Vodacom’s role within Vodafone Group

Paul Theron, equities asset manager and CEO of Vestact has highlighted Vodacom’s increasing role within Vodafone, which owns a 65% in the South African operator.

“Vodacom now nestles safely in the Vodafone global group. Its function is to do a good job and to make lots of cash flow, dividends, and to pay them upwards to London,” Theron said, speaking as a guest on CNBC Africa’s show Hot Stoxx last week.

In financial results reported on February 6, Vodafone reported a decline in both revenue and Group service revenue, with Europe particularly hard hit. Vodafone also reported a decline in subscribers in several key markets.

Vodacom reported only a 2.2% rise in revenue for its South African operation to R15.5 billion for the quarter ended 31 December 2012, driven by a 27.2% growth in equipment revenue from smartphone and tablet sales. Service revenue, however, declined marginally.

Active customers in SA increased 11.7% year on year to 30.6 million, while group active customers increased 12.2% to 51.0 million.

Vodafone Group data revenue, meanwhile, grew 12.8%, reflecting an increase in European smartphone penetration to 33.4%.

Theron said he suspected that it was only a matter of time before the group was totally rebranded within the Vodafone group, although he quickly added that the colours of the group didn’t much matter.

LTE, data and smartphones

The analyst said key to Vodacom’s continued success would be its handset deals to increase average revenue per user and to encourage customers to make use of data led services on its new “4G” LTE network.

Vodacom stressed that smartphones remain a key strategic growth driver with active smartphones increasing 29.2% to 5.8 million devices.

Smartphone net additions increased in the quarter compared to prior quarters, adding over 500,000 to its network, largely supported by the group’s working capital investment in handset financing.

Smartphone data usage increased 36.1% to 138MB per smartphone customer, per month.

Vodacom said it extended its LTE coverage in South Africa to reach Johannesburg, Pretoria, Durban and Cape Town, with 542 active sites. Vodacom launched the commercial service of its LTE offering in October last year.

Hot stock

With a market cap of R173.42 billion, P/E ratio of 4.91, and dividend yield of 5.87%, analysts have put Vodacom as a ‘hot stock’. The group has also recently committed to paying 90% of earnings as dividends.

Investment analyst at Investment Solutions, Chris Hart believes that the group’s dividend yield is secure, “and is something that will grow over time”.

He said the dividend rate when compared against cash on inflation, meant that Vodacom remains a good investment.

He noted, however, that Vodacom’s missing element remained its lack of footprint outside of South Africa, particularly in emerging markets. “But it is in the dominant position in the dominant economy of Africa,” he said.

Aside from its leading operation in South Africa, Vodacom also has networks in Tanzania, the Democratic Republic of Congo, Mozambique and Lesotho.

Theron opines that, while Vodacom’s operation in the DRC remains a concern, “they do have nice businesses in Tanzania and Mozambique”.

M-Pesa

In its recent results announcement, Vodacom heralded increased penetration of mobile financial services in Tanzania.

“M-Pesa is progressing well in Tanzania, with active customers increasing 72.6% to 4.7 million and M-Pesa revenue now accounts for 74.6% of Tanzania’s overall data revenue and 14.1% of service revenue. We launched M-Pesa in DRC in the period and expect to expand the service to Mozambique and Lesotho before year end,” it said.

Vodafone outlook

Following the announcement of Vodafone’s results, Emeka Obiodu, principal analyst at Ovum said that Vodafone’s results reflected the challenging economic environment in its core market.

“Given Europe’s economic woes in 2012, we expect telcos that rely on Europe for the majority of their revenues to struggle.  Customers feel the pinch in their pockets before they reduce their telecoms spend.

“The challenge for Vodafone and other European operators is to stabilize their performance and ensure that their share of the customer’s wallet holds firm.

“For Vodafone in particular, Ovum warned in 2009 that its emerging market operations must not be relied on to perpetually offset poor performance at home. This has proved to be a prescient warning. Growth in its emerging markets operations has slowed and Vodafone is now relying on Verizon Wireless,” Obiodu said.

The analyst stressed that there is hope for Vodafone. “Opportunities exist for telcos to play a bigger role in the “connected future”. Better pricing design can also unlock additional value, and telcos should look to become active enablers of the digital society.”

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Vodacom’s role within Vodafone Group