The telecommunications sector is usually considered to be relatively defensive in times of economic difficulty. But with credit markets under pressure, and regulatory and new media convergence issues playing more of a role in 2009, then a selective approach to investing in the sector looks wise.
The resilience of companies operating in the telecoms arena largely reflects the robust levels of contractual revenue streams. So, despite a profit warning last year, BT - which has 70 per cent of its residential income and the bulk of its corporate income contracted - should still manage some earnings stability. More importantly, BT also boasts a relatively small exposure to the debt markets, with just £159m-worth of bonds due for refinancing in August 2009. Another player with significant levels of contracted income is Colt Telecom. The group also benefits from strong cash generation, which means its £262.2m debt facility - not due for renewal until end-2009 - isn't a huge concern.
Conversely, Vodafone could prove to be less resilient as mobile usage is regarded as being relatively discretionary. Moreover, pre-paid mobile usage greatly outweighs contracted mobile usage in most emerging markets. Worse still, Vodafone is faced with the task of refinancing a whopping £3.4bn-worth of bonds this year, with the largest tranche - £2.8bn - due in May.
Regulatory and convergence issues also leave the sector looking very differently placed compared to the last downturn. At the regulatory level, Ofcom's local loop unbundling price consultation is due to complete in February, with a statement due in March and implementation in April. Oriel Securities expect BT to gain about £50m from this initiative.
And BT Vision's tie-up with BBC and ITV - Project Canvas - will see BT earn revenues for delivering TV programmes over the internet. Further convergence into the web-delivered space will also be evident from Vodafone's shift towards offering more broadband services. BT's commitment to finance a £1.5bn super-fast broadband project is, however, likely to face scrutiny. Mike Jeremy, telecoms analyst at broker Daniel Stewart, warns that BT will probably be unable to finance the project, which was announced last July. Instead, he expects shared funding proposals to be explored over the year.
With most of the obvious takeovers in the sector having already been carried out, it's likely that 2009 will only see very selective deals. Cost-cutting measures are likely to take precedence in the sector's efforts to support historically strong dividend yields. However, smaller players, such as Spirent Communications, may acquire small, niche businesses.
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