Swisscom vs Sunrise

Long regarded as the jewel in the crown of Swiss telecoms, Swisscom is under pressure from growing competition and a saturated market. Swisscom shares have fallen by more than 20% since the peak of 2014 and by 7% since the beginning of the year compared to its direct competitor Sunrise, up 16% in 2016. The “blue giant” has certainly reached a size which reduces its potential for growth, but its revenues are stable, and its dividend of almost 5% makes it an attractive investment.

Growing, but overstated competition

Much has been written about the arrival of Xavier Niel in Switzerland with the takeover of Orange, now Salt, but the company’s performance has been far from glittering. Salt Mobile is losing customers, and it is not improving with Mobilezone who has just removed Salt from its offering. What’s more, Salt’s main objective is to reduce its high debt. It is difficult to imagine it entering into a price war, as was the case in France. It’s also worth remembering that Swiss consumers tend to favour quality of service over price.

The greatest threat comes therefore from Swiss number two Sunrise which has seen a significant growth in its mobile postpaid customer base. It added 22,000 customers in Q2 and 18,000 in Q1. This nevertheless hides a loss of 41,000 prepay customers who have for the most part been transferred, which equates to a net loss of 1000 mobile customers in 2016. By comparison, Swisscom has lost a total of 2000 mobile customers. In the Internet and TV segments, Sunrise added a new combined offer Fixed -TV-Internet with “Sunrise Home”, which is rapidly expanding but too early to say.

Analysts ultra-pessimistic

As is often the case, analysts are favouring “sexy” growth stocks. Most analysts have lowered their forecasts on Swisscom with only 5 recommendations to buy against 12 neutral and 7 sell. Sunrise, in contrast, has 8 recommendations to buy, 7 neutral and no recommendations to sell. The difference in expectations seems exaggerated to me. There is no contest between paying a P/E (estimated 2016) of 42x for Sunrise, which has not yet generated net profit on the whole of a year, and paying 16x for Swisscom, which has stable profits. Given the high expectation for Sunrise, it will have to deliver or shares will drop sharply.

Growth potential in fibre optics

Swisscom is the undisputed leader in fibre-optic connection in Switzerland with a quasi-monopoly (2 million lines compared with 0.34 million for Sunrise). The rate of penetration of fibre optics is among the highest in Switzerland at 50%, and Swisscom very much hopes to bring its expertise to Europe where the rate of connection is still low. Indeed, its subsidiary Fastweb has just announced a joint venture partnership with Telecom Italia to connect 3 million households across 29 Italian cities. Fastweb today accounts for 15% of the Swiss firm’s income. As usual, the blue giant also has its hand in several innovations and areas of growth, including 5G technology in partnership with EPFL (École polytechnique féderale de Lausanne)

The dividend of 4.7% will continue to attract investors.

In the current climate of low, and even negative, interest rates, Swisscom remains an attractive stock, particularly for pension funds in desperate search of yields. On the other hand, Sunrise, which also pays a significant dividend, has a market capitalisation that is still too small to attract certain institutional clients. Swisscom’s share price is CHF 470, but will pay a dividend of CHF 22 in February 2017, bringing the purchase to approximately CHF 455 (net of tax), approximately halfway between the 2009 low of CHF 290 and the 2014 high of CHF 587. An interesting level in my opinion.

ANDREAS RUHLMANN
IG Bank Premium Client Manager / Market Analyst  

What do you think about this article? Leave your point of view on Facebook