1. UK Telecommunication Sector Landscape

The telecommunication sector in the UK is quite mature and stable. In future, 5G technology shall uplift the demand as major operators like O2, Three, and Vodafone introduced 5G services in 2019. The public funds and investment from operators shall support the expansion of the broadband market. In terms of risk, Covid-19 pandemic and Brexit continued to be the biggest risk to the sector in the short-term scenario. The pandemic compelled telcos to re-examine usage and consumer demand patterns and bundle the services to meet service obligations, which has led to a digital transformation. However, the sector also offers a low churn rate and favourable business environment despite low average revenue per subscriber. The sector experienced a stellar increase in connectivity demand amid a work-from-home environment.

Key Trends in the Telecommunication Sector

• Fibre Networks – Fibre network is going to play a critical role in building the UK’s infrastructure, including investment in metro networks and introduction of Local Full Fibre Network Programme, supporting the virtual reality, telehealth, home applications, and online learning.
• 5G Infrastructure – The industry will require significant investment for the roll-out of 5G and there might be some relaxation of planning laws to support this investment.
• Connected Car Projects – The advent of 5G connectivity with automated vehicles will create ample opportunities and will secure a robust relationship between IT and Automotive industry.
• Cloud Computing – The remote working environment also gave rise to the usage of SaaS applications and video conferencing services, which shall benefit the market over the long-term period.

Risk Exposures to the Telecommunication Sector

• Macro-economic uncertainties - Covid-19 pandemic and Brexit uncertainties are adversely affecting the sales activity and demand due to reduced roaming and suspension of sports events.
• Political Instability - Changing political conditions can impact investor confidence and future strategy. Moreover, the cessation of acquisition activities and minimizing capital expenditure plans can affect future growth.
• Cyber Security - Heavy reliance over home telecoms amid remote working environment has increased the risk of cyber-attacks, while the supply chain environment is already challenging.

Benchmark Index Performance

Based on the last 1-year performance, FTSE All-Share Telecommunications Index has generated a price return of around +32.74%, which was better than a +31.67 price return generated by the FTSE 100 Index. However, the telecom index underperformed against the FTSE AIM All-Share with a stellar return of +80.78%.

Fig 1: Benchmark Index Performance

 (Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Telecommunication Sector Outlook

The telecom market of the United Kingdom is one of the largest in Europe, which faces cut-throat competition in terms of pricing for end-users. The government is supporting the industry to have a fully-fibred infrastructure by 2033. Similarly, the fixed-line voice segment is making its way for IP-delivered content. However, it is also predicted by the thinktanks that infrastructure cost can be doubled for telcos with 5G broadband services. The new era of speed in terms of latency, download and upload will play a critical role in building a digital economy. Overall, it is expected that the total revenue of UK telcos is likely to increase at a CAGR of 0.1% between 2019 to 2024. It is noteworthy that top three-players (O2, Vodafone and British Telecom) represents nearly 75% of the overall mobile subscription.

2. Investment analysis and stocks under discussion (VOD, ADT, BBB, and CALL)

After gaining insights into the telecommunication sector, we would look at the business model of four stocks listed on the London Stock Exchange.

A. Vodafone Group PLC (LON: VOD)

(Recommendation: Buy, Potential Upside: 15.89%, Market Capitalization: GBP 37.61 billion)

Vodafone Group PLC is a FTSE 100 listed Telecommunication Company, providing a range of services including mobile communication, fixed communication, unified communication, internet of things (IoT), cloud hosting and security & carrier services.

(Source: Refinitiv, chart created by Kalkine Group)

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~15.89% over the closing price of GBX 134.52 (as on 16 March 2021).

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

 B. AdEPT Technology Group PLC (LON: ADT)

(Recommendation: Speculative Buy, Potential Upside: 26.44%, Market Capitalization: GBP 63.33 Million)

AdEPT Technology Group PLC is a FTSE AIM All-Share Company, which independently provides managed services for unified communications, information technology, voice solutions and connectivity.  The Company caters the education, health, commercial and public sector. Its portfolio consists of Cloud Services, Voice Services, Data Networking, Cyber Security, Business Continuity, Professional and Managed IT Services. ADT has a variety of products and services in the telecommunication domain. It provides world-class operational support which enhances efficiency and reduces costs for its franchise partners.

 (Source: Refinitiv, chart created by Kalkine Group)

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~26.44% over the closing price of GBX 253.00 (as on 16 March 2021).

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

C. Bigblu Broadband PLC (LON: BBB)

(Recommendation: Expensive, Downside Potential: ~11.23%, Market Capitalization: GBP 59.32 million)

Bigblu Broadband is a FTSE AIM All-Share quoted Company that provides ultra-fast broadband services throughout the Nordics, Australia, and significant parts of the UK. Since its inception in 2008, the Company has grown rapidly with organic and acquisitive growth, and completed 21 acquisitions across nine different countries.

 (Source: Refinitiv, chart created by Kalkine Group) 

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology

Our illustrative valuation model suggests that the stock has the downside potential of ~11.23% over the closing price of GBX 107.00 (as on 16 March 2021).

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

D. Cloudcall Group PLC (LON: CALL)

(Recommendation: Avoid, Downside Potential: ~28.81%, Market Capitalization: GBP 29.51 Million)

Cloudcall Group PLC is a FTSE AIM All-Share quoted integrated communication entity that provides contact center and unified communications software that integrates with Customer Relationship Management platforms. As of FY20, the Company had nearly 160 employees serving over 48,000 end-users.

(Source: Refinitiv, chart created by Kalkine Group)

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology

Our illustrative valuation model suggests that the stock has the downside potential of ~28.81% over the closing price of GBX 76.50 (as on 16 March 2021).

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy and Speculative Buy” recommendation are also valid for the current price as covered in the report as on 17 March 2021.

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