Telcos’ growth doesn’t mean they are a haven

Telcos’ growth doesn’t mean they are a haven

‘This industry moves at breakneck speed in terms of technological innovation’.IN THESE uncertain times any stock should do well that has a decent dividend yield and earnings that aren’t tied to people buying expensive but non-essential items on the basis of increasing property values.

Telecommunications is a space to where many investors have gravitated on the basis that its earnings are protected from an economic downturn. And it’s not just Telstra, which is trading at three year highs. The shares in Perth-based Amcom Telecoms (AMM) more than trebled in the past three years. At $1.08 its market cap is $260 million.

Many believe it will climb higher as it builds on its 20 per cent market share in the Perth business market (Telstra has the rest).

These guys wire up a commercial building with fibre capacity and then sell the connectivity to its tenants.

Its stock is priced for growth, trading on a current year PE of about 16 (the average is about 11) and a dividend yield of just over 3 per cent.

But the idea that telcos’ earnings are a defensive investment is absurd considering that the domestic market place is in for the biggest transformation since Telstra first started to become a public company in 1997. That’s right, we’re talking about the national broadband network.

We asked Amcom’s chief, Clive Stein, whether there is a danger that his company’s fibre network could become stranded; a good asset that nobody needs.

He fired back that the NBN’s time line could be “many years, five years or longer”, and then came up with three reasons why the NBN will not be a threat to Amcom’s business.

First, Stein says, Amcom’s network will co-exist with the NBN because it provides its business customers with speeds of up to 1000 megabits a second, which is way in excess of what’s initially promised by the NBN’s 100 megabits per second for residential customers and small businesses.

Second, he suggested that the NBN would not be business friendly because there would be congestion on the nation’s telecommunications super highway.

Third, dark fibre capacity is something that the NBN won’t have, but which Amcom does.

This gives corporates the ability to splice a fibre and control its speed from different locations.

It could be said that the NBN represents a competitive threat to another junior telco, BigAir (BGL), being the country’s biggest provider of fixed wireless broadband services to the business market.

This company is younger than Amcom and its growth has been even more impressive. Its shares have climbed by more than six times in the past three years.

Chief executive Jason Ashton echoes Amcom’s counterpart’s optimism when it comes to the NBN.

“The NBN is a real marketing machine, promoting the benefits of high speed broadband,” he says.

The fact is that nobody really knows what’s going to happen when the NBN comes in. It will definitely lower the barriers to entry for the sector, meaning increased competition and lower profit margins.

Both companies are moving very quickly to expand businesses outside of their core infrastructure. BigAir is now Australia’s biggest provider of internet services for student accommodation. This will represent about 30 per cent of its revenues.

Meanwhile, Amcom is getting into web-based IT services, also known as the cloud. It bought L7 Solutions late last year, an IT integrator.

“We’re now in the market to offer customers both telecommunications and IT solutions,” Stein says.

”The two come together in cloud services.”

This industry moves at breakneck speed in terms of technological innovation, which is complicated by changing legislation.

At the small end you have to believe that the executives are moving ahead of the curve. Otherwise their assets could be stranded in the middle of the telecommunications lake, without a paddle.

Richard Hemming ([email protected] report苏州美甲培训学校.au) is an independent analyst who edits fortnightly newsletter www.undertheradarreport苏州美甲培训学校.au

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