Where to for SA telco stocks?

It’s been an up and down period for local telco stocks on the JSE in recent sessions, led in the main by Africa’s largest mobile operator MTN, which has been busy of late, linked to a number of new territories in an attempt to expand its operations.

By close of play on Friday, shares in MTN rebounded from an otherwise miserable week on the local bourse, having shed close on 10% by Thursday (6 June). The operator however, ended 3.02% or R5.02 higher at R171.20, some way off its 52-week best of R185.90.

Telkom and Vodacom, meanwhile, also made strong gains on Friday, with the former rallying 5.97% or 90 cents to R15.98, closing out a good week for the otherwise under pressure group. Telkom has a best of R21.95 rand for the 52-week period.

Telkom has climbed 18.4% or R2.48 over the past ten days. On Wednesday last week, the group said it was considering writing off the carrying value of its legacy network through a non-cash impairment charge.

“For a considerable time the price at which Telkom shares have been trading at has been significantly lower than the net asset value (“NAV”) of a Telkom share,” Telkom said.

The move has been broadly welcomed by investors; however, an analyst at PSG Konsult said that Telkom’s move was inconsequential as he believes that the company will stll be sold off – most likely in pieces.

Vodacom advanced R1.66 or 1.48% to R113.50 on Friday, and is chasing a best figure of R129.88 for the 52-week period.

The PSG Konsult analyst says that Vodacom continues to be a good company for investors, given its dividend history.

Spiwe Chireka, program manager of telecoms at the IDC, however, says that the company faces the same problems it has for some time – a lack of territories. She says that the company has also constrained itself by its criteria to enter new markets.

For MTN, Nick Crail, portfolio manager RMB Private Bank said: “MTN has come under some pressure again of late, I suspect led by a ratings drop by Fitch. There is talk that the group is close to entering India which has raised questions due to the low margins highly competitive environment there.”

“We are of the opinion that opposed to it being too expensive, it has come off being priced at correct levels, therefore we could expect it to reach is previous levels again in the short to medium term.”

Crail said that, in terms of news, the critical factors to watch are: the Myanmar license, the India acquisition, and Nigeria.

MTN Group is believed to be sniffing out a potential acquisition in India with Reliance Communications, which boasts a customer base of over 130 million, including 7.2 million 3G customers and 29.4 million data customers.

The group is also vying for a lucrative licence in Myanmar.

“In terms of the first two points, MTN can only do one. They have, however, stated their intention to continue growing and so they will continue looking for opportunities. MTN has the ability to gear up quite significantly, but not to the extent that both are viable options at the same time,” the analyst said.

“Regarding India, it would be a high risk move where the real plus is access to a population (market) of that size. There are very few opportunities of that magnitude in a global context. Obviously, it is not seen as an easy environment for business success and therefore it would be risky,” Crail said.

In terms of Myanmar, he said that with the exit from the process by Vodafone/China Mobile for profitability reasons, it raises whether the opportunity is economically viable.

“The point I would make, is that MTN is most qualified to make that decision and we trust their management in this regard,” Crail said.

On Nigeria, the news flow has been negative for some time, “we don’t however see this as a significant problem”.

“With the rally in the share price over the last year, we don’t expect a similar 40% return over the next year. We still prefer this stock to Vodacom and are quite bullish over the medium to long term,” he said.

“We expect MTN to trade in the current range of R160-R180 over the next few months,” said Nadim Mohamed, investment analyst & partner at First Avenue Investment.

“In our view, telco stocks could suffer from a lower market rating due to the recent sharp increase in SA bond yields.  Also, Icasa is re-looking at the cost to communicate and it’s not clear yet whether the recent regulatory actions in Nigeria will spark more intensive price competition from the likes of Etisalat.”

“There may, however, be some good news later in the month if MTN were to win one of the Myanmar licenses – [that] could open a new growth path for the firm,” Mohamed said.

More on MTN, Vodacom and Telkom

MTN courting India acquisition: report

MTN hit with Fitch downgrade

Investor confidence hurting MTN: analyst

Telkom considers legacy impairment

Vodacom keen on acquisitions, but where?

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Where to for SA telco stocks?