With the introduction and expansion of the 5G technology across the world and the ever-expanding possibilities for the utilization of this technology, today we take a look at the telecommunications sector. How was it impacted by the pandemic and the roll-out of 5G networks and what are the looming trends that could impact its future?
5G has been one of the main talking points for years, not just in the telecommunications industry, but in the entire technological sector. Even if we were to look back only 2 years in the past, before the pandemic, no one could have imagined where the industry would lead in the pandemic’s wake. As the new reality of work from home, more time spent online, more data generated and a larger need to analyze said data, 5G has been at the forefront of achieving these goals. And much more.
As it was the case many times in the past, this drives the need for further innovation and the rethinking of strategies by both the companies as well as the providers of these services. Therefore, we present you with some of the trends that might drive this growth in the coming years.
Staying connected
One thing that almost no one could have forecast 2 years ago, is how large of a strain the pandemic would put on our need to stay connected, both physically as well as digitally. With the various restrictions around the world, there has been a need to introduce new ways of communicating, something that can replace face-to-face communication. In the last 2 years, various companies have come up with many different solutions to this problem. Be it video conferencing, communicating over various apps, or different task-managing applications. With the drive for better technology, the 4G has shown some of its limitations. Here we are thinking of Facebook’s metaverse, AI assisting with large data analytics, or a plethora of new technologies that are sure to appear in the next few years. 5G however, solves (or at least mitigates) these limitations by brute force. Transferring larger amounts of data at faster rates for longer periods allows for innovation that has not been seen before. This is even more evident if we look at the numbers.
Global mobile data traffic (Exabytes/month)
According to Ericcson Mobility’s report, in 2021, mobile networks carry around 300 times more mobile data traffic than in 2011. Around 2 billion people have a smartphone, while there are 8.1bn mobile subscriptions globally. At the same time, 5G uptake is also increasing more rapidly than what was the case with any generation before it. With an estimated 660m of 5G mobile subscriptions by the end of 2021, this number is expected to increase 5-fold by 2027 to an estimated 4.1bn subscriptions, amounting to a CAGR of 36%. At the same time, 4G, which accounts for 4.4bn subscriptions in 2021, is estimated to decrease to 2.85bn by 2027.
Global Mobile Subscriptions by Technology (million)
The building of 4G and 5G networks and the roll-out of the new spectrum for telecom providers becomes an enabler for shutting down legacy technologies, namely 2G and 3G. 3G wireless networks introduction was the turning point that served as a booster for using the smartphone and it allowed fast mobile web browsing and apps that allow usage of services and upload of media. This only got faster as time went on, while starting from this year, 3G networks will be turned off forever in the USA. All three major cellular carriers will shut down their older 3G networks this year to free up more wireless spectrum for the 5G, while at the same time maintaining their 4G networks. In Western Europe, there is a larger dependency on 2G, so the sunset of 2G is not expected until closer to 2030. Eastern Europe, where there’s a lower penetration of 4G and 5G technologies, is also expected to maintain its 2G and 3G networks, and there are not expected to be turned off by close to 2030.
New job opportunities
As the pandemic has driven a large number of workers to work from home, a lot of people asked themselves the question: Do I need to go to the office, spend a lot of time in traffic, while I could do the same job from home? If a job can be done remotely and the same job can be done even from a different country, people would have a larger variety of choices when it comes to the job market. 5G could help expand these opportunities even further as it allows large transfer, storage, and analysis of data. Therefore, 5G could lead to more job opportunities around the world.
Local expertise adopting global trends
So the question remains, can the uptake of 5G technology be translated into new revenue for telecom companies in the region, as well as globally? Who are the main winners of the strong shift from physical to virtual?
Even though Croatia is one of the smaller regional markets, the global trends still apply to it in a very visible way. With so many startups and technology companies coming to the market over the last couple of years (think Span, Infobip, Rimac, etc.), the nature of their business requires them to collect and analyze large data, and as such 5G adoption is essential in further strengthening of the business of these companies. According to the Croatian Post and Electronic Communications Agency (HAKOM), in Q3 2021, there have been over 4.57m mobile subscriptions in the country, which is an increase of around 2.3% YoY.
Number of mobile subscriptions in Croatia
When we look at the revenue of telecom companies in the region it has been shrinking in the past few years due to a decrease in fixed services that couldn’t have been exchanged for new revenue. In 2021 both regional listed telecoms in Croatia and Slovenia – Hrvatski Telekom and Telekom Slovenije – have introduced 5G plans after the purchase of 5G frequencies and network setup. In 3Q 2021 both telecoms evidenced growth in mobile revenue stemming from a pick-up in tourist activity and mobility and growth of ARPU. The introduction of 5G is characterized by traffic growth with most of the telecoms that have been down this path already. It is driven by both, the rising number of smartphone subscriptions and an increasing average data volume per subscription. But does it necessarily mean it will be transformed into revenue growth? If we look at examples of global companies that have already introduced 5G plans a year or two ago, we can see that there is no price premium charged for 5G on the mobile data plans, and older 4G plans are exchanged for new ones. But with plan telecoms offer more additional services, such as subscriptions to app store galleries, gaming, video, and audio streaming services provided by telecom partners.
These value-added service subscriptions like video streaming services can all be used as sources of new revenue by partnering telecoms with these companies. Since the conversion of doing business from physical to digital has started, technology companies have been growing exponentially in revenue as they are the main producers of applications that are being used by telecom clients. Therefore, to take advantage of revenue growth in this sector international telecoms after the introduction of 5G have started to move into this part of the ICT sector to ensure revenue growth. One of the examples is establishing subsidiaries to focus on gaming while entering partnerships with cloud gaming providers to develop solutions and gaming packages to leverage on 5G networks’ ultra-low latency capabilities. The following example is working with partners like government agencies and municipalities to develop smart city solutions. Also, the offering of wireless-based cloud offices for small offices and home offices could be another solution. Our regional telecoms are down this path already and it remains to be seen how successful they will be in their applications.
Valuation
To see just how these trends could affect the telecom companies, we decided to bring you an overview of the current valuation of regional and western telecommunication companies by looking at their EV/EBITDA trading multiples.
EV/EBITDA ratios of selected telecommunications companies
As we can see from the chart, regional telecoms Hrvatski Telekom and Telekom Slovenije are traded at an EV/EBITDA ratio of 3.91x and 3.75x, which is below the peer group’s median of 4.37x. This implies that regional telecoms are valued at a discount compared to telecoms on bigger and more liquid capital markets. It also implies that regional telecoms have room to expand, and the 5G technology could help it do just that and improve their revenues. This could in turn increase their prices and lead to higher valuations.
On Friday, three major US indexes fell for a third week in a row because of expectations of higher interest rates and their effect on valuations. Despite the slower pace in accommodating monetary policy in Europe, rising bond yields are suggesting it might be sooner than expected. Therefore, the spillover effect was evidenced on some regional equity markets. Croatian index ended the week flat in its performance (-0.31%), Romanian BET was down 1.7%, while Slovenian index was up 5.5%.
In a situation where higher interest rates are expected, all higher risk and premium assets like high leverage stocks, technology stocks, and cryptocurrency are down while quality stocks are not that much impacted. These riskier assets could continue to be under pressure in the period to come, so their lows might not be realized yet. For the week Nasdaq fell 7.55%, S&P dropped 5.7%, while the Dow lost 4.6%. Within S&P only the consumer goods sector closed in green. It is expected that the risk premium for equities could go up further due to the current situation on the market.
S&P500 Performance [2020-2021]
Croatian index ended the week flat in its performance (-0.31%), as consumer sector heavyweights also closed in green. The best weekly performance was realized by Atlantic Grupa which was up 5.6% WoW and has 11.32% weight in the index. It ended the week at HRK 1,870.00 per share. Podravka, another consumer goods company with 10.6% weight in the index, was up 0.9% ending the week at HRK 696 per share. Another sector that is operating well under rising interest rates is ICT, so Ericsson NT showed good performance and was up 3.2% WoW. The share ended the week at HRK 1,950 per share. Adris preferred was up 0.5% WoW, due to its strong impact on the insurance sector which is achieving strong performance this year. But other hospitality companies due to rising rates and prices of consumer products were quite volatile during the week and ended the week practically flat, Valamar at HRK 34.5 per share and Arena on HRK 300 per share.
CROBEX10 Performance [2020-2021]
SBITOP was up 5.5% WoW, as practically all shares showed strong performance during the week until Friday when the financials came under pressure due to the spillover effect and threat of rising rates. Petrol, the second biggest index constituent with a 23.3% share in the index, was a star and was up 4.9% in its weekly performance. Cinkarna was the second-best weekly performer rising 2.2%, supporting the growth of the index with a weight of 4%. As a reminder, Cinkarna is the highest dividend paying share in the index with last year’s dividend amounting to EUR 21 per share and a yield of 8.9%. You can read more about it here. Romanian BET was down 1.7%, while last week was marked by the OMV Petrol sale of shares in the amount of app. EUR 200m. The shares were sold at an 8.5% discount and if you want to read more about it, click here. OMV Petrom is the share with the third-largest weight in the index, 14.6% while the seller of shares Fondul is the biggest heavyweight with 20.72% of the weight in the index. In the week Fondul is down 5.93%, while OMV Petrom is down 8.72%.
SBITOP Performance [2020-2021]
In December, passenger car registration in the EU decreased by 22.8% YoY, totaling 795,295 units. While in 2021 EU demand for new cars decreased only by 2.4% YoY. In Croatia in 2021 passenger car registration reported a sharp increase of 25% YoY, while in December 19% YoY increase was noted.
In December 2021, passenger car registration in the EU decreased by 22.8% YoY, totaling 795,295 units. The biggest decrease reported in the EU was in Germany, where the reported decrease amounted to 84k units, representing a 26.9% YoY decrease. Also, Italy reported a significant decrease of 33k units, representing a decrease of 27.5% YoY.
However, when observing January – December 2021, the situation is not that alarming – EU demand for new cars decreased only by 2.4% YoY, reaching 9.7m units registered in total. When observing the whole period, Germany, as the major market, reported a decrease of 10.1% YoY with total car registration amounting to 2.6m units. This decrease was partly offset by an increase in another major market, Italy. Italy reported an increase of 5.5% YoY, which is an increase of 76k units of cars registered. Spain, which is also considered a major market, remained stable and reported a slight increase of 1% YoY.
Looking at the region, when observing the whole period since the beginning of the year, Croatia reported a steep increase of 24.7% YoY, amounting to 44.9k units registered. Looking at data only for December, Croatia reported an increase of 19.3% YoY, amounting to 2.5k units registered. Slovenia reported a different kind of picture – when observing the whole period, Slovenia reported a slight stable increase of 0.6% YoY, amounting to 54k units of the car registered.
Here you can find the dates for the upcoming events of the regional companies.
| wdt_ID | Date | Ticker | Announcement | Country |
|---|---|---|---|---|
| 10 | 27.01.2022. | KRKG | Preliminary results for 2021 | Slovenia |
| 11 | 27.01.2022. | KRKG | Press conference on business performance in 2021 | Slovenia |
Given the current Covid-19 situation, some of these events might be subject to change (postponed or cancelled).