Intelligence Brief: Will telecom values improve in 2020?

In terms of share price performance, 2019 was a mixed year for the telecoms sector. A number of companies delivered positive returns, even if many underperformed their local market indices. In Europe the telecom sector (covering fixed and mobile operators) achieved positive returns (around 6 percentage points in terms of total shareholder returns or TSR), but still trailed well behind the broader European market, which delivered returns of more than 20 per cent. The US was generally more positive, with T-Mobile US and AT&T outperforming the S&P 500, supported by generally positive news around competition and consolidation. Share price performance across Asia was more muted, but with a number of notable weak performers. A number of operators in both China and South Korea ended the year at 12-month lows. In India, share price performance of the locally listed operators was sharply polarised: while Bharti Airtel delivered a positive TSR of 37 per cent, Vodafone Idea posted a decline of just over 80 per cent. Consolidation: risks on the downside In-market consolidation deals are generally seen as positive by the financial markets, with the assumption that easing price competition and scale/merger synergies will generate incremental shareholder value. Hope springs eternal for further consolidation in the European telecom sector, a region which remains highly fragmented with far more operators than markets such as the US and China. A number of consolidation deals over recent years have given the promise of more to come, with hopes over the course of 2020 the EU competition authorities could take a more relaxed stance. An important factor will be the focus on 5G and the desire to see Europe take a leading role in the technology, given perceptions (and indeed the reality) the region lost its mobile technology leadership with the transition from 3G to 4G. However, recent news flow suggest Margrethe Vestager (reappointed as Competition Commissioner [1]) would be more supportive of cross-border deals than in-market consolidation. While these deals have a poor track record in terms of value creation for shareholders, such a stance may be driven by a desire to see the emergence of regional champions. The outlook in the US will rest on a single key decision, the final approval of the proposed T-Mobile and Sprint merger. While the deal was approved by both the FCC and Department of Justice, the final hurdle is a court case [2] brought by thirteen states and the District of Columbia, which argue the deal will be anti-competitive. After almost two years of overhang since the original merger announcement, 2020 will at least bring closure on the issue, but at the same time could herald a major redrawing of the competitive landscape in the US. Politics: the wildcard Telecoms is generally seen by investors as a fairly defensive sector and can be something of a safe haven in terms of heightened geopolitical risk, but the sector also faces a range of more specific and localised political factors in 2020. The upcoming US presidential election will increasingly loom large in news flow and investment decision-making as the year progresses. The Trump administration is generally seen as relatively sector friendly, certainly from a policy perspective, even if the trade dispute with China caused some friction. A change of administration could raise new challenges. Topics which could see more stringent regulatory decisions under the Democrats include net neutrality and antitrust policies. Political factors in Europe tend to be less clear-cut, though a proposal from the UK’s Labour party to part privatise BT had a significant (albeit short term) effect on the share price and was a further reminder to always expect the unexpected. A new European Commission took office in December 2019: beyond the consolidation issue noted above, there may be greater support for network sharing and the scope to spinout network assets. Can 5G impact revenue growth? Isolating a single factor as a key driver of share price performance can be a challenge, but 5G is likely to dominate sector news flow in 2020 and will certainly have a major impact on share prices. The initial readings for 2019 are not overly positive. South Korea, for example, saw some positive KPIs around consumer 5G adoption and ARPU uplift. As noted earlier this has not fed through to improved share price performance. The biggest challenge is the range of moving factors encapsulated by the single phrase 5G: Will a growing number of 5G handsets and increasing adoption lead to the return of device subsidies and a hit to operator profitability? Will pricing discipline hold in those markets where 5G is priced at a premium to 4G, allowing a period of sustained ARPU uplift? Capex has shown some signs of an uptick in markets including the US and China as operators begin 5G deployments, while remaining flat in Europe. A growing number of network sharing deals in Europe will help on this front, with markets generally cautious around the prospects for higher capex until there is greater clarity on the likely returns. Spectrum auctions are expected across many markets in 2020 to release vital 5G spectrum, which will add to pressure on sector cash flow even if capex remains under control. What to expect in 2020 Making share price predictions for the sector or individual companies can be challenging at the best of times, with 2019 showing a range of outcomes across regions and within individual markets. The market consensus is generally cautious for the year ahead, with the broad expectation the telecom sector will underperform local market indices. What is certain is there are an even broader range of factors which will influence share prices in the current year as compared to 2019, with most decisions and key events likely to produce both winners and losers. It would be nice to predict an overriding theme, preferably a positive one, which could see a rising tide lift the overall sector. While 5G is likely to be the dominant theme in 2020, the broad range of uncertainties the issue brings will make it hard for markets to come to a clear agreement on the impact of 5G, whether positive or negative. Ultimately, near term share price performance and valuations will more likely be driven by local considerations, whether political or around consolidation and competitive factors. Longer term, upside to telecom valuations will likely require a new sector growth story. This will depend on emerging revenue streams in new consumer services (beyond more-for-more speed upgrades) and by operators taking a more proactive role in the ongoing process of enterprise digitisation. 5G will certainly play a key role in both these areas, but success will also require factors such as new business models and more agile organisational structures. - David George - head of consulting, GSMA Intelligence The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members. [1] https://www.mobileworldlive.com/featured-content/top-three/vestager-remains-eu-competition-chief/ [2] https://www.mobileworldlive.com/featured-content/top-three/states-hit-back-in-sprint-t-mobile-merger-case/

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