Morgan Stanley raises targets on EEMEA telcos

Morgan Stanley raised its price targets on several Eastern Europe, Middle East, African (EEMEA) telecom companies, and said the new targets imply an average 21 per cent upside potential to shares, given encouraging signs of earnings momentum.

"Longer term, we see 200-300 basis points support for both revenue growth and profitability from the ramp-up of mobile broadband solutions," analysts, including Sean Gardiner and Alexander Vassiouk, wrote in a note to clients. Second-quarter revenues for the EEMEA telecom sector rose 6 percent sequentially, in line with the historical norm, while average profitability has also remained largely intact during the downturn at 44 per cent, the analysts noted.

In addition, consensus estimates bottomed in April with earnings before interest, taxes, depreciation and amortization expectations for 2010 up 17 per cent from the lows, they added. The analysts named Russia's top mobile carrier Mobile TeleSystems (MTS), Saudi Arabia's second-largest mobile phone company Etihad Etisalat (Mobily), Kenya's leading mobile phone operator Safaricom and South Africa's largest fixed telephone group Telkom as their top picks among EEMEA telecom companies.

They also raised their price target on several other EEMEA telecom stocks.

In Russia, the analysts prefer MTS due to improving corporate customer activity in the country and on likely upside to forecasts from consolidation of Russian fixed-line operator Comstar's earnings.

MTS last month said it secured two loans worth a combined 59 billion roubles, which it would use to finance its investment program, including the pending acquisition of a 51 percent stake in Comstar.

In the Middle East and North Africa region, the analysts said they favor Mobily as consensus estimates may rise after a very strong first half.

In Africa, the analysts said they preferred Safaricom as the worst was over in terms of irrational market pricing, adding that the ensuing repair phase of the market is conducive to positive earnings surprises.

Analysts, however, removed South Africa's top mobile operator Vodacom from their top picks list and downgraded the stock to "equal weight" from "overweight," citing less chances of a positive revenue surprise on macroeconomic and regulatory pressures.

They also downgraded Egypt's mobile operator Egyptian Company for Mobile Services (Mobinil) by a notch to "underweight," citing a disappointing dividend payout in the first half of 2009 and valuation.