Data price cut will be a big blow to earnings
Vodacom was, for a long time, the best pick of the telecommunications companies listed on the JSE. It has operations throughout Southern Africa, with its biggest market by far being SA itself. The group has 110-million customers across various markets in Africa, including SA, Tanzania, the Democratic Republic of Congo, Mozambique, Lesotho and the Kenyan joint venture, Safaricom.
During financial 2019, revenue grew by 4.3% to R90.1bn. About 63% of the company’s total revenue comes from SA, with the remaining 37% being contributed by its international operations, split almost 50/50 between Kenya’s Safaricom (35% stake acquired in an equity swap deal with Vodaphone UK in August 2017), and all the other operations outside SA combined. As is the trend in the telecommunications sector, Vodacom is experiencing a decrease in revenue earned from traditional voice calling and an increase in revenue earned from data and related bandwidth services (including fibre internet).
Unlike its competitors, Vodacom is making use of big data, machine learning and artificial intelligence to offer its clients service bundles which include talk time, data and SMS. This enables it to make its customers personalised service offerings that, last year, translated into the accelerated uptake of bundle offers, which has been very successful in driving data sales.
Another component of
Vodacom is M-Pesa, which last year processed 11-billion transactions, resulting in 32.2% growth to earn the group R3.1bn in revenues.
Vodacom is a force to be reckoned with and has a lot of positive, if not market-leading, attributes. But it does have a weakness.
Earlier this month, when Vodacom released its latest earnings numbers, the market reacted rather negatively. This was confusing because most of the metrics that we all follow so closely were better than the year before.
We saw earnings growth, subscriber growth, a nice dividend … but still the market did not like the results. Furious head-scratching and pondering ensued and finally it became clear that much of this reaction can be explained by one simple sentence in the results which read “reducing the price of 1GB of data valid for 30 days from R149 to R99”.
To elaborate; earlier this year, in a Trade of the Month article, I pointed out the potential impact that a move like this could have. In a nutshell, the
risk was that the regulator, Icasa, will force data prices down — which appears to have happened. Consider that data makes up about 44% of the total service revenue that Vodacom earns (and 30% of total revenue), accounting for about R27.3bn per year. A 33% reduction in this revenue stream should result in around a R9.1bn shortfall (or 10% reduction in total group earnings).
Add to this the fact that unused data now rolls over and does not expire at the end of each month. This will hurt.
Competitors, most pointedly Telkom and Rain who are charging R99 and R50 for 1GB of data, are unaffected, while Vodacom takes a pretty big haircut (along with MTN).
In addition, Vodacom has been trading in a rather tight range over the past 12 months with only about R26 between the lows of R110 and highs of R136. The good results we saw this month, while the stock was trading around 12-month highs, failed to get the stock up beyond that 12-month ceiling of R136 — which makes it likely that it will trade back down to the lower end of the range at R110. At this stage, there are probably better options for exposure to the telecommunications sector. ●