MTN, Telkom downgrades to have minimal impact

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MTN group CEO Ralph Mupita.
MTN group CEO Ralph Mupita.

SA’s telecoms sector is expected to remain relatively resilient compared to other more domestic consumer sectors in the near future, despite the downgrades of MTN and Telkom to junk status by rating agency Moody’s last week.

The two telcos were downgraded by Moody’s Investors Service in line with SA's recent sovereign rating downgrade.

Recently, SA received a double blow from two of the main ratings agencies, Moody's and Fitch, which are both concerned about the country’s fiscal position due to the effects of the COVID-19 lockdown.

Moody's downgraded the country's credit rating one notch to BA2 and maintained a negative outlook.

Fitch had earlier downgraded SA’s credit rating deeper into “junk” status, citing the lack of a clear path towards debt stabilisation and higher economic growth. Moody’s Investors Service last week then downgraded both MTN and Telkom.

Analysts say the latest debt rating downgrades on the companies are largely “house-keeping” in nature to align with the sovereign rating.

The downgrade for both telcos comes on the back of strong financial performances in recent months by both companies.

High yielding season

Buoyed by increased data demand, Telkom’s mobile division solidified its position as SA’s third mobile operator in the six months ending September, adding two million new customers in the period.

In the first half of the year, Telkom’s mobile service revenue was up by 47.8% to R8.2 billion, while mobile data revenue increased by 53.8%.

Telkom’s mobile data traffic is up 81%, which the company says is attributable to the increase of people working from home and online schooling due to the COVID-19-induced national lockdown.

MTN added 12 million subscribers and 5.3 million active data users in its third quarter. The mobile carrier reached a significant milestone in its goal to enable greater financial inclusion by surpassing the 40 million mobile money subscribers mark, an addition of 3.5 million in the quarter.

During the period, MTN recorded growth in voice revenue of 3.9%, which MTN CEO Ralph Mupita says reflects an encouraging recovery supported by the easing of lockdown restrictions and the gradual reopening of the economies in the group’s markets.

Data revenue grew by 31.9%, bolstered by increased demand for work from home services, digital entertainment as well as online education offerings.

According to Mupita, MTN also completed the exit from its 18.9% investment in Pan-African e-commerce platform Jumia, netting R2.3 billion from the deal.

Market update

Reacting to the downgrade on Friday, MTN said Moody’s action is a direct consequence of the rating action on the South African sovereign and reflects MTN’s material exposure to South Africa which is a key market for the telco.

“Moody’s has also considered MTN’s other key market Nigeria (B2 negative) where it views the country risk as elevated and where the market is currently experiencing shortage of dollar liquidity.

“Notwithstanding the ratings action, Moody’s has acknowledged the company’s financial and operating performance has been resilient in the current year despite the challenges created by the COVID-19 pandemic.”

Equally, Telkom said: “The rating downgrade is a direct consequence of the rating action Moody’s took on 20 November 2020, to downgrade the South African sovereign rating by one notch to Ba2 with a negative outlook.

“Telkom’s operations and revenues are concentrated in South Africa, and as a result, its credit rating is highly correlated to the country’s economic environment. Moody’s notes the company’s strong credit metrics and good liquidity, and will monitor Telkom’s performance given the prevailing economic conditions.”

Commenting on the downgrades, Peter Takaendesa, head of equities at Mergence Investment Managers, says: “Of course, the rating agencies are concerned more about the government finances outlook and implications on the rest of the economy. We believe most of this rating downgrade was already reflected in the debt markets as bond yields have remained relatively high in line with emerging market countries at lower ratings than South Africa.

“We therefore expect minimal near-term impact on the telecoms sector, given strong industry profit growth in this environment, but new spectrum funding in 2021 and the performance of the economy over the next few years will have implications on funding costs for the telecoms sectors.

“However, we expect the telecoms sector to remain relatively resilient compared to other more cyclical domestic consumer sectors if economic conditions become more challenging as predicted or implied by the negative country credit ratings actions by the rating agencies.”

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