Investors are probably too optimistic about Telkom’s fast-growing mobile business, and the partially state-owned group is now overvalued, according to US bank JPMorgan.
Telkom’s shares have gained about 75% over the past 12 months on hopes that the network operator’s fledgling mobile business will continue to win market share and on expectations that the group will unlock value from its vast property portfolio.
After better-than-expected annual results, the company’s stock rallied to just shy of R100 in June, but has since retreated to R86.49 on Tuesday.
That is still too expensive for JPMorgan, which has a price target for Telkom’s shares of R80. That target "suggests material downside risk to current levels", the bank said in a research report.
Under CEO Sipho Maseko, Telkom’s board has improved the group’s returns on invested capital, the bank said. "This turnaround was supported by staff efficiency and repositioning of the mobile business."
But current valuations implied "overly optimistic market share gains over the medium term". Telkom’s near-term free cash flow profile "is anaemic" given high capital expenditure relative to sales.
However, JPMorgan said Telkom could benefit from any delay in the government’s spectrum licensing process, as this could result in capacity constraints for incumbents.
"In turn, this could delay competitive intensity from the mobile incumbents, which could allow Telkom to accelerate mobile market share gains."
President Cyril Ramaphosa said in his state of the nation address in June that the long-delayed spectrum licensing process would start within weeks.
Mobile operators have said for years that their limited access to radio waves, or spectrum, is keeping costs elevated for consumers and themselves, since they need to counter the shortage by building more towers.
Ramaphosa said on June 20 that communications minister Stella Ndabeni-Abrahams would issue a policy direction to the industry regulator to get the ball rolling "within the next month".
Lester Davids, a trading desk analyst at Unum Capital, said Telkom’s recent pullback to below R88 a share indicates profit-taking following the stock’s stellar run.
"The group has defied odds in the telecoms space, having made strides with its mobile unit, which has been a key driver of profitability, while the expectation that its property portfolio could be the next ‘value unlock’ has also seen the share price rally," Davids said.
But with the sector under pressure to reduce data costs, Telkom may be compelled to continue cutting prices.
With the group’s shares around R87, the short-term outlook for the stock "has weakened" from a technical trading perspective, meaning further declines are possible.
"Technically, I see R82 as a target and next level of support," Davids said.
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