This article was first published in the latest issue of the Moneyweb Investor. To read the magazine click here.
Until as recently as a year ago, investors in telecoms would have picked MTN for growth and Vodacom for a safe and steady ride.
Since then, the extent of MTN’s problems in Nigeria and South Africa has caused investors to run for the hills.
If you had invested in MTN five years ago, your investment would be worth slightly less now (at R140) than it was then and would be down almost a third from a year ago. If you had invested in Vodacom, however, your share, at R160, would be worth almost 90% more than five years ago.
While Vodacom remains on a safe and steady track, an investment in MTN would now be based on hopes for a recovery, and the extent to which investors think this is possible will be reflected in its price trajectory from here on. An investment in MTN was always based on high risk, high return, and in that sense, nothing much has changed. But while there has been some recovery in its share price, investors remain on the fence.
Taking a current snapshot, MTN has moved from profit to loss in the six months to June following a $1.7 billion fine on MTN Nigeria, foreign exchange losses in a number of operations, hyperinflation adjustments on MTN Irancell and the poor performances of MTN Nigeria and MTN South Africa.
MTN Nigeria was affected by the disconnection of 4.5 million subscribers and the withdrawal of regulatory services while MTN South Africa is losing ground largely due to some neglect.
Apart from getting its Nigerian fine reduced from $5.2 billion and reaching agreement to pay it, MTN has appointed Vodafone Europe head and former Vodacom, Standard Bank and Nedbank executive Rob Shuter as group president and CEO. Now begins the slog to turn its fortunes around.
Vodacom, on the other hand, has capitalised on MTN’s troubles. In its quarterly update to end-June, it gained just under 1 million customers as sustained capital expenditure on infrastructure continues to give it a huge and growing competitive edge.
MTN and Vodacom offer very different investment propositions. MTN is widely spread geographically in potentially fast-growing markets while Vodacom is predominantly South African. Both are experiencing a surge in data usage and decline in voice and both are looking for new avenues for expansion.
Fairtree Capital equity portfolio manager Jean Pierre Verster says he is currently neutral on the valuation of both companies.
“But they have vastly different investment propositions. Vodacom is leading in South Africa and winning market share from MTN of late, so it is in a strong position. It has good margins on the voice side of revenue generated, although voice is not growing anymore. Data is growing strongly, although at a lower margin.
“Vodacom has also been spending more on network so the quality and speed of its data offering is superior to its competitors – another reason why it has been taking market share. It is a virtuous cycle – it is the largest and leading provider, which enables it to generate more cash for capital expenditure, which allows it to attract more customers, and so the cycle repeats.”
While non-South African operations have seen currency volatility, it has a much smaller exposure than MTN.
South Africa accounts for about a quarter of MTN’s profits, against about 80% for Vodacom, Verster says, so they have a vastly different geographic exposure, with Vodacom’s fortunes being inextricably linked to the South African telecoms industry.
Vodacom is in a “sweet spot”, but it needs access to more spectrum, and the spectrum auction announced by the regulator, the Independent Communications Authority of SA (Icasa) has been stalled by the minister, who is instituting court proceedings.
“It needs access to more spectrum, which is why it was eager to buy Neotel and to bid for more spectrum. But the DTT (digital terrestrial television) migration process is stalled and now the minister wants to interdict Icasa, so it is a tricky situation, and a risk.”
MTN is listing MTN Nigeria and trying to appease regulators in Nigeria, its most profitable market. MTN “has its hands full there and needs to spend a lot to enhance capacity,” Verster says.
In all its other geographies it has been tough. “Higher than average risk needs to be reflected in the valuation of the shares. The valuation is not about predicting the future, it is about assessing probabilities of success, and at the current share price a lot of the risks are being discounted. It has not been given a lot of the benefit of the doubt in Nigeria, or of regaining market share in South Africa. The current price reflects a low probability that these issues will be resolved.”
“At the moment and at current valuations, I am neutral on them [Vodacom and MTN],” says Verster. “I don’t see the need to own shares at the current share price. It could be an investment opportunity at current share prices but that is not a foregone conclusion.”
Africa Analysis managing director Dobek Pater says MTN has been increasing capex in South Africa, but it will be difficult to claw back.
Despite the challenges, MTN’s geographic spread remains its strength, Pater says. “Delivering services in the MEA (Middle East and Africa) region will probably be problematic for a long time still as the region continues to be volatile. But this is also a growth region, particularly some of the African markets and probably Iran.
“Moreover, after every conflict there is a phase of rebuilding the country and the economy. MTN stands to benefit from this.”
Vodacom’s reliance on South Africa, does limit its growth prospects relative to MTN, “but this does not mean that Vodacom cannot grow. Apart from its mobile operations, Vodacom is also present in more markets as Vodacom Business. With growth in business ICT expected, Vodacom Business is well-positioned to take advantage of this opportunity”.
Vodacom’s upside potential would depend on its ability to expand in the business market, its access to fibre deployment, ability to take advantage of the internet of things and its ability to expand into adjoining markets like financial services, Pater says.
Blue Label Telecom’s proposed investment in Cell C, and Telkom’s aspirations to become a bigger player, particularly in data, do pose some threats to Vodacom and MTN’s dominance in South Africa.
Verster says if Blue Label’s acquisition is successful, investors can gain exposure to Cell C. “They have been a bit of a disruptor – they tried to gain market share by cutting prices and tariffs and still getting market share but are undercapitalised, and will benefit greatly from Blue Label’s access to capital and strong position in the distribution of airtime. This could be an interesting strategic move, it could upset the applecart a bit in terms of the competitive landscape.”
Verster says Telkom has won market share mostly in data, and its high-value and high-gig broadband packages would put some pressure on competition.
Pater says Cell C’s subscriber growth has slowed and Telkom is unlikely to present a significant danger. Cell C’s downside, he says, is lack of real presence in the business market. As voice revenues and data prices decline, cellphone companies need diversification. Pater says Vodacom has more experience through M-Pesa (mobile-based financial services) and its activities in South Africa, but its advantage may diminish as others expand into financial services.