STOCKS NEWS EUROPE-Telecom firms need to consolidate-Nomura

Nomura says European telecom services companies need to consolidate to justify their new valuation, but upgrades Swisscom (Other OTC: SCMWY - news) as it believes the company has good growth potential.

European telecoms have outperformed the market by 12 percent this year, as supporting themes like consolidation have contributed to multiple expansion of more than 30 percent. The sector trades at a 2014E EV/EBITDA (Enterprise value/earnings before interest, taxes, depreciation, and amortization) of 6.6, up from 5.0 in January, Nomura says.

"Progress on fundamentals has been slow, with negative trends in mobile competition, leaving limited valuation upside," Nomura says, adding it targets the sector's upside potential of 1.5 percent and a 4.9 percent dividend yield for 2014.

Nomura says in a note that it expects some stabilisation in 2014. The mobile migration to flat-rate pricing is well underway and the scale of 4G rollouts should help the industry to recoup some pricing power.

"BT stands out in our value analysis on access networks, but few candidates are poised to follow BT's example. Swisscom screens next best given our assumptions of fibre adoption and its ability to monetise enhanced network value in the retail market."

Nomura says BT Group remains its top pick. It upgrades Swisscom to "buy" from "neutral" and retains its "buy" rating on Vodafone.

It downgrades Deutsche Telecom to "neutral" from "buy" and Telenor (Other OTC: TELNF - news) to "reduce" from "buy" on domestic risk and valuation grounds.

Swisscom and Vodafone are up 0.9 percent and 0.2 percent respectively, while BT Group, Deutsche Telecom and Telenor fall 0.1 to 1.1 percent.

Reuters messaging rm://atul.prakash.thomsonreuters.com@reuters.net