Nedbank’s outlook for African telecos sector

The African telecommunications sector has been facing a myriad of challenges in the first half of the year, with pressure stemming from foreign exchange fluctuations and inflationary trends. Preshendran Odayar, Senior Market Analyst at Nedbank, sheds light on the tough operating environment for telcos across the continent. Despite strong service revenue growth, companies like MTN Nigeria are grappling with rising costs and negative EBITDA impacts. The landscape remains treacherous as inflation levels soar and foreign exchange dynamics add to the complexities faced by these telecom giants. The biggest hurdles for these companies encompass escalating costs and regulatory pressures. In markets like Nigeria, regulatory hurdles impede price adjustments despite inflationary spikes. Additionally, the energy crisis in South Africa poses a significant challenge, prompting companies to invest in power resilience measures. The reliance on external power providers for network operations during load shedding escalates operational costs, further straining the financial health of telcos. While the telecommunications sector is dominated by major players like MTN and Vodacom, performance differentials exist within the industry. Odayar rates MTN as neutral, while positioning Vodacom as overweight due to its proactive approach in mitigating power-related challenges. The investment in power resilience positions Vodacom favorably compared to its counterparts. Moreover, with the propensity of network downtime, power resilience emerges as a critical factor defining network reliability within the industry. Corporate activities within the sector have been gaining momentum, with mergers and acquisitions taking center stage. Vodacom's proposed collaboration with Etisalat signifies the evolving landscape of telecom alliances. In South Africa, the Vodacom-CIVH merger on fiber infrastructure awaits competition commission approval, underscoring the strategic recalibration within the sector. Telcom's strategic initiatives to divest tower assets and seek partnerships in fiber business highlight the sector's dynamic nature. The emergence of smaller players in the fiber space underscores the trajectory towards consolidation, signaling upcoming transformations in the telecom domain. The emphasis on FinTech within the telecommunications landscape underscores a shifting paradigm towards financial services integration. The evolution from traditional mobile money services to advanced payments, loans, and insurance offerings signifies an expansive opportunity horizon for telcos. The lack of a robust banking network in certain African regions paves the way for innovative FinTech solutions to thrive. Markets like Kenya and Ghana exhibit strong performance in mobile money ventures, propelling telecom companies to explore diversified financial offerings beyond the traditional revenue streams. With Telkom emerging as a pivotal player in the South African telecom arena, the spotlight falls on its potential M&A prospects. While Telkom stands resilient as a standalone entity, the M&A realm presents compelling opportunities for value unlocking. Odayar's assessment of Telkom's intrinsic value juxtaposed with market dynamics reflects a nuanced perspective on the company's growth trajectory. The CEO's vision for a share price milestone of 60 rand per share underscores the strategic imperatives driving Telkom's journey towards enhanced shareholder value. The strategic collaborations with the government in leveraging data center assets elucidate Telkom's proactive stance in fostering synergies with regulatory stakeholders. The government's strategic utilization of Telkom's data centers underscores the company's pivotal role in the digital infrastructure ecosystem. The symbiotic relationship between Telkom and government entities reflects a strategic alignment aimed at enhancing data security and operational efficiencies. As the African telco sector navigates through a volatile landscape fraught with operational challenges and strategic opportunities, the synergy between market dynamics and corporate actions underscores a transformative phase for the industry. The resilience exhibited by telecom giants amidst regulatory hurdles and economic headwinds paints a picture of adaptive innovation and strategic recalibration to foster sustainability and growth in a dynamic marketplace.