The local telecommunications industry is facing a slowdown in growth, and companies are having to invest heavily in infrastructure, say analysts.
Telecoms companies, such as MTN, Vodacom and Telkom, are facing shrinking profits, and have to spend large amounts of money to develop data networks, says Allan Gray equity analyst Jan Silvis.
“Reported revenue is up 16 times in 16 years and, on a combined basis, these three operators have shown a stable compound revenue growth rate of 19% per year,” notes Silvis.
However, he believes this increase in revenue, at levels beyond economic growth, is not sustainable. “No industry can maintain revenue growth in excess of nominal GDP over the very long-term. After an extended period of high growth, we would argue that the risks are to the downside,” says Silvis.
He also points out that revenue has been growing faster than profit, which is a cause for concern. In addition, he says, revenue from Telkom's fixed-line business is declining, and mobile subscribers have reached saturation point.
Feeling the heat
Telkom has already indicated it will spend R6 billion to launch its own mobile operation as fixed-line penetration declines.
Vodacom's interim results presentation, however, showed better results for the local operation, but also raised concerns about the fact that SA is at 100% penetration.
Silvis says the reduction in mobile interconnection rates, which is due to kick in during March, will affect the distribution of profits from termination rates among market participants. “Secondary effects, such as retail price pressure and increased competition, could well reduce the absolute size and distribution of industry profits,” he says.
In addition, the three large telecoms companies are facing increasing competition as new organisations enter the market, and new technologies such as voice over IP become more pervasive.
No choice
Chris Gilmour, an analyst with Absa Investments, adds that the SIM card registration Act will also take its toll on profit. He says it costs operators around R3 a person to register subscribers for the Regulation of Interception of Communications and Provision of Communication-Related Information Act.
“The profit pool is getting squeezed,” he says. Gilmour explains that the reduction in interconnect fees will also impact profitability, and the telecoms companies have to invest.
He says the investment is both an imperative from government, and necessary to fulfil the growing need for data. “It's a catch-22 situation.”
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