As we begin the final trading month of 2014 the ASX All Ordinaries Index (XAO) is essentially flat on the year, up about 1% as of 27 November.  As one would expect given the collapsing price of iron ore, the XMJ Materials Index represents the biggest drag on the market, down about 11%.

Amidst the gloom there stand two defensive sectors showing double digit appreciation year over year.  The XHJ Healthcare Index is up close to 15% while the Telecommunications Index (XTJ) is up about 14%.  For defensive minded investors, stocks in the XTJ may represent slightly better prospects as the Sector Dividend Yield of 3.3% bests that of the XHJ at 3.1%.

Both these sectors will benefit from long term demand trends – healthcare for the retiring baby boomers and data and connectivity for businesses and consumers alike.  One could make a case that the Internet is driving demand for data and connectivity is a “here and now” trend, while the expected upsurge in healthcare demand will take some time to fully play out.  For that reason we have elected to look at eight of the top stocks in the ASX Telecommunications Index.  Over the last month each of these stocks reached new 52 Week Highs before tailing off slightly in the last few days.  Here is our table, ranked by Market Capitalisation.

Company

(CODE)

Market Cap

Share Price

52 Week % Change

Div.
Yield

5 Year Total Share-holder Return

2 Year Earn-
ings Growth Fore-
cast
2 Year Div. Growth Fore-
cast

Telstra Corp

(TLS)

$70.6b

$5.69

+13%

5.2%

19.8%

-2.9%

0.8%

Singapore Telecom

(SGT)

$56.1b

$3.52

+8%

4.5%

(Un-
franked)

15.7%

16.7%

12.5%

TPG Telecom

(TPM)

$5.9b

$7.43

+80%

1.4%

38%

21.4%

18.7%

M2 Group

(MTU)

$1.5b

$8.34

+43%

3.3%

45.8%

9.5%

15.5%

iiNet Ltd

(IIN)

$1.3b

$8.10

+33%

2.9%

39.1%

15.2%

18.4%

Vocus Comm.

(VOC)

$632m

$5.97

+74%

0.4%

67.6%

33.1%

87.4%

Amcom Telecom

(AMM)

$626m

$2.29

+11%

2.8%

41.2%

16.2%

16.4%

My Net Fone Ltd

(MNF)

$234m

$3.75

+142%

1.3%

119.7%

25.5%

20.9%

 

If you have sorted through the myriad of market analyst and expert articles on dividend paying stocks over the last few years you know Telstra Corporation (TLS) joins the Big Four Banks as recommended income stocks for the long term.   While Telstra’s current dividend yield is the highest of any stock in the table, note that the average annual rate of total shareholder return, which includes capital appreciation from rising share price, is the second lowest.  Singapore Telecom (SGT), owner of Optus, Australia’s second largest Telco, also has a high yield but lower total return over time.  Each company has seen its share price rise close to 70% over a five year period.  Here is the price movement chart for the two.  

Now compare that performance against the next two stocks in the table – TPG Telecom (TPM) and M2 Group (MTU) over the same period.

Obviously both Telstra and Singtel have done well.  They have scale and are literally into every aspect of telecommunications you can think of.  Singtel has the advantage of its major presence across the Asia Pacific Region while here in Australia Telstra provides fixed and mobile lines, Internet access, Pay TV services, and a host of solutions for business and government entities.  In addition, Telstra is looking to expand its Asian presence as well.  

In our view what differentiates the smaller rivals M2 and TPG is earnings growth.  Telstra and Singtel are mature companies while M2 and TPG are relative newcomers.  The following table lists growth rates over one, five, and ten years for each of the Telco stocks we are examining.

Company

(CODE)

 

Earnings Growth Rate

1 Year

 

 

Earnings Growth Rate

5 Years

 

 

Earnings Growth Rate

10 Years

 

Telstra Corp

(TLS)

24.2%

2.9%

24.2%

Singapore Telecom

(SGT)

9.2%

-2.3%

2.4%

TPG Telecom

(TPM)

15.1%

54%

18.9%

M2 Group

(MTU)

90.5%

44.2%

36.4%

iiNet Ltd

(IIN)

7.5%

19%

29%

Vocus Communications

(VOC)

43.2%

58.2%

47.4%

Amcom Telecom

(AMM)

3.7%

20.5%

29.1%

My Net Fone Ltd

(MNF)

32.7%

95.9%

 

The table says it all.  Telstra has a P/B ratio of 5.10 which makes the stock a bit pricey for those who wonder from where the company’s future growth will come.  Telstra is still negotiating with the NBN (National Broadband Network) for its copper network and has been in the financial news of late with a number of new initiatives.  Telstra’s partnership with Foxtel announced new bundling entertainment packages for consumers while Telstra Health announced it was taking a stake in the latest Healthcare float, Orion Health.  More news included a partnership between Telstra and US based VMware will be bringing its Vcloud services to Australia via Telstra Date Centres.  Meanwhile, rival Singtel announced it would be partnering with Microsoft Corporation to bring that company’s Cloud Operating System Network (COSN) to SGT’s Asia Pacific operations.

TPG Telecom (TPM) began trading on the ASX back in 2001 under the name SP Telemedia and the Code SOT.  The shares closed the first day of trading at $0.13.  In 2008 a reverse merger between SP Telemedia and Total Peripherals Group created the current TPG Telecom with the trading code changing to TPM in 2009.  The company made headlines with its purchase of PIPE Networks in 2010 and now is considered a potential contender for Telstra’s massive market share.  TPG’s future is in fibre optics.

In September 2013 the company announced plans to build its own FTTB (Fiber to the Building) Internet network with speeds rivalling that of the NBN.  The ACCC (Australian Competition and Consumer Commission) has ruled that TPG may offer these services in competition with the NBN, opening the door for as many as 500,000 new residential and commercial customers.  The Department of Communications recently upped that number to a staggering 1.8 million customers.

There are two other Telco’s in our table with eyes set on the potential of fibre optic networks – Vocus Communications (VOC) and Amcom Telecommunications (AMM).  Vocus spans the globe with its network across Australia and New Zealand; Hong Kong and Singapore; and the US.  Dark Fibre is what could set this company apart from the pack.  Vocus claims its dark fibre network offers the fastest way to connect critical sites, data centres, disaster recovery services, and cloud providers.  The company listed on the ASX in 2010 and its share price rise has been nothing short of phenomenal.  Here is a price movement chart for Vocus since it began trading.

Amcom Telecommunications (AMM) operates in Australia serving business and government customers.  The company has three divisions – Data Networks; Cloud Solutions; and IT Services.  The company’s strength is its extensive fibre optic network.  Vocus and Amcom were already engaged in merger discussions when news broke that rival TPG Telecom increased its existing stake in Amcom to 5%.  Amcom’s network serves the western part of the country while Vocus is focused primarily in the east and a merger would create a larger rival to TPG.  This has led to speculation that TPG might step in and attempt to acquire Amcom on its own.  Whatever the outcome, all three are well-positioned to benefit from the ongoing need for the greater speed, security, and reliability fibre optic networks can provide.

M2 Group (MTU) provides telecommunications services to business and residential customers through two segments – Retail and Wholesale.  The wholesale side accounts for about 9% of revenue and basically involves M2 selling its services to other Telco providers who can package them under their own brands.  

The Retail segment serves residential customers and primarily SME (Small to Medium Enterprises).  The company grew through acquisition and now features four branded products – iPrimus broadband and DoDo mobile and fixed voice as well as data, both for residential consumers.   The Engin Voice over Internet Protocol and Commander Phone systems are aimed at business customers.  The company has a fibre optic network operating in the Capital Cities but must lease access elsewhere.  

M2 listed on the ASX in 2004 and was added to the ASX 200 in 2012.  Investors patient enough to hang on during the early years have been very well rewarded.  Here is a then year price movement chart for MTU.

iiNet Ltd (IIN) is the second largest provider of broadband DSL in Australia and ranks third in residential fixed broadband services.  In addition, the company offers telephony, mobile and IPTV (Internet Protocol TV) to both residential and commercial customers throughout Australia.  iiNet grew its broadband accounts by 40,000 in 2014 and now boasts nearly one million broadband customers.  The customer growth was organic, not due to acquisitions and company management attributes the result to the aggressive marketing strategy now underway.  The largest share of new customers was NBN subscribers, which bodes well for the company’s future.  Having made several key acquisitions over the past few years, iiNet is looking to organic growth.  The company stands to benefit from the NBN rollout as its largest growth in 2014 came from NBN subscribers.  Long time shareholders have had a rough ride, with total shareholder return over ten years of 14.5% but over the past three years the return was 50.6%.   The following five year price movement chart shows the upward momentum beginning in 2012.

My Net Fone (MNF) describes itself as “Australia’s leading provider of hosted voice and data communications services for residential, business and enterprise users.”  The company listed on the ASX in May 2006 and closed its first day of trading at $0.18.  Over ten years the share price has risen about 1500% and over five years it is up an astonishing 4200%.  Here is a ten year chart for MNF.

How did this tiny company do it?  A series of earnings accretive acquisitions beginning with VOIP wholesaler Symbio in late 2011 set the stage.  By April 2012 the company increased its earnings guidance and won a major government contract in July.  By the end of 2012 My Net Fone had announced plans to acquire three more highly accretive businesses – Callstream, a cloud based call management system for business customers; Connexus – an Internet Services Provider (ISP) for businesses; and GoTalk – a voice network wholesaler.  The share price has been rising ever since, justified by the company’s financial results.

Full Year 2014 results saw a 28% revenue increase and a 40% jump in net profit after tax (NPAT).  In addition, the company ended the year with $7.4 million in cash on a balance sheet with zero debt.  On 24 October BRW (Business Review Weekly) listed My Net Fone as the fastest growing Telco on the ASX.  

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