Financial Mail - Investors Monthly
TELECOMS ON THEIR TOES
Competition is driving telecoms revenues down and business models will have to keep changing, writes Samuel Mungadze
The outlook for telecoms giants such as MTN and Vodacom doesn’t look so rosy for 2015. The expansion of SA’s mobile ecosystem will keep their revenues under pressure and the market is expecting declines in the low to mid single digits in the year to come.
Cut-throat pricing competition caused by the interventions of the regulator, the Independent Communications Authority of SA, has already taken its toll in a market where demand for voice services is approaching its peak. SA’s big operators, including Telkom, have been forced to turn their focus to data strategies such as social media and the streaming of music, gaming and video.
With mobile data revenue growing by between 15% and 20%, it will partly offset the declines in voice revenue, but the strong uptake of cheaper instant messaging services such as WhatsApp is eroding higher-margin SMS revenue, says Peter Takaendesa, an analyst at Mergence Investment Managers.
He says there will be another 20% cut in mobile termination rates in October next year, but the impact should be much less than the 50% cut in March this year.
Better revenue trends will require stronger execution to gain market share, or finding alternative revenue streams from adjacent industries
Another industry role-player, Farai Mapfinya, head of equities at JM Busha Asset Managers, says interconnect revenues will continue to decline for both Vodacom and MTN, but the impact will be positive for Telkom.
Mapfinya expects that companies will compete for a bigger share of the data market by making smartphone use more affordable for consumers.
For an operator like Telkom, fixed-to-mobile migration will continue to put pressure on its voice or call revenues.
To save their ailing business models, South African telecommunications companies have to seek ways of reinventing themselves to remain profitable.
The effects of the strain in the sector have already trickled down to service providers. Reunert’s decision to close its Nashua Mobile business in June this year was evidence of that strain.
“Given that the whole local pie is no longer growing, better revenue trends will require stronger execution to gain market share, or finding alternative revenue streams from adjacent industries,” Takaendesa says.
The major three operators had varying share activity on the market from January to November 14 of this year.
Telkom was the best performer among them; the fixed-line operator’s share price moved by 128%. The share started the year at R28 and at the close of the market on November 14 it was comfortably trading at R64.
MTN’s share started the year at R217 and was at R228 on November 14, having gained 5.37%. The country’s biggest network by subscriber numbers, Vodacom, shed 5.26% during the same period. It was trading at R133 in January and ended the market on November 14 at R126.
However, all is not gloomy for
the sector.
Dennis Magaya, CEO of Rubiem Technologies, an international telecoms consultancy, believes some international trends will be positive for the industry despite the challenges that remain for the coming year.
He says growth in data traffic will be more than 50% compared to 2014 and this will drive capital investment to ensure quality of service. “Unfortunately, the data traffic growth is not quite proportional to revenue growth. Research shows that data traffic is growing nine times faster than the generated corresponding revenue,” says Magaya.
Another aspect of the fortunes of operators in 2015 will depend on government policy on spectrum.
Spectrum allocation has been delayed in SA, hampering broadband penetration. The plans to allocate the much-needed 800MHz and 2.6GHz spectrums were revealed in December 2011 and the intention was to license them, particularly to mobile operators, which would use them to offer more services, including fast internet.
Mapinya says that if that is finalised “we will certainly see material advances in LTE and 4G rollouts”.
LTE is the new highperformance air interface for cellular mobile communication systems. It is the last step towards the fourth generation of radio technologies designed to increase the capacity and speed of mobile telephone networks. LTE has an advantage over 3G services because it is faster.
While analysts believe operators will push for increased rollout and commercialisation of LTE, they caution that the absence of widely affordable devices may mean the technology will remain a premium service for corporate and top-end markets.
“Other key issues will be the allocation of broadband spectrum needed for new, faster 4G networks and the outcomes of the proposed acquisitions,” says Takaendesa.
These deals include the Vodacom and Neotel tie-up as well as the proposed merger of Telkom and Business Connexion.
The Vodacom and Neotel deal is now before the competition commission. MTN and Telkom are opposing it, saying Vodacom will have an unfair advantage as it will take control of the Neotel spectrum in the R7bn tie-up.
Telkom’s merger with Business Connexion (BCX) got the thumbs-up from 80% of BCX’s shareholders in August. Telkom’s R2.6bn bid for the JSE-listed ICT firm is viewed by analysts as an attempt to boost fortunes and revenue.
LTE is the last step toward the fourth generation of radio technologies designed to increase the capacity and speed of mobile telephone networks
Telkom offered BCX shareholders R6.60 a share, which represented a 20% premium to what the company was trading at when trade closed on April 14, when the cautionary was issued.
Magaya says as the pressure for high bandwidth and high quality data mounts, both mobile and fixed line operators will increase the rollout of fibre to the home.
“In fact, mobile network operators will be more aggressive because they need to carry the exponential mobile broadband traffic and to make an offensive in the corporate market,” he said.
Turning to the prospects of telecoms stock as high growth in future, analysts hold mixed views.
Takaendesa says the stocks are now largely well advanced in their transition from growth to being dividend payers.
“You are getting a good blend of modest growth and relatively attractive dividend yields in SA mobile operator stocks. These qualities make these stocks relatively good places to hide in case of a strong stock market correction,” he says.
He says MTN, for example, has high exposure to relatively underpenetrated African markets and management has made a commitment to grow dividends by at least 5% a year (even in the case of earnings declines), making it more attractive than its peers.
On revenue growth, Mapfinya says certain segments such as data can still grow but are less profitable than voice. “So we do not think telecoms is still a high-growth sector, also taking into account the capital intensity of these businesses.”
On the other hand, there are some analysts such as Magaya who believe telecoms is probably the most dynamic sector in terms of strategic options and growth opportunities.
The number of wi-fi hotspots will double in the Southern African Development Community region, Magaya says.
“The increase in devices that are wi-fi capable will drive growth. This will give mobile network operators that have invested heavily in networks a challenge.”