BlackRock sees sharp rise in European telecoms

By Brian Gorman

LONDON (Reuters) - European telecoms are undervalued and companies such as Telefonica and Vodafone could rise 25 to 30 percent in the next year, said a fund manager at BlackRock.

Telecoms have strong free cash flow and high dividends, and cost savings mean they are still demonstrating earnings growth, Andrew Williamson-Jones, co-manager of the BlackRock Global Equity Fund, told Reuters in a telephone interview.

"But the market is not rewarding that. They're trading on sub-10 times earnings," he said.

The European telecoms sector .SXKP is only up about 27 percent from its March low, compared with more than 56 percent for the FTSEurofirst .FTEU3.

Telefonica (TEF.MC) is his top holding, accounting for 3 percent of the fund, while he has 2.8 percent in Vodafone (VOD.L). The 5.8 percent total of these two companies compares with 4.5 percent of the benchmark holding of telecoms for the MSCI World Index.

Williamson-Jones prefers these two companies in the sector, due to their higher exposure to emerging markets, and their higher mobile exposure, 100 percent in the case of Vodafone.

"In mobile, the competitive dynamics are better than in fixed line, where the users are actually declining as people 'cut the cord'," he said.

The fund manager has held them for some time without seeing the rise in value he had been expecting, but said the market was recognising their value more. "I can see them going up 25-30 percent from here," he said.

Telecoms were now pricing in more normalised earnings, he said. "Not peak margins, or peak earnings, but more normalised," he said.

BlackRock's Global Equity Fund rose 18.1 percent in the year to September, compared with a rise of 12.1 percent for the benchmark.

The fund was launched in 2000, and had around 140 million pounds of assets under management at the end of September.

UNDERWEIGHT IN UTILITIES

Williamson-Jones is less keen on utilities, where he is underweight, with just 2.5 percent of the fund against the benchmark's 4.7 percent.

"There's going to be a greater supply of power in the next three years, while demand remains weak, and is bottoming. And bigger capex bills are coming through.

"Gas is a driver of power prices. The surplus of gas is depressing power prices," he said.