TELE­COMS ON THEIR TOES

Com­pe­ti­tion is driv­ing tele­coms rev­enues down and business mod­els will have to keep chang­ing, writes Sa­muel Mungadze

Financial Mail - Investors Monthly - - Front Page -

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.”

Pic­ture: THINKSTOCK

Pic­ture: THINKSTOCK

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