1. UK Telecommunications Sector Market Landscape

The telecommunications industry has played a vital role in showcasing how the modern world operates during the pandemic. The new norm of work from home and digital transformation has depicted the relevance and importance of the telecommunications sector in our lives. The high-speed internet has been at the forefront that has helped in providing seamless connectivity and uninterrupted business continuity. The telecommunications network includes fixed and wireless-based communications such as broadband, voice and data services. The telecommunications sector has increasing overlap with the technology, digital and broadcasting sector.

As per Business Research Company data, the global telecommunications market size is expected to grow at a CAGR of around 6% between 2018 and 2022. The global telecommunications market size is expected to reach USD 3,450 billion by 2022. The global telecommunications services spending is expected to be around USD 1,553 billion in 2020 and USD 1,565 billion in 2021 as per Statista. As per Statista, the total telecommunications industry revenue in the UK was £31.74 billion. As per Ofcom data, in Q2 20, the UK fixed cost services generated revenue of £1.8 billion. Access and add-on call bundles generated revenue of £1.6 billion. Total fixed-generated voice call volumes increased by 1.7 billion minutes (16.6%) to 12.2 billion minutes during the quarter, primarily due to Covid-19 lockdown resulting in people being at home. There were 27.0 million fixed broadband lines at the end of Q2 2020.

Broadband and internet connectivity are considered as an essential element of our everyday life. The telecommunications infrastructure in the UK plays a critical role in economic growth. Mobile telephony services generated £3.2 billion in retail revenues in Q2 2020. Average monthly revenue per subscriber was £12.77 in Q2 2020, with post-pay subscribers generating more revenue than pre-paying users on average. The number of mobile-originated voice calls minutes was 50 billion minutes in Q2 2020. The increase in call volumes was mainly because of the pandemic. The roaming call volumes declined by 57.1% year on year to 0.3 billion minutes. The data usage in Q2 2020 increased to 1,007 petabytes.

Key Trends in the Telecommunications Sector

• Digital Transformation: This includes leveraging new digital technologies that include cloud computing, artificial intelligence, and robotic process automation. These technologies are enabling businesses to connect with customers and offer personalised solutions. It improves the efficiency of all commercial and technological decisions.
• 5G Technology: The mobile segment is shifting from 4G to 5G, and the services are live in many cities in the UK. The 5G network is an enhanced version that would provide better connectivity. It offers a download speed of 1Gbps along with extremely low latency.
• Internet of Things (IoT): These are a network of physical objects embedded with electronics, sensors, and network connectivity, including built-in mobile sim cards. IoT enables collection of data and exchange communications with one another or database. It is finding increasing use in all domains, and an increasing number of vehicles will be connected to IoT devices. It is increasingly used in facilities, logistics, healthcare, insurance, and automotive segments.

Risk Exposures to the Telecommunications Sector

• Cutback in Investment: The slash in investments in technological advancement and innovation can hold back the digital transformation journey. The technologies such as 5G need immense investment.
• Cyber & Information Security: Any internal or external attack on the system and infrastructure can result in service unavailability or data breach.
• Legal & Regulatory Compliance: The telecommunications sector is exposed to laws and regulations, and any non-compliance of laws can lead to cancellation of licenses and imposition of fines.

Benchmark Index Performance

Based on 3-months performance, FTSE All-Share Mobile Telecommunications Index outperformed the FTSE-100, FTSE-250 and the FTSE AIM UK 50 Index. FTSE All-Share Mobile Telecommunications Index generated a return of around 15.17%, which was better than the FTSE-100 Index return of nearly 8.75%. FTSE-250 Index and FTSE AIM UK 50 Index generated a return of about 11.49% and 8.14%, respectively.

Fig 5: Three Months Benchmark Index Performance

(Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Telecommunications Sector Outlook

We are currently living in a digital society where data flows at speed, and it connects people, communities, and things to the internet. Gigabit networks, IoT and mobile financial services enable incredible innovation and technologies. Digitalisation is a key operational theme for the telecoms industry, which has a significant proportion of activities that can be automated, while also having unrivalled insight into customer usage trends. By using advanced digital technologies, operators will be able to enhance their customers' experience, generate incremental revenue opportunities, and reduce costs.

The telecommunications industry contributes close to 4% to 5% of the UK’s GDP and plays a critical role in the economic and social well-being of the nation. As per the Businesswire report, the telecom service revenue in the UK is expected to grow at a CAGR of 0.1% between 2019 and 2024. The Mobile revenue is expected to constitute around 42.8% of total and pay-TV services revenue in 2024. The rising data consumption and 5G data plans will support the growth.

By 2024, the total telecommunications and pay-TV service revenue is expected to generate revenue of USD 44.9 billion. The demand for high-speed NGN broadband is increasing over cable or fibre connectivity. There is a rising opportunity for operators with high-quality Gigabit-capable infrastructure. The demand for one provider giving multiple services of converged bundles is rising, which is a combination of mobile, voice, broadband and TV services. Customer loyalty, customer retention and operational efficiencies will continue to be the essential elements of the telecommunications industry. The telecommunications sector will create a digital society, which will connect people to next-generation networks. The IoT will be used in connecting the vehicles, and more people will be connected to mobile money services.

2. Investment Analysis and Stocks Under Discussion (BT.A, VOD, GAMA, HTWS)

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

A. BT Group PLC (LON: BT.A)

(Recommendation: Buy, Potential Upside: 21.95%, Market Capitalization: GBP 12.03 billion)

BT Group is a UK based company that provides connectivity services. The services of the Company include fixed-line, broadband, mobile and TV services. The Company is listed on the FTSE-100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~21.95% over the closing price of GBX 123.05 (as on 1 December 2020).

B. Vodafone Group PLC (LON: VOD)

(Recommendation: Hold, Potential Upside: 6.80%, Market Capitalization: GBP 33.51 billion)

Vodafone Group PLC is a UK based technology communication company with a global footprint. In Europe, the major services of the Company include fixed-line communication, mobile communication and IoT for businesses. The Company has a strong mobile network and deep spectrum position in Africa. The Company is listed on the FTSE-100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~6.80% over the closing price of GBX 125.44 (as on 1 December 2020).

C. Gamma Communications PLC (LON: GAMA)

(Recommendation: Speculative Buy, Potential Upside: 18.16%, Market Capitalization: GBP 1.54 billion)

Gamma Communications PLC is a technology-based provider of communication services. It is a leading provider of Unified Communications as a Service (UCaaS) in the UK, Spain, and Germany. The Company is a FTSE AIM UK 50 index. 

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~18.16% over the closing price of GBX 1,595.00 (as on 1 December 2020).

D. Helios Towers PLC (LON: HTWS)

(Recommendation: Avoid, Potential Downside: 23.73%, Market Capitalization: GBP 1.50 billion)

Helios Towers PLC is a UK based telecommunications company, which owns and operates passive infrastructure and telecommunications towers in African markets.  The Company is listed on the FTSE-250 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the downside potential of ~23.73% over the closing price of GBX 141.20 (as on 1 December 2020).

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

*The "Buy/Speculative Buy" recommendation is also valid for the current price as covered in the report as on 2 December 2020.

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