South African telecommunications companies feel the heat

Vodacom, MTN, and Telkom had a difficult first six months of the year, and their share price performance reflects this pain.

Vodacom and MTN are South Africa’s two biggest telecommunications operators, and both struggled with international problems.

Vodacom’s earnings took a significant hit because of Egypt’s currency devaluation. It owns a 55% stake in Vodafone Egypt.

Egypt is Vodacom’s second-biggest market after South Africa, and the country’s decision to devalue its pound hurt Vodacom’s earnings.

In March 2024, Egypt announced macroeconomic reforms, including monetary policy tightening and the free float of the Egyptian pound.

The currency depreciated materially against the US dollar but with a significant associated liquidity improvement in the inter-bank foreign exchange market.

Egypt performed well in local currency terms and contributed R13.1 billion, or 23.3%, of group EBITDA (earnings before interest, taxes, depreciation, and amortisation).

The reported EBITDA margin of 40.2% was impacted by foreign exchange losses on working capital balances due to the Egyptian pound’s depreciation.

Investors were concerned about the impact of Egypt’s currency devaluation, which pressured Vodacom’s share price.

Added to that was an adverse Supreme Court of Appeal (SCA) judgment which entitled Please Call Me’s Kenneth Nkosana Makate to R29 billion.

Vodacom applied for leave to appeal the SCA judgment to the Constitutional Court. Makate is opposing Vodacom’s application.

The amount ultimately payable to Makate remains uncertain and will depend on whether the Constitutional Court grants Vodacom leave to appeal.

Vodacom’s share price declined by 9% in the first six months of the year as investors were concerned about the company’s challenges.

MTN had an even worse time on the market. Its share price plummeted by 26% due to the collapse of the Nigerian Naira.

Nigeria is MTN’s biggest market and the one where it makes a large chunk of its money. In the 2022 financial year, Nigeria contributed 40% to MTN’s total service revenue.

The country is even more important to MTN’s bottom line. MTN contributed 46% to the operator’s earnings before interest, taxes, depreciation, and amortization (EBITDA).

In June 2023, Nigeria lifted the US dollar peg on its local currency, allowing the Naira to trade freely.

However, government-regulated and multinational corporate transactions still had to be done at an official exchange rate. The official Naira exchange rate lost 27% overnight.

At the end of January, the Naira experienced another extreme currency devaluation, where it fell by 40% relative to the US dollar in a single day.

This was due to the central bank revaluing the official exchange rate, bringing it closer to the black market rate.

In its full-year trading statement, MTN said its financial performance has been negatively affected by the sharp devaluation of the Naira.

Investors took note, and MTN’s share price declined by 39% over the last twelve months. In the first six months of 2024, it dropped by 26%.

Telkom does not have significant international operations. However, it has its challenges in South Africa.

Sanelisiwe Tofile from All Weather Capital said there is a lack of strategic direction at the operator, which is up against fierce competitors.

“Telkom faces a lot of price pressure in South Africa, and there is a big regulatory burden on telecoms operators,” he said.

As the third largest mobile operator, it risks being stuck in no-mans-land without big upside and good growth opportunities.

Alex Duys from Umthombo Wealth said Telkom holds great potential but needs an activist investor to unlock value.

However, it is unlikely that this will happen with the South African government as the controlling shareholder.

Share performance of top telecommunications companies

The table below shows the share price performance of Vodacom, MTN, and Telkom in the first six months of 2024.

Company	Share price move
Vodacom	-9.17%
Telkom	-23.50%
MTN	-26.11%