Brokerage Barnard Jacobs Mellet Securities has revised its share price target for telecommunications group Vodacom sharply downward in anticipation of a significant fall in interconnection rates in SA that could hit the group’s profits.
BJM Securities has also lowered its target price for MTN, but not to the same degree as Vodacom, given that the former is less exposed to the SA market.
Combining the effects of voice-over-Internet Protocol (VoIP) technology and lower mobile interconnection rates, the “longer-term profitability of the mobile operators looks under threat”, BJM Securities says in a report to its clients.
The report, which was leaked to TechCentral by one of the brokerage’s clients, shows that there is “at least 18% downside for Vodacom SA’s Ebitda and 13% downside for MTN SA’s Ebitda, assuming overheads can be reduced by 30%.”
Ebitda is a financial term meaning a company’s earnings, before interest, tax, depreciation and amortisation.
BJM Securities has downgraded Vodacom from “overweight” to “neutral” and slashed its target for the share price from R84 to R60; it has cut its target for MTN, which is much less reliant on the SA market than Vodacom, from R124 to R120 and remains “neutral” on the share.
At lunchtime on Wednesday, Vodacom was trading down 2,7% at R54,84; MTN was up 0,9% at R125,67.
Political pressure is mounting for interconnection rates, the fees the operators charge one another to carry calls from each other’s networks, to drop. The rates the mobile operators charge — R1,25/minute in peak times — looks set to be reduced, with potentially big implications for their long-term profitability.
Industry regulator, the Independent Communications Authority of SA (Icasa), on Tuesdsay met with the big operators, which have all agreed to produce a findings document by end-December on how rates should be brought down. Icasa wants interconnection rates to begin falling as soon as February 2010.
The 35-page BJM Securities report examines in detail the financial implications of a sharp cut in mobile interconnection rates. It also contemplates a “worst-case scenario” for the mobile operators.
The report finds that the “downside profit risk for the mobile operators seems to be far greater than for the Telkom fixed-line business”.
It says the mobile operators will be forced to pass through a significant portion of a cut in interconnection rates to consumers in the form of lower tariffs. “Our sense is that price elasticity of demand is unlikely to be high enough to compensate fully for the tariff cuts, resulting in reduced revenues for the mobile operators.”
MTN is likely to feel the impact of a cut in interconnection rates less than Vodacom. “MTN’s geographic diversification helps shield the group from SA-specific issues, though we believe VoIP has the potential of ultimately disrupting markets in MTN’s other territories as well.”
BJM Securities emphasises, however, that the changes won’t happen overnight – prices are likely to come down over a period of three to five years. Also, regulatory inertia and obstruction by the mobile providers could reduce downside risk for the operators in the short term. — Duncan McLeod, TechCentral
