Vodacom – the future is red
In a generally expensive equity market – and weak economic environment – there are not many sectors receiving positive earnings revisions. Of late, Vodacom – one of the g iants in the South A frican telecommunication sector – has stood out for us in this regard, as it has a steady earnings outlook and we see upside potential to t he current earnings estimates.
The sector has had its fair share of turbulence, but we believe Vodacom is now through the worst of its earnings cycle, after cuts in mobile termination rates saw the group lose R1.7bn worth of interconnect revenue in the most recent f inancial year. With interconnectivity rates now just accounting for 5% of service revenue, we believe any further termination rate declines will be immaterial for the group.
Counting strongly i n its favour is Vodacom’s continued substantial investment in South Africa, which is strengthening its market leadership in the country. It has larger 2G population coverage than its competitors, owns more base stations and has invested heavily in 4G. Notably, it has outspent MTN by more than R4bn cumulatively over the past five years (also see page 20).
The prog r e s s i n s mar t phone penetration and the continued data traffic uptake point to strong growth potential for SA’s data market – the country remains well below global usage averages.
This positions Vodacom very well for the future, and we anticipate service revenue in SA to be a balance between data growth and declines i n voice revenues.
While Vodacom has been strong in the subscriber client base (where it has 45% of the local market share) it also successfully gained further market share in both pre- and post-paid customers, with a progressive price-bundling strategy and low-cost smartphones being sold in the prepaid subscriber base.
One of the more recent developments is the proposed Neotel acquisition, which we believe has been underestimated by the market. The enterprise business is small in Vodacom’s revenue base, at only 16%. We estimate Neotel would add 5% to group earnings in the first full year of integration. There are plenty of synergies to be had with a converged mobile and f i xed-line business. Telkom still dominates the fixed-line market (with more than 60% of revenue in SA), so there is only upside potential for Neotel to make further inroads if it is backed by Vodacom’s balance sheet, which would enable it to accelerate capital expenditure in the business.
Even with the past restrictions on Vodacom’s Africa expansion ( given Vodafone’s shareholding) Vodacom has still managed to build market leader positions in Tanzania, Mozambique, the Democratic Republic of Congo and Lesotho.
In summary, the group should deliver reasonable growth in coming years. It offers investors a 6% dividend yield and is trading on a forward price-to-earnings multiple of around 15 times, a discount to the broader market. We believe both measures are attractive in the current economic environment.
R121.01 - R156.54
A pedestrian walks past a Vodacom-branded billboard at a taxi rank near Vodaworld, the group’s headquarters in Johannesburg.