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Analysts give Cell C management thumbs up

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There is general consensus among analysts that Cell C management has done well to limit the rate of decline at the troubled telco.

Reacting to Cell C’s annual results for the year ending December 2019, analysts say the management team led by CEO Douglas Craigie Stevenson performed well under the circumstances.

SA’s third-largest operator has been bleeding cash for some time, failing to compete meaningfully against leading carriers – Vodacom and MTN – which have superior network infrastructure and deeper pockets for sizeable capex investments.

Cell C’s debt has ballooned from R7.44 billion to R8.24 billion, which the company says was driven by increased capital expenditure and working capital drawdown facilities.

Yesterday, Cell C results showed that in the six months to 31 December 2019, the telco had a strong showing with a R1 billion improvement in earnings before interest, tax, depreciation and amortisation (EBITDA).

Compared to the first half, Cell C said gross margin improved by 9%, operating expenses declined by 18% and EBITDA more than doubled to R1.7 billion.

Cell C said the latest set of results highlights that the turnaround strategy has delivered improved operational efficiencies with the positive impact of these changes flowing through during the latter six months of the reporting period.

Analysts who spoke to ITWeb agree.

Peter Takaendesa, head of equities at Mergence Investment Managers, says: “Management has done well to limit the rate of decline and the second half has shown some encouraging signs in the context of a very difficult business to manage and tough economic environment.

“However, it is still early to tell if the improved second-half performance will be sustained as the industry is continuing to get tougher, given well-known economic challenges and regulatory impact on data pricing.”

According to Takaendesa, Cell C needs to accelerate the recapitalisation process to strengthen its balance sheet and “we need to see a couple of reporting periods with consistent positive free cashflow generation to avoid another recapitalisation failure”.

Over and above that, he says Cell C losing close to three million subscribers was not a train-smash but a welcome development.

“Part of the subscriber loss is necessary for the company to optimise its operating costs and network investment, but Cell C’s challenged financial position is likely to continue to make the company vulnerable to increasing competition for revenue market share,” says Takaendesa.

“Cell C can no longer afford to play the traffic and subscriber market share game as the new network strategy to rely mainly on roaming is not suitable for that business model.”

Similarly, Nesan Nair, senior portfolio manager at Sasfin Securities, says Cell C is certainly moving to a much better product mix, as indicated by the improvement in margin.

“It seems the big drop-off in customers is related to them abandoning non-profitable business rather than chasing market share.”

However, Nair cautions “there’s too many external factors right now to establish whether the business can turnaround – particularly the CompCom review on pricing and the allocation of spectrum”.

He adds: “We just don’t know how Cell C is going to fare in light of these industry-changing events.”

Presenting the financial results yesterday, Craigie Stevenson was optimistic, saying the green shoots of the telco’s turnaround strategy, which was implemented from March 2019 onwards, are now visible.

He said the carrier’s turnaround strategy was focused on operational efficiencies, including cutting costs that do not translate into revenue-generating opportunities, minimising operating expenses and optimising traffic.

“Operationally, the business is stronger and a successful recapitalisation will secure the long-term sustainability of Cell C.”

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