Vodacom to retain lead in domestic mobile market: S&P
Standard & Poor’s Ratings Services says that mobile operator, Vodacom should retain a clear leading position in the local domestic mobile market over the next twelve months, with around 50% market share.
For the year ended March 2011, Vodacom customers increased 9.0% to 43.5 million across the group, with South Africa contributing 61.0% of the total base.
The rating agency says that Vodacom should continue to benefit from sound growth prospects, particularly in the mobile broadband segment.
S&P views the SA-based mobile telecommunications services provider’s business risk profile as “satisfactory” and its financial risk profile as “intermediate.”
“The ratings on Vodacom are supported by the group’s resilient and leading position in the maturing South African mobile telephony market. Rating strengths also include the group’s sustained solid free cash flow (FCF) generation and moderately leveraged balance sheet,” S&P said in a research summary.
However, it warns that expectations of increasing competition and adverse regulatory changes over the next few years in SA constrain its ratings. “Additional credit quality constraints include sizable infrastructure investment requirements and growing exposure to higher-than-average political, operational, and currency risks in the countries in which Vodacom operates outside South Africa,” it said.
It noted that on 30 September 2011, Vodacom reported gross consolidated financial debt of R11.7 billion (about $1.5 billion), of which about 87% was denominated in rand.
S&P also highlighted the increasingly challenging market conditions in SA for Vodacom.
“We expect higher competition in the coming year as Telkom and Cell C are rolling out or upgrading their networks and marketing aggressive pricing offers, in particular in data products,” the ratings group said.
“We believe that Vodacom will also be affected by the regulator’s planned cuts to mobile termination rates until 2013, as Vodacom is a net receiver of interconnections. However, partly mitigating these factors are the resulting lower tariffs, which we believe could lead to increased customer usage,” it continued.
Standard & Poor’s believes that Vodacom’s profitability is sound, “though lower than that of other leading operators in emerging markets”.
However, the firm does not foresee significant profitability improvement given the risk of an overall downward trend in average revenue per user (ARPU). “We expect Vodacom’s percentage EBITDA margin to move toward the low to-mid-30s range over the next two years, and that the group will carefully manage the various challenges of its international operations by adopting a prudent financial policy to mitigate country risk,” it said.
In July 2011, Standard & Poor’s Ratings Services assigned its South Africa national scale long-term rating of ‘zaAA-’ and short-term rating of ‘zaA-1′ to Vodacom Group.
Looking ahead, S&P says it expects Vodacom’s network investment to remain sizable, notably to facilitate the expansion of its transmission capacity and radio access networks in response to escalating data traffic.
“We view Vodacom’s maintenance of a conservative capital structure, including an adjusted gross debt-to-EBITDA ratio of below 2.0x, as likely to remain consistent with the current ‘zaAA-‘ rating (South African national scale long-term). Given the group’s solid positive FOCF generation, it has some headroom to offset unexpected operating setbacks or future acquisitions, if appropriately timed and executed,” the firm stated.
S&P stressed that it could lower the rating if the group’s operating measures or business positions significantly weakened, or if the group introduced a more aggressive financial policy, which could lead to persistently weaker cash flow generation and credit measures.
“Additionally, we could consider a downgrade if Vodacom’s liquidity remained, over a lengthy period, below levels that we believe are adequate,” it continued.
“Given Vodacom’s business risk profile characteristics, which include a strong market position in a competitive, mature market and international operations with weak credit quality, we are unlikely to raise the ratings in the medium term,” S&P concluded.
At the end of play on Wednesday, shares in Vodacom had shed a rand to R107.10 on the JSE.
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