The Asian tour in December each year is a great way to get to the bottom of the developing trends and embed our thinking as we head into the New Year. This year was no different as we met with the Japanese, Taiwanese, Chinese and Malaysian telecom operators. In Japan, we were pleasantly surprised by the confidence the operators had to lower costs to defend against any risk around tariff headwinds and we remain sanguine around the prospects of Rakuten’s launch. With returns and shareholder returns unlikely to be impacted in 2019, we came away reassured that our preferred play (NTT) is likely to lead the market in return improvements. On our return, we upgraded China Tower to a Buy given the stock’s lacklustre performance, but most importantly the ability to access 10mn ‘social resources’ assured us that future growth was unlikely to be as capital intensive as initially feared.
We are thinking about spectrum again, as we head into the weekend. We thought about it last weekend because we were putting the finishing touches on a report on the C-Band in the US (LINK). It is the first in a series that will endeavor to quantify the threats and opportunities presented to Wireless, Cable and Satellite companies as this new band comes to market.
Continue reading “We Have Spectrum On Our Minds”
We tend to like global infrastructure assets. In the best case scenario, they often have captive demand and no regulation, which can lead to superior pricing power – think US towers or datacentres (see most recent report HERE). But infrastructure assets always tend to have captive demand, so even in the case of European tower infrastructure, less attractive contracts still afford investors good earnings visibility with upside optionality from infrastructure expansion (recent note on Inwit highlighting this HERE).
As most of you hopefully know, Pierre Ferragu, who covers Apple at New Street, has had a phenomenal call on Apple’s iPhone sales falling short of expectations (see his downgrade to Sell HERE). He was right on 3Q volumes, and the call has been building into 4Q as Apple’s suppliers, one after another, warn of cancelled orders (details HERE).
As telecoms asset classes go, towers should be more predictable than most, and the recent earnings season has laid bare the diverging trends seen between some of the developed market tower companies and the emerging market ones. We are seeing positive trends emerge for tower companies in developed markets like SBAC, Inwit, and to a lesser extent Cellnex. Meanwhile, the outlook in India Bharti Infratel remains difficult and AMT remains stuck in the middle with a foot in both camps.
DoCoMo’s announcement on Wednesday evening that the Japanese market leader intends to give back up to ¥400bn in discounts to consumers, offering cheap plans at a 20-40% price cut to existing levels has derailed what until this week had been perceived as the last large good market for telco investors, where all three operators generate a return well above their cost of capital. The response in share price terms was savage: at the low point of trading on Thursday, DoCoMo’s share price had lost 44% of all the gains made over its 6 year bull run from 2012 to its recent high. So, what should investors in Japanese telcos do from here? Is Japan over? Are, as we heard a number of investors say in the last 2-3 days, Japanese telcos headed to multiples similar to those the Chinese operators trade on?
We had the two largest Wireless companies and the two largest Cable companies report results this week with trends that were a little different between the two companies in each category and market reactions that were starkly different.
While some of the differences in operating trends were more surprising than others, and some of the difference in market reaction less welcome than others, the reactions aren’t that surprising in retrospect. We try and dissect what happened, and why, in this edition of the Global Weekly Review.
The next couple of weeks should mark a turning point for US Cable. We are hoping the Comcast / Sky deal will close before Comcast reports results on Thursday. If it hasn’t closed by Thursday, it will be very soon after. As soon as it has closed we would expect Comcast’s management to provide a more fulsome account of their ambitions with Sky, with updated guidance.