Stock pickers rarely do a proper analysis of sectors and stocks within each sector to find the hidden gems, or standout stocks that may provide much-needed diversification in a portfolio. In this week's column we study the telecommunications sector (XTJ), which is dominated by one of Australia's biggest companies - Telstra.
In looking at the chart below, you can see that the telco sector has performed remarkably well considering the year we've just been through. While other sectors have gyrated wildly - with many heading sharply lower - telcos have steadily risen. The index is up 15.6% for the year and the largest 14 stocks boast an average 14.35% gain. Just five stocks have fallen (with one of those falling 1%), and the top gainer is up 142.5%. Meanwhile the ASX200 has tumbled 10.8% over the past 12 months.
Chart: XTJ 1 year price chart as at 4/11/2011, source: Yahoo
Although it has had a stellar past year, the telecommunications index has actually been a poor performer for some time. It has lagged the ASX200 by a large margin and has been significantly lower than its sister index, the IT index (XIJ). This year's strong performance may welll be a sign that the sector is finally on the rise. The chart below tells the tale of the past seven years:
Of late the telco sector has been dominated by talk of the National Broadband Network (NBN), with large and small players alike jostling for position. The NBN is a game-changer that will long dominate the sector as it is projected that it will take 10 years to roll out - until June 2021 on current estimates. 1,000,000 Australians will be connected to the NBN by the end of 2013.
However with at least one change in Goverment likely before 2021, if not several, it could well take much longer to be completed. The NBN has prompted plenty of political wrangling and this is sure to continue over the coming decade.
In short, the NBN is a wholly-owned Commonwealth company that has been set up to "deliver Australia's first national wholesale-only, open access broadband network to all Australians, regardless of where they live," according to its website. It claims it "will connect 93% of homes, schools and workplaces with optical fibre, providing superfast broadband services to Australians in urban and regional towns." The remaining 7% will use fixed wireless and satellite.
As is to be expected, Telstra is the biggest winner so far. Last month Telstra shareholders approved an $11 billion deal with the federal government and NBN Co where Telstra will progressively decommission its copper-based network and allow NBN Co to access its pits, manholes and exchanges, and sell some infrastructure.
1 year return: 15.6%
Largest: Telstra (TLS), $38.9 billion market cap
Top gainers (12 months): NewSat (NWT) 142.5%, Vocus (VOC) 43.6%, BigAir (BGL) 34.2%
Biggest losers (12 months): Hutchison (HTA) -47.3%, Nexbis (NBS) -27.0%, iiNet (IIN) -13.7%
With a $38.9 billion market cap that represents 83% of the sector, Telstra casts a giant shadow over the entire telecommunications industry. Telecom NZ is next in line with a market cap of just under $4 billion, followed by TPG with a market cap of $1.1 billion. Despite its woes this year which saw its stock price plunge 47.3% to be the biggest percentage loser in the industry Hutchison is in fourth spot, while rising star SingTel - Optus Communications' parent company - rounds out the top five.
Top Gainer - NewSat (NWT), up 142.5%
Market capitalisation: $85 million
Price/earnings ratio: 285.29 times
Share price: $0.485
Chart: Share price over the year to 4/11/2011 versus ASX200 (XJO)
According to NewSat, it specialises in global satellite communications providing tailored satellite services to 75% of the earth’s surface. The company provides remote and temporary sites with fast, secure and reliable solutions ensuring unrestricted connectivity.
NewSat isn't covered by many brokers, however E.L. & C Baillieu couldn't be more bullish about Australia's leading independent satellite service provider, which had a 50-for-1 share consolidation last month to drag it out of penny stock status (it was trading at 1 cent prior to the consolidation). Baillieu says "the 1 for 50 share consolidation is the first of several initiatives designed to attract institutional investors...the old capital structure and share price precluded a number of institutions from investing in the stock." The broker has a price target of $2.50 on the telco, more than five times Friday's closing price.
Baillieu says that it has reviewed the company’s operations and strategy to leverage off its blue chip client base to become an operator of geostationary satellites in high premium markets. "We conclude that the company has a high probability of success, despite its low share price and equity base." it says.
"Although the stock is regarded as high risk, we recommend the shares based on our view of expected returns outweighing the risk profile of the investment," said Baillieu in a research report released two weeks ago. "We conclude from our sum of parts valuation that NewSat’s shares are worth closer to $4.20 cents each, compared with their current trading price of approximately $0.50 each (see table below)".
Biggest Loser - Hutchison (HTA), down 47.3%
Market capitalisation: $787 million
Price/earnings ratio: 10.74 times
Share price: $0.058
Chart: Share price over the year to 28/10/2011 versus ASX200 (XJO)
As a result of the 2009 merger between Vodafone and Hutchison 3G, Hutchson Telecommunications (HTA) - a subsidiary of global telco powerhouse Hutchison Whampoa - owns a 50% stake in Vodafone Hutchison Australia. While the merger made it the third biggest carrier in Australia behind Telstra and Optus, it has been far from smooth sailing. Network issues, lack of market penetration, falling subscriber numbers and lawsuits have dogged the company. The share price is down 47.3% this year and 75% over the past five years.
There's not much to say about this stock other than that its share price performance reflects the current state of affairs for the company. Merrill Lynch advises investors to steer of the stock, rating it as "Underperform, High Risk". Although the broker notes that the outlook is slowly improving it expects earnings will take two more years to recover. This is a long time to wait for a stock that continues to underperform. Merrill Lynch's price target is slashed accordingly, down 45% to just 5.5 cents.
Largest by market cap - Telstra (TLS)
Market capitalisation: $38,947 million
Price/earnings ratio: 11.61 times
Share price: $3.13
Chart: Share price over the year to 4/11/2011 versus ASX200 (XJO)
As Australia's most widely held stock by private investors, there's no shortage of coverage on the telco giant. And brokers are certainly bullish on the stock, with the $11 billion windfall from the decommissioning its copper network in its NBN deal received positively by investors and analysts alike.
What's more, Telstra also confirmed it would retain its fully franked dividend at 28 cents a year for the next two years. The telco giant’s share price held up well during the recent correction and John Rawicki, of Ord Minnett, expects it to go higher. He is forecasting a dividend yield of 9.2 per cent for 2012 on the back of stronger net operating cash flows increasing to $8 billion. “Telstra is in a strong position with manageable debt supported by increasing cash flows generated from growing mobile and internet businesses,” he says. “It’s a great dividend stock with potential capital growth built in.”
Austock's Michael Heffernan also notes that the stock has proved very resilient in the past few months, as the European debt crisis has severely impacted many mainstream and blue chip ASX companies. "The temporary easing in Telstra’s share price from time to time creates opportunities," he says.
UBS also has a buy and Cameron Bell from Intersuisse believes that Telstra will be able to retain its dividend yield of almost 9 per cent for several years. Meanwhile Paul Clarke from State One Stockbroking says that Telstra offers capital growth, a potentially higher share price and a bright outlook.
The combination of Telstra's high dividends and increasing market share makes it attractive to investors in uncertain times. It doesn't hurt that a swag of brokers are also crying out that it's hard to go past Telstra right now. The following table compares Telstra’s dividend yield and earnings stability against the ASX and the Telecommunications sector. As you can see, the yield is impressive - it is almost twice that of the sector.
| ||TLS ||ASX ||Telecom |
|Dividend Yield ||9.7% ||5.2% ||5.4% |
|Earnings Stability ||77.4% ||51.1% ||56.2% |
Rising Star - SingTel (SGT)
Market capitalisation: $444 million
Price/earnings ratio: 13.39 times
Share price: $2.44
Chart: Share price over the year to 4/11/2011 versus ASX200 (XJO)
South-East Asia’s largest telco Singapore Telecommunications (SingTel) makes a regular appearance on broker and fund manager lists. JP Morgan has upgraded SingTel from Neutral to Overweight, and lifted its price target based on higher growth from regional assets and associates.
SingTel expanded into Australia in October 2001 when it acquired Optus, the number 2 telco in Australia with six million customers and annual revenues of about A$5.5 billion. According to SingTel, Australia is now its major business centre outside Singapore, with offices in Sydney, Adelaide, Brisbane, Canberra, Darwin, Melbourne and Perth. Revenues from Australia constitutes nearly half of the Group's total revenues.
However the company is much more than just a holding company for Optus and its reach extends throughout Asia. Singapore’s very own ultra high speed national broadband network (NBN) is set to launch shortly and SingTel is in a commanding position in the market with a 60% market share. JP Morgan noted that the NBN will limit competition, which can only serve to benefit SingTel. With the best balance sheet among Singapore telcos, SingTel is also on track to pay out good dividends to shareholders, the broker says.
SingTel invests heavily across the region thus diversifying its asset base and income sources. The group owns a 21% stake in Thailand’s Advanced Info Service (AIS); a 32% effective interest in India’s largest GSM operator, Bharti Airtel, with operations in Bangladesh, Sri Lanka and Africa; a 47% share in Globe Telecom in the Philippines and a 35% ownership in Indonesia’s largest mobile operator, Telkomsel. It also has a 45% stake in Pacific Bangladesh Telecom Limited and a 30% stake in Warid Telecom in Pakistan.
Mobile customer growth in these regions is mind boggling; as at at 30 June 2011 the group boasted 416 million mobile customers. Over the course of one year, its Indian operator Bharti alone added some 44 million customers to its database, to 221 million people. SingTel’s shares are up almost 5% over the past 6 months, but have displayed some weakness lately.
Shadforths' Andrew Inglis is positive about the telco's future, despite the fact that its share price has traded sideways for three years. "With its huge customer base across Asia, Africa and Australia, it operates in the world’s fastest growing markets," he says. "With a strong balance sheet, it’s well positioned to use this strategic advantage in future years despite intense competition in several markets."
|Company ||Code ||Last Price ||Market Cap ||52-wk high ||52-wk low ||1 yr change (%) ||Div Yield ||EPS ||P/E |
|Amcom ||AMM ||$0.840 ||200,722,023 ||0.9 ||0.5669 ||15.1% ||4.3 ||0.04 ||23.4 |
|Big Air ||BGL ||$0.255 ||38,563,835 ||0.345 ||0.16 ||34.2% ||0 ||0.01 ||21.25 |
|Hutchison ||HTA ||$0.058 ||787,205,497 ||0.11 ||0.055 ||-47.3% ||0 ||0 ||-34.12 |
|iiNet ||IIN ||$2.460 ||368,476,576 ||2.99 ||2.12 ||-13.7% ||4.9 ||0.22 ||11.18 |
|Macquarie Telecom ||MAQ ||$8.230 ||171,669,916 ||12.5 ||7.4 ||7.6% ||2.7 ||0.85 ||9.71 |
|M2 ||MTU ||$2.780 ||346,091,610 ||4.08 ||2.36 ||5.3% ||5.8 ||0.23 ||12.32 |
|NexBis ||NBS ||$0.054 ||43,111,262 ||0.125 ||0.04 ||-27.0% ||0 ||-0.02 ||-2.7 |
|NewSat ||NWT ||$0.485 ||85,424,277 ||0.65 ||0.20 ||142.5% ||0 ||0 ||0 |
|NextDC ||NXT ||$1.670 ||206,301,042 ||2.00 ||1.345 ||4.7% ||0 ||-0.04 ||-48.27 |
|SingTel ||SGT ||$2.440 ||460,348,500 ||2.57 ||2.0961 ||-1.2% ||5 ||0.18 ||13.25 |
|Telecom NZ ||TEL ||$2.020 ||3,888,386,591 ||2.174 ||1.4245 ||24.3% ||5.5 ||0.07 ||30.38 |
|Telstra ||TLS ||$3.130 ||38,946,822,737 ||3.22 ||2.55 ||16.8% ||9 ||0.26 ||11.99 |
|TPG ||TPM ||$1.420 ||1,113,131,761 ||1.83 ||1.23 ||-8.4% ||3.2 ||0.1 ||14.06 |
|Vocus ||VOC ||$1.580 ||96,292,060 ||3.05 ||1.05 ||43.6% ||0 ||0.15 ||10.55 |
| ASX200 Telecomms||XTJ ||1,071.9 ||1087.6 ||891.0 || 15.6%|| || || |
*Only stocks with a market cap of more than $30,000,000 have been included, there are other small- and micro-caps in the telco sector.
>> Click here to go back to the newsletter to read other articles
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.