Dead air: Why investors are hanging up on telecom stocks
Caution advised as all four of the sector’s largest players are now trading at, or near, multi-year lows
Telecommunications stocks have been battered since the start of 2018, and all four of the sector’s largest players are now trading at, or near, multi-year lows.
Blue Label Telecoms, which distributes airtime and owns 45% of Cell C, has led the decline, having more than halved in value so far in 2018 . Its stock has fallen from R14.92 at the end of December to a six-year low of R5.87 on Tuesday.
Rocked by its regulatory issues in Nigeria, shares in MTN closed below R70 on Monday for the first time in 12 years, before recovering to R73.06 by Tuesday’s close.
And Vodacom and Telkom share prices are both close to their lowest levels in four years.
While all four companies are facing regulatory and structural headwinds – particularly as traditional voice revenues decline – MTN’s shares have been hammered by Nigerian authorities as well.
The group, which is yet to pay the final instalment of its $1.5bn fine in Nigeria for failing to disconnect unregistered SIM cards, was recently told to return $8.1bn worth of dividends to the country and to pay $2bn for allegedly unpaid taxes.
Earlier this month, JP Morgan cut its MTN price target to R86 from R92 owing to risks in Nigeria, and said it remained “cautious on the outlook for SA mobile prospects”.
Argon Asset Management portfolio manager Mark Ansley said these “black swan” events require a healthier risk premium “to compensate for the risk of being broadsided again”.
MTN’s business in Iran had also been discounted by investors following renewed US sanctions on the country, while returns from MTN SA had been under pressure. “The lack of spectrum availability has escalated costs and regulatory concerns have been a worry,” Ansley said.
Mobile operators in SA face a swathe of new rules aimed at lowering communication costs and stimulating competition.
The Electronic Communications Amendment bill proposes the creation of a wholesale open-access network, and that MTN and Vodacom let rivals use their networks.
Ansley said Vodacom – “the premium operator in SA’s telco sector” – had also been dealing with higher costs, spectrum shortages, an “extremely tough” consumer environment, and regulatory requirements that operators reduce out-of-bundle rates and other prices.
Meanwhile, the market is concerned about Cell C’s rising debt. In the six months to June, Cell C’s net debt grew to R7.3bn, from about R6bn in August 2017.
This sparked a “catastrophic fall” in Blue Label’s shares “as the market begins to factor in that Blue Label will ultimately have to recapitalise Cell C again”.
And while Telkom had become leaner and more efficient, it was still struggling to grow revenue, particularly in the information technology and fibre segments.