Bethel Finance: Barclays pessimistic about telcos

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Bethel Finance news:
Barclays Capital is pessimistic about Israel's telecommunications sector, reiterating its "Negative" rating, although it gives Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) and "Outperform" recommendation.

"Bezeq looks attractive despite the regulatory headwinds: We view Bezeq's estimated16% dividend yield in 2012 and recent share price weakness as compelling reasons to buy the stock," says Barclays analyst David Kaplan. He adds, "The regulatory pipeline is busy but we do not expect any of it to impact 2012 operations… We expect the negative regulatory impact to total NIS 150m over the course of 2013 and 2014; not that significant for a business generating an estimated EBITDA of NIS 4.5 billion in 2012."

In contrast to the enthusiasm for Bezeq, Kaplan gives mobile carriers Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) and Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) "Underweight" recommendations, with high uncertainty.

A main reason for investing in Israeli telecommunications shares in recent years was their generous dividend policies. Kaplan asks, "Are Israel telcos addicted to dividends?", he answers, "The short answer is no."

As for the entry of new market players - Mirs Communications Ltd. and Golan Telecom Ltd., as well as mobile virtual network operators (MVNO) - Kaplan believes that Mirs and Golan Telecom's initial pricing "is most likely going to be relatively competitive and unlikely to significantly undercut the existing market prices."

As for the MVNOs, Kaplan cites the December launch by Rami Levy Chain Stores Hashikma Marketing 2006 Ltd. (TASE:RMLI), which he says has only limited ability to offer service to low-end feature phones and is therefore less of a threat to Cellcom and Partner's prepaid business." He adds, "The “good news” is that the offers are clearly focused on low-end users and are not in direct competition with Pelephone, Partner and Cellcom for the high revenue heavy users."

Kaplan believes that Bezeq mobile subsidiary Pelephone Communications Ltd. will be short-term winner, because Rami Levy is its customer.

Kaplan concludes, "The risk of course is that while "rational" for now we expect another two MVNOs to launch in the near term and both of the new mobile operators to launch by the third quarter of 2012, all of which may reapply pressure on pricing in the worst case scenario and limit price increases that are expected to be phased in by Partner and Cellcom in the best case."