Consolidation and M&A remain key drivers of sentiment and valuation for the European Telecoms sector. The EU decision regarding German mobile consolidation is now due in June at the earliest following TEF’s submission of remedies, thus, falling after the 1Q reporting season. At 1Q we see a continuation of the relatively weak trends seen at 4Q, with European wireless in particular remaining under pressure and impacting Vodafone’s outlook for FY15 and other incumbents exposed to European wireless. From a fundamental perspective we continue to favour stocks able to ‘move the dial’, which include UK fixed line stocks (BT/TALK), TNOR and challenger operators taking market share (TNET, Iliad, JAZZ) and direct plays on M&A which include KPN, TEF D.
* Wireless trends to remain tough, consolidation key. We expect tough wireless trends
to remain across Europe, with Vodafone likely to see continued pressure across
European markets. This is likely to manifest itself in relatively weak FY15 guidance but
we note earnings expectations have been significantly rebased in recent weeks. Overall
on our estimates, European mobile service revenue is set to decline by 6.3% in 1Q14
(4.1% ex-regulatory basis). Conversely, we expect stocks such as Iliad, TNET, JAZZ,
TALK and BT to benefit from market share gains in mobile through disruptive MVNO
models (Inside out MVNO - Battle for Nomads).
* Fixed line – pockets of growth. European fixed line trends have been steadily
improving in terms of ABC (Access, broadband and calls) growth since 3Q12 and we
expect 1Q14 to be no different with ABC growth marginally improving to –c3%. This
includes strong pockets of growth such as the UK fixed market where we expect
BT/TALK to continue to benefit from UK fixed line inflation, fibre and TV.
* Moving the dial: In our sector outlook at the beginning of the year we identified three
key areas where Telecom operators could move the dial: (i) organic revenue growth, (ii)
cost transformation, and/or (iii) inorganic opportunities as ways to significantly alter
cashflow profiles across the sector (Moving The Dial). We continue to see these as the
key drivers of stock performance in 2014.
* EM Telco’s: Divergent regulatory trends are in focus. We see asymmetric regulation in
South Africa and Mexico softening the outlook for Vodacom and AMX respectively. In
contrast, potential consolidation in Brazil and Kenya could drive margin expansion. For
MTN the approval of Nigerian mobile money is a key catalyst for the stock, while a
spectrum auction is in focus for TPSA. For the 1Q14, we see the best prospects of real
revenue growth in Nigeria and Kenya supporting our OW ratings on MTN and
Safaricom respectively. Top sector picks also include Turkcell and TIM Brasil.