European telco sector set for resurgence, says Jefferies

The European telecom sector looks set for resurgence in 2022 amid top-line growth, potential consolidation and an improved regulatory environment that values incentives to invest over an exclusive focus on end-user pricing and competition, according to analysts at Jefferies.

Jefferies’ analysts said they were “looking with confidence” at the sector over the coming year in a report on the sector.

Jefferies pointed to “positive underlying growth” evident if third quarter numbers from players in the sector, with “at least sequentially improving growth rates” for the weaker service providers.

The analysts see signs that regulators are now more focused on incentivising infrastructure investment than in keeping end user pricing low through competition, citing the revised European Electronic Communications Code, the UK Wholesale Fixed Telecom Market Review and the terms of the recent Spanish spectrum auction as evidence.

“The regulatory agenda is shifting towards incentivising investment, attractive dividends are well underpinned, and we see rising prospects for return-enhancing consolidation and infrastructure monetisation,” said the analysts.

The analysts said that costs in the sector tend to rise at a lower rate than headline inflation, with the possibility of restructuring providing “a crucial safety valve”.

Jefferies believes that consolidation is again in the offing. “We believe this subject is emerging again, driven by a recognition that the regulatory agenda has compressed sector returns unsustainably below cost of capital,” they said.

Jefferies cited the UK, Spain, Portugal and Sweden as markets where consolidation could potentially go ahead.

Jefferies’ analysts also believe that private equity players will take a stronger interest in the sector next year and that telcos will seek to make more of their infrastructure assets. They argue that private investors are likely to take a longer term view of the value of fixed infrastructure than public markets, with consolidation of fixed line assets and tower infrastructure both strong possibilities.

Companies whose share price is likely to do well, according to Jefferies, include BT, Deutsche Telekom, Vodafone, Orange and Liberty Global, while Proximus, Telefónica, NOS and Telia are among those relatively less favoured.