Vodacom's silver lining

2010-02-07 15:15

Johannesburg - Following months of bad news - including poor growth figures because of new legislation, a $400m write-off of a new investment and threats of legal action from its partner in the Democratic Republic of Congo (DRC) - Vodacom's [JSE:VOD] management now has two reasons to relax somewhat.

Its trading figures for the quarter to end-December show that the cellular giant still has some strength, particularly with the 35.2% increase in data turnover in South Africa, which is positive.

It should also score a few political and publicity points for its decision to proceed with lowering interconnect rates on March 1, which is likely to lead to lower cellphone tariffs for consumers.

This will however do little to inject new life into its share price which, since the company's listing in May last year, has see-sawed between 5 155c/share and 5 990.

Although the company dominates the South African cellphone market, its share price is struggling to keep up with those of its telecoms competitors as well as with the JSE all-share index.

The reason is simple: Vodacom has no decent growth engine, or a deus ex machina.

South Africa produces all the money, but does not offer real growth; Vodacom's international operations - in Mozambique, Lesotho, Tanzania and the DRC - stagger on without inspiration (unlike MTN's foray into Nigeria, which proved a massive money-spinner).

Apart from the fact that the South African market is pretty much saturated, there are two other factors constraining Vodacom's share price: Telkom's plan to establish its own cellphone network here, and interconnection tariffs.

Martin Mabbutt, an analyst at Nomura in London, said that even if Telkom's plans are potentially disastrous, the telecommunications giant will enter the market aggressively with massive investments. This could make things difficult for Vodacom, he explained.

Vodacom has long derived significant benefit from high interconnection tariffs - which is an unsustainable situation. The cellphone group has committed itself to a 30%-odd reduction on March 1, down to 89c a minute, at a cost to itself. For every 10% reduction in interconnection tariffs, profits will decline by an estimated R200m.

Reductions in interconnect rates not only impact profits, they also alter the competitive landscape, said Mabbutt. They will make it easier for smaller operators to compete effectively.

But 89c a minute is still very high, and the Independent Communications Authority of SA (Icasa) is sure to trim it much more in time.

Offshore disappointment

Vodacom's international operations, which do not form a large part of its business or its valuation, have performed disappointingly in the past year.

In the December quarter turnover from its international operations fell 33.4% to R1.4bn (a 6.3% contraction if exchange fluctuations are ignored). Tanzania and the DRC - its two foreign markets with the best potential for significant contributions to the group - are struggling.

As if the DRC did not already have enough political and economic challenges, Vodacom's two-year long dispute with its partner, Congolese Wireless Network (CWN), has now reached breaking point.

CWN, with a 49% stake in Vodacom, has accused its SA partner of "plundering" the group's capital and being disinterested in investments to expand the company.

But Vodacom said the capital being withdrawn is repayment of loans advanced to the DRC enterprise at exceptionally attractive commercial rates.

Vodacom's management has indicated it is not inconceivable for the group to exit the DRC.

Limited opportunities

The cellphone giant's options to break new ground are extremely limited.

Last week chief executive Pieter Uys said the company would consider accessing only those markets with a fairly sizeable population and low penetration, in which it would be one of three top players.

There's nothing on the table in the cellphone market at the moment, he commented. But Vodacom might consider a couple of small acquisitions in the enterprise services market.

After the Gateway fiasco, investors hope that Vodacom is a little more cautious on the Africa trail. Last year it bought Gateway - which offered transmission services and infrastructure to telecommunications players in 40 African countries - for about $700m. But it soon had to write-off a $400m chunk of the investment - a "classical error" on the part of cellphone operators going into such markets.

It might have made sense to bolt Gateway on to the group's business - but it was bought at the wrong price, reckoned Mabbutt.

Vodacom shares are still a good investment and will deliver good returns, he said, but the days when investors can expect to make a fortune out of South African telecommunications stocks are unfortunately over.

Of 15 Bloomberg analysts, two recommend selling, eight holding and five buying.


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