Nicola Mawson
South Africa’s telecoms sector has been going downhill since 2022, especially for the mobile operators, a time at which it peaked, according to an analyst.
Peter Takaendesa, portfolio manager and head of equity at Mergence Investment Managers, told Business Report this week that apart from Telkom’s bright star, MTN and Vodacom have been “plagued by increased competition and a weaker consumer have put pressure on revenue while stubborn operating costs have continued to put pressure on profitability”.
Over the past five years, the listed telecoms index has declined almost 5% while the JSE’s All Share Index has gained 55.9% over the same period.
Takaendesa said load shedding and a weaker rand were largely to blame for the operating cost pressure for most of the period between 2022 and now.
“While the rest of Africa mobile operations and FinTech continued to deliver strong growth in local currencies of those countries, the crippling devaluations of the currencies of key operating countries such as Nigeria and Egypt have become a key detractor to returns to shareholders,” he said.
“This has meant that the telecoms sector has not been attractive to investors especially when compared other South Africa stocks.”
Vodacom’s latest results for the six months to September showed revenue 1% higher year-on-year. MTN reported group service revenue down 18.5% in the quarter to September. Both companies reported better growth when currency devaluations were stripped out.
Takaendesa said that it’s just Telkom that “positively surprised the market”. The operator, long a laggard, grew subscribers, fibre access, and service revenue, leading to adjusted headline earnings per share from continuing operations shooting up 68% 146.9 cents per share.
“Telkom’s interim results for the period ended September were stronger than market expectations, largely driven by market share gains in the mobile business and cost optimisation across the group,” said Takaendesa.
“If this improved operational performance is sustained over the coming years, we expect Telkom to sustainably improve its returns to shareholders. The shares are still not expensive if Telkom continues on this path and more so when compared to other SA Inc. stocks that have run quite hard since the formation of the Government of National Unity.”
Vodacom and MTN are also not expensive, but they still need to navigate major forex headwinds and some company specific risks over the coming six to 12 months, said Takaendesa.
These two mobile operators face other challenges. As Takaendesa said, Vodacom must contend with the fact that its multi-billion rand bid to create what would have been South Africa’s largest fibre operator has been blocked by the Competition Tribunal.
The country’s largest mobile operator may appeal the ruling, and it and Remgro, which would have been selling the asset, have told the market that they have extended the long stop date, which buys them time to explore their options.
At the same time, Takaendesa noted, Vodacom was dealing with the Please Call Me legal claim. That matter, in which inventor, Nkosana Makate is claiming R9.4 billion for the innovation, is before the Constitutional Court.
MTN, meanwhile, is battling trying to get money out of Nigeria.
“[It may fail if] the regulator of that country does not approve price increases to help accelerate the recovery in profitability post a devastating Naira devaluation and related inflation spike over the past 18 months,” said Takaendesa.
“The improved service revenue growth rates for both companies in constant currencies is encouraging if sustained, but those will only make a difference if they translate into actual growth in rand earnings and cash returns to shareholders.”
He also noted that the near-term outlook remained challenging in the context of a stronger dollar, increasing competition locally and the other unresolved company specific financial risks that will “need to wash out first” for Vodacom and MTN.
The year 2024 also saw Cell C, which is being bought out by Blue Label pending regulatory conditions, rebranding. This refreshed look aims to disrupt the market and have the customer at the heart of everything it does.
During the year, two mobile virtual network operators launched in the form of C-CONNECT and Melon Mobile, as they see an opportunity to own some market in a country that may seem oversubscribed.
BUSINESS REPORT