The pricing power it will be one of the trends in 2022 in the eyes of investors. Telecommunications operators, reviled during much of the latest stock market rally, are among the companies with the ability to adapt to an environment of higher inflation thanks to regulations that allow ‘index’ the rates to the evolution of the CPI. Telefónica and Cellnex, two of the main shares of the Ibex 35, have received the support of Bank of America for this 2022 with an increase in their forecasts and potential on the stock market in the face of a volatility scenario.
“With a broadening market sentiment shifting to defensive and value stocks (value), we expect a recovery [del sector], but investors must tread carefully to avoid ‘value traps’ as inflationary pressures weigh on earnings. Our focus is on stocks with catalysts to create value but with some pricing power and cost reduction as measures to offset inflation. David Wright, analyst at the investment bank Bank of America (BofA).
According to the analysis of the US bank, telecommunications companies also face rising inflation and energy costs increasingly high but unlike other sectors they have tools to neutralize these impacts. “The ability to mitigate with price increases and cost reductions varies across regions and carriers. For example, Germany and the United Kingdom are markets with greater pricing power compared to Italy and Spain”, points out the BofA analyst.
The key to the improvement in forecasts for the entire ‘teleco’ sector on the part of this and other investment banks lies in the fact that inflation will act as the engine of growth. Operators are generally well positioned to raise their rates thanks to the support of legislation to index them to the CPI in some of the markets in which they operate. This is not the case in Spain or Italy, but it is in the United Kingdom, Germany, Norway or the Netherlands.
“The UK has recently switched to CPI-based pricing with BT offering all new B2C contracts at CPI+3.9% annual growth which has been followed by others such as Liberty. In the Netherlands, all KPN offers have characteristics linked to the CPI. In Belgium, cable subscription, while Norway’s Telenet’s revenue is generally tied to inflation,” according to BofA.
The investment bank notes that Telefónica is exposed to this type of protection against rising prices in the United Kingdom, although it also “It has some rates linked to inflation in Brazil and Latin America”, according to BofA. “On the other hand, we note that inflation-linked pricing remains relatively uncommon in many other markets or is not permitted by regulation,” they add.
Here he puts the Spanish multinational as an example because in Spain this type of update does not exist, although the company has taken it upon itself to raise prices on its own at the cost of losing less profitable customers. In Germany, where the company is also present, there is no indexation to the CPI as such, but the operators can argue that the rates are raised at the sector level if they justify that the costs have risen significantly and they have to pass it on to their clients. .
Bank of America recalls a fact in this regard that is usually hardly taken into account but that has triggered its interest with the current energy crisis. How much do operators spend on electricity for their activity, including data centers, exchanges and telecommunication towers? According to BofA, energy costs account for around 3% of revenues for companies such as Telefónica and Telenor, which will have to face increases in energy supply.
Despite the challenges facing telecommunications, BofA is positive in general with the sector and, in particular, with the Spanish. Operators will enter 386,048 million euros this year, 1.8% more than in 2021, according to the entity’s forecasts.
Specifically, the firm has just raised the target price for Cellnex from 64 to 66 euros per share due to multiple factors such as price revision clauses in its contracts and the possibility that its intense acquisition activity will continue.
Under that price reference, the tower would reach a market capitalization close to 45,000 million of euros. In the case of Telefónica, despite the impact of 1,500 million euros from the current employment reduction plan, the bank maintains its positive recommendation on the operator, to which it has raised the target price of 5.2 to 5.8 euros per share, which means a potential path of more than 40% with respect to its price.