2013 to be difficult for MTN and Vodacom – analyst

While MTN and Vodacom have good leadership and assets, 2013 is set to be a more challenging year for the operators amid increasing competition – and for MTN in particular, regulatory issues in Africa.

This is the view of investment analyst and partner at First Avenue Investment Management, Nadim Mohamed.

“We saw evidence of MTN and Vodacom’s strong competitive advantage in the SA market where they’ve improved earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin despite lower terminating charges and pricing from Cell C and 8ta.

“Similarly, in Africa they’re shown strong growth and been able to maintain a leadership position in the market,” the analyst said.

Mohamed believes that being the top one or two operator in the market in which they operate gives both MTN and Vodacom an implicit scale advantage and network effect.

“Also, ‘deep pockets’ for marketing and branding have enabled them to attract a premium for a mobile voice minute, which should really be a commodity in mature markets,” he said.

However, First Avenue said it will become more of a challenge to defend above-average margins and ROEs in 2013 given strong competition from the likes of Bharti and Etisalat.

“Also, regulators appear to be increasingly more active as we’ve seen in Ghana where MTN have been barred from adding new subscribers because of deteriorating network quality,” the investment firm said.

“While MTN and Vodacom have good leadership and assets, it does appear that 2013 will be a challenging year for them,” Mohamed said.

Telco stocks:

Stock return 1 Jan to 12 Dec, 2012

Code Company % return
VOD-ZA Vodacom Group Ltd. 32.6%
MTN-ZA MTN Group Ltd. 15.6%
TKG-ZA Telkom SA SOC Ltd. -46.7%
BLU-ZA Blue Label Telecoms Ltd. 33.6%

The analyst noted that Telkom, on the other hand, has seen significant destruction of shareholder value because of an industry structure which promotes fixed-mobile substitution as well as a poor operational performance from 8ta.

The loss of board members, management and the CEO hasn’t helped either, he said.

“We think that Telkom has incredible network assets; but the uncertainty of its future as well as inability to address internal inefficiencies prevent it from effectively monetizing these assets.”

“As a result, we think Telkom is very high risk even at these levels and therefore we do not hold it in our portfolios.  We hope to see more clarity on government’s plans for Telkom after Mangaung,” Mohamed said.

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2013 to be difficult for MTN and Vodacom – analyst