Equities: 5 reasons why European Telecoms should perform in the coming months
Telecoms in Europe have been suffering over the last few years. European markets are quite mature and price competition remains fierce, business revenues continue to decline and further roaming headwinds are expected in Europe. In this environment, revenue growth and profitability have declined. Telecoms have thus underperformed in recent years. Nonetheless, we believe that the sector should perform better in the coming months.
1. The sector should benefit from a more volatile environment in the coming three months. The reflation trade has performed well over the last six months, but should fade in the near future. With mounting uncertainty, investors will look for alternatives to reflation and cyclical themes.
2. Valuations are fairly attractive. The sector is currently trading at a discount. P/E is clearly below its two-year average and cheaper than other sectors.
3. We believe that stabilising earnings growth will be a key factor in 2017. With this prospect, an outperformance in Telecoms would be sensitive to any earnings revisions. In 2017, Telecoms’ earnings are expected to stabilise thanks to higher data volumes. Increasing penetration of smartphones and rising demand for data and services are supportive to the activity. This positive trend, as well as easing macro, has implied a gradual stabilisation of revenues growth in Europe. We should see further upside as Europe lags US and Asia in term of data usage. In addition, the ongoing cost control continues to be supportive to companies’ profitability. However, we note that higher capex could keep pressure on free cash flow.
4. Companies are more and more focused on data and services. In this perspective, the quality of the connection and services are more and more important. As a result, pricing power could be restored. Some companies will be able to implement more efficient strategy than other (stock picking will be key).
5. M&A announcements are likely in Europe. Mobile- and fixed-only operators could have to consider M&A activity to position companies for the world of integrated networks and 5G. Companies could extract cost synergies with new acquisitions. This trend will likely drive M&A speculation on markets.