One doesn’t often think of Telkom as operating at a competitive disadvantage, but when it comes to the cellular market, that’s exactly the situation. Compared to Vodacom and MTN, Telkom is a midget in terms of market cap, and while Vodacom and MTN trade at earnings multiples of 14 and 16 times respectively, Telkom trades at just 5 times earnings, indicating how unexcited investors are by the company.
Telkom is in the middle of a strategy to change all of that by becoming a converged ICT services company, instead of a fixed line operator with benefits, which it has been for many years. As part of this transition, Telkom is trying to buy out Business Connexion (BCX), a move it hopes will strengthen its ability to deliver IT services. The deal has previously been vetoed by the Competition Commission, but perhaps this time things will work out. – FD
ALEC HOGG: Well, to get a more in-depth view of how the market is trading today, we’re joined by Viv Govender, Senior Analyst at Vunani Private Clients. Viv, perhaps we can start with that big deal of the day, as Gugu mentioned earlier, BCX being taken over by Telkom. I was just looking back, as I mentioned, at the share price of BCX. It’s been in a decline virtually for the last 15 years. R6.60, although a nice uplift from where it was trading previously, is pretty much bottom end of the market and that’s the one part of it. The second part was that in 2006, when Telkom tried to acquire BCX, it was a very different operation. Remember, Vodacom only listed in 2009. This time around, would you perhaps agree that the Competition Commission would give it the thumbs-up?
VIV GOVENDER: I don’t see why not. If you look at the major competition in the sector, it’s probably MTN and Vodacom, companies that are vastly larger [inaudible 0:00:58.8] larger than Telkom at the moment. Telkom has a market cap of about R20bn. We’re talking about more than ten times that.
ALEC HOGG: Is Vodacom 190?
VIV GOVENDER: One-hundred-and-ninety and MTN is even bigger than that. Vodacom getting hold of Neotel is currently in the works as well. There’s a bit of consolidation happening in the sector and I think most of these operators realise that voice is diminishing, data is increasing, and we have to offer some of these additional services out there, such as Cloud-based things etcetera. I think Telkom tried to do things previously – the media they were looking at, which was a total bust. They tried to expand into Africa and to a certain extent move into Nigeria, which was also a bust. The company is currently trying to do some restructuring, and I think they just realised that they can’t rely on the landlines as they do right now or even some of the fixed data services, without adding some other services to that to get an advantage.
ALEC HOGG: This is a smart deal for them.
VIV GOVENDER: I think it is a necessary deal for them. I think they’ve just lost so much competitive advantage versus the other competitors out there. For example, if you look at MTN’s expansion or infrastructure revamp in Nigeria – R30bn – that’s bigger than the combination of Telkom and BCX if you think about it. Just what they’re Nigeria by, is bigger than this company is. If they want to maintain themselves of course, they have a huge advantage with their fixed line network in this country, but they have to do something to take advantage of that and BCX gives them some opportunities in that regard.
GUGULETHU MFUPHI: We had a look back at our interview on the 15th of April with Benjamin Mophatlane of BCX and what was interesting was that he kept on emphasizing the point that they’re looking into Africa quite strongly, even though they do need to balance the risks there. Telkom also burned its fingers with multi links in Nigeria, so it does seem as though for Telkom, maybe that’s their gateway into the rest of the continent.
VIV GOVENDER: Yes, when it comes to these types of things, moving into Africa is very difficult. We’ve had issues with them. MTN has done extremely well. Vodacom has done some interesting things in Africa, as well. They’re introducing financial services in Tanzania. These kinds of things are very big. I saw some ridiculous numbers. A significant fraction of the total money supply of some of these countries goes through Vodacom’s financial services product on a daily basis, so it is a very popular product in that country. If you’re currently going through Africa, you have to be aware that you need to spend money. These aren’t just places where you can just get profits. You have to reinvest. MTN has seen that. Nigeria’s come out and said [inaudible 0:03:20.8], but you are not giving us the services that we require and therefore, you need to up your game in order to meet these things. I don’t know if Telkom has the ability to go into these bigger markets and invest, as they need to invest, in order to compete with some of the bigger telecoms companies out there. It’s not just our telecoms companies. There are Indian companies as well [inaudible 0:03:37.6] etcetera are all in South Africa and you need to have the financial heft to offer services and infrastructure to these countries.
ALEC HOGG: It’s almost as if our companies had a free run for some years and that’s over, isn’t it? They’re meeting big competition. Ketso Gordhan was telling us – from his perspective – on PPC. They are bumping against a lot of competitors, which is what Investec did years ago – not in the African continent, but elsewhere and now, they’ve virtually pulled out of Australia. I just had a chat with Bernard Kantor before we came in the studio and he was telling me that it was very tough to crack into that market I suppose, in the same way as many companies find it tough to crack into the South African market. Are we going to find it tough to crack into Africa?
VIV GOVENDER: Look, we have advantages and we should make the most of it. For example, look at Shoprite. Shoprite’s doing really well in parts of Africa. Why? They know how to handle the African environment whereas an outside investor such as Walmart has greater difficult handling the developing economy. Our companies should take advantage of the fact that we know the African continent better than our competitors in the developed world does. We don’t know the developed world that well. For example, if you looked at Pick n Pay…also into Australia – fingers burned – or Investec going into the U.K. and going into Australia, Old Mutual going into the U.S.: those things weren’t really profitable. Things that really were profitable were the ventures into Africa and building that infrastructure. Because you’re going into a Greenfields operation, you can give yourself an advantage that will keep you going for decades to come as opposed to trying to get up against established businesses that already have an advantage or an established base in their own markets.
GUGULETHU MFUPHI: And your thoughts on Investec’s numbers today – strong headline earnings per share, up quite significantly – but the share price only up just under two percent…
VIV GOVENDER: I do think that in the developed world especially, looking at the banking industry, you’re up against [inaudible 0:05:25.2] that really don’t like your business. When you go up against a government that says ‘well, if its stated purpose is to make sure there’s less profit in your sector’, it is never a great thing for your company. Look, I do think the U.K. is probably the better part of Europe. There’s still opportunity there. I do think South African businesses are looking reasonably well, but that being said, it’s by no means my favourite bank at the moment.
ALEC HOGG: It has a PE of 20. I like Investec. Up 29 percent in the last year, it trimmed down, they got rid of some of those excesses they had in the build-up to the financial crisis, and they’re quite confident about it. We mentioned South African businesses that went overseas and didn’t succeed, although they’ve done well in the U.K. (Investec, of course), but SABMiller has been our flag-bearer, hasn’t it, in the global sense.
VIV GOVENDER: In a global sense, it’s probably up there with Elon Musk and MTN as our biggest export champions of South Africa. SAB has some reasonable numbers. Their organic growth was quite nice. It’s obviously a positive. There are some cost issues with the currencies, the fluctuation in the emerging market currencies that they’re exposed to. They are good numbers. The market’s reflecting that nicely with the stock up on that news. Going forward, I do think that there’s a lot of expansion possibly, especially in the emerging market. There are huge spaces in the world, for which BA is not yet a daily purchase or a weekly purchase, as it may be in South Africa and some other markets out there, so there’s a huge opportunity for expansion. SAB has shown that it knows how to cultivate its markets, adapt to the particular cultures, and sell their products, but in a better way.
ALEC HOGG: Especially China…when I visited there, Snow, which is the biggest brand in the world – an SAB brand, which of course, they own 49 percent of the company and not 51 – the margins they earn are a fraction of what they earn elsewhere in the world because the Chinese demand value, I guess. As you say, everywhere you go it’s a new learning curve. Outside of that, here at home we have Tsogo Sun who are very much a South African-based business that is also looking to expand internationally, but they seem to be focusing on Africa for their growth.
VIV GOVENDER: Yes, it makes sense. If you look at the disposable income that you have in Africa, it will be going up dramatically. You’ll probably have as many people (I’m talking middle-class) in the developed world standards, who earn enough disposable income to be classified as middle-class, going to developing world standards – probably as much in Africa as you find in other places. If you look for example, at some of the big leisure houses of Vegas etcetera, where are they making their money? [Inaudible 0:07:50.2]. In developing markets, people have a very high tendency to want to go to gaming, to want the leisure, and the activities you get from the offerings of places such as Tsogo Sun. There is opportunity there, but then again, you have to spend some time building it up. You can’t just offer a slapdash service. You need to offer something world-class, because the people you’re going after do have disposable income and they don’t see what you’re offering as being valuable. There are other opportunities out there in the world.
