937.

Turning to the chart.

In a 5 year downtrend.

Buying in May 2019 saw a price rise from 22$ to 26$.

Buying in March 2020 from 16ish to 20$.

Presently 16,53$

DYOR especially if you have access to the Singapore market (Z74 XSES)

Do not know their position on 5G, Huwaie.

AnonymousUser1117153

4G's range is 10 miles, 5G's is about 1500 feet - correct me if necessary. I can see this working in cities, but how will it become provincial without relying on a massive fibre backbone? The transmitters would be on every 2nd lamp post (600ft).

T-mobile say a transmitter can cover an area of "hundreds of square miles" but there's a little bit of sophistry here when a 5.7mile radius works out at a hundred square miles, and an 8 mile radius is "hundreds of square miles" i.e. 200sqm.

These frequencies are also more susceptible to adverse weather conditions. They don't reflect and bend like lower frequencies - it's straight lines only, and could struggle to penetrate a sausage roll (only relevant if that's where you keep your phone)

Not sure I'm totally in on 5G being ubiquitous unless Starlink enters very-very-very-low earth orbit.

I'm very curious to hear how it might work though so very happy to be corrected on any of my premises.

Retireyoung

5th Sep '20

Thanks Keelan. This is very relevant for me considering Telecom Plus (LON:TEP) and Airtel Africa (LON:AAF) are my two biggest holdings. I have held Telecom Plus (LON:TEP) for about 12 years after Robbie Burns personally recommended it to me, and I have to say, it's done very well over this time.... I'm about 500% up and the company's interesting model seems to do well both in good and bad economic conditions.

I have been very optimistic about Airtel Africa (LON:AAF) prospects, living in Africa myself and having travelled to the continent extensively over the last 20 years. Everyone in urban Arfica wants to own a smart phone and buying talktime is a spending priority. Also, access to digital financial services is a massive, largely untapped market as most can't get a bank account, and get money transferred from relatives abroad or in different cities. Airtel is getting strategic in this regard with its new partnerships with banks and big money transfer companies. The big African cities are literally transforming every year into modern commercial hubs (e.g. there are 10 shopping malls within 10 minutes drive of my house in Lusaka.. crazy).

However, I would be very interested in what you think about Abtan's analysis of Airtel Africa (LON:AAF) ability to generate cash in the discussion section. He is far less optimistic about their financials and ability to maintain dividend, despite reasonable top line growth.

Thanks in advance!

Ben1

6th Sep '20

I agree I see 5G as being for the the cities only.

Covid-19 Sector Reviews: Telecommunications

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Keelan Cooper

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