Analysts overlook Vodacom performance letdown

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Peter Takaendesa of Mergence Investment Managers said that while the performance was still fairly strong in a tough operating environment in both SA and the rest of African countries in which Vodacom operated, the market had been expecting stronger numbers. "The revenue growth of 5.8% was slightly below market expectations of 7%-8%," he said.

Takaendesa attributed lower than expected revenue growth to weaker handset sales, declining voice revenue in SA, and customer disconnections in operations in the rest of Africa. In SA, Vodacom added 932,000 subscribers in the three months to June, taking its total to 35.1 million. Contract customers increased 51,000, while the rest of the new customers were prepaid. Takaendesa said there was "normally high churn" in the prepaid market, "so, the situation can change quickly."

"I think we are now experiencing more multiple SIM cards in SA, because MTN also recently said its South African subscribers grew 7% for four months to end-April," he said.

Vodacom group CEO Shameel Joosub attributes the South African performance to the significant investment in infrastructure.

Vodacom's total active customers declined 2.6% to 61.8 million, dragged down by new customer-registration processes in Mozambique and the Democratic Republic of Congo. Total active customers from Tanzania, Congo, Mozambique and Lesotho had decreased 11.5% to 26.7-million in the quarter. However, net customer additions turned positive towards the latter part of the quarter in most operations, Joosub said. "We remain committed to actively bedding down new customer registration processes in the various markets in which we operate," Joosub said.

Momentum SP Reid's Sibonginkosi Nyanga said Vodacom might have missed revenue growth expectations for the quarter, but "the trend is encouraging, as it finds itself in a favourable cycle" in SA.

Underlying growth for its rest of Africa revenue was still strong, he said. However, this was hampered by new customer registration processes and competition, which was offset by currency gains. "The results reveal that Vodacom used its capital efficiently and the network investment is paying off," he said.

Joosub said capital expenditure of R1.9bn had enabled the group to expand network coverage, increase data speed, and reduce the dropped-call rate. Vodacom's data revenue increased 19.4% to R5.8bn. Strong demand for data has resulted in data customers increasing 6.1%, to 18.8-million. The group's share price declined 2.24% to close at R166.20. The stock has gained about 9% in 2016.

Takaendesa said Vodacom shares had rerated significantly in the past few years, and were now priced closer to ratings of companies with pricing power. "Telecoms companies normally experience price deflation, and we do not think SA will be different longer-term," he said.

This meant that an acceleration in Vodacom's growth rate from single digits was required to sustain the high-teens price earnings ratio that the stock was trading on, and "we think this will be difficult to achieve over the mid-term."

Source: Business Day