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Steady progress
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Larry Claasen
Financial Mail
Friday, May 21, 2010
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“Are you free or are you dom [stupid]?” is the catch phrase of Vodacom’s latest advertising campaign, but it also sums up it s listing last year.
The mobile operator was “freed” from an agreement between its shareholders, Telkom and the UK’s Vodafone, that explicitly limited its expansion across Africa and implicitly limited its capacity to invest in its own fibre network in SA.
The “dom” part was waiting until last year to push through with the listing. By then the signs were already out that the mobile phone market had peaked and the economy was slowing.
The deal did give Telkom shareholders a shareholding in Vodacom and they also got a handsome special dividend. But if they had closed a deal four years ago, when Vodacom’s prospects were better, it could have been even sweeter.
Back then Telkom’s share price was boosted by its 50% holding in Vodacom. It reached a high of R171 in February 2006. By the time it listed 35% of its shares on the JSE and sold 15% to Vodafone for R20,29bn, its share price had dropped to R61,99.
It may have come late but analysts are happy that it eventually happened. Avior Research analyst David Lerche says he is glad the deal went through because Vodacom was starting to compete with Telkom and there was a need for a break in the relationship.
“Separating them was essential to the health of the SA telecom sector,” he says.
Doing this earlier would have also given Vodacom more room to manoeuvre to catch up with other operators, such as MTN, in Africa.
“I would not say they missed the boat but they got on it very late,” says Frost & Sullivan ICT analyst Spiwe Chireka.
Chireka says Vodacom not only has to deal with the likes of MTN and Zain, a mobile telecoms company with a wide commercial presence in Africa, but has to contend with well-funded Indian and Russian operators setting up shop on the continent .
Competition is not the only problem Vodacom has to deal with in Africa. Analysts point to the group’s internal dynamics as a possible hindrance.
Where MTN is more at ease operating across bo rders, Vodacom’s performance has been stilted.
MTN’s African operations, for instance, have in general outperformed those in SA while the opposite is true for Vodacom. “MTN seems to have chosen its partners in Africa better,” says Sanlam Investment Managers analyst Andrew Kingston. ”Vodacom always seems to struggle outside SA.”
Besides getting to grips with Africa it has to contend with a maturing SA market, and has come to terms with this. “The environment in which Vodacom operates is very different to that seen a few years ago,” says CEO Pieter Uys.
Lerche says that in a slowing market, it is essential for the group to keep costs down . Vodacom has worked hard at achieving this. O perating cost rose only 4% to R38,7bn for the year to end- March. Revenue was up 5,6% to R58,5bn and operating profit rose 8,7% to R19,7bn for the period.
The group is not a company that will grow earnings in double digits but its management has accepted this and is focused on running a tighter ship.
As Lerche points out, it is still a good company, pays dividends and makes good profits. He thinks it is close to fully valued at its current price of R58. The consensus recommendation of 12 analysts on I-Net Bridge is “hold”.
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