The fundamentals of the Yebo Yethu BBBEE scheme

Existing and potential investors in the Vodacom BBBEE investment scheme, Yebo Yethu, need to be alive to the challenges and opportunities faced by Vodacom in the South African market. The Yebo Yethu shares are set to start trading on an over the counter platform on the 3rd of February 2014.

As we reported in the previous installment, it is important to zoom into Vodacom South Africa and for a moment forget about the widely publicised Vodacom Group financial results, even though Vodacom South Africa accounts for 82% of the group’s revenue. This is because Yebo Yethu is invested in the South African division of Vodacom and not on the entire group and its greater Africa wide growth prospects.

While the Vodacom Group is showing fairly good growth prospects as a result of the Africa wide exposure, the South African picture is challenging. This is because the local market, on the voice front, is coming close to maturity. Growth, on the voice front, is largely coming from operators stealing market share from one another. Vodacom has the lion’s share of the South African market with a subscriber base topping 30 million. It is followed by MTN which has a subscriber base of about 25 million. With about 13 million subscribers, Cell C has recently launched a serious challenge with indications that it has punched holes into the bases of the two giants.

However there is still considerable growth potential on the data front in South Africa as users graduate into complex consumption patterns and mainly via smart phones. If it happens earnestly market consolidation, via mergers and acquisitions, can also benefit the bottom line.

Vodacom has shown healthy appetite to grow through acquisitions in South Africa which could boost its revenue base. Most recently the company announced that it is pursuing South Africa’s second national fixed line operator Neotel which is stealing market share from Telkom. This move, a proposition to buy Neotel, is still at an early stage with no indication of an outcome as yet. It has to pass through a number of considerable regulatory hurdles.

The latest Vodacom SA financial numbers reflect a fight back of sort. Previous numbers were showing a leak in the subscriber base. Reporting results for the six months ended September 2013, Vodacom Group CEO Shameel Joosub highlighted a net gain in active prepaid customers of 927 000 in the six months, up 1.2%.

Vodacom SA revenue increased 6% to R30.1 billion in the six months ended September. The company said this was largely driven by a 41.2% growth in equipment revenue from smartphone and tablet sales. “The growth in equipment revenue was achieved through increased device financing which underpins our strategy of putting data capable devices into our customers’ hands by making devices affordable for more of our customers. This has supported the growth in active data customers of 13.4% to 15.1 million customers.”

Vodacom has promised to roll out a massive capital expenditure (Capex) programme to enrich its revenue base. At group level Capex was quoted at R4.9 billion and South Africa claimed about R3 billion during the six months ended September 2013. “Our investment concentrated on increasing the reach of our data network and improving network capacity and resilience through self-provided high speed transmission. Our 3G data network now covers 88.9% of the population from 83.6% in the prior year.”

Joosub said “A cornerstone of our strategy is sustained investment in network capacity. With increased capacity, we’re able to offer better value and support higher usage without impacting quality.”

The major challenge, in addition to market pressures, is of regulatory nature. The regulator, the Independent Communication Authority of South Africa (Icasa) is tightening the screws in its attempt to bring down mobile phone rates. Icasa recently proposed to slash mobile termination rates (MTRs), the rate charged by operators in carrying cross network calls, more radically than before. This will benefit the smaller players Cell C and Telkom Mobile and may cause a huge hole on the income statements and profit margins of Vodacom and MTN.

There is also another threat coming from Cell C. The third largest operator has launched a complaint against Vodacom and MTN to the Competition Commission. Cell C is accusing the two of anti-competitive behaviour in the pricing of on net and off net calls.

In the six months ended September 2013 the Vodacom Group reported 11% growth in operating profits from R8.9 billion to R9.9 billion. Vodacom SA operating profits showed 8% growth to land at R9.1billion.

In our next installment we will drill down into how these profits filters through to Yebo Yethu.

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