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Sharenet portfolio manager Dylan Bradfield has taken a deep dive into the telecoms options in our inaugural Fantasy Fund Manager game and offers some canny advice. Bradfield, a value investor at heart, explains in some detail why the shares of Telkom and Blue Label have explosive upside potential – while rivals Vodacom and MTN are fragile. He spoke to Alec Hogg of BizNews
Interview timestamps below:
Dylan Bradfield on how Sharenet is involved with Fantasy Fund Manager and what they help with
Yeah, so from Sharenet we’re starting off as one of the platinum sponsors, we are also bringing to the competition the JSE data. So there’ll be 60 listed JSE shares that the competitors can dive into. You know, we then also took the rationale to partner with like minded companies and now we see an opportunity. We want to create awareness to the youth of South Africa on the benefits of investing. that really aligns with our strategic ambition, repositioning ourselves really as a holistic financial services provider to the public.
On why Telkom and Blue Label are suitable investing opportunities compared to Vodacom and MTN on the short to medium side
If we deep dive into quite a few of the components within the businesses, we are really focusing on telkom for the value like value unlock proposition. What we’ve seen recently is you know the commitment towards the retrenchment. Then that started to move quite swiftly. There was a techcentral article out in February already which intimated that Swiftnet might be taken out by IHS. MTN owns about 25% of that. So already we see some movements within the markets regarding the sale of the assets. And then also on Bloomberg more than a month ago, some indication that Telkom actually had hired Bank of America’s merger and acquisition team to go and find a suitable buyer for Openserve, which is their crown jewel. So we think things are ticking along there. We have had a little bit of concern regarding the valuations for the stock, like Vodacom, trades at a much higher multiple to its peers. And if we had deep dive a little bit to some of the other risks, we’d like to just talk about the political risks as well as the fixed risks between both of the companies. Now, we saw back in 2016, MTN had a bit of a nightmare with, you know, some allegations of some tax accuracies. The government came with them with the $5.2 billion fine. They settled for a third of that. Then again that came in 2018 for another billion dollars. They settled that at $53 million. And also more recently, Vodacom also had a little scare in the DRC.
So, you know, we think that there’s surrounding political risks for both of these two companies. if you take a step back and also look at the effects risks. So again, more recently, looking at MTN’s numbers, they had to now take up scrip dividends in Nigeria as opposed to taking out cash dividends. So, the poor liquidity in some of these African nations is really starting to hurt these guys and that’s going to start being impacted in the dividend. So we think this dividend risk to the bigger players just this morning, Vodacom came out and they had a 20% reduction in their dividend. So, the markets are starting to move and unfortunately starting to move down for the big ones.
On why he likes Blue Label despite it’s bumpy ride
If we talk about the story, which we’ve just told on Telkom. Telkom, through all its assets and assets sale, could probably come down the line to making 40 billion rand. Let’s just say, in asset sales. The current market cap sits at about 16 billion and they’ve got about 16 billion in debt. So on day one, if they had to write down what they did, they’d still be sitting on about 25 billion rand of excess cash. Now that could either come through to the market and as you said before, in the form of a dividend, special dividend. But we think strategically what Telkom or now it would probably just be Telkom mobile once all the assets are done. We think the smarter move here would actually be for a merger with Cell C, but the actual M&A would actually be through Blue Label Telkom. So for those that don’t know, Blue Label effectively owns 49% of Cell C and there is another 25% optionality that sits in a spot that they have an option through to purchase. So Blue label we look at this company, we think it’s a four and a half billion rand market cap. Its 12 month forward cash flow is about 1.4 billion, which is pretty similar to Cell C’s forward cash flow currently. So if you combine those two together, you’re looking at a business around 2.8 billion in free cash flow. What multiple a company would put on that to take it out, you know, would leave that to the imagination of the bankers.
But you know, what we think would really make sense here is that a deal like this would be very cash flow accretive from day one. if we assume that Telkom pays 12 billion rand for Blue Label, you know that would still leave them with an excess of 13 billion cash. So then what you left with is actually a credible number three mobile player that would have a market share of around 20-22% in South Africa, and that would be effectively a good thing for the SA consumers. There would be more pricing within the new NewCo. It will be cash flow positive and it will be focused on primarily the new sector which they’re targeting, which is mobile. So yeah, they can start paying dividends from day one. It’ll also be one of the largest MVNO players in South Africa. Currently, cell C as it sits, has 75% of the MVNO markets and more recently Nedbank actually made a very interesting point in one of their research pieces regarding Capitec Connect, intimating that for every 1 million clients that they could convert, this could net around 320 round EBITDA for cell C. So I think, you know, they have a significant opportunity. Capitec in recent earnings results, did mention that they were targeting a conversion of about 10 million clients from their customer base of about 20 million onto this platform. So a significant runway. And we think the deal would make sense if, you know, certain things had to follow suit.
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