Vodacom, Telkom and MTN share prices impact after Competition Commission findings

The Competition Commission inquiry on telecom giants

After an inquiry into data pricing which commenced in August 2017, the Competition Commission has now released its findings to the public.

Some of the salient features relating to prepaid data pricing are as follows:

• Benchmark and profitability analysis confirm South African prepaid data prices are too high
• Vodacom Group Ltd and MTN Group Ltd pricing are higher than the median pricing in both Africa and a broader international comparative
• Vodacom and MTN data pricing in South Africa are higher than what is charged by these companies is most of the other African jurisdictions in which they operate

Essentially the ruling has found that the MTN and Vodacom dominance in the local market has created a duopoly in the South Africa and that their pricing on prepaid data bundles is excessive and in need of remediation.

Some of the remedial action required is as follows:

• MTN and Vodacom are required to lower prepaid data pricing by between 30% and 50% within the next two months
• Operators must agree within 3 months to offer all prepaid subscribers’ free data daily (referred to as a ‘lifeline package”)
• Operators must agree within 3 months to providing “zero rated” (free) content to certain industry and educational organisations
• Operators must agree within 3 months to provided subscribers information on pricing and data usage
• MTN and Vodacom are recommended to significantly reduce wholesale pricing on their networks to smaller providers (Telkom SA SOC Ltdand Cell C)

Telkom’s major subsidiary Openserve has also been flagged by the Competition Commission and is required to reduce the pricing of IP connect service within two months.

Impact on Telkom, Vodacom and MTN shares, and what happens next?

The Competition Commission’s report has been met with concern by Telkom, Vodacom and MTN. Questions have been raised about the commissions methodology in calculating prepaid data pricing which often includes bonus bundles. Telecommunications providers have also argued that the regulator needs to allocate more spectrum for them to help bring down costs within the country.

Besides the obvious impact the sudden drop in data pricing will have on earnings (most substantially Vodacom who derives a greater portion of its earnings from the domestic market than MTN), markets will be wondering about the future of mobile infrastructure within the country and the effect on unemployment.

MTN has noted that it has spent R50bn on infrastructure in the last five years and had planned on spending a further R50bn over the next 5 years. Vodacom to has spent around R10bn per year expanding and upgrading its towers. Less reward for infrastructure spend provides a much lower incentive for these providers to invest in the South African economy.

It does appear likely that the findings of the Competition Commission will be challenged in court once the full detailed document is released (the Competition Commission has as of yet, only released a summary of its findings to the public).

However, reducing local data costs does reduce the barrier to access for the broader public. Lower costs are expected to equate to increased data usage volumes for providers which could help offset some of the initial losses stemming from the dramatic drop in pricing. Telecommunications providers will need to make sure that their current infrastructure can handle the increased volumes.

JSE listed telecommunication shares – Broker ratings and client views

Following the news from the competition authority we look at how the major players, MTN, Vodacom and Telkom are faring in the view of both institutional and retail market participants.

The below table highlights current analyst ratings (as polled by Thomson Reuters), as well as looks at how IG clients who are trading locally listed telecommunication share are placed at the time of writing.

The Thomson Reuters analyst ratings and IG Client sentiment are features available on IG’s trading platform. The ratings and sentiment indicators are snapshots of these views on the respective shares as of the 11^th of December 2019.

The telecommunications sector carries an average long-term analyst rating of ‘hold’. The Vodacom Group has the most ‘strong buy’ recommendations (3), although along with Telkom also has the most ‘sell’ ratings (4). The MTN Group has the least ‘sell’ recommendations (1).

In terms of IG client sentiment data, Vodacom, closely followed by MTN has the most ‘long’ open interest and the least short open interest (as of the 9^th of December 2019) amongst IG clients. Telkom is also favoured by IG clients with 81% of traders having a ‘long’ open interest in the share.

“Long” means that traders with open positions on the company expect the price to rise in the near term, while ‘short’ means that traders with open positions on the company expect the price to fall in the near term.