Good value Vodacom not without challenges

RMB Private Bank says that at R93, Vodacom offers good value for investors, but the group is not without challenges in the South African mobile space.

Shares in Vodacom slipped 36 cents to R93.13 on the JSE on Monday (25 June), continuing its recent trend of decline. For rival operators, MTN advanced R2.42 or 1.75% to R140.42, and Telkom was flat at R19.98.

The JSE All Share Index ended 0.87% weaker at 33821.98 points on Monday.

Suraj Sookdew, RMB Private Bank portfolio manager told BusinessTech: “We have seen fantastic share price performance from Vodacom, gaining 45% from March 2011 to March 2012, on its defensive and strong cash flow generation qualities. While MTN Group traded largely flat for that period. MTN Group has been plagued by negative press around possible litigation around its Iran business as well as unrest in Nigeria and Syria.”

“More recently we have seen Vodacom losing approximately 15% from its peak (share went ex-div R4.50 on 18 June 2012), while MTN gained 8.5% Investors have recognised the strong share price performance in Vodacom while also acknowledging the opportunities in MTN and have been switching from Vodacom to MTN Group,” the analyst said.

However, he notes that at R93, Vodacom too offers value. He says that the market is looking for earnings growth of about 16%, (placing it on an undemanding price earnings multiple of about 11 times) and a dividend yield of 8.5% for 2013.

But RMB points out that Vodacom is not without its challenges:

  • Cell C has received a USD 180 million cash injection and is looking to aggressively gain market share;
  • Telkom is trying to penetrate the corporate market with its converged service and will have the potential to cut prices. Vodacom had to give up some margin to protect its corporate market share.
  • MTN, too, has been aggressive in the local market.

Sookdhew says that talks around nationalisation of Telkom have resulted in some renewed interest for the company. “However, Telkom still lacks strategic direction and the failed Korea Telecom deal has caused investors to lose confidence in the company. It is difficult to find a catalyst that will re-rate the company.”

Vodacom results

In May, Vodacom reported a 9.4% rise in revenue to R66.93 billion for the year ended March 2012, from R61.197 billion before.

The group lifted operating profit to R16.617 billion, from R 13.696 billion in 2011, while headline earnings per share improved 8.1% to 709 cents.

The mobile operator said that customers increased 29.9% to 47.8 million, adding 11.0 million.

Vodacom improved its total dividend per share by 54.3% to 710 cents.

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Good value Vodacom not without challenges