A Mid-sized Telecoms Company That Rings True!

Portugal Telecom (PT) look like a great long-term investment this year, both for exposure to emerging markets and investment in the non-cyclical telecommunications sector within a eurozone periphery country displaying economic recovery. PT stock is currently trading at €4.1370 per share on the Lisbon stock exchange, with a 52 week range of €3.0030-€4.4620, a P/E ratio of €14.8704, earnings per share of €0.2700, and market capitalization of €3,600,500,000. PT’s share price has also risen steadily by 32% since June 2012. Investing in PT at this point would conform to Warren Buffett’s investment philosophy that “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.”

PT's future of fibre optics?

Recent consolidation in the telecoms industry suggests there will be further consolidation in the next few years. The German telecoms market is highly fragmented with several regional operators. The UK’s Vodafone is interested in acquiring Kabel Deutschland, Germany’s biggest cable operator that provides phone and internet services to over 8 million households, for €10 billion – completion of the deal would provide Vodafone with its own broadband lines as they currently spend €300 million a year on leasing lines from Deutsche Telekom. Similarly, private equity owned French cable operator, Numericable, is looking to purchase Vivendi’s telecom operator SFR – Numericable is the only national cable operator in France and the leader in high-speed fixed optical fibre cable access whilst SFR is France’s 2^nd largest mobile operator. In Portugal too mobile operator Optimus announced a merger in January with cable operator Zon to create the second largest firm in their telecommunications market. Also in the UK, BSkyB have announced their €229 million acquisition of O2, the UK broadband business of Spain’s operator Telefonica - the deal adds 500,000 new subscribers to its 4.2 million base and makes BSkyB the second largest broadband provider in the UK. Late February also saw a €19 billion bid from US market leader Liberty Global for the UK’s Virgin Media, which has been notified to the European Commission due to competition concerns – the merger would strengthen multi-product offerings spanning fixed line, mobile phone, internet, and television. It would be reasonable to suggest that PT may be part of this consolidation.

Internally, Portugal Telecom have many strengths that would appeal to investors. PT is the largest telecommunications company in Portugal, with 100.4 million customers in 2012 and EBITDA of €2.269 billion. PT owns PT Comunicações, the largest landline operator in Portugal. PT owns Telecomunicações Móveis Nacionais (TMN), the largest mobile phone operator in the country. PT also owns 25% of Páginas Amarelas, the publisher of the Portuguese Yellow Pages, and PT PRO, one of the largest shared services companies in Europe. One aspect of PT that would appeal to investors is their significant presence in emerging markets, particularly China, Macao, East Timor, Guinea-Bissau, Cape Verde, Mozambique, Namibia, Angola, Kenya, and Sao Tome and Principe. Some of PT’s foreign holdings include:

·         Brazil - 25% stake in one of Brazil’s largest telecom companies, Oi;

·         Angola - 25% stake in Unitel, 40% in Multitel (internet access and data provider), and controlling stake in ELTA, Angola’s telephone directory company;

·         Mozambique – Owns directory company - Listas Telefonicas de Mocambique, owns Teledata (ISP and data);

·         Cape Verde – 40% stake in CV Telecom, 60% stake in Directel;

·         Sao Tome and Principe – 51% stake in Companhia Santomense de Telecomunicações;

·         Namibia - Through a 75% owned investment holding company Africatel, PT holds a 25.5% stake in Namibian mobile company MTC;

·         East Timor – 41% stake in Timor Telecom;

·         Macau – 28% stake in CTM.

Despite a difficult European macroeconomic environment, PT managed to increase their number of customers in Portugal in 2012 by 3.4%, the number of business and corporate mobile users in Brazil by 14%, and the number of customers in Africa and East Timor by 16%. Data accounts for 34% of PT’s revenues and they have sought to consolidate this revenue stream through investing in cloud computing – Cloud PT – as well as in partnerships with Oracle, SAP, Cisco, Fujitsu and EMC. PT also boast an excellent 52% of non-voice revenues. In another way, PT show that they are a very innovative telecommunications company. PT has an advanced fibre-to-the home network in Brazil and cover 46% of Portuguese households and businesses with this FTTH. In February, PT further advanced their innovation by teaming up with small British ecommerce company, Powa, to create devices that allow businesses to take card payments by smartphone – the first in Europe. Powa, a competitor to Square, hope that their device, small card readers that connect via Bluetooth to the smartphone, will be available in Q3 2013. Powa’s device differs from Square, which concentrates on new users to card payments and utilizes swipe technology, as it targets existing users through banks and telecoms companies and has security clearance to handle chip and PIN which is widely used in Europe. Powa’s device takes a small licensing payment on top of the card fee, which is split with PT.

Mobiles for all!

Portugal, as a periphery country within the eurozone that took a bailout from the EU, is experiencing economic recovery. Buying into PT, one of the Lisbon Stock Exchange’s largest companies, therefore also means buying into exposure to Portugal’s economic recovery, which is being driven by renewed confidence in their corporate sector. While Portugal’s economy is still likely to be in recession during 2013 and with unemployment set to reach 19%, there is still much for Portugal’s government to do before they are truly recording positive growth. Yet the Portuguese 10-year government bond yields have fallen from around 15% in January 2012 to 5.9% currently, which intimates at heightened international market confidence in Portugal’s economy.

Therefore, there are many reasons to favour an investment in Portugal Telecom stock right now. Combine the above factors with PT’s annual habit of dividends of around 16% and a stock price around €4, makes this a favourable investment. Speculation abounds that China Mobile, the world’s largest mobile phone operator by number of customers, is interested in investing in PT due to its African and Brazilian exposure as well as comparatively low valuation, and there is an opportunity to possibly capitalize on a fast rising stock too this year.