vodacom is on the prowl for potential acquisitions on the African continent.
Chief executive Pieter Uys said after the company’s results presentation last week, he had “put a team on the ground to roam the continent, so that when opportunities come we’re at the table”.
But investors believe Vodacom sealed its fate as an ex-growth stock when it remained restricted to five territories in the sub-Saharan Africa region, a terrain that rival MTN has long been plying.
Vodacom is not expected to attract deals similar to what MTN has achieved.
Asset management firm Barnard Jacobs Mellet said in a newsletter last week it preferred exposure to MTN, which was trading on a similar rating, but with a better earnings growth profile.
Vodacom is trading on a forward price:earnings (PE) ratio of 11.8 times, which indicates the years of future earnings an investor is paying for today, and a dividend yield of 6 percent.
In an unprecedented move, but indicative of a mature stock, the cellular network provider increased its dividend pay-out ratio from 40 percent to 60 percent of headline earnings for the year to the end of March 2011.
Mohammed Shafee Loonat, a portfolio manager at Element Investment Managers, said Vodacom could in future hike its dividend as much as 80 percent before it needed to raise more debt.
Loonat said Vodacom would continue on a trend of mature top-line revenue growth in the high, single-digit and double-digit earnings growth.
In contrast MTN was growing top line and bottom line. But as MTN’s base was growing bigger, its growth rate would incrementally fall, he said.
“Vodacom could do a deal, but it is very unlikely to do a major transformational deal.”
MTN recently said it would focus on regional consolidation, as large-scale opportunities were dwindling.
There is a sense that Vodacom is looking to give MTN a run for its money. But it will have its work cut out to find ways to work on the continent where challenges such as political risk, competition and regulatory pressures abound.
Some of the obstacles MTN has dealt with include poor infrastructure and power supply to civil unrest in Côte d’Ivoire.
During 2010, its margins in Ghana and Benin deteriorated mainly due to higher electricity and utility costs.
Competition in Nigeria, its biggest market, came from large rivals Bharti Airtel and Etisalat.
Vodacom has also had its fair share. Extreme competition forced the government in the Democratic Republic of Congo (DRC) to put a floor to tariff decreases. In the same market, Vodacom is still awaiting expert advice on whether or not to sell its stake in Vodacom DRC after a shareholder dispute.
Uys said a verdict was expected in another three months.
Informa Telecoms & Media analyst Thecla Mbongue said Vodacom could achieve the growth rates MTN had seen on the African continent, if it focused growth on underserved areas and data segments – consumer as well as enterprise.
“MTN’s growth was achieved in the voice market, but across 21 high markets, including high growth and dynamic markets Nigeria, Ghana or Uganda, while Vodacom has been confined to five markets until they acquired Gateway.”
Abdul Davids, the head of research at Kagiso Asset Management, said: “Vodacom is not expected to grow earnings as fast as MTN, given its substantial exposure to South Africa, that is quite mature.
“We would expect increased mobile penetration in Nigeria, Ghana and Iran to drive MTN’s earnings growth.
“Vodacom is attractive because of its dividend yield, but MTN is more attractive.”
Uys said with internet penetration on the continent below 1 percent, opportunities abounded in data. “We’ve turned the corner in markets where we operate. In the DRC – where we’ve been holding back – there are new opportunities.”
He said the company would acquire prudently and had learnt lessons from the purchase of Gateway, a carrier and business network services company, and which it impaired for R1.5 billion due to declining margins.
“We didn’t take into account how quickly things could change. We bought it at the height of the telecoms bubble. It’s been a very painful exercise.” - Asha Speckman