July 19, 2008
Here is the Network News – and It’s Good
By Nick Clay
At Newton, we believe in looking at investments on a global basis, with the focus for our global analysts led by our global themes. One such theme is Networked World. The use of networks remains relatively low and only now, as the devices and applications become more readily available, are we seeing rapid growth in network usage. It's a trend that can have profound benefits for many industries, with telecommunications being at the forefront.
A simple look at some of the current trends demonstrates the effect now happening. Research by Bernstein highlights that an Apple iPhone consumer uses 10 times the amount of data that a BlackBerry consumer uses. Yet a dongle (wireless internet for your laptop) consumer uses 10 times more than the Apple user. The clear message here is that the demand for the data and applications exists, and as the ease of access and use improves, the demand follows.
People want to get connected, and as the prices of these devices falls, the take-up is also accelerating. Carphone Warehouse has seen weekly unit sales of mobile broadband connections go from fewer than 1,000 per week to more than 7,000. This isn't simply owing to phone prices falling, but lower prices for all devices - laptops are now available at 200.
The impact on revenue growth for the companies is very meaningful. In Australia, Telstra has seen mobile services revenue growth rise from 4.7 to 13 per cent in just 12 months after the launch of its 3G service. In Europe, data traffic quadrupled in 2007, and data traffic is now almost as large as voice traffic in Europe.
Yet the trend is only just beginning, as penetration rates remain low. Vodafone, for example, has only 5.8 million data users compared to its 250 million subscribers worldwide, and only 20 million out of 100 million in Europe. Trends from around the world also point to the potential, with data revenue generated per user in the US 20 per cent higher than that generated by users in Europe, while still growing twice as fast.
It's a global trend, too, with usage adapting to each country's needs. In the West, it's internet surfing, emails, videos and such like, whereas in Africa the mobile network is used for applications the West already has infrastructure for, like virtual banking. With a lack of ATMs and banking infrastructure in developing countries in Africa, the mobile device is being used for transferring money from towns to villages and people to people. In the developing world, data and voice are growing hand in hand, with emerging market voice minutes growing 32 per cent year on year in 2007.
However, in many areas of the world, in spite of the fact that the networks are largely already built, usage of them remains low. Currently, only 20 per cent of Vodafone's European network is being used - evidence that as the usage increases, the operational gearing in terms of profit growth is significant.
And this is the important part. A few years ago, building out these networks proved very costly and ultimately premature, with the devices able to make use of the network still not in circulation.
However, in spite of the writedowns, the balance sheets have returned to health and the previously dormant networks are starting to fill up. Most crucially, the returns are now really starting to come through. Indeed, the trend in network usage is so irrefutable that the incumbent fixed-line operators are being forced to respond by investing in building their own networks to rival the Vodafones and Telstras of this world. Only this week, BT announced the investment of 1.5bn in a fibre network to deliver data applications to consumers. It will take five years to build, and BT will be playing catch-up as some companies are already benefiting.
You would think, with such strong trends developing, that the companies involved would be reflecting this theme in their valuations. Not so. At 150p, Vodafone is trading on 10 times earnings and a 5.5 per cent yield to March 2009.
Telecoms on a global basis are not fully reflecting the strength of this theme, so providing investors with a potential buying opportunity. At Newton, we have exposure to many of the stocks set to benefit, like Vodafone, MTN in Africa and Millicom in Latin America and Africa. Others are also waking up to the potential, with India's Reliance Communications starting talks with Africa's MTN to join forces. Newton is already there.
Nick Clay is manager of the Newton Managed Fund.Sean O'Grady is away
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