NEW YORK (TheStreet) -- We have identified the top five telecom stocks that investors should consider adding to their portfolios. These frontier market stocks have market caps of at least $1 billion and offer returns ranging from 12% to 57%. In the frontier markets arena, you'll find stocks like Vodafone Qatar (VFQS), with its 16% upside, and more.
Many of the stocks identified below are from the Middle East. Overall, Middle East companies have larger operations and are trading relatively cheap, compared to other geographies. In fact, we had to exclude prominent companies like Hrvatski Telekom and Jordan Telecom with market caps of $4 billion and $2 billion, respectively, from the list as valuations were not in favor.
The companies included in the list have some distinct advantages. Firstly, these companies benefit from higher tariff advantage. As per the Telecommunication Regulatory Authority, the average mobile tariff rate in the Mideast countries is 80%-100% higher than in the Organization of Economic Co-operation and Development (OECD) countries including Australia, Canada, U.K. and the U.S.
Secondly, the Middle East market is characterized by a strong demand for value-added services. Increasing mobile penetration, higher per capita income and improving lifestyles have led to the massive explosion of mobile telephony services. Most companies compiled in our list are focusing on niche areas to improve their margin profiles. For instance, the penetration of broadband and related services in these markets is relatively low; in Oman, the use of digital broadband is about 2%. In addition, the price of broadband in this region is three times higher than the European average. Indisputably, the companies we have listed here will benefit from future demand growth.U.S. players operating in relatively mature markets and in regions associated with higher tele-density, are trading at a premium compared to their counterparts in the frontier markets. China and India, which are home to companies like China Mobile (CHL), China Unicom (CHU) and Tata Communications (TCL) are relatively under-penetrated, offering opportunities for expansion. Integrated communications companies, like Century Link (CTL), are trading at lower valuations, relative to companies like Windstream (WIN) and Qwest Communications International (Q), which provide niche services. We have not considered SBA Communications (SBAC) and Crown Castle International (CCI), with negative return on equity and net profit margins. Frontier market telecom companies like Bahrain Telecommunications and Oman Telecommunications are trading at enterprise value per earnings before interest tax depreciation of 4.7 and 4.3, respectively, offering maximum upside for investors from the present levels. In comparison, AT&T (T), Verizon Communications (VZ), and Sprint Nextel (S) are trading at EV to EBITDA ratios of 5.6, 5.4 and 4.9, respectively.
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