A blast of year-end deal-making on the JSE is especially evident in SA’s telecoms sector.
But the performances of its top three players in 2021 couldn’t have been more diverse.
Vodacom, the poster child for stable returns, is looking like a slug in comparison to MTN and Telkom. While Vodacom’s shares have crawled 12% higher, year to date, MTN’s have rocketed 166%, and Telkom has gained almost 57%.
The FM looks at which of the three companies investors have their eye on for 2022.
Vodacom
Results out this week from SA’s largest mobile operator confirm that Vodacom really could do with a shot in the arm. No wonder then, that it’s going large with a 5G push, and a decision to buy Vodafone Egypt.
Revenue for the first half was just 4.2% ahead, at R49.9bn. Headline earnings a share fell 5.1% to 505c. Vodacom’s dividend payout was also virtually flat on last year, at 420c a share.
Clearly, growth is stalling.
Enter a tie-up with Johann Rupert’s investment holding company, Remgro. This is a multibillion-rand deal that will combine the two groups’ fibre businesses.
Under the deal, Community Investment Ventures Holdings (CIVH), whose biggest shareholder is Remgro with 57%, will transfer its fibre assets Dark Fibre Africa (DFA) and Vumatel into a newly created entity, InfraCo. Vodacom will inject at least R9bn into the new entity and transfer its fibre business, valued at R4.2bn, into InfraCo in exchange for a 30% stake.
The R13.2bn deal values CIVH at about R44bn, highlighting the growing importance of fibre assets in a 5G future, and Vodacom’s ambition to have a bigger piece of a market long dominated by Telkom’s Openserve unit.
At the turn of the century, the race was about which operator had the most cellphone towers. Now it’s about fibre. If operators want customers to consume more data (a revenue driver for industry), infrastructure needs to be in place.
Valuing the assets seems to have been at the heart of a more than three-year negotiation process, Sipho Makhubela, CEO of Harith — the second-largest shareholder in CIVH — tells the FM. Harith is a $1.2bn infrastructure fund associated with Tshepo Mahloele, chair of Arena Holdings (owner of the FM).
Roy Mutooni, analyst at Absa Asset Management, says the deal delivers scale as well as long-term growth potential.
"We believe the strategic rationale is sound: Vodacom needs to scale up its FTTH [fibre to the home] offering and acquire managerial talent to drive the strategy.
"In the long run, the strategy is key to driving converged services among Vodacom’s current mobile base and supports its digital distribution strategy," he says.
Vodacom also has an option, which is exercisable for 180 days after the deal, to buy an extra 10% stake in InfraCo.
The company also last week signed a deal to buy a controlling stake in the Egyptian unit of parent Vodafone for $2.73bn (R41bn). The cash and share deal gives it a foothold in northern Africa for the first time.
Vodafone Egypt is the country’s market leader. It has 38-million prepaid users and a market share of over 40%.
David Lerche, head of equities at Sanlam Private Wealth, says it’s a substantial whack, but that the price appears fair.
"It will likely be quite easy for Vodacom to integrate the Egyptian business, given the common Vodafone culture," Lerche says. "This provides an additional growth vector for Vodacom, while also simplifying parent Vodafone’s structure. Vodacom’s expertise in the mobile money space will likely facilitate faster deployment of the existing product suite in Egypt."
The deal also puts Vodacom in a stronger position to challenge MTN, whose aggressive expansion — generally in risky markets where others have feared to tread — have made it Africa’s biggest mobile network operator.
MTN
MTN’s shares have enjoyed an incredible run in 2021. The stock is trading at its highest levels since 2015, giving it a market capitalisation of R301.65bn — a R44bn premium over Vodacom.
Much of the share run is borne out by results for the September quarter. Service revenue rose 19.1%, fintech sales were 35% ahead and data revenue grew by a similar margin — led by Nigeria, MTN’s former problem child, and Ghana.
The company has finally been able to repatriate cash out of Nigeria, and MTN is on track to sell its SA towers business, which JPMorgan believes should net the group R13bn. The investment bank — which has a price target of R200 on MTN — recently upgraded its target for MTN’s earnings growth over the next three years. This, it says, gives the company a two-year forward p:e ratio of 10.8, "which we believe is undemanding, given the potential fintech opportunity".
This includes a licence in Nigeria to operate its mobile money platform there, which could see it generate a fifth of its revenue from fintech.
MTN has spent years grappling with regulatory issues in Nigeria. Given Nigeria’s sensitivity to the oil price, which accounts for much of its wealth, MTN has benefited from the rebound in Brent crude. At $83 a barrel, it is almost double where it was a year ago.
Peter Takaendesa, head of equities at Mergence Investment Managers, says this is probably a good time for investors to sell some of their stock. "The risk-reward profile is now less attractive and therefore it is prudent to lock in some gains."
Telkom
Telkom is also keen to capitalise on its fibre portfolio with a plan to separate its Openserve division into a standalone business, as the company says its value is not truly reflected in the share price.
The group’s outgoing boss, Sipho Maseko, says of Openserve: "It’s our core, actually. It’s a beautiful business."
After years spent as the also-ran, close to 60% of Telkom customers are now on new-generation networks using technologies like fibre, as opposed to the old copper wires.
"Eight years ago, we were written off," he says. "People thought we would be like an Eskom or Transnet, but we’ve been able to really recover from the brink of self-destruction, to have a business that is sufficiently diversified, with good growth and I think we’ve built a solid platform."
Besides fibre and an upcoming listing for its property unit, estimated to be worth R13bn, Telkom says it is looking for a joint-venture partner with the financial and technological muscle to help plug the holes at BCX, its IT service unit that has been losing money for a few years now.
Maseko wants an international partner rather than a local one.
BCX has struggled since Telkom bought it out in 2014. While BCX still makes sales — about a third of the group’s total — earnings before interest, tax, depreciation and amortisation dropped 15%, to R1.14bn.
Take your pick
Analysts canvassed by the FM say MTN and Telkom still offer better returns than Vodacom.
Mutooni argues that MTN is still cheap relative to its earnings outlook and emerging market peers, including Vodacom. Telkom has a lot of "latent value" that can be unlocked through the listing of its towers business, and the potential listing of its fibre assets, he says.
Takaendesa likes Telkom, on the grounds that it has the most potential upside over the next few years. He says that valuing Telkom’s fibre assets in Openserve alone, based on the Vodacom deal with CIVH, "results in an outcome that is much more than Telkom’s entire current market valuation".
"We believe the listing of Telkom’s tower assets before the end of March next year should go a long way in focusing investor attention on this significant value hidden in the group."
For MTN, much of its outlook hinges on what happens to the oil price, and whether Nigeria’s notoriously fickle regulators stay sweet.
As for Vodacom, it will have to pull off three major deals — its acquisitions in Ethiopia and Egypt, as well as CIVH — and still satisfy dividend-hungry investors.
That’s no small ask.
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