Best South African telecom shares: MTN, Telkom and Vodacom compared

The following article looks at South Africa’s top three telecommunications companies on the JSE Top40 Index (J200) to see how they compare in terms of broker ratings, total returns, and fundamental valuations.

The primary Telecommunications companies on the JSE:

1. MTN Group (MTN)

2. Telkom SA SOC (TKG)

3. Vodacom Group Ltd (VOD)

MTN, Telkom and Vodacom shares – Total Returns

The total returns figures on the chart above account for both capital gains and dividends paid over the one month, three month and year to date look back periods as of the 16^th of November 2022.

The telecommunications sector has been under pressure in 2022 with MTN, Vodacom and Telkom all yielding negative total returns for the year to date. Vodacom has been the relative outperformer having posted the smallest loss over this look back period, while Telkom has performed the worst.

Telkom has underperformed its peers and yielded a negative total return over a one month, three month and year to date look back period.

MTN, Telkom and Vodacom shares – Peer Valuations

As of the 16^th of November 2022, Telkom trades at the most conservative valuation in terms of trailing and forward-looking Price to Earnings (P/E) multiples. Earnings growth for the group has been slowing and the company does not currently pay a dividend. The group has paused its dividend offering for a three-year cycle of which it is currently in year two. The temporary suspension in the group dividend is in lieu of the company reprioritizing capital allocation for future growth. In turn FY22 saw the acquisition of spectrum, a priority for the group.

Vodacom continues to present the highest yield offering in terms of dividends.

A more positive outlook for MTN earnings suggests a more attractive forward P/E valuation than with Vodacom, albeit with a lower historical dividend yield offering.

MTN, Telkom and Vodacom shares – Broker ratings and price targets

MTN currently carries a consensus ‘buy’ rating from a Refinitiv poll of analysts and brokers (as of the 16^th of November 2022). The median long term price target of R178.22, suggests the share to currently trade at a 25% discount to its longer-term fair value estimate.

Telkom and Vodacom currently carry ‘hold’ ratings in consensus, although also trade at discounts to a median of longer-term analyst price targets.

Recent news updates

Vodacom

Vodacom has received regulatory approval to acquire a 55% controlling stake in Vodafone Egypt for R41bn. Vodafone Egypt boasts 43% market share within the region and a client database of 43 million customers.

Vodacom has also recently been granted license approval from the Independent Communications Authority of South Africa (ICASA) for a transfer of licenses from Dark Fibre Africa (DFA). The deal still requires approval from the Competition Commission, although if met will see Vodacom gaining access to major open access fibre networks within the country.

The group has seen a decline in headline earnings per share for the interim period of 9.5% against the prior year’s comparative period.

Telkom

Telkom’s interim trading statement has guided a drop in headline earnings per share for 1H23 of between 45% and 55% against the prior year’s comparative period.

MTN

Q3 2022 results have shown pre-tax profit to have increased by 14.7% year-on-year, supported by increasing demand for the company’s data and financial services. The group has also recently announced a strategic alliance partnership agreement with Microsoft to support African expansion plans and position the company as a major provider of terrestrial connectivity.

In summary:

• Vodacom total returns for 2022 have outperformed that of Telkom and MTN

• Telkom is the worst performing of the three telecommunication stocks covered over a one month, three month, and year to date look back period

• MTN currently carries a consensus ‘buy’ rating and trades at the steepest discount to a median of long-term price targets for the share

• Vodacom continues to return the highest yield in terms of dividends to shareholders

• Telkom is in year two of a three-year dividend suspension cycle

• Vodacom and Telkom currently carry consensus ‘hold’ ratings

How to trade telecommunication stocks in South Africa

If you want to trade any of the three stocks we have discussed today, you can utilise IG’s CFD trading platform to speculate on the share price movements of the underlying asset – to buy (long) or sell (short) following these simple steps:

1. Create an IG Trading Account or log in to your existing account

2. Enter the company name or ticker in the search bar and select it

3. Choose your position size

4. Click on ‘buy’ or ‘sell’ in the deal ticket

5. Confirm the trade