"The two new mobile operators launched what we believe are unsustainable disruptive pricing business models in an attempt to grab market share. While there is a risk that the price collapse and profitability fall we have seen over the past six quarters might continue, we believe this is not likely," says Barclays Capital analyst David Kaplan in a new analysis on Israel's telecommunications, which he gives a "Negative" rating.
Kaplan downgraded HOT Telecommunication Systems Ltd. (TASE: HOT) to "Underweight" from "Equal weight", upgraded Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) to "Equal weight", and reiterated his "Overweight" recommendations for Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) and Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ).
Kaplan raised his target price for Cellcom from NIS 24 to NIS 34, cut his target price for HOT from NIS 39 to NIS 34, and reiterated his target price for Bezeq at NIS 5.50 and for Partner at NIS 22.
Kaplan says, "We argue that HOT Mobile Ltd. and Golan Telecom Ltd. miscalculated in launching unlimited plans below the NIS 100 price level. They underestimated the reaction by Partner, Cellcom, and Bezeq to respond quickly and drastically; by offering unlimited voice and SMS, they boxed themselves in as low cost/high usage providers and forfeited potential future price hikes; and their data packages are 1.5-3 times larger than competitors and are included in the monthly price."
Kaplan argues that Israel is different from Europe, and concludes that disruptive pricing plans which were successful in Europe, don’t work in Israel because the new mobile carriers lowered prices for unlimited plans by around 55%, but the price gap with the incumbents was still narrow; the new carriers launched services with minimal network coverage and use national roaming agreements to supplement coverage; HOT’s cash flow from fixed line cannot fund the mobile network build out and Golan Telecom has no fixed line infrastructure at all. He concludes that for these reasons the new carriers will struggle to gain market share and generate revenue to finance new wireless networks.
Kaplan adds that when the wholesale market is opened the market dynamics will change, and that HOT’s revenue from fixed line telephony will fall. He upgraded Cellcom because he thinks that the wholesale market will create opportunities for it and Partner as they enter the fixed line through triple play and begin to market IPTV. Though Bexeq will face some of the same challenges as HOT, the opening of the market will unlock large efficiency opportunities for Bezeq.
Kaplan continues to prefer the energy and exploration and technology industries, which have greater growth and upside potential compared with telecom and the banks, which are still reeling from regulation and disruptive competition.
By mid-afternoon on the TASE, Partner rose 2.6% to NIS 19.97, Cellcom rose 2.5% to NIS 32.55, and HOT rose 0.8% to NIS 36.14, but Bezeq fell 2.5% to NIS 4.63.
Published by Globes [online], Israel business news - www.globes-online.com - on September 20, 2012
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