Airwaves Get a Little Clearer for Big Value Call

(Bloomberg) -- Equity investors have troubled waters to navigate amid protests in Hong Kong, tanker attacks in the Middle East, rising no-deal Brexit odds, unresolved trade conflicts and slowing growth. With that, value stocks have fallen to a record low relative to growth equities. But one long-standing call is slowly offering more visibility: telecoms.

Germany’s sale of fifth-generation wireless airwaves ended this week, with all four of the nation’s main phone companies getting sufficient spectrum to provide their own networks, including new entrant 1&1 Drillisch. The news sparked a rally in the sector yesterday morning, although gains didn’t stick, and telecom stocks remain the laggards among European sectors, along with banks.

This year’s underperformance has attracted the attention of short sellers, with a handful of telcos showing short interest above 5%, according to IHS Markit data. Among them, Drillisch stands out with 9% of float.

While much focus has been on whether Drillisch will build a network of its own, overall, analysts don’t anticipate that would impact the competitive dynamic of the market too much.

UBS analyst Polo Tang points out that Vodafone and Deutsche Telekom are well-positioned at the high-end of the consumer market, rural areas and the B2B market, which are areas Drillisch is unlikely to target for some time. Some see the two companies as the winners after the auction, with Macquarie analyst Guy Peddy praising them for securing significant spectrum.

The German auction did get pricey at around 6.5 billion euros ($7.3 billion) and was almost as expensive as Italy’s auction, which raised a record $7.6 billion. The problem is that large spending on spectrum will likely weigh on companies in an industry struggling with competition, debt loads and a regulatory environment which hasn’t been keen on mergers. This could be a risk for the rich dividend yields of the sector, especially after Vodafone’s cut last month.

With the spectrum auctions out of the way in Italy and Germany, visibility has improved but hurdles lie ahead. The actual deployment of 5G may come at significant extra cost if telcos have to switch from Huawei to other companies like Ericsson or Nokia. After recording negative returns for three consecutive calendar years, telecoms are still looking for a turning point.

In the meantime, Euro Stoxx 50 futures are trading up 0.1% ahead of the open.

SECTORS IN FOCUS TODAY:

• Watch semiconductors and chip-equipment firms after U.S. group Broadcom cut its annual forecast on concerns trade tensions between the U.S. and China will curtail an expected demand recovery. Watch for a read-across impact on chipmakers Infineon, AMS and STMicroelectronics and for chip-equipment makers ASML, ASM International and BE Semiconductor.
• Watch oil companies after crude soared as much as 4.5% on Thursday, its biggest gain in about five months, on reports of an assault on ships near the Strait of Hormuz. Oil edged higher again overnight as the U.S. claimed a video showed Iranian involvement in the latest incident.
• Watch trade-sensitive sectors after U.S. economic adviser Larry Kudlow warned overnight that Beijing will have to face consequences if Xi refuses an invitation for talks on tariffs, while there were also warnings of a possible currency devaluation.

COMMENT:

• “U.K. equities have only traded on a higher (dividend yield) relative to U.K. gilts once in the last 100 years: World War 1,” Citi strategists write in a note. “U.K. equities trade on a FCF yield above 7%, and the gap between the cost of debt and equity funding is aggressively wide. The financing incentive to buy U.K. shares for activists, corporates and private equity has rarely been more extreme.”

COMPANY NEWS AND M&A:

• Volkswagen Values Truck Unit at Up To $18.6 Billion in IPO
• Thales to Join CAC40 Index June 24, Valeo And Worldline to Leave
• Airbus in Talks With Indigo Partners on A321XLR Jet Sale:Reuters
• Total Close to Buying 30% Stake in Adani Gas for Over $800m: TOI
• Bayer to Start Glyphosate Re-Registration in EU in 2019
• UCB’s Bimekizumab Shows Improvements for Ankylosing Spondylitis
• TF1 Lifts Rates Again for French Women’s Soccer Matches: Figaro
• Paris Airports May Passenger Traffic Rises 2.9%: ADP
• Fraport May Frankfurt Airport Passengers +1.4%
• Straumann Won’t Explore Scanner Pact With Align Technology
• Transgene Launches Rights Issue Up to EU50m
• Swiss Re’s Reassure Confirms Intention to Undertake IPO
• Hera Is Frontrunner to Buy Ascopiave Retail Business: Sole
• ASTM, SIAS to Merge Into One Company

NOTES FROM THE SELL SIDE:

• Adecco’s self-help potential and operating leverage are underappreciated, Morgan Stanley says in a note as broker lifts the rating to overweight from equal-weight. Stock is trading at 25% discount to historical average, pricing in a recession scenario.

TECHNICAL OUTLOOK for Stoxx 600 index:

• Resistance at 382.1 (50-DMA); 385.7 (61.8% Fibo)
• Support at 374.5 (61.8% Fibo); 368.2 (200-DMA)
• RSI: 55

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

• Resistance at 3,410 (50-DMA); 3,514 (May high)
• Support at 3,309 (50% Fibo); 3,266 (200-DMA)
• RSI: 53.4

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

• Adecco upgraded to overweight at Morgan Stanley; PT 67 Francs
• Engie upgraded to buy at Goldman; PT 15.80 Euros
• Lundin Petroleum upgraded to buy at Goldman; PT 334.90 Kronor
• National Grid raised to outperform at Bernstein; PT 9.50 Pounds
• Oriola upgraded to accumulate at Inderes; PT 2.20 Euros
• Royal Mail upgraded to hold at SocGen; PT 2.08 Pounds
• Scor upgraded to overweight at JPMorgan; PT 45 Euros

DOWNGRADES:

• 3i Infra cut to sector perform at RBC; Price Target 2.95 Pounds
• Ferguson downgraded to hold at Berenberg
• Lancashire downgraded to hold at Peel Hunt
• Rheinmetall downgraded to reduce at Oddo BHF; PT 89 Euros
• SIAS downgraded to neutral at MainFirst; PT 16.70 Euros
• Thales downgraded to add at AlphaValue

INITIATIONS:

• None reported.

MARKETS:

• MSCI Asia Pacific down 0.5%, Nikkei 225 up 0.3%
• S&P 500 up 0.4%, Dow up 0.4%, Nasdaq up 0.6%
• Euro down 0.04% at $1.1272
• Dollar Index up 0.07% at 97.08
• Yen up 0.05% at 108.33
• Brent up 0.6% at $61.7/bbl, WTI up 0.2% to $52.4/bbl
• LME 3m Copper down 0.1% at $5853/MT
• Gold spot up 0.3% at $1346/oz
• US 10Yr yield down 1bps at 2.08%

ECONOMIC DATA (All times CET):

• 8:45am: (FR) May CPI EU Harmonized YoY, est. 1.1%, prior 1.1%
• 8:45am: (FR) May CPI MoM, est. 0.2%, prior 0.2%
• 8:45am: (FR) May CPI EU Harmonized MoM, est. 0.2%, prior 0.2%
• 8:45am: (FR) May CPI Ex-Tobacco Index, est. 103.93, prior 103.76
• 8:45am: (FR) May CPI YoY, est. 1.0%, prior 1.0%
• 10am: (IT) April Industrial Sales WDA YoY, prior 1.3%
• 10am: (IT) April Industrial Orders NSA YoY, prior -3.6%
• 10am: (IT) April Industrial Orders MoM, prior 2.2%
• 10am: (IT) April Industrial Sales MoM, prior 0.3%
• 11am: (IT) May CPI FOI Index Ex Tobacco, prior 102.6
• 11am: (IT) May CPI EU Harmonized YoY, est. 0.9%, prior 0.9%

To contact the reporters on this story: Kit Rees in London at krees1@bloomberg.net;Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon

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