Telkom best placed to weather the regulatory storm, says JP Morgan
The second half of 2018 will be a "defining period for regulatory risk" for the telecommunications sector, but Telkom is in the best position to weather the storm, according to investment bank JP Morgan.
Telecommunications network operators face a swathe of new regulations and market inquiries aimed at extending broadband coverage and lowering the costs to communicate, and some of the proposals on the table have irked them.
Vodacom CEO Shameel Joosub has gone so far as to say the impending Electronic Communications Amendment Bill is the industry’s equivalent of the Mining Charter, which has been blamed for denting investor appetite in the resources sector.
One of the most contentious recommendations in the bill is the establishment of a wireless open-access network (Woan) that would force operators in the country to share spectrum, or radio frequencies.
Vodacom and some of its peers want regulators to rather focus on releasing new spectrum so they can roll out services faster and cheaper.
Asymmetric regulatory models
"We believe Telkom is best placed among South African telecoms [companies] to mitigate regulatory risk over the next 12 months," JP Morgan said in a report last week. This was partly because of the government’s move towards "asymmetric mobile regulation" that would affect the largest players most. Asymmetric regulatory models allow smaller operators to charge larger competitors a higher price for terminating calls while small operators pay a lower fee for the same service.
JP Morgan expected incumbent mobile operators to get access to "some" high-demand spectrum, but said they were likely to face pressure on data growth over the medium term.
"Telkom’s investment case is less sensitive to a high-demand spectrum allocation, in our view, while its industry-low mobile data pricing positions it for ongoing share gains.
"In a scenario where spectrum is not issued to incumbent mobile operators, we see Telkom as the most defensive of the South African telecom names. Indeed, we believe it could even benefit from an asymmetric spectrum allocation to the Woan and support its rollout," JP Morgan said.
JP Morgan has a sell recommendation for MTN, buy recommendation on Telkom and a hold for Vodacom.
Mergence Investment Managers portfolio manager Peter Takaendesa said Mergence had preferred MTN and Telkom’s shares to Vodacom’s, largely due to relative valuations.
"MTN is coming off a very low base and lots of the regulations that are being proposed in SA have already been implemented in MTN’s other markets, including Nigeria," he said.
Telkom, meanwhile, was cheap and offered an attractive dividend not at risk of being cut due to its low debt levels.
But Takaendesa said while Vodacom had been expensive, the recent share sell-off was making it more attractive.
Takaendesa was optimistic that the regulatory impasse "will be resolved in a logical way — I don’t think the government will take a very hard stance".
This was partly because the network operators were making progress with black empowerment, were lowering the cost to communicate and had largely not bought into the Woan concept.
"It’s very likely to be a hybrid model where they’re allocated some spectrum but they have to also commit to use that wholesale network."
Vodacom’s shares had slipped from above R185 in August 2017 to R124.57 on Friday. Over the same period, MTN had declined from above R120 a share to R106.68 and Telkom’s shares had declined from R64.03 to R47.67.