Telkom should list soon so that investors, including government, can take advantage of the slump in the telecommunications sector and benefit on the upswing, says Steve Minnaar of Old Mutual Asset Managers.
]Minnaar, who is head of the group`s telecommunications, multimedia and technology (TMT) research, says he remains cautiously optimistic about telecommunications shares, although the fund manager is happy to stay on the sidelines for the time being.
"If Telkom had to list now, government would get a more realistic price for the shares, and investors would be a lot more satisfied that they are paying close to the true price," he says.
Government intends to list public utility Telkom in the first quarter of 2003 as part of a privatisation programme relating to state assets. Market expectations are that up to 30% of Telkom will be sold through a public offering listed on the JSE and the New York Stock Exchange.
If Telkom had to list now, government would get a more realistic price for the shares, and investors would be a lot more satisfied that they are paying close to the true price.
Steve Minnaar, Old Mutual Asset Managers.
Telkom`s privatisation is part of an ambitious government strategy to raise about R18 billion through the full and partial sale of state assets. The listing of Telkom has been delayed several times, largely due to regulatory issues.
As for the rest of the TMT sector, Minnaar feels there is still reason to be cautiously optimistic, although there are a number of factors that have to be taken into account when examining the shares.
"People will buy and use IT equipment again, but there is no real driver out there to spark strong renewed interest in the sector. Furthermore, there has not been enough consolidation of the companies in the US and so we are happy to be on the sidelines for the time being," he says.
Minnaar says telecommunications shares have taken most of the pain during the recent market falls. "However, they are looking much healthier now and fundamentals within the industry are improving. Most of the companies have got good cash flows and this is important as they are able to reduce their capital expenditure."
He says there is still some concern about the local regulator after the slow pace in issuing the third cellular phone licence. "But we think they have learnt a lot from that. While there is no immediate catalyst to drive telecoms shares, the groundswell is positive and they should rise in the longer term."
Examining SA telecoms shares specifically, Minnaar says they have huge opportunities for growth into other African markets and this should help them to continue to expand while capitalising on the South African business.
He says M-Cell, which owns 100% of cellphone provider MTN, is undervalued. "The company has a good SA business with strong cash flow generation and an option on huge African growth through its investments in Nigeria."
VenFin, used as a proxy for MTN rival Vodacom, is also undervalued and has the same market opportunities as M-Cell, although its SA business is more extensive, says Minnaar. VenFin has a forward price earnings ratio (PE) of 2.3 to March 2003 and it should be higher, he says. Some analysts feel the forward PE should be 12 to 14.
Turning to SA IT shares, Minnaar says Datatec remains a favourite as the company has settled well into its niche of being a distributor. "Datatec is in a low margin business and it has recognised that and has done a remarkable job of trimming the fat, while staying within the global distribution arena."
Minnaar says that while US networking products manufacturer Cisco recently released better-than-expected results, this was not helping embattled networking installer Dimension Data. "The margins in this industry have moved higher up the food chain and Cisco has made it clear that it is going to look after number one first. DiData will continue to struggle in a low margin, highly competitive market," he says.
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