Vodacom, SA’s largest mobile operator, managed to weather the 2020 storm — a troubled time for many counters on the JSE — better than other local telecoms companies.
Like other consumer-focused industries, the mobile network industry is facing macro-economic challenges as customers battling job losses struggle to keep up with monthly phone bills, even when the sector’s services are so essential during the pandemic.
Despite the rapid growth of Telkom’s mobile business, Vodacom continues to dominate the mobile sector in SA — its largest market with 44-million customers, due to the quality of its network. The company has also benefited from a temporary allocation of radio frequency spectrum given by the government to cope with increased demand for communications services during the pandemic, as data traffic increased more than 40%.
Vodacom has also has outperformed its peers on the stock market during the lockdown, offering consistent returns to investors.
Since March 2020, when countries, including SA, went into lockdowns, Vodacom shares are 15.6% firmer while MTN has lost about 1% of its value. At R42, Telkom is up 60%, though its share price did experience more volatility than Vodacom, coming down to as low at R15.
MTN — which has the largest footprint of the local players, operating in 21 countries — has taken the biggest hit over the past year, mainly driven by its reliance on oil-producing countries such as Nigeria — its biggest market — as oil prices plunged at the start of the pandemic. Its share price plunged to R29 from R81.
Since then, the stock has recovered to about R67 but has yet to break the R81 mark.
As mobile operators start reporting their earnings, it is clear things are looking up for industry
Besides the geographic factors, some investors see Vodacom, valued at R237bn, as offering predictable returns over time.
Absa Asset Management analyst Roy Mutooni, says, “The stock has been stable largely because the company has a solid, reliable and high dividend, and was more expensive on a valuation basis than the other two telco stocks, so investors preferred to hold it rather than sell it out.”
Vodacom upped its interim dividend 9.2% to 415c to end-September 2020, a R7.6bn payment.
Mutooni says this positive sentiment should continue, however, “as the global economy improves and investors start to seek out capital gain opportunities, they may forgo this attractive dividend in favour of other cyclical growth stories such as technology or commodity stocks.”
David Lerche, senior investment analyst at Sanlam Private Wealth, agrees that Vodacom’s momentum is not guaranteed. He says the lower level of total economic activity in the operator’s markets means “growth from here will be more difficult. We would expect sales momentum to slow in 2021. Key for the business will be if and when new spectrum is issued in SA”.
Vodacom’s prospects are highlighted by the company recently reporting a 6.4% growth in revenue to R25.1bn in the quarter to end-December, which is slightly lower than the same period a year earlier and before companies across the country tempered their expectations when it became clear that Covid-19 would wreak havoc on household finances.
As mobile operators start reporting their earnings, it is clear things are looking up for industry.
Vodacom rival MTN has indicated that its headline earnings per share (HEPS) are expected to rise by up to 70%, higher than the 468c seen previously for the year to end-December 2020. This translates to a range of 702c to 796c for the reporting period.
This week, Telkom, the newest player to enter the fray, reported that its mobile service revenue rose 40.7% for the nine months to end-December 2020, up to R12.58bn compared with R8.9bn in the previous comparable period, while group revenue rose 0.9% to R32.43bn for the period.
Investors have received MTN and Telkom’s news favourably. MTN is now trading 12.5% higher for the year to date, while Telkom is up 36.1%.
With growth across the industry as people demand mobile communications services at increasing rates, only time will tell if the Vodafone subsidiary — up 4% so far in 2021 — can remain top of mind for investors.
While Cell C’s largest shareholder, Blue Label Telecoms, has more than doubled its share price since March 2020 — up 113% — it wrote off its R5.5bn investment in SA’s largest mobile operator to nil. Cell C has seen lower customer numbers in the past year but the company says its focus is on having quality customers on its network.
It is in the process of a turnaround that includes shifting away from having its own network infrastructure and a long-awaited recapitalisation of its business.
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