In the past 12 months, AltX-listed Huge Group’s share price has defied gravity, soaring nearly 400%, making it one of the best performing shares on the JSE. At face value, though, the share’s sterling performance makes little sense.
Huge Group has been buying back its own shares over the past year — which will help boost earnings per share — but the company operates in the same least-cost routing (LCR) market that has seen the share prices of rival companies Vox Telecom and TeleMasters Holdings plummet.
Last Friday, Vox announced it would impair R745m in goodwill and intangible assets, mostly related to its acquisition of LCR specialist Orion Telecom (now Vox Orion), sending its share price down 11,9% by the day’s close.
Vox CEO Tony van Marken says the write-down was inevitable after the Independent Communications Authority of SA (Icasa) cut wholesale call termination rates — the fees the operators charge each other to carry calls onto their networks.
Companies like Vox Orion and Huge Group have taken advantage of arbitrage opportunities, routing calls over different networks to offer corporate customers lower effective telecommunications tariffs.
But industry players and analysts have long warned that if termination rates are cut, the opportunities for arbitrage will be reduced — and will go away entirely below a certain point.
Vox Telecom is scrambling to convert its LCR clients onto its on own network to offset what it regards as the looming decimation of LCR.
Van Marken says Vox Orion is not buying any new Sim cards from the mobile operators, which LCR players use to route calls, believing the traditional LCR market is fading fast as termination rates come down.
But Huge Group CEO James Herbst says Van Marken and other prophets of LCR’s doom have got it all wrong. And, if Huge’s share price is any reflection (the share trades on razor-thin volumes), it appears investors believe him.
Though it’s off its recent highs, Huge Group’s share price is still up 129% in six months.
Within hours of Vox alerting shareholders about its plan to write off goodwill, Huge issued a press release insisting Icasa’s rate cuts were “great news” for the company and the broader LCR industry.
“This confirms and enhances the inherent value of Huge Telecom and we foresee the potential for significant financial benefits as a result of the reductions,” Herbst says in the release.
He says the lower rates “will drive down input costs, increase demand, and deliver growth in the voice traffic generated by Huge Telecom’s 6 000 clients”.
Icasa will reduce mobile termination rates to 73c/minute in March 2011, with further cuts in 2012 and 2013 taking the rate to just 40c/minute. They were already cut in March this year, from R1,25/minute in peak times to 89c/minute.
The cuts have prompted the mobile operators to rein in their costs, with MTN and Vodacom both recently ending the payment of connection incentive bonuses for each Sim connected to their networks.
The cuts are prompting rivals to invest millions in their own networks. But Herbst says they’re wrong to do this.
“The continued existence of the LCR industry has nothing to do with interconnect,” he says.
“Building your own network is expensive. You need Cisco engineers. Costs are much lower in LCR.”
Herbst says Huge offers value to telecoms operators in that it serves 6 000 business customers and carries 500m voice minutes a year. And he says because he’s not building his own network, he’s not perceived by the operators as a threat.
“We have no reason to fight with the operators because we don’t want to be an operator,” he says.
But relations between Huge Group and MTN are strained. Herbst denies market talk that MTN won’t supply Huge with Sim cards. But he admits relations are difficult after Huge tried unsuccessfully to buy service provider iTalk Cellular, a deal strongly opposed by MTN.
Herbst plays down the bad blood between the companies. “We don’t necessarily have to have two or three suppliers,” he says. “There are some very interesting permutations possible in this game.” — Duncan McLeod, TechCentral