Telecom sector shares improve

JPMorgan on Tuesday upgraded the European telecoms sector to "overweight", anticipating an improved economic climate in the second half, and said Vodafone (VOD.L), France Telecom (FTE.PA) and KPN (KPN.AS) were top picks.

The upgrade buoyed telecom shares with Vodafone gaining 2.2 percent by 1054 GMT. France Telecom shares rose 2.5 percent and KPN stock was up 1.37 percent. Deutsche Telekom (DTEGn.DE) gained 1.2 percent.

The DJ Stoxx Telecom index .SXKP was 1.1 percent higher.

JPMorgan said the telecoms sector was favoured by cheap valuations, increasingly stable and predictable results, and seasonal trading patterns that had led the sector to consistently outperform in the final months of most years since 1995.

"In H109, this seasonality `predisposed' the sector to underperform, but in addition, expectations regarding the sector's `immunity' from the recession were too optimistic," JPMorgan said.

In the first quarter, only two incumbents beat estimates on core profit and while domestic fixed line businesses remained almost stable "mobile revenues tracked a deeper than expected GDP drop", it said.

The second quarter gave reason for a more optimistic outlook as incumbent operators missed less on the top line and eight out of 13 incumbents beat core profit expectations.

"In H2, we believe the improving economic context will act to strengthen the usual trading seasonality, for which we found Q2 results overall supportive."

JPMorgan said positive seasonality in the third and fourth quarters and valuations would be supportive, and pointed out that European telecom companies were currently trading at 50 percent relative price-to-earnings discount.

BofA Merrill Lynch downgraded the sector earlier this month to "neutral".

The brokerage said telecoms would likely lag behind sectors that were more geared into the economy and it would be hard for the sector to see catalysts for outperformance over the near-to-medium term.

However, BofA Merrill Lynch said telecom-sector valuations remained extremely attractive, with 2009 and 2010 dividend yields estimated to be the highest of any sector, and it remained the brokerage's favourite defensive sector.

Reuters, 25th August 2009

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