Vodacom is a more attractive investment opportunity than its long-time rival MTN right now, as its network is proving more resilient to load-shedding and less exposed to fluctuations in foreign exchange rates.
Nedbank senior market analyst Preshendran Odayar told CNBC Africa that there is not much to choose between South Africa’s dominant telecoms companies, but they are exposed to different risks due to the places wherein they operate.
Telecom companies operate in a challenging environment in South Africa and across the continent.
In South Africa, they face elevated load-shedding stages, which impacts their networks’ operation and raises the costs of keeping their networks running with alternative power sources.
Across the continent, they face foreign exchange pressures, particularly in Nigeria, and a slowdown in consumer spending as rising inflation and interest rates impact disposable income.
Obayar said this has resulted in some companies posting strong revenue growth but even stronger cost growth, resulting in decreased profit margins and free cash flow.
While telecom companies face growing regulatory pressure, their main pressure is rising costs.
When it comes to mitigating the effects of these pressures, Vodacom has proven more adept than MTN as it is less exposed to foreign exchange fluctuations and has a more resilient network in South Africa.
Obayar said that MTN is heavily exposed to Nigeria and, subsequently, to fluctuations in the naira-rand and naira-dollar exchange rates.
Since the start of the year, the naira has weakened more than 40% against the rand. This has effectively reduced the earnings of MTN’s largest business unit by 40% in rand terms due to no fault of the company.
In a trading update, MTN estimated that foreign exchange losses reduced its earnings per share by 169 cents, of which 128 cents is from Nigeria, of which approximately 95 cents was incurred in June alone.
MTN is also proving less resilient to load-shedding in South Africa, playing catchup to Vodacom.
Obayar said Vodacom began investing in making its network more resilient ahead of its peers, which is paying dividends now as load-shedding has reached elevated stages.
MTN is successfully catching up but is still behind.
Vodacom has also seen its share price decline over the last 12 months, making it more attractive from a valuation perspective.
Obayar said Nedbank is overweight Vodacom while it remains neutral on MTN.