Telkom the 'best call' to weather regulatory storm
In face of a raft of new laws, Telkom is best placed to mitigate risk over the next 12 months, says JP Morgan
The second half of 2018 will be a “defining period for regulatory risk” for the telecommunications sector, but Telkom is in the best position to weather the storm, according investment bank JP Morgan.
Telecommunications network operators face a swathe of new regulations and market inquiries aimed at extending broadband coverage and lowering the costs to communicate, and some of the proposals on the table have irked them.
Vodacom CEO Shameel Joosub has gone so far as to say the impending Electronic Communications Amendment (ECA) Bill is the industry’s equivalent of the mining charter, which has been blamed for denting investor appetite in the resources sector.One of the most contentious recommendations in the ECA Bill is the establishment of a wireless open-access network (Woan) that would force operators to share spectrum, or radio frequencies. Vodacom and some of its peers want regulators to rather focus on releasing new spectra so they can roll out services faster and cheaper.
“We believe Telkom is best placed among SA telecoms to mitigate regulatory risk over the next 12 months,” JP Morgan said in a report last week.
This was partly because of the government’s move towards “asymmetric mobile regulation” that would affect the largest players most. Asymmetric regulatory model allows the smaller operators to charge their larger competitors a higher price for terminating calls while the small operators pay a lesser fee for the same service.
JP Morgan expected incumbent mobile operators to get access to “some” high-demand spectra, but said they were likely to face pressure on data growth over the medium term.“Telkom's investment case is less sensitive to a high-demand spectrum allocation, in our view, while its industry-low mobile data pricing positions it for ongoing share gains.
“In a scenario where spectrum is not issued to incumbent mobile operators, we see Telkom as the most defensive of the SA telecom names. Indeed, we believe it could even benefit from an asymmetric spectrum allocation to the Woan and support its rollout.”
JP Morgan has a sell recommendation for MTN, buy recommendation on Telkom, and a hold recommendation for Vodacom.
Mergence Investment Managers portfolio manager Peter Takaendesa said Mergence had for some time preferred MTN and Telkom’s shares to Vodacom’s, largely due to relative valuations.“MTN is coming off a very low base and lots of the regulations that are being proposed in SA have already been implemented in MTN’s other markets, including Nigeria,” he said.
Telkom, meanwhile, was cheap at current valuations and offered an attractive dividend that was not at risk of being cut due to its low debt levels.
However, Takaendesa said that while Vodacom had been expensive, the recent share selloff was making it more attractive.Takaendesa was optimistic that the regulatory impasse “will be resolved in a logical way – I don’t think the government will take a very hard stance”.
This was partly because network operators were making progress with black empowerment, were lowering the cost to communicate and had largely not bought into the Woan concept.
“It’s very likely to be a hybrid model where they’re allocated some spectrum but they have to also commit to use that wholesale network.”
Vodacom’s shares have slipped from above R185 in August 2017 to R124.57 on Friday. Over the same period, MTN has declined from above R120 a share to R106.68 and Telkom has declined from R64.03 to R47.67.