Is Now The Time To Bet On The Telco Sector And Ziptel Limited (ASX:ZIP)?
Ziptel Limited (ASX:ZIP), a AUDA$2.55M small-cap, is a telco company operating in an industry which has experienced slower top-line growth in the past decade due to the declining high-margin call service but increasing low-margin data usage. Telco analysts are forecasting for the entire industry, a positive double-digit growth of 12.66% in the upcoming year , and an enormous growth of 34.16% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, and also determine whether ZIP is a laggard or leader relative to its telco sector peers. Check out our latest analysis for Ziptel
What’s the catalyst for ZIP’s sector growth?
Innovations and technological developments allow telco companies to be more cost-competitive. However, this has become a necessity given that the overall growth in the sector is stagnating, and often the only way to maintain profitability is through cost-cutting. Over the past year, the industry saw growth in the twenties, beating the Australian market growth of 5.37%. ZIP lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means ZIP may be trading cheaper than its peers.
Is ZIP and the sector relatively cheap?
The telco sector’s PE is currently hovering around 27x, higher than the rest of the Australian stock market PE of 17x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry returned a similar 11.64% on equities compared to the market’s 11.92%, potentially illustrative of a turnaround. Since ZIP’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ZIP’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ZIP recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto ZIP as part of your portfolio. However, if you’re relatively concentrated in telco, you may want to value ZIP based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If ZIP has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the telco industry. Before you make a decision on the stock, take a look at ZIP’s cash flows and assess whether the stock is trading at a fair price.
For a deeper dive into Ziptel’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other telco stocks instead? Use our free playform to see my list of over 300 other telco companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
