Investment guide: Vodacom

Vodacom Group, recently released its trading statement for the last quarter of 2016. According to the results, Vodacom Group recorded a 1.2% increase in revenue netting R21 222 million. This was prompted by expanding the company’s customer base in South Africa, as well as its international operations.

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Shameel Joosub, Vodacom Group CEO, stated: “I am pleased with what we achieved in the quarter. Performance was driven by strong customer growth in South Africa and strong data demand. In our international operations the effect of customer disconnections in Q4 of the prior year are still impacting its performance.”

He added: “Strong growth in South Africa was delivered through our strategy of sustained investment in network infrastructure, growing data demand and successful execution of our pricing strategy. This includes the continued impact of our segmented pricing offers, a key highlight of this quarter. Combined with our network advantage and delivering value for money propositions, this contributed to almost 700 000 new customers joining our network in South Africa this quarter, showcasing the success of our focus on bundle adoption through ‘Just 4 You,’ our youth proposition under the NXTLVL banner and our summer campaign. Strong growth in data demand outstripped declining voice revenues with service revenue growth of 5.5% to R13.4 billion in South Africa.”

Despite these good results, the question remains whether or not Vodacom Group is a good investment. This guide looks at what you need to know before taking the plunge and investing in Vodacom.

How has the share price performed?

Chris Gilmour, investment marketer and analyst at Absa Stockbrokers and Portfolio Management pointed out that Vodacom’s share price dropped sharply in 2016, however, in the past few weeks and months, it has stage a nice recovery.

Stefan du Toit, Stockbroker, PSG Wealth Durbanville, pointed out that Vodacom’s stock price has declined by approximately 2% over the last 12 months, with most of these losses occurring in the past six months.

However, despite this, du Toit highlighted that Vodacom still awarded investors with an attractive dividend. “Looking forward, it is clear from Vodacom’s most recent trading update that telecommunication companies are under pressure. The update was mixed, with the South African operations performing well, but the international business disappointing,” added du Toit.

Performance compared to competitors on the JSE

Vodacom’s only real competitor on the JSE, according to Gilmour, is MTN. While Telkom is also a competitor, it is a much more diversified business.

Du Toit agreed that MTN and Telkom are Vodacom’s main competitors on the JSE. He noted that MTN is the largest with a market capitalisation of R266 billion, followed by Vodacom with R222 billion, and lastly Telkom with R38 billion.

“It has been a particularly tough year for Vodacom and MTN due to different factors. MTN’s share price over the last 12 months is 12% lower and the share is 50% from its peak, currently trading at R122. MTN’s investment in Nigeria caused the company many headaches where they were also fined $3.9 billion (R52.42 billion) for failing to disconnect unregistered SIM cards. With the decline in the oil price, the Nigeria currency also depreciated significantly, further hurting ZAR revenues for MTN. This caused MTN’s earning to become under extreme pressure,” stated du Toit.

He added: “Over the last couple of years, Telkom’s share price was influenced by a number of once off costs, underperforming assets and poor management decisions. However, Telkom seems to have turned the corner after an extensive restructuring period aimed at cutting costs. Vodacom primarily operates in South Africa, with 85% of EBITDA (earnings before interest, tax, depreciation and amortization) generated locally. The company has invested heavily in infrastructure, with R2.1 billion added during the last quarter. Management is confident that the continued investment in infrastructure and the implementation of its pricing strategy will continue to drive growth in South Africa.”

Is Vodacom a good investment?

Based on market share, Vodacom is the largest cellular operator in South Africa, du Toit highlighted. Vodacom invested heavily in its own network, which du Toit noted the company is now enjoying the benefits of.

“There may, however, be limited upside in revenue as both voice and data prices remain under severe pressure. Mobile data is currently a key driver of revenue growth, but with the recent #Datamustfall campaigns there will in all likelihood be downward pressure on data prices,” revealed du Toit.

According to Gilmour, Vodacom is a good investment as it is a solid and well-managed operation. He said that the company spends large amounts of money on capital expenditure, most notably in data, to keep ahead of its competitors. “It also pays a very juicy dividend,” he added.

When considering investing in Vodacom, or a similar company, there are a number of things that should be taken into consideration. For example, Gilmour highlighted that you need to look at its free cash flow, its compliance to regulators (to ensure it doesn’t end up paying avoidable fines), its technological competence and advantages, as well as any associations with global companies. Vodacom’s main shareholder is UK-based Vodafone, which provides Vodacom with huge IP assistance.

“MTN used to be the darling of the sector until it fell foul of the regulator in Nigeria a couple of years ago. Vodacom has hardly entered the rest of Africa and as a result is less vulnerable to the recent decline in fortunes of the rest of the continent,” added Gilmour.

Du Toit concluded: “Vodacom is a quality company with solid cash generation. It provides investors with a very attractive dividend stream. Vodacom will continue to invest in infrastructure to ensure a high quality offering and expanded coverage. The group’s 4G and 3G coverage now covers 70% and 99% of the population respectively. Data growth rather than voice revenue is expected to remain robust in the interim, with Vodacom committed to investing R40.6 billion over a three year period on infrastructure, with the majority aimed at the South African market.

“This remains a quality stock and the market is for that reason pricing it at a premium. It is difficult to get excited about any possible earnings upgrades after the most recent update, which may result in limited price action going forward. However, for long term investors looking for a constant dividend income, this is definitely one to consider in your portfolio.”