Our opinion on the current state of VODACOM(VOD)Vodacom (VOD) remains a key player in South Africa's telecommunications industry and holds a dominant position in the market as the largest provider of mobile airtime and data services. As a subsidiary of Vodafone, Vodacom benefits from the backing of a global telecommunications giant but also faces challenges tied to its parent company. The market tends to react to decisions made by Vodafone, which can impact Vodacom's share price, as seen previously when concerns arose about potential sell-offs of non-European assets.
Operational Overview:
- Vodacom has expanded its operations beyond South Africa to include Mozambique, Tanzania, the DRC, Lesotho, and more recently, Ethiopia. The entry into Ethiopia, Africa's fastest-growing economy, presents a significant growth opportunity given its large population of over 105 million people.
- The company has been focusing on mitigating declining voice revenue by shifting towards data services and expanding its financial services offerings. In partnership with Jack Ma's Alipay, Vodacom is developing a "super-app" to enhance its non-voice revenue streams.
- Loadshedding remains a challenge in South Africa, leading Vodacom to invest heavily (R4bn) in infrastructure to reduce its impact and ensure network stability.
Recent Financial Performance:
In its latest results for the six months ending 30th September 2024:
- Revenue increased marginally by 1%.
- Headline earnings per share (HEPS) were down by 19.4%.
- Financial services revenue grew by 7.8% and now contributes 11.4% to group service revenue.
- Vodacom reported having a customer base of 206 million, with 83 million using its financial services.
The company acknowledged that its bottom line was impacted by several one-off factors but expressed optimism for a stronger performance in the second half of the financial year.
Technical Analysis:
- Vodacom's share price peaked at 16214c on 1st April 2022 but experienced a downward trend due to regulatory pressures and market conditions.
- We recommended waiting for a break above its long-term downward trendline, which occurred on 25th July 2024 at 9836c.
- Following the breakout, the share price rose to 11483c but has since retraced due to the disappointing latest results.
- Despite the recent decline, the stock appears relatively undervalued at current levels, offering a dividend yield of approximately 4.34%.
Investment Outlook:
Vodacom continues to demonstrate resilience in a challenging environment marked by regulatory changes, economic pressures, and technological shifts. The company's strategy of diversifying into data and financial services, coupled with its expansion into new markets like Ethiopia, positions it well for future growth.
However, the telecommunications sector remains subject to rapid technological changes, regulatory interventions (such as forced reductions in interconnect fees), and economic uncertainties in its key markets. Therefore, while Vodacom appears relatively cheap at current levels, the investment carries inherent risks.
Conclusion:
Vodacom presents a mix of stability through its established market leadership and potential growth through new initiatives. It may be suitable for investors seeking exposure to telecommunications in Africa with a relatively attractive dividend yield. However, caution is advised due to the evolving regulatory landscape and market dynamics.
