Telcos to remain under pressure

Shares in the big three telecommunications companies are expected to remain under the weather as the credit crunch, interconnect concerns and slowing growth take their toll on the groups.

Chris Gilmour, an analyst with Absa Investments, says telcos are “under major pressure” to find new sources of revenue, and this is reflecting in their share prices.

He points to several issues, such as concerns over what impact an expected cut in interconnect will have, and slowing penetration in markets. “Fundamentally, they are all not looking as good as they used to.”

Frost & Sullivan ICT industry analyst Spiwe Chireka says telcos are facing growth constraints, and this could impact their shares.

MTN closed at R117.50, at the end of last month, which was a slight respite from its R109 close a year ago. However, the stock has been in play and - after the Bharti Airtel deal was cancelled - rose to R129 before coming back down. Yesterday, it closed at R114.99.

“MTN has been the subject of an unsolicited and then a solicited bid from Bharti Airtel for the past year or so,” says Gilmour. As the share has been “in play”, its price was artificially held up, he adds.

MTN is SA's only telco that is showing any growth outside of SA, but this too could stagnate, he says, as the company runs out of subscribers to sign up.

Chireka adds that MTN is a bit more balanced than Vodacom and Telkom, as it has operations in Africa that could aid it. However, MTN has already seen the SIM card registration Act bite into its subscriber base - and this trend is expected to be reflected in Vodacom.

Chireka says the full impact of the Regulation of Interception of Communications and Provision of Communication-Related Information Act (RICA) will be seen on Monday, when Vodacom reports its results.

However, she points out that the Democratic Republic of Congo is seeing slower growth as consumers cut back on spending. This, and expected lower numbers in SA, will impact the company, Chireka explains.

Vodacom, while being SA's biggest cellular company, does not have many operations in Africa and is seeing slowing growth in SA - its largest market. Gilmour says Vodacom is ex-growth, a fact that was seen in its latest trading update.

Last month, Vodacom said it would report a drop in headline earnings per share when it releases its half year results on Monday, as financial costs and a tough environment take their toll.

The cellular company said headline earnings per share would be between 10% and 20% lower for the six months to September, and earnings per share would drop by between 95% and 105%.

Vodacom opened at R59 when it listed on 18 May, before climbing to R63 in the early hours of trade. It closed its opening day at R59.50, but by the end of October, had settled to R52.87. Yesterday, the stock closed at R51.55.

Telkom, which unbundled its Vodacom stake when the cellular company listed separately, has seen its share roller-coast in the past year. Yesterday, the share closed at R41.60.

At the end of October, it was trading at R44, down from the previous year's R53.41. However, on 21 May - the Monday after Vodacom listed - Telkom was trading at R84.35, only to fall to its lowest price in five years at R33 a month later.

Telkom has seen a decline in fixed-line penetration, says Gilmour, and has yet to get its African expansion and mobile strategies off the ground.

Chireka adds that the company may battle to get subscribers from the current networks, and SA already has a penetration rate of more than 100%. As a result, Telkom will have to find innovative solutions to lure customers, such as bundling mobile and fixed offerings.