In­come or value?

Com­pelling in­vest­ment cases for both Vo­da­com and African Bank

Finweek English Edition - - Companies & Markets - SIKONATHI MANTSHANTSHA sikonathim@fin­ * Mantshantsha holds shares in Abil

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 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.

Ra­jay Am­bekar

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