The world’s two main central banks have already begun their own de-escalation after raising interest rates to combat soaring and uncontrolled inflation caused by the crisis. shock commercial declines derived from the Covid pandemic. Once these declines have started and, even without knowing where the floor of the currency price will be set in the short and medium term, this process has a direct influence on the valuations of a large part of investment assets.
The most obvious is fixed income securities, but there are also companies on the stock exchange whose performance has a very close direct correlation with the price of debt. These are the so-called bond proxies. In the telecommunications sector, there is a very visible example the owners of the communication towerswhich have been penalized on the stock market in recent years and which are finally beginning to see their recovery become a reality.
From Berenberg, they explain that “in the last two years they have behaved as a defensive sector, doing worse than the benchmark indices in a period of little uncertainty and economic growth”. “The change in direction of interest rates and the decisions taken by Jerome Powell and Christine Lagarde indicate that it is time to bet on them. bond proxies like Cellnex or Inwit, which are already trying to join the gathering of operators,” they add.
In this context, without going any further, since the beginning of the year, the major telephone operators have accumulated double-digit returns. Telefónica is up nearly 23%, while Deutsche Telekom is approaching 20%, as is BT. Vodafone and Orange are also positive, but with increases of 10% and 5% respectively. On the other hand, the two main listed tower companies have experienced a slower evolution. The Italian Inwit is indeed down nearly 5% over the year while Cellnex barely scores a percentage point. On the other side of the Atlantic, the global benchmark in this business is trading 7% above its January levels, compared to 20% for the S&P 500.
The sector’s relationship with fixed income is not explained exclusively by its high debt and capital intensity profile. Incumbents, or leaders in their markets, are also considered an alternative to bonds due to the high visibility of their dividends. This also explains the rotation of investors within the sector since the gap between the yield on their payments (4.5%) and that of a 10-year German bond on the secondary market (2.2%) has narrowed considerably towards the lows of the last decade.
“For the coming months, expectations for a rate cut are positive, but we also need an improvement in earnings estimates, especially if uncertainty increases,” Berenberg continues.
Cellnex, the best recommendation
In the telecommunications tower sector, there are not many listed companies. Cellnex is the main player on the Old Continent, where the remaining shares are shared between Inwit, Telxius (now owned by American Tower), Altice (also dedicated to other activities) and Vantage (the Vodafone tower, which is no longer listed) and GD Towers (of Deutsche Bank, now owned by two funds) and Totem (of Orange), among other smaller ones.
The Spaniard receives the best recommendation in the industry at a time when the results of its strategic shift towards deleveraging, organic growth and dividends are already visible. “We nevertheless believe that it will continue to be active in the consolidation of the European market, which is still very fragmented, and will therefore continue to focus on growing its rental rate. [número de operadores medio por torre]which will be a catalyst for increased profits,” they emphasize at Barclays.
The other major European tower company, Inwit, also receives a buy recommendation. In its case, analysts also expect a revaluation of more than 20%. However, due to its greater maturity, it has already become a high dividend company and this year the market estimates a profitability of 4.6%.
To find others listed in the sector, you have to cross the Atlantic. American Tower and Crown Castle are the leading American companies. Both also receive a buy recommendation from experts.
