zamano plc (AIM:ZMNO), a GBP€3.73M small-cap, is a telco company operating in an industry which is underpinned by technological changes such as improvements in network efficiencies to meet changing consumer needs. Telco analysts are forecasting for the entire industry, a somewhat weaker growth of 8.80% in the upcoming year, and a massive growth of 34.16% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the UK stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether ZMNO is lagging or leading in the industry. View our latest analysis for zamano
What’s the catalyst for ZMNO's sector growth?
The convergence that has been talked about is now happening, but driven by disruption rather than well-considered strategies and marketing campaigns. Overall the growth in this segment of the telco industry is stagnating, and often the only way to maintain profitability is through cost-cutting. On the positive side, innovations and technological developments allow these companies to be more cost-competitive. In the previous year, the industry endured negative growth of -8.09%, underperforming the UK market growth of 1.54%. ZMNO lags the pack with its negative growth rate of -603.13% over the past year, which indicates the company has been growing at a slower pace than its telco peers. As the company trails the rest of the industry in terms of growth, ZMNO may also be a cheaper stock relative to its peers.
Is ZMNO and the sector relatively cheap?
Telco companies are typically trading at a PE of 27x, above the broader UK stock market PE of 18x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry returned a similar 11.86% on equities compared to the market’s 12.78%, potentially illustrative of a turnaround. Since ZMNO’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ZMNO’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ZMNO has been an telco industry laggard in the past year. If your initial investment thesis is around the growth prospects of ZMNO, there are other telco companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ZMNO fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ZMNO has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its telco peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at ZMNO’s future cash flows in order to assess whether the stock is trading at a reasonable price.