Telco sector update

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

28 January 2014, 1:15 PM

Sectors Covered:

Telecommunications, Technology

Sector outlook

We have a neutral sector view but see stock specific opportunities. Our key pick into reporting season is M2 Group (MTU) - Add recommendation; A$7.50 share price target.

After a great run in 2013 the sector is now looking close to fair value. It's trading on 7x EV/EBITDA (vs its 10 year average of 6x). We expect EPS growth of around 5% for FY15 and the 6% cash yield and defensive earnings remain an attraction of the sector. 

We see iiNet (INN) as the cheapest stock in the sector trading on 6x EV/EBITDA and TPG Telecom (TPM) as the most expensive stock in the sector, trading on ~12x EV/EBITDA. TPM and IIN are similar businesses and in our view TPM isn't worth twice the multiple of IIN.

Key thematics

• subdued revenue growth - declining fixed line revenue offset by strong mobile growth
• cost reductions as companies continue to gradually gain benefits from economies of scale
• margin expansion as cost reductions flow through

More information

Morgans clients can access detailed reports on stocks in the Telco sector. If you are interested in finding out more, please contact your nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.