Data price cut will be a big blow to earn­ings

Financial Mail - Investors Monthly - - Analysis - Petri Redel­inghuys

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. ●

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