Investors should reduce holdings of telecommunications stocks in the emerging markets of Europe, the Middle East and Africa because gains in the past six months have left them expensive, according to Goldman, Sachs & Co.
Analysts including Sergei Arsenyev in Moscow downgraded the shares to „neutral” from „attractive,” which suggests that holdings should now match the weighting in benchmark indexes. Wireless companies, in particular, have outperformed those in developed Europe, the analysts wrote in a report dated yesterday.
They cut recommendations on Cairo-based Orascom Telecom Holding SAE, the biggest mobile-phone company in the Middle East, and on MTN Group Ltd., the largest in Africa. „Valuations are now becoming stretched,” the analysts wrote. „Increasing competition is the main long-term threat to the sector, which is likely to lead ultimately to margin and earnings compression.”
Growth in wireless markets in Europe has slowed because most consumers already have mobile phones. Telecommunications companies in emerging markets are seeking to expand in countries with high populations and low mobile-phone usage. Egypt, the Arab world's most populous country, has 18 million mobile-phone users out of a population of 72 million, Telecommunications Minister Tarek Kamel said on January 16.
Phone companies in emerging markets face increasing competition as a result of the issuance of new licenses and mergers and acquisitions, according to the Goldman report, which was also written by Alexander Balakhnin in Moscow and Sonalee Parekh in London. Orascom Telecom was reduced to „neutral.” The shares have surged 79% from their 2006 low in June.
The Dow Jones Stoxx 600 Telecommunications Index, a measure for phone shares in western Europe, has gained 29% in the same period. Orascom shares trade at 20.4 times estimated earnings, according to data compiled by Bloomberg. That exceeds the average price-earnings ratio of 14.9 for the phones index. Shares of MTN Group, based in Johannesburg, have jumped 72% since their 2006 low in July.
Goldman, Sachs & Co. cut the shares to „sell” from „neutral.” The analysts said they also remain „negative” on Magyar Telekom Nyrt, Hungary's former phone monopoly, and on Morocco's Maroc Telecom. Goldman Sachs still recommends shares of Russian telecommunications businesses including OAO Mobile TeleSystems because revenue growth „has not been fully reflected in share prices,” according to the analysts. (Bloomberg)