ECONOMY

Telecom stocks may not boost the bourse again

Greek telecommunication stocks – OTE, Panafon and CosmOTE – came to the rescue of a badly bruised Athens Stock Exchange last year, mainly thanks to some large buy orders by some foreign institutional portfolios trailed by some Greek institutionals eager not to lose out in the domestic competition for returns. Cheap valuations, stock liquidity, reweighting by Morgan Stanley Capital International (MSCI) in the case of Panafon, and high earnings growth in the case of CosmOTE were the main catalysts. But all three telecom stocks have appeared to suffer from varying degrees of fatigue lately, possibly related to the partial closing of valuation gaps against their other European peers. As a result, they may not be able to provide the Athens bourse with the same boost as they did last year. Heavyweight OTE has been traditionally regarded as an undervalued stock in the European telecoms universe, but with little to show on earnings growth and operational efficiency. It is no accident that CosmOTE, its mobile subsidiary, has been its main growth engine over the last couple of years. In addition, it has long been characterized by mismanagement, perhaps the result of repeated government interventions, while OTE’s past international investments have yet to show any meaningful returns. Still, OTE has a large weighting in the MSCI-Greece index; and it is a liquid stock, which makes it a prime candidate for foreign institutional portfolios willing to look for exposure to the small Athens stock market. Moreover, it has a relatively strong balance sheet and, unlike other European telecom incumbents, it is not plagued by high levels of debt. It also has yet to face fierce competition from competitors following the liberalization of the Greek telephony market on January 1 of last year. With most sector analysts expecting a drop in after-tax earnings this year compared to 2001 and no well-known foreign telecom operator seemingly interested in acquiring a significant equity stake and assuming OTE’s management, it looks as if comparative valuations will be the key to the performance of OTE shares in 2002. However, OTE outperformed its European peers in 2001, going a substantial way toward closing the valuation gap. Therefore, it is reasonable to say that OTE’s upside potential is directly linked to the performance of other European telecom stocks this year. In the fast-growing mobile sector, one of the few Greek sectors attracting the interest of foreign international portfolios, things look tougher this year. With penetration estimated to have reached about 72 percent of the population at the end of 2001 and with the entry of a fourth player looming, most analysts predict single-digit earnings growth this year, well below the double- and triple-digit growth rates experienced by some in the last few years. Still, the sector has to show good earnings visibility while the shares of Athens listed firms, CosmOTE and Panafon-Vodafone, still trade at a discount, albeit lower, to their other European peers. Both firms secured 3G licenses at reasonable prices last year and have relatively low levels of net debt. CosmOTE is expected to experience another good year, marked by slowing earnings growth as the Greek mobile market matures. The company can still look at its Albanian subsidiary, AMC, for growth to partially compensate for slowing demand at home and to reign in operating costs to keep profit margins at high levels. CosmOTE’s EBITDA margin surpassed 43 percent in the third quarter of 2001. Nevertheless, investors have still to contend with the potential stock overhang from the decision by Norwegian Telenor, one of CosmOTE’s founding shareholders, to sell its 18-percent equity stake in the company; they also must weigh the threat posed by the fourth entrant, Infoquest, in the market. Panafon-Vodafone, which is 52.8-percent owned by the Vodafone Group, has the second-largest market share in the Greek mobile market with 36.2 percent. Its top management has repeatedly made it clear that it mainly focuses on earnings growth to enhance shareholder value. Indeed, the company commands a high EBITDA margin (by European standards) of around 43 percent based on third-quarter financial figures. However, this profit margin is likely to be squeezed a bit in 2002 as the company consolidates two of its service providers. The Greek subsidiary of Vodafone has already absorbed Unifon and is about to consolidate Nextnet. On the positive side, lower subscriber acquisition costs may partially offset the dilutive effect which first-time consolidation will definitely have on its EBITDA margin. Looking at what many analysts call a tough year ahead, the Athens-bourse-listed Panafon-Vodafone, which has a 49-percent stake in Vodafone Albania, can look to the neighboring country for some growth. Despite closing a good deal of the valuation gap separating it from parent Vodafone group in the last few months, Panafon-Vodafone shares still trade at a considerable discount, of more than 35 percent, in comparison with the parent company, meaning they have upside potential on valuation grounds. As in the case of CosmOTE, the impact of the fourth player in the local market is something to be considered, as is its parent Vodafone’s decision to absorb its European subsidiaries at some point. All in all, there is some scope for outperformance by Greek telecom stocks in 2002, but it is more limited than in 2001. Unless an M&A deal changes the local landscape, a lot will depend on the performance of their European peers.