Share price performance over the past year (based to 100)

Source: Bloomberg *as at 16 July 2025

 

Although Telkom has been our key telecommunications sector overweight, we certainly did not expect such stellar outperformance, particularly given the sector’s structural pressures and general lack of investor enthusiasm about its prospects. While the herd fawned over tech darlings, with Tencent, Naspers and Prosus benefitting from Artificial Intelligence (AI) mania and its seemingly unlimited blue sky potential, Telkom was distinctly out of favour but poised to deliver the ultimate valuation barometer - a strong recovery in free cash flow generation. 


While hindsight will always be a perfect science, it is worth examining the performance of the South African (SA) operators as interesting themes evolve.

 
By mid-July 2025, Telkom delivered 147% over 12 months, while MTN (+82%) and Vodacom (+45%) also delivered strong investment returns. Blue Label Telecoms, with its Cell C exposure, is the JSE’s best performing share over the same period, with an incredible return of 242%.


If asked to rank the valuation prospects for the listed South African telecommunications operators over the next 12 months, we become significantly more cautious, given sector re-rating driven by a strong consensus upgrade cycle over the past year. Looking ahead, we believe a few key themes are likely to remain significant determinants of sector performance and drive stock specific performance. 


African price increases help recovery from weak currencies, rampant inflation

As African countries beyond SA recover from significant currency devaluation and inflation, regulated price increases are driving strong revenue and FCF recovery in key operating regions for MTN (Nigeria, Ghana) and Vodacom (Egypt). 


Significant currency devaluations in Nigeria and Egypt have stabilised, allowing strong local currency revenue growth, supported by regulated price increases to drive consensus MTN and VOD rand estimates higher, supporting the sector re-rating over the past year. Ghana’s debt restructuring triggered a world beating rally in the cedi over the past twelve months, providing further impetus to MTN’s upgrade cycle and re-rating.

Meanwhile a series of price increases granted by the Egyptian regulator prompted a significant improvement in its outlook, supporting Vodacom’s re-rating. 


A year ago, investor concern regarding the potential disruptive impact caused by the launch of low earth orbit satellite services, like Starlink, across the continent has eased. Initial competition concerns, turned to recognition that the operators will most likely be re-sellers of satellite services, which could complement their offerings. In addition, African operators have announced partnerships with satellite operators to provide cheaper backhaul costs from remote rural mobile sites, thus driving efficiency gains and potentially broadening market penetration. 


Can Telkom still outperform its larger peers?


While Vodacom and MTN have benefitted from an Africa led recovery, Telkom’s focus on driving South African mobile revenue growth, cutting costs across mobile, fibre and enterprise businesses, as well as reducing debt has supported its peer beating free cash flow recovery, driving its relative outperformance. 


Although Telkom’s easier wins, such as much reduced mobile roaming costs and easing loadshedding impact have largely been extracted, management deserves credit for executing the Swiftnet tower sale, reducing debt substantially, maintaining tight reins on capital investment and ultimately delivering much improved free cash flow generation. 


To sustain strong mobile revenue growth, Telkom recently increased mobile prices, following Vodacom and MTN’s lead to recover higher loadshedding induced network costs to sustain returns on substantial capital investment required to build network resilience. 


A potential upside risk to Telkom’s current valuation could be triggered by sector consolidation. Now that Vodacom, CIVH and the Competition Commission have reached an agreement on an expanded set of transaction conditions related to the proposed Maziv transaction, it may open a path to suitor interest in Telkom. Investors will also remember that MTN has previously courted Telkom – with a particular interest in Telkom’s OpenServe fibre network. Should a similar scenario unfold, we believe this would provide support for Telkom’s current valuation levels and may even result in further upside, providing an interesting potential underpin to the investment case.

   
The potential Cell C listing, Capitec and the MVNO play 


Over the past 12 months, Blue Label Telecoms – the majority owner of Cell C – has been a star performer delivering a 242% share price appreciation, triggered by Blue Label’s planned restructuring and potential separate listing of Cell C. 


It could be argued that the market is already pricing much of the potential value unlock, given the myriad of company specific and macroeconomic risks. If one considers that if Cell C were to be listed separately and Blue Label maintains a significant equity stake, Cell C’s free float is likely to place it squarely in the small-cap universe with the attendant liquidity challenges. 


Where Cell C potentially offers a unique investment value proposition is its positioning as a Mobile Virtual Network Operator (MVNO) operator and aggregator, benefitting from growth of its portfolio of MVNO clients, such as Capitec. 


Capitec has already succeeded in capturing over 1 million voice and data customers and could plausibly reach as many as 5 million over the next decade, given the strength of its existing distribution platform. This could pose a material threat to the local growth of Vodacom, MTN and Telkom, with Capitec well-positioned to leverage its banking infrastructure for broader distribution.  


Still some life yet in the SA telco sector


The South African telecommunications sector’s recent relative outperformance over the likes of Naspers and Prosus highlights that structurally unattractive sectors can deliver portfolio alpha despite unattractive long run fundamentals. As always, timing is a key determi

nant to capturing that alpha, which is often notoriously difficult, even for the most seasoned investors. 
Although we expect sector newsflow to remain elevated, with spectrum policy updates, infrastructure-sharing debates, and potential mergers or acquisitions all in play, we believe that the sector is highly unlikely to generate future investment returns similar to those of the past year. For investors, operators, and regulators alike, these developments signal both challenges and significant opportunities in shaping the investment outlook over the next 12 months. 

 

Disclaimer

Prescient Securities (Pty) Ltd is an authorised Financial Services Provider – FSP 44074. This document is for information purposes only and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions expressed in this document may be changed without notice at any time after publication. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information. For more information visit www.prescient.co.za