Four Things You Missed Over the Summer

This week’s review focused on a few important reports that we are worried you may have missed (mostly published during the late-summer doldrums).  We highlight the three or four reports that we have written for each region that touch upon the biggest controversies that will impact our sector in the months ahead.  The list includes riveting accounts of the coming disruption in US wireless, the drivers of falling churn in US broadband, a new focus on infrastructure assets in Europe, and failing firms, new entrants and the impact of 5G in Asia.

Starting with the US…

The most important report we published over the summer covered our modeling and valuation of Dish’s future wireless businesses (LINK).  The report has big implications for Dish (target price $96; it is a three-bagger from here).  It has equally big implications for T-Mobile, Verizon, AT&T, Intelsat and the other C-Band holders, and other owners of spectrum.

Next, is our wireless trends report, which focused on improving network performance at AT&T as they deploy new spectrum (LINK).  We think this could drive improving churn that will in turn drive a recovery in net adds.  We aren’t ready to recommend AT&T’s stock on this thesis, but a recovery at AT&T would make us even more wary of Verizon.

Then, in our broadband trends report we focus on how declining move churn has been helping EBITDA (LINK).  We expect this to continue to benefit margins at Charter, Comcast and Altice in coming years.  AT&T and Verizon will benefit too; however, their broadband business is too small to matter.

We also saw slightly slower broadband growth this quarter, driven mostly by slower household formation (industry penetration growth and cable share gains remained strong).  We expect household formation to revert to a more normal trend and for broadband growth to accelerate over the next couple of quarters.

We addressed the impact of Dish deploying a new network in our tower trends report (LINK).  With Dish deploying a real broadband network, T-Mobile’s acquisition of Sprint would actually boost growth at towers.  We still struggle to get enthusiastic about the equities at current valuations.  We remain Neutral on SBAC and AMT, and underweight CCI.

Finally, Blair closed out our summer report series with a discussion of four major forces (and a few minor ones) that could completely reshape the communications services sector in the year ahead (LINK).  Blair argues that the next 12 months could usher in a wave of change the likes of which we haven’t seen since the years following the implementation of the 1996 Act (a period during which Blair was at the FCC taking an active hand in much of that change).  It is possible that the players that dominate the industry today could weather the change with little damage, but it is far from certain, and perhaps not the most likely outcome.

…and moving onto Europe…

The summer has been reasonably kind to the European telecoms sector, which has now outperformed the European market over the past year. The results season was surprisingly event-free, and our estimates for the sector are broadly unchanged, which is a relief from the earnings shocks that have often greeted past European earnings seasons.

The biggest area of focus over the summer seems to have been on infrastructure assets, with Vodafone’s announcement that it is considering an IPO of its tower assets and that it finalized terms for its deal with Inwit acting as a touchpaper for the stock and for the wider sector. We wrote on the specific Vodafone implications from the Inwit terms (HERE) and tower IPO announcement (HERE), in which we upgraded our target to 195p.

Although the current momentum on the value of infrastructure assets seems to continue unabated, we took a more selective view on the European tower assets as we feel the run in Cellnex shares looks excessive based on limited change in the fundamentals and we downgraded to Reduce, but felt there is still more to play for in Inwit, which would be our preferred EU tower play (HERE for the full report).

Continuing with the infrastructure theme, we also published a report looking at the hidden value that might lie within BT, which now looks like the cheapest EU telco. Management can only sit and watch as other infrastructure assets are bid up – especially as our report (HERE) highlighted that BT’s implied rump value might now be as low as 4x P/E.

While the sector has broadly been a safe place to be over the summer, concerns have heightened in Spain around excessive promotions ahead of the new football season. We see these as overdone, and our in-depth report on the Spanish market (HERE)  highlights the opportunity we currently see in both Telefonica and Masmovil.

And finally, after 15 months of waiting, Liberty Global finally completed their disposal to Vodafone in Germany, but sadly this was tempered by weaker performance at Virgin Media. Although the tender was a welcome announcement, we see a tough 6 months ahead in the UK as they try to push through a price rise, so decided the time was right to move to the sidelines and we downgraded the stock to Neutral (HERE).

…and finally Asia

We published a note looking into the implications of the collapse in profitability at Vodafone IDEA (LINK). With the stock plumbing new depths, we think it likely runs out of money (again) in 12-18 months if nothing changes. Therefore, a change of strategy is likely, and that the company should look to move to a cash-flow maximizing strategy, cutting capex, exiting weaker regions, stopping expensive content for free etc.  Since we published, the CEO has resigned, suggesting we may be on to something. Implications are positive for Bharti Airtel and negative for Bharti Infratel.

In Japan Rakuten finally fessed up that it would be delaying commercial launch potentially into the middle of 2020 (LINK). We used this as an opportunity to write a note describing the current state of play. We think the market is both overestimating Rakuten’s ability to disrupt and underestimating the incumbents’ ability to offset pressure through other means. The Japanese telcos have been good performers in recent months and we expect this to continue. In particular, we think Softbank Corp is a poor short. KDDI remains our top pick.

In China, we wrote on the implications of a 5G network co-build (LINK). Contrary to the apparent consensus view that sees co-build as a positive because it could reduce capex relative to building 3 separate networks, we think investors should focus on the evidence that China is heading towards an extreme 5G roll as it accelerates towards an AI future, “saves” Huawei, and stimulates the economy. As always, signals from the industry (which would prefer a low capex outcome) have the potential to confuse. All the signs are that capex is going to surprise to the upside. We remain cautious on the Chinese telcos (CM, CU, CT) and positive on China Tower.

One other market that has been of interest for us is Korea, given the 5G launch at the beginning of Q2. The three operators all reported numbers over the summer and in this note (HERE) we summarise the initial conclusions of whether 5G has been good, bad or indifferent. The initial conclusion is that it generally has been bad for investors. It is too early to see whether 5G will lift revenues, but instead earnings and cash flow are being significantly impacted by increased competition for bragging rights on the best network. It’s probably a sector worth staying away from for the time being (we remain Neutral on SKT, KT and LG).

Our updated Global Valuation Comp sheet can be found HERE