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Fortis Investments

Global Telecom Sector

Flash | October 2006

Clouds are clearing

We have reached an inflection point within the global telecom sector. After five years of underperforming
the broad market, it appears that the sector is finally turning the corner. There is a sense that the worst is
behind us, as telecom was the best performing sector globally during the third quarter. Looking forward
there are several factors which we believe will drive further outperformance in the sector: improved
earnings visibility, realization of merger synergies and solid growth opportunities in select markets. The
sector also offers a highly attractive dividend yield and stands to benefit from investors seeking more
dividend yield.

Telecom sector performance

relative to global equities (past 5 years)






















MSCI World Index MSCI World Telecommunications Services Index

Source: Fortis Investments, Factset (Indexed returns in Euros)

Earnings visibility
Earnings growth is being driven by improving pricing conditions, stabilizing operating trends, aggressive
cost cutting initiatives, a positive regulatory environment, strong wireless growth, and new market
opportunities. This has translated into greater visibility of forward earnings as evidenced by recent
increased analyst upgrades within the sector.

Merger synergies
Given the substantial amount of excess capital available in the sector and in private equity we expect to see
additional merger and acquisition activity, albeit at a slower pace than recently witnessed. Global telecom
M&A deals over the past two years have reflected market expansion but have also had a positive effect on
the buyers’ balance sheets. Partnering companies have begun realizing their synergies through cost

Flash: Global Telecom Sector | October 2006 1

Fortis Investments

reductions and economies of scale. In the US, the largest three companies now account for over 70% of the
sector market cap; this compares to 34% in 1990. Trends in bundled services are also paving the way for
additional M&A activity. Sector consolidation will further increase the importance of stock selection.

While cost-cutting has been a major source of earnings growth, we have seen top-line pressures decreasing
which will help revenues become a larger driver of earnings growth again. We see growth within the sector
coming from a number of areas including: broadband, 3G (third generation) technology, expansion in
emerging markets. Broadband penetration has been accelerating as internet customers are seeking faster
downloads for audio and video files. 3G services, which facilitate the simultaneous transfer of both voice
and non-voice (i.e. video, downloads, SMS, etc.) data are providing mobile users with a much more robust
communication platform and should finally begin to realize their growth potential in 2007. Emerging market
companies benefit from low penetration rates and also tend to have lower leverage, higher margins and
higher growth than most developed markets telecom companies.

Global opportunities
It has become less difficult to find attractive telecom investment opportunities globally than it was a year
ago. As the fog has lifted from the sector, there are increased opportunities within both the growth and
value spaces. In the US, improved clarity in the regulatory environment has opened the door for a number
of players. Within Europe the risk of negative news flow remains a potential detractor but there is valuation
support from attractively priced stocks. There is little difference between the European and US integrated
carriers making it more of a stock call than a regional call. Within Asia we see high revenue growth and
return on assets. Overall, emerging markets continue to be the fastest growing region within the sector and
offer the largest valuation discount. Additionally, the healthy macro environment in emerging markets
coupled with increasing domestic wealth is creating a positive consumer environment in the local markets.

Fortis Investments: Telecom sector strategy

Our strategy is to create a more focused portfolio of diversified high conviction ideas. In the current
environment we continue to be sensitive to relative valuations and positive earnings momentum. Our
portfolio is largely levered to growth. We have positioned ourselves in companies that will provide synergies
as well as margin expansion through wireless exposure. We recognize the sensitivity of the regulatory
environment in some markets and have minimized our exposure to those markets. We also continue to
overweight our exposure to niche players within developed markets as well as to emerging markets which
have low penetration rates and more growth opportunities.

Largest Overweights:
„ Rogers Communications: Very strong free-cash-flow growth and beneficiary of positive market
dynamics in Canada with large economies of scale.
„ Telenor ASA: One of the best positioned companies within its core market in Scandinavia and
solid exposure to rapidly growing wireless activities in emerging markets.
„ America Movil: The undisputed leader in the high growth and concentrated Latin American
market with strong subscriber growth and significant margin expansion.
„ Telekom Austria: Compelling valuation, resilient earnings, attractive M&A story and exposure to
higher growth Eastern Europe.
„ American Tower: Largest tower company in an industry that has strong underlying growth

Flash: Global Telecom Sector | October 2006 2

Fortis Investments

John K. Chisholm, CFA

Product Specialist – Global Equities
(617) 478-7201

This document has been prepared solely for informational purposes and does not constitute 1) an offer to buy or sell or a solicitation of an
offer to buy or sell any security or financial instrument mentioned in this document or 2) any investment advice. Any decision to invest in
the securities described herein should be made after reviewing the most recent version of the prospectus, which can be obtained free of
charge from Fortis Investments*. Moreover, prospective investors should conduct such investigations as the investor deems necessary and
should seek their own legal, accounting and tax advice in order to make an independent determination of the suitability and consequences
of an investment in the securities. The opinions contained herein are subject to change without notice.

Investors should ensure themselves that they read the last available version of this document.

Past performance or achievements are not indicative of current or future performance. The performance data do not take account of the
commissions and costs incurred on the issue and redemption of units.

For more information, please contact

Fortis Investments is the trade name for all entities within the group of Fortis Investment Management. This document has been issued by
Fortis Investment Management Belgium N.V./S.A. (address : Avenue de l’Astronomie 14, 1210 Brussels, Belgium, RPM/RPR 0882 221

Flash: Global Telecom Sector | October 2006 3