NTT was sold after results showed that progress is slow. The mobile side of the business has become engaged in a price war, driving down margins and hampering cash-flow. Until this situation is resolved, which could take a long time, we saw little value in the stock.
NTT is the dominant Japanese telecom operator, with around 45% of the business based on its fixed line, 40% on mobile (NTT DoCoMo) and the remainder being its IT services arm (NTT Data). We believe that 2006 will mark the low-point in the company's operating margin and free cash flow. The fixed line division has spent several years building out its optical fiber to the home network, and is spending money this year marketing the new services. 2007 should see both the capex and opex requirements for this new service fall, leading to an expansion in free cash flow. NTT Data is well positioned in the high-growth IT services sector (which is benefiting from the upgrade of financial institutions' IT systems plus the forthcoming privatisation of the postal service). NTT DoCoMo and KDDI dominate the Japanese mobile sector which is about to undergo the relaxation of number portability rules - whilst the market is making significant noise about this, we believe that the downside risks to DoCoMo are already priced in and expect the actual impact on DoCoMo to be less pronounced than the market expects. With a strong franchise, expanding free cash flow and a cheap absolute valuation (2007 FCF yield of 8.5% compared to a target yield in Japan of 6.0%) NTT is a BUY.
| Sedol |
Type |
Price |
Date |
| 6641373 |
Sell |
JPY 506,191 |
01/08/2007 |
| 6641373 |
Buy |
JPY 599,175 |
17/08/2006 |
| 6641373 |
Buy |
JPY 566,121 |
10/08/2006 |
|
