Investment: Should you invest in... telecoms?

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The Independent Online
IS THERE still growth in the telecoms sector? Many professional investors think so. "Telecoms was a sector that performed exceptionally well in 1998, as investors perceived the growth potential of an industry subject to liberalisation," said David Harbage, a sector analyst with Barclays Stockbrokers. The three best performers in the FTSE in 1998 were telecoms companies - Colt Telecom, Orange and Telewest."

Ian Lance, of Gartmore's UK investment team, said: "We are keen on the sector in the UK and Europe for three reasons - firstly, because there are phenomenal rates of growth in data transmission, secondly, the growth potential of mobile phones and, finally, the move to global consolidation, as shown by the announcements concerning BT and AT&T and Vodafone and Airtouch."

The fund management house Johnson Fry recently launched a unit trust specialising in global telecoms companies. Richard Neill, a trust manager, said:"There is pricing pressure, but growth should be sufficient to allow for this."

Growth is the name of the game, and two names recur, the giants BT and Vodafone. Anthea Gaukroger, a telecoms analyst at the stock broker Greig Middleton, said: "BT has just had very good third- quarter results. This was due partly to the increased use of the Internet.

"The Internet now accounts for 15 per cent of all call minutes and BT thinks that could rise to 25 per cent next year. This is what sent BT's share price soaring last week."

Mr Lance agrees. "BT will benefit from the growth of data traffic and mobile phones. Big global companies want telecom firms to carry calls around the world on their own networks. That is the reason why the BT- AT&T link-up is so attractive."

Mr Harbage said: "BT is reasonably valued. It has a good income stream and it pays a dividend that will grow in future."

BT also has 60 per cent of Cellnet, with Securicor holding the rest.

"The DTI have said that BT can buy all of it - a bid is inevitable," Mr Harbage said. Ms Gaukroger is cautious. "BT were back-pedalling on that last week. BT's share price has been exceptionally strong and you have to ask whether all this good news really justifies trading on 30 times earnings for the year to March 1999. We rate BT as an attractive stock, rather than an outright buy." She is bullish about Vodafone. "The Vodafone/Airtouch deal is a good one as Vodafone previously had no exposure to US," she said.

"And there is a good fit in Europe. The deal enables Vodafone to increase `roaming revenues' - UK subscribers roaming into Europe and Continental European users roaming into the UK."

Mr Harbage said: "Vodafone/Airtouch is now a major global player. Its shares will be well supported by index fund managers tracking the FTSE, because they will have to double their stakes."

A similar process could affect the network provider, Energis. "With Energis now being given a free float it will almost certainly enter the FTSE in March," Mr Harbage said.

There are good reasons for looking positively on the new breed of telecoms companies that provide state-of-the-art call networks.

Mr Lance said: "We advise our fund managers to be under-invested in the big former state-owned networks, with a bias towards smaller, new entrants.

"Newcomers are either building their own networks, or where they are using established networks, the regulators have ensured that usage costs are low. On this basis, our funds have invested in the likes of Colt Telecom, Energis and GTS."

Mr Neill, of Johnson Fry, said: "We are selectively looking at the new breed of carriers, such as GTS.

"They have constructed a pan-European network of fibre optics. Over five years, they reckon their network could carry 20 times the current value of all European networks."

Of the "big three" established UK telecoms companies, Cable & Wireless is the potential laggard.

Mr Harbage said. "In five years it will be a very different company. It's already hived off or floated a lot of its businesses and it would be very attractive to a large US provider which wanted to expand operations in the Far East."

Is the world not really Orange? "Orange is a pure UK operator and it doesn't make money, although it will do in 18 months," Mr Harbage said. "It has good technology but it's a pure play on the UK mobile telephone sector and not the most attractive share because of this."