Income or value?
Compelling investment cases for both Vodacom and African Bank
QUALIFYING INVESTORS WITH limited resources will have to conduct a weighing up exercise to gauge what’s the better of the two competing black empowerment share offers in African Bank Investments Ltd (Abil) and Vodacom South Africa.
Both offers run concurrently and independently until early September, with the black public (and all employees) able to buy shares in microlender Abil and the SA operations of cellphone company Vodacom. Vodacom is SA’s biggest cellphone operator, with around 24m subscribers; Abil is the country’s largest microlender, with a loan book of R18,6bn and a stated objective of doubling that over the next five years.
Vodacom’s Yebo Yethu offer is part of its R7,5bn broad-based economic empowerment deal that seeks to transfer about 6% of the company’s SA operations to blacks.
Abil came up with its Masonge scheme to boost its black shareholding back to the 6% it achieved prior to the dilution that resulted from its acquisition of furniture retailer Ellerine this year. Abil issued 294m shares for Ellerine, diluting its empowerment levels, but promised to conduct a transaction similar to its 2006 Eyomhlaba black equity ownership programme on the Ellerine part of the combined entity. It’s Abil’s stated intention to have a direct black shareholding of 15% by 2015. That’s currently around 4%.
Masonge beneficiaries will pay a maximum 700c/share, depending on their proximity to Abil, while Yebo Yethu will cost 2500c/share. Minimum subscription is R2 500 for Yebo Yethu, while Masonge’s is R700.
However, which deal do prospective investors who can’t afford to invest in both offers choose? That decision has to be informed by where the best value lies. Which of the two companies promises most value? What are the growth prospects of the respective investments?
Vodacom’s 24m subscribers represented period. Contracted subscribers increased 2,9% to reach 3,6m, while the low-paying pre-paid subscribers saw a drop of 0,2%. Though growth in Vodacom’s SA market might be slowing, it’s encouraging to see the biggest subscriber growth came from its more affluent post-paid customers, who spend on average R481/month (down 1%) on their cellphones compared to their pre-paid counterparts on R64/month (up 3,2%).
Vodacom estimated SIM card penetration at 96% in SA, up from 94%. “Vodacom’s non-South African operations increased their total customer base by 5,4% since 31 March 2008 to 9,7m customers,” says Vodacom in its quarterly results. That compares with 6,6% growth for the overall group since June 2007. Despite its slower subscriber growth, Vodacom still managed to increase its group revenue by 14,5% year-on-year for the quarter.
So is Vodacom a good buy? “There’s not any discount being given on the asset at the offer price,” says Rajay Ambekar, equity analyst at Cadiz African Harvest. “The price is pretty much a full one.” However, Ambekar says what’s particularly attractive about the Yebo Yethu offer is its funding. The R2 500 minimum subscrip- a 0,3% growth on the quarter to June 2008, while its community services grew 6,8% to 110 service points over that tion will give investors a total exposure of R15 625. Asked about growth prospects, Ambekar says the market is getting “very mature”. “I’d assume there won’t be any huge growth in Vodacom over the next five years.”
So what does Masonge offer? Masonge applies to the whole of Abil and the maximum price of 700c/Masonge share compares favourably with the current market price of the underlying Abil shares at 2743c/share at the time of writing. That translates to an exposure of R2 743 for the minimum R700 subscription. Proceeds of the deal and more money to be raised by Masonge (plus dividends from Abil) will
go to buying more Abil shares (on the open market) for the proportional benefit of Masonge shareholders.
Abil estimates Masonge’s NAV to be 1000c/share, an immediate premium of 30%. In the half year to March, Abil had an NAV of 689c/share. The R981m interim profit in March 2008 represented headline earnings per share of 125c. Worked on the 700c/Masonge share, that gives an earnings multiple of 5,6. Analysts at McGregor BFA expect Abil to deliver a higher HEPS of 369c in 2009, up to 423c/share by 2010 and rate Abil a buy at current levels.
As a clue to Abil’s future prospects, investors need to observe SA’s microlending industry in the recent past and in light of the National Credit Act.
Microlender and Abil competitor Blue Financial Services says the Act will put SA’s microlending industry under pressure to consolidate even more over the next two years. There’s been a slight consolidation over the past year, with smaller lenders either being swallowed up by their bigger competitors or larger financial services companies taking equity in the microlenders.
“The Act puts more pressure on the smaller lenders, as it regulates and puts caps on the fees they charge,” Blue CE Dave van Niekerk told Fin24.com recently. That means bigger lenders, such as Blue Financial Services and Abil, would benefit from the pressure on margins felt by their smaller competitors that don’t have access to cheaper funds, as the big ones do.
Another factor to consider is the question of dividends. Yebo Yethu participants will receive dividends on 50% of their shareholding from day one, with the rest used to pay off their debt in the company for the remainder of the 10-year empowerment period.
While Abil is generally a good dividend payer, there will be no dividend payment to Masonge shareholders for the entire empowerment period to 2015.
While the Yebo Yethu offer is found wanting on future prospects and current value, the promised dividend income (Vodacom pays more than half Telkom’s dividends) certainly makes it a major attraction. Though Masonge will have no dividend income, its current value and future prospects make for a compelling investment case.
Mature cellphone market.