This usually defensive sector, hit hard in 2020, is reviewed by a team of City experts.
Working from home connectivity failed to stop a “vicious” 2020 for telecoms stocks, but a City bank’s telecoms team now sees substantial opportunities amid price upgrades for BT (LSE:BT.A) and Vodafone (LSE:VOD).
The scale of the sell-off for the traditionally defensive sector surprised Deutsche Bank after European stocks were treated as super-cyclical with high correlation to their local indices.
Even after recent vaccine breakthroughs helped BT, Vodafone and other European shares to rebound by 30%, total shareholder returns for the year-to-date still lag the rest of the market at 8% lower — continuing a five-year run of underperformance.
Deutsche said in a note today:
“This was remarkable as telcos are relatively less impacted by the economy and they are logically relative beneficiaries of home working.”
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The immediate loss of mobile roaming and business-related revenues in the pandemic hurt sentiment, even though infrastructure valuations continued to rise over the period.
Deutsche expects this focus on the monetisation of assets, such as Vodafone's plans for the Frankfurt IPO of its mobile towers business, to drive momentum in 2021 alongside an expected upward swing in economic fortunes.
“We expect a substantial improvement in European telco stock performances next year as growth improves, as returns become more sustainable, and as a number of operators move to highlight material discrepancies between public and private market valuations.”
Its top picks in the European sector include Vodafone, whose target price it upgraded this week to 237p from 230p. The shares were 103p at the start of November and now trade at 131.76p.
Deutsche expects Vodafone to see a pick-up in service revenues growth next year, particularly as global travel recommences and roaming metrics lap last year's sudden downturn.
The company has a loyal following among retail investors, with a projected dividend yield of more than 6% for 2020 attractive at a time of pressure on FTSE 100 pay-outs.
BT's outlook is much less clear, with Deutsche continuing to have a ‘hold’ recommendation on the telecoms group due to risks over investment returns, pensions and convergence.
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To the disappointment of its army of small investors, BT shares spent much of 2020 languishing at near to 100p after bosses axed the final dividend for the first time since privatisation in 1984 and also rebased expectations.
The stock is now at 137.1p, which is close to Deutsche's valuation after upgrading its target price from 135p to 140p. However, the bank notes there's the potential for a near-term lift should a Brexit deal with the EU give a boost to the FTSE 100 and pound.
Much will also depend on this spring's ruling by telecoms regulator Ofcom about the level of return it will allow BT to make on its investment rolling out fibre-optic broadband.
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