Picture: 123RF/Sasin Paraksa
Picture: 123RF/Sasin Paraksa

Telecoms companies on the JSE have delivered strong performances so far in 2019. But finding new sources of revenue will be essential to future growth, as changes in technology and consumer behaviour have resulted in a decline of the staple voice business.

Peter Takaendesa, portfolio manager at Mergence Investment Managers, says: "MTN and Telkom are leading this year. They’ve delivered stronger numbers if you look at earnings growth and revenue performance."

At the time of writing, MTN’s share price was up 11%, with Telkom showing the most gains, rising 16%. Vodacom’s growth has been flat.

Despite delivering the strongest growth for the year, Telkom, which grew its subscribers by 85% in the past financial year to 9.7-million, is trading at the same multiple as Vodacom, Takaendesa says. That’s why some are a bit cautious about Telkom, he adds.

US bank JPMorgan said in July — when Telkom shares were trading at close to R90 — that investors were probably too optimistic about Telkom’s fast-growing mobile business, and that the company was overvalued.

Telkom’s shares had gained about 75% in the 12 months to July, when the bank released its report on it. This growth was based on hopes that its fledgling mobile business would continue to win market share. However, Telkom’s share price has settled at R70 this week.

Blue Label — the majority shareholder in the third-largest mobile operator, Cell C, with about 17-million subscribers — has been playing in negative territory in 2019, owing to continued troubles. Blue Label, with a 45% stake in Cell C, and Net1, with its 15% stake, have had to write down the value of their investments in it to nil. Blue Label’s share price is down about 45% this year.

So where should investors put their money?

Momentum Securities equity analyst Nancy Bambo says that Vodacom, down 8.5% for the year, offers better value than its peers. She says on a p:e basis it is the cheapest, and it has the highest margins.

Takaendesa says both MTN and Vodacom are good bets. "They have strong balance sheets. In this tough economy, they’re more likely to weather the storm."

There are very obvious red flags at Cell C, but investors should also be cautious about Telkom, he says. The Telkom investment in information & communications technology company BCX has not worked out as planned. It was meant to provide a revenue hedge, but that is not happening, owing to a slump in the corporate sector, which is one of its main markets.

It’s no secret that telecoms operators the world over have to find new sources of revenue to compensate for the decline in voice calls.

Bora Varliyagci, CEO of digitalthings, a communications advisory firm, says that in emerging markets telecoms firms have large subscriber bases they can leverage to offer added services.

He says it has been a welcome development to see these firms moving into digital services, beyond the traditional voice and data business.

He cites M-Pesa’s mobile wallet service as the best-known example of a mobile service provider moving into financial services.

In this regard, MTN and Vodacom again look to provide the best investment.

Beyond voice, the main drivers of revenue growth for the sector will be data and mobile money.

Takaendesa says: "For now I’d prefer a company with exposure to mobile money and mobile data." Everything else is still being tested or hasn’t scaled up to a point of becoming a reliable stream yet.

He believes investors should select companies with exposure to markets outside SA, where mobile money has really taken off and has proved to be a strong revenue stream. Good examples of successful mobile money firms include M-Pesa, which is run by Vodacom affiliate Safaricom, and Zimbabwe’s EcoCash, operated by billionaire Strive Masiyiwa’s Econet.

Looking ahead, Bambo says one of the important risks for SA telecoms companies is regulatory pressures.

The Competition Tribunal found earlier this year that local operators charge too much for data. Bambo expects revenue pressure for telecoms companies in the short term as adjustments are made to a new regime. Revenues will likely recover as lower data costs encourage greater data use by consumers.

Another uncertainty for operators is the issue of spectrum, which has been touted for allocation in the coming months by President Cyril Ramaphosa and the department of communications & digital technologies.

Bambo says the auctioning of spectrum this year, should it happen, will be good for stocks — mainly Vodacom and MTN, as they have less spectrum than Telkom. More spectrum will allow MTN and Vodacom to price their services more competitively, particularly data.

Whether this allocation will happen soon remains to be seen.

"Investors have been disappointed on this front many times before, but it does look as if the president is quite set on that," Takaendesa says.

Meanwhile, JPMorgan says delays to the awarding of spectrum will benefit Telkom.