Durable telecoms have a bright future

What's up Phone companies. Service used even when people cut back elsewhere.

When it comes to defensive sectors, so called because they hold out against the onslaught of tough economic times, they don't get much more defensive than telecommunications. Buoyed by a service that people keep using even when cutting back elsewhere, and aided by their duopoly status, the UAE's two telecoms companies are practically guaranteed to make investors happy when annual results are announced in the coming week.

While three years of breakneck growth at du may be over - its chief executive says the company is approaching the day when it is no longer a growth story - the story of the country's second operator is still a compelling tale. The smart money says that the UAE will not be adding a third operator any time soon, and regulatory reforms expected to be introduced this year - including number portability and broadband internet competition - will help du.

More important, Etisalat, the national telecoms company, is seriously undervalued. Just one of the 17 analysts tracking the company recommends selling its shares; 14 say buy, estimating that the company is trading at a discount of as much as 78 per cent. The reason, most analysts agree, is that the value of Etisalat's international operations, which now reach 17 countries, is not priced in by the market.

It should be. While most of Etisalat's international units remain in the unprofitable early stage, the company is building strong positions in vast emerging markets such as Nigeria, Egypt and Pakistan. It has asked regulators to allow it to purchase a majority stake in its Indian subsidiary, which will launch operations in the world's fastest growing telecoms market this year. Analysts say Etisalat's current stock price is a fair reflection of the value of its domestic business, so an Etisalat share bought today effectively includes a free share in a giant, sovereign-backed, emerging market telecoms group. Seems like a good deal to us.