Vodacom still faces challenges

After reporting strong third-quarter numbers, Vodacom faces a more challenging trading environment in which it will have to contend with regulatory risks and a stronger rand, an analyst says.

After reporting strong thirdquarter numbers, Vodacom faces a more challenging trading environment in which it will have to contend with regulatory risks and a stronger rand, an analyst says.

Vodacom’s share price rose 5.45% to close at R163.50 on Wednesday after it said revenue growth accelerated to 6.7% in the quarter to end-December.

Higher revenue, at R22.6bn, was supported by the addition of 2.5-million active customers as well as strong gains from mobile money service M-Pesa and data sales in the rest of Africa.

“It looks like Vodacom is still executing well and is holding on to its dominant market position,” said Mergence Investment Managers portfolio manager Peter Takaendesa. “However, the near-term outlook is likely to be challenging as they navigate a number of regulatory challenges in SA,” he said.

For instance, Vodacom’s contract to supply mobile communication services to government departments had come under the scrutiny of the Competition Commission.

The telecom industry would also have to grapple with proposed changes to data expiry rules and out-of-bundle billing, as well as amendments to the Electronic Communications Act, which proposes that operators share resources.

Takaendesa said the stronger rand was likely to dilute the improved underlying growth from Vodacom’s rest-of-Africa operations over the next reporting period, while the group also “has to improve” its black economic empowerment (BEE) shareholding in SA in 2018.

Vodacom’s existing empowerment deal expires in November. Group CEO Shameel Joosub said in late 2017 Vodacom would probably offer existing BEE shareholders the chance to “invest into a new scheme” with a similar format.

THE NEAR-TERM OUTLOOK IS LIKELY TO BE CHALLENGING AS THEY NAVIGATE … REGULATORY CHALLENGES IN SA

Meanwhile, Takaendesa said that Vodacom’s third-quarter results “show that Vodacom has more ways of extracting cash from the low-mid segments of the South African consumer market, which is largely their prepaid customers”.

On the other hand, mobile contract revenue in the country remained under pressure, declining 2.5%.

Takaendesa said one concern about Vodacom’s operational performance in SA was that mobile data revenue — the group’s most important longterm growth driver — had decelerated to single digits as pressure mounted to reduce data prices.

Data revenue in SA rose 8.7% after accelerating 12.2% in the second quarter.