Vo­da­com – the fu­ture is red

Finweek English Edition - - PRO PICK - BY RHYN­HARDT ROODT Port­fo­lio man­ager, Investec Eq­uity Fund

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

16.86

A pedes­trian walks past a Vo­da­com-branded bill­board at a taxi rank near Vo­da­world, the group’s head­quar­ters in Johannesburg.

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