Blend of old favourites and new ser­vices pay off

Financial Mail - Investors Monthly - - Analysis - Larry Claasen

The re­ports of the death of least-cost rout­ing (LCR) have been greatly ex­ag­ger­ated. The prac­tice of buy­ing band­width at large dis­counts from the big telecom op­er­a­tors and then re­selling it at a prices lower than the re­tail rates to busi­nesses has served a hand­ful of niche play­ers such as TeleMasters well.

This model only worked, how­ever, if the large telecom op­er­a­tors kept their prices rel­a­tively high.

So when the op­er­a­tors came un­der pres­sure from gov­ern­ment and the sec­tor’s reg­u­la­tor, the In­de­pen­dent Communications Author­ity of SA, to cut tar­iffs, it was as­sumed that the writ­ing was on the wall, as the rate cuts had ef­fec­tively elim­i­nated the price range in which LCR firms could op­er­ate prof­itably.

This is where TeleMasters found it­self a few years ago. It thought its LCR busi­ness was all but dead, and that it had to come up with a new model to re­main rel­e­vant in a rapidly chang­ing tele­coms sec­tor.

“I was wrong,” says TeleMasters CEO Mario Pre­to­rius. For years he had been try­ing to get his clients to shift to the new ser­vices his com­pany was of­fer­ing, but they stub­bornly re­fused to make the move.

They liked the idea of hav­ing an old Telkom num­ber and a ser­vice they un­der­stood. Af­ter about six years of try­ing to get them to move, Pre­to­rius fi­nally came to the re­al­i­sa­tion that with about half his busi­ness still com­ing from LCR, his clients were just not ready to shift. “I was stupid. I should have lis­tened to the mar­ket in the first place,” Pre­to­rius ad­mits.

But though he may have re­alised that he was wrong to try to walk away from LCR, it does not mean it does not see a fu­ture with its new of­fer­ing.

Ever since prices have started to come down, TeleMasters has been evolv­ing from a LCR firm to an In­ter­net Pro­to­col (IP)-based telecom op­er­a­tor, which means that in­stead of only try­ing to buy and re­sell band­width to its clients, it is now try­ing to get them onto its vir­tual IP net­work, which pro­vides both data and voice ser­vices. With 4 500 clients on its own net­work, it has ba­si­cally snatched busi­ness away from the large telecom op­er­a­tors.

The prob­lem for TeleMasters is that there is not a lot of mar­gin in pro­vid­ing this kind of con­verged ser­vice com­pared to a voice of­fer­ing. Pre­to­rius says it does not help that “Free call” en­trants like the Face­book-owned What­sApp are now threat­en­ing tra­di­tional cel­lu­lar mar­kets.

This, along with a sched­uled 25% de­crease next year in mobile and fixed ter­mi­na­tion rates — the fees op­er­a­tors charge for trans­mit­ting each other’s calls over their net­works — could re­sult in a 10% drop in over­all prices in the com­ing pe­riod.

It does not mean that Pre­to­rius is fear­ful about the fu­ture, how­ever. If any­thing, he is buoyed by how his com­pany has po­si­tioned it­self to of­fer a raft of new ser­vices.

It has launched, or is close, to of­fer­ing an ADSL line, is ex­pand­ing its cel­lu­lar data of­fer­ing and is in­tro­duc­ing a ser­vice that in­te­grates of­fice lines with per­sonal hand­sets. It is also in the process of set­ting up a se­cure data ser­vices.

Over the past few years LCR firms have had a rep­u­ta­tion for hold­ing onto their ex­ist­ing clients rather than win­ning over new ones. Pre­to­rius says this is about to change, be­cause it is gear­ing up its sales divi­sion — it has tripled its sales man­age­ment staff.

Though from the out­side the group looks well po­si­tioned, its re­cent num­bers have yet to fully show that it has turned the cor­ner. Rev­enue fell from R103, 4m to R98, 11m and op­er­at­ing profit was vir­tu­ally un­moved at R3, 5m for the year to end June. Head­line earn­ings rose from R2, 6m to R2, 27m and cash and cash equiv­a­lents was at R7, 12m at the end of the year, com­pared with R7, 03m.

Though the jury is still out on whether TeleMasters can find the growth it be­lieves is out there, there are still some good rea­sons to like the group. For one, its low gear­ing — it de­creased its long-term debt from R1, 12m to R585 775 — means its bal­ance sheet is health­ier.

An­other thing in its favour is its habit of pay­ing div­i­dends ev­ery quar­ter, giv­ing it a re­spectable div­i­dend yield of 3,85%.

At a share price of R1,30 and a price-earn­ings ra­tio of 19,88, it looks like it might be fully priced for a penny stock but is suit­able for those look­ing for a counter that will pay out div­i­dends at a rea­son­able rate.

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