Blend of old favourites and new services pay off

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.