High-risk telcos yield best returns

By PETER GRIFFIN

Telecommunications companies in emerging markets lead the pack in terms of revenue growth and free cashflow outlook, says merchant bank Goldman Sachs, leaving Telecom and Telstra languishing in global rankings.

But with unpredictable economic and political factors adding a element of high risk to investing in developing operators, the local, dividend-paying incumbents may appear a safe bet.

Analysis of 89 companies demonstrated again that the Asian operators and a diverse collection of emerging players scattered across the globe seem to offer good returns for brave investors.

Telecom took 79th place in the analysis, which factored in free cash-flow yield (FCF) for 2003 (operating income less expenses, taxes, and changes in net working capital and investments as a percentage of market capitalisation) as well as compound annual growth rate (the year-on-year rate of revenue growth for a three-year period to 2005). Both are good measures of a company's financial health.

With a projected three-year growth rate of just 1.3 per cent and an FCF yield of 7.7 per cent, Telecom joined a stable of other "defensive stocks" in the bottom third of the table which have stable cashflows but low growth prospects.

In comparison, Indonesian operator Telkom took the top spot with a forecast growth rate of 19.9 per cent.

The world's largest mobile operator, Vodafone, had a growth forecast of 9.2 per cent, Telstra had a growth rate of 2.7 per cent and FCF yield of 7.2 per cent.

Hutchison Australia's ambitious plans for third-generation mobile services pushed its estimated growth rate to 32.1 per cent. Telecom is a 19.9 per cent stakeholder in Hutchison's 3G venture.

Asian operators Korea Telecom, SK Telecom and China Telecom ranked in the top 20.

"Not surprisingly, with generally better revenue growth, telcos in emerging markets stood out when compared to developed market companies," said Goldman Sachs analyst Tim Storey.

But do the rankings point to good investment targets for sharemarket speculators?

That depends on the challenges facing each company.

Those leading in the growth stakes generally had greater levels of risk attached to their businesses than companies with established customer bases and revenue streams and greater regulatory certainty.

Relatively high cashflow yields were sometimes being achieved because the market capitalisation of telcos was decreasing as share prices slumped.

"Investors won't buy the shares so they trade down to the point where the free cash yields go through the roof," one analyst said.

But Goldman Sachs pointed out that strong revenue growth and high FCF would be "precursors to good share price performance this year", signalling a win to those investors who had bought into higher-risk, developing companies early in the game.