Barclays Capital gives Israel's telecommunications sector a "Negative" outlook. Analysts David Kaplan and Tavy Rosner say that aggressive regulation in both the mobile and fixed line sectors is preventing growth, and will keep pressure on the market through the rest of 2012. They add that the market has not yet stabilized, but that this will not prevent companies from distributing dividends, although they may be reduced.
Kaplan and Rosner give Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) and Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) "Overweight" recommendations as their current share prices imply worst-case scenarios
Kaplan and Rosner say, "Following our recent meeting with the Ministry of Communications, it is clear to us that the regulator still sees work to be done. Most of it is on the fixed-line side of the business and includes opening the market to wholesale and introducing a third fiber-to-the-home (FTTH) network owned as a joint venture between Israel Electric Corporation (IEC) (TASE: ELEC.B22) and strategic investors. While the ministry speaks highly of this project and is doing all that is in its power to see it succeed, the tender process has been delayed for a second time. We presume that the delay is due to a lack of responses to the tender, and we expect the ministry to try and sweeten the offer."
Kaplan and Rosner say that the reduction in mobile telephone rates and the entry of five new mobile carriers and mobile virtual network operators (MVNO) clearly points to a successful implementation by the regulator, but that regulation may have gone too far by that in simultaneously introducing MVNOs and new carriers which have to build infrastructures at an estimated cost of $350 million when the business case and chances of succeeding have deteriorated. The cases of HOT Mobile Ltd. and Golan Telecom Ltd. look troubling at best. The leverage of HOT Mobile's parent company HOT Telecommunication Systems Ltd. (TASE: HOT) and need to invest in its telephony business mean that it may be a stretch before it can adequately invest in the mobile business. The success of privately held Golan Teleco will depend on how deep the pockets of the owners are and how long they can handle the losses.
If the IEC fiber optic venture materializes, it will adversely affect Bezeq. In this scenario, Barclays halves its 2013 earnings before interest, taxes, depreciation and amortization (EBITDA) estimate to NIS 1.2 billion from NIS 2.4 billion, and it cuts its target price to NIS 3.90 per share from NIS 5.90.
Kaplan and Rosner add that Bezeq has a silver lining to the additional regulatory pressure: the removal corporate structural separation regulations, which would allow the company to merge is subsidiaries and gain control of DBS Satellite Services (1998) Ltd. (YES), which would enable Bezeq to cut costs and recognize accumulated losses from YES.
Barclays gives Bezeq a target price of NIS 5.90, after cutting it from NIS 7.80 in February. It gives Partner a target price of NIS 24.00, after cutting it from NIS 38 in November 2011. It gives Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) an "Underweight" recommendation with a target price of NIS 26, after cutting it from NIS 56 in February, and its gives HOT an "Equal weight" recommendation, with a target price of NIS 39, after cutting it from NIS 50 in February.
Bezeq's share price fell 2.2% by early afternoon to NIS 4.13; Partner's share price fell 4% by to NIS 14.53, after falling 4.1% on Nasdaq yesterday to $3.74; Cellcom's share price fell 1.5% by to NIS 23.62, after falling 4.6% on the New York Stock Exchange yesterday to $5.99; and HOT's share price fell 1.4% by to NIS 33.54.
Published by Globes [online], Israel business news - www.globes-online.com - on July 17, 2012
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