1. UK Telecommunication Industry Landscape

The telecommunication sector encapsulated a list of companies that make communication possible on a global scale, whether it is through the phone or the internet, through airwaves or cables, through wires or wirelessly.  The global Telecommunication industry was dominated by a pool of big national and regional operators. Furthermore, the industry has witnessed a trend of rapid deregulation and innovation since the early 2000s. The government monopolies got privatized, and a plethora of new competitors had entered the industry.

On an optimistic note, the sector had demonstrated a modest growth boosted by the rise of work from home environment after the emergence of the Covid-19 pandemic. The most prominent names of the British Telecommunication industry are British Telecom and Vodafone.

The British telecommunication industry remained one of the largest in Europe. Moreover, it is known for the intense competition, which resulted in lower pricing for the end-users. There are four leading mobile network operators (MNO) in the UK, such as Vodafone, Three (3), EE and O2. Furthermore, there are several mobile virtual network operators (MVNO), which purchase the right from the MNO to use the wireless network infrastructure. Apple held approximately 50% of the market share for the mobile device market in the United Kingdom (UK) in 2020.

Key Trends in the Telecommunication Sector

Risk Exposures to the Telecommunication Sector

• Economic Downturn: The macro-economic uncertainties has impacted the demand in commercial space as the dented consumer confidence has subdued the demand for smartphone and tablet markets.
• Supply Chain Disruption: The Covid-19 pandemic and US-China spat has also impacted the availability and cost of raw materials, including smart chips.
• Cyber Crimes: The increasing number of cyber-attacks across several industries had posed serious threats, and the heavy reliance on the telecom industry had increased the cyber-attacks risk.
• Political Instability: The change in political dynamics may dampen the investors’ confidence and adversely impact the capital allocation programmes.

SWOT Analysis

Benchmark Index Performance

Based on the year-to-date performance, the FTSE All-Share Telecommunication Service Providers index has outperformed the FTSE 100 and FTSE 250. The FTSE All-Share Telecommunication Service Providers index generated a return of about 18.97%; however, the FTSE 100 generated a return of around 10.84%, and FTSE 250 generated a return of around 15.05%

Figure 1: Year-to-date Benchmark Index Performance

(Source: Refinitiv; Analysis done by Kalkine Group)

Telecommunication Sector Outlook

The 5G network was available through 40 mobile networks in around 24 countries at the beginning of 2020. Moreover, the pioneering countries were South Korea, United States, Switzerland, China, and Kuwait. According to GSMA Intelligence, mobile connections are forecasted to jump from 7.9 billion subscribers during 2020 to 8.6 billion subscribers by 2025. However, mobile broadband would put accelerated pressure on the fixed-line broadband subscriber base as customers would get enticed to shift towards 5G-enabled services. Major mobile networks like Vodafone, Three (3), and O2 had introduced 5G in 2019. Nonetheless, the telecom industry would have a huge role to play in shaping up the digital economy with the implementation of 5G, Artificial Intelligence (AI), Edge Computing, and the Internet of Things.

2. Investment analysis and stocks under discussion (VOD, TEP, ZEG)

After gaining insights into the Telecommunication sector, we would look at the business model of three Telecommunication players listed on the London Stock Exchange. 

A. Vodafone Group PLC (LON: VOD)

(Recommendation: Buy, Potential Upside: 32.46%, Market Capitalization: GBP 33.13 billion)

Vodafone Group PLC (LON: VOD) is an FTSE-100 listed telecom company having a global presence. The company was founded in 1984 and headquartered in Newbury, United Kingdom. It provides various services such as mobile communication, unified communication, fixed communication, cloud service, the internet of things, and security & carrier services.

The company had paid its final dividend of 45 Eurocents on 6 August 2021, while the ex-dividend date was 24 June 2021.

 

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                      

From a technical standpoint, the stock price is trading above the 20-days exponential moving average of GBX 118.05, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 32.46% over the closing price of GBX 119.28 (as of 10 August 2021).

B. Telecom Plus PLC (LON: TEP)

(Recommendation: Speculative Buy, Potential Upside: 22.66%, Market Capitalization: GBP 811.44 million)

Telecom Plus PLC (LON: TEP) is an FTSE 250 index multi-utility supplier company based in the United Kingdom. It supplies gas, electricity, landline, broadband and mobile services to residences and businesses.

                                                                                                                                       

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the MACD line remained above the signal line, indicating an upside potential in the stock price. 

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 22.66% over the closing price of GBX 1,050.00 (as on 10 August 2021).

C. Zegona Communications PLC (LON: ZEG)

(Recommendation: Expensive, Potential Downside: 18.70%, Market Capitalization: GBP 324.08 million)

Zegona Communications PLC (LON: ZEG) is a British company investing strategically across Europe with the objective of acquiring businesses in the European TMT sector, using a "Buy-Fix-Sell" strategy to deliver attractive shareholder returns.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the momentum indicator 14-day RSI (~70.31) is indicating an overbought zone and suggesting a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 18.70% over the closing price of GBX 148.00 (as on 10 August 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 11 August 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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