Telco sector outside Australia more attractive
Investors interested in the telecommunications sector should look globally for the best investment opportunities after Telstra downgraded its earnings, Antipodes Partners said.
However, the major global telecommunication markets also faced structural challenges, the firm warned, indicating that both Australia and Singapore saw heightened competition with the emergence of the government-owned National Broadband Network (NBN).
Following this, many existing telecommunications firms were reduced to “little more than resellers”.
Antipodes’ chief investment officer, Jacob Mitchell, said the global telecommunication sector had de-rated relative to multiples, warning that stocks might be cheap “for a reason”.
“For example, one reason is the view that the sector will remain a proverbial black hole for capital spending and that profitability will continue to decline,” he added.
“After significant rounds of spending on 3G, 4G and fixed-line fibre, investors are justifiably weary of the constant drain on telco cash flow.”
At the same time, Antipodes pointed to Korea as a potential telecommunications market offering growing opportunities for investors, with the ex-government-owned operator KT Corporation (KT) entering a period where capital expenditures would trend structurally lower than annual depreciation, and growth in free cash flow should accelerate.
“It has also become one of the cheapest telecommunications stocks globally with an enterprise value (EV) to sales multiple of 0.6x and EV to EBITDA of 2.6x but, more importantly, is also trading on a highly attractive EV to free cash flow yield of approximately 15 per cent,” Mitchell stressed.
Antipodes said it has currently around of eight per cent of its global portfolios invested in global telecommunications, which is reflective of the value the firm sees in the sector.
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