Telecoms companies plummeted in line with the wider market sell-off in March, which perhaps undermines the traditional view of the sector as defensive. But demand for telecom services remains resilient, if not currently stronger, as people spend more time at home. Telecom networks are seeing changes in traffic patterns never seen before, as 'busy hours' shift earlier in the day to noon.
However, as we recently explored in a news feature, the telecoms infrastructure in the UK is especially patchy compared with some countries. Capacity is concentrated in city centres, along railway lines and in shopping centres, and is simply weaker in rural and residential areas. But, from a company perspective, it is perhaps a good thing that the crisis has drawn attention to the gaping holes in the UK's capacity.
In his recent Budget, Chancellor Rishi Sunak reiterated the government's commitment to developing the nation's connectivity, including £510m to be spent on a shared rural mobile phone network and £5bn to deliver faster broadband into the “hardest-to-reach” areas of the country. Increased government spending will mean that the likes of BT (BT.A) and Vodafone (VOD) are able to widen their capacity, which in turn will drive demand as more consumers search for the fastest, highest quality packages available.
With demand so high, it is not surprising that both Vodafone and BT have raised prices on some of their products – the former ramping up its bills by 2.5 per cent. The company said it was following its rivals in reflecting the Retail Price Index. EE, O2 and Three had already said that they would increase their charges by at least 2.2 per cent, and BT has hiked up the prices of some of its broadband packages. But as the main challenger in the broadband market, Vodafone's price rise is positive for the rest of the market.
It is worth bearing in mind, however, that while BT's management maintains that it is business as usual, the wider crisis is likely to put pressure on the company's finances. The market turmoil can only have worsened the group’s already gaping pension deficit, prompting Jefferies to raise its deficit forecast for March to £7.1bn net from £5.8bn. This, combined with a higher cost of capital assumption for Openreach, is likely to stretch BT’s finances even further.
As other sectors in the FTSE 350 have been turned on their heads by coronavirus, telecoms companies remain a relatively defensive play. Demand certainly will not be disrupted, and more committed government spending is good news. But BT's pesky pension problem persists and it is likely to emerge in worse shape from the current market turmoil.
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?
