Many stocks in the telecommunications sector have been dismal performers over the last few years – but is that reason to give up on the sector entirely? According to one broker, there are a few smaller telcos that are beginning to buck the trend.

The IT and telecommunications sector consists of more than 122 companies, with a market capitalisation of about $52.83 billion at March 16, 2011, according to stockmarket research firm Lincoln Indicators. However, equities analyst James Samson has narrowed the field to focus purely on the telecommunications services sector, which he says comprises 29 companies making up less than 3 per cent of total ASX market capitalisation of  $1.37 trillion at March 16, 2011.

The telecommunications services sector has been disappointing during the past five years after posting an annualised negative return of 7.33 per cent, according to Standard&Poor’s. In comparison, the S&P/ASX 200 has booked an annualised negative return of 0.37 per cent. The chart below compares the performance of the S&P/ASX Telecommunications sector (in blue) with the S&P/ASX 200 index over the past few years (the red line).


Source: Yahoo! Finance

Within the sector, Telstra boasts the biggest market capitalisation by far at $32.4 billion at March 16, 2011, but it’s not on Samson’s list of stocks to consider buying. (See table below for more figures). “Currently, sentiment in the telecommunications sector is poor, as political agendas and the National Broadband Network project portray a sense of uncertainty among industry participants,” Samson says. “This uncertainty has resulted in several great businesses trading at depressed share prices. Telstra has been a major drag on sector performance, but there are a few smaller companies bucking the trend.” Samson has established a list of stocks that he believes offers good long-term term.

M2 Telecommunications Group Limited (MTU)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Dividend yield: 3.45 per cent

Price/earnings ratio: 21.5 times

Market capitalisation: $428 million 

MTU repackages and resells fixed line, mobile and data services to small and medium sized enterprises. Samson says the company is a leader in a niche market and is growing organically and via acquisition. While Samson says its business model is low margin, the company is building its client base from “providing better service than any other competitor”. He says MTU upgraded profit guidance on March 7, 2011 by about 20 per cent on the back of reducing wholesale line rental costs.


Macquarie Telecom Group Limited (MAQ)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Dividend yield: 2.63 per cent

Price/earnings ratio: 15.5 times

Market capitalisation: $237 million

MAQ provides services in transitioning businesses to cloud-based computing. Despite all its hype, Samson describes cloud computing as a “simple enough concept”. He says a business pays a service provider to house all its online content on a server, rather than owning and maintaining the server itself. “Cloud computing is an exciting growth opportunity for MAQ, and it’s reflected in the high price/earnings multiple the company is currently trading at,” he says. Samson says as the share price is above his company’s valuation, investors should be prepared to pay premium at current levels. However, they should also be rewarded over the longer term.


TPG Telecom Limited (TPM)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Dividend yield: 3.05 per cent

Price/earnings ratio: 16.1 times

Market capitalisation: $1.01 billion

Samson describes this internet service provider as a small, robust and agile firm ready to meet the challenges of a changing telecommunications landscape courtesy of the NBN. Since acquiring Pipe Networks in March 2010, TPM has become a low-cost leader in the ISP space. “As a result, the company is placed at the forefront of cost efficiency and will be up to dealing with any further margin pressure that an increasingly competitive price environment may bring,” he says.


Amcom Telecommunications Limited (AMM)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Dividend yield: 5.8 per cent

Price/earnings ratio: 9.2 times

Market capitalisation: $197 million

Amcom owns and generates revenue from its optic fibre network infrastructure in Perth, Adelaide and the Northern Territory. Samson says Amcom will eventually compete with NBN Co Limited  for customers in the optic fibre pace. He says it’s well placed, if not in front of NBN Co, in terms of its technological offering and provides investors with exposure to a company that owns infrastructure. Amcom also owns a stake of about 23 per cent in iiNET Limited.


iiNet Limited (IIN)

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Dividend yield: 4.4 per cent

Price/earnings ratio: 10.2 times

Market capitalisation: $380 million

This company is Australia’s second largest internet service provider. IIN has grown rapidly in recent years after acquiring WestNet, Netspace, and AAPT’s consumer division. The company is integrating its acquisitions and the share price may consolidate until synergies are realised. Samson says this may be a good time to consider buying. “IIN is also beneficiary of recent reductions in wholesale line rental costs.”


M2 Telecommunicatios Group Limited MTU $3.54
Macquarie Telecom Group Limited MAQ $11.50
TPG Telecom Limited TPM $1.295
Amcom Telecommunications Limited AMM 29.5 cents
iiNet Limited IIN $2.40

*All figures at March 16, 2011 close.

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