Few investors would have picked Blue Label Telecoms and Telkom to comprehensively outperform much larger peers Vodacom and MTN, never mind tech giants Naspers and Prosus, over the past 12 months.
Though Telkom has been our key telecoms sector heavyweight, we certainly did not expect such stellar outperformance, particularly given the sector’s structural pressures and general lack of investor enthusiasm about its prospects.
While the herd fawned over tech darlings, with Tencent, Naspers and Prosus benefiting from AI mania and its seemingly unlimited blue-sky potential, Telkom was distinctly out of favour but poised to deliver the ultimate valuation barometer — a strong recovery in free cash flow generation.
Though hindsight will always be a perfect science, it is worth examining the performance of the South African operators as interesting themes evolve.
By mid-July 2025, Telkom had delivered 147% over 12 months, while MTN (up 82%) and Vodacom (up 45%) also delivered strong investment returns. Blue Label Telecoms, with its Cell C exposure, is the JSE’s best-performing share over the same period, with an incredible return of 242%.
If asked to rank the valuation prospects for the listed telecoms operators over the next 12 months, we become significantly more cautious, given sector rerating driven by a strong consensus-upgrade cycle over the past year. Looking ahead, we believe a few key themes are likely to remain significant determinants of performance.
As African countries beyond South Africa recover from significant currency devaluation and inflation, regulated price increases are driving strong revenue and free cash flow recovery in key operating regions for MTN (Nigeria, Ghana) and Vodacom (Egypt).
Significant currency devaluations in Nigeria and Egypt have stabilised, allowing strong local currency revenue growth, supported by regulated price increases to drive consensus MTN and Vodacom rand estimates higher, supporting the sector rerating over the past year.
Ghana’s debt restructuring triggered a world-beating rally in the cedi over the past 12 months, providing further impetus to MTN’s upgrade cycle and rerating. Meanwhile, a series of price increases granted by the Egyptian regulator prompted a significant improvement in Vodacom’s outlook, supporting its rerating.
Investor concern has eased regarding the disruption that low-earth orbit satellite services such as Starlink might cause across the continent. Initial competition concerns turned to recognition that the operators will most likely be resellers of satellite services, which could complement their offerings.
In addition, African operators have announced partnerships with satellite operators to provide cheaper backhaul costs from remote rural mobile sites, thus driving efficiency gains and potentially broadening market penetration.
Can Telkom still outperform its larger peers?
While Vodacom and MTN have benefited from an Africa-led recovery, Telkom’s focus on pushing South African mobile revenue growth — and cutting costs across mobile, fibre and enterprise businesses, as well as reducing debt — has supported its peer-beating free cash flow recovery. This has driven its relative outperformance.
A potential upside to Telkom’s valuation could be sector consolidation
Though Telkom’s easier wins, such as much-reduced mobile roaming costs and relief from load-shedding, have largely been extracted, management deserves credit for executing the Swiftnet tower sale, reducing debt substantially, maintaining tight reins on capital investment and ultimately delivering much-improved free cash flow.
To sustain strong mobile revenue growth, Telkom recently increased mobile prices, following Vodacom and MTN’s lead to recover the higher network costs caused by load-shedding. The price hike sustains returns on the substantial capital investment required to build network resilience.
A potential upside to Telkom’s valuation could be sector consolidation. Now that Vodacom, Community Investment Ventures Holdings and the Competition Commission have reached agreement on conditions related to the proposed Maziv transaction, it may open a path to suitor interest in Telkom.
Investors will remember that MTN has previously courted Telkom — with a particular interest in its Openserve fibre network. Should a similar scenario be repeated, this would support Telkom’s valuation levels and may even result in further upside — an interesting potential underpin to the investment case.
Blue Label’s star performance over the past 12 months has been triggered by its planned restructuring and potential separate listing of Cell C.
It could be argued that the market is already pricing in much of the potential value unlock, given the myriad company-specific and macroeconomic risks. If Cell C were to be listed separately and Blue Label maintained a significant equity stake, Cell C’s free float would likely place it squarely in the small-cap universe with the attendant liquidity challenges.
Where Cell C potentially offers a unique value proposition is its positioning as a mobile virtual network operator (MVNO) and aggregator, benefiting from a growing portfolio of MVNO clients such as Capitec.
Capitec has already captured more than 1-million voice and data customers and could plausibly reach as many as 5-million over the next decade, given the strength of its existing distribution platform. This could pose a material threat to the local growth of Vodacom, MTN and Telkom, with Capitec well-positioned to leverage its banking infrastructure for broader distribution.
The telecoms sector’s recent relative outperformance over the likes of Naspers and Prosus highlights that structurally unattractive sectors can deliver portfolio alpha despite unfavourable long-run fundamentals. As always, timing is key in capturing that alpha, which is often notoriously difficult even for the most seasoned investors.
Though we expect sector news flow to remain elevated, with spectrum policy updates, infrastructure-sharing debates and potential mergers or acquisitions all in play, the sector is highly unlikely to continue generating the kind of returns it has over the past year. For investors, operators and regulators alike, these developments signal both challenges and significant opportunities in shaping the investment outlook over the next 12 months.
Kennedy-Good is senior equity analyst at Prescient Securities
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