Vodacom looks ready for a comeback

Vodacom is set to bounce back in the coming years, with the telecommunications company coming out of a decade of declining earnings in real terms. 

This is on the back of the company’s management team signalling higher growth expectations for the medium term at a recent investor day. 

Sanlam Private Wealth investment analyst Dumisani Chiume said this is bringing the company back into the consideration of portfolio managers. 

Chiume explained that on investor day, Vodacom raised its earnings growth guidance towards 2030, projecting double-digit earnings before interest, taxes, depreciation and amortisation (EBITDA) growth per year. 

This is an upgrade from their previous forecast for only high single-digit growth. 

Vodacom expects much of this growth to be driven by its operations in Egypt after it acquired a controlling stake in Vodafone Egypt in December 2022. 

Chiume said the organic growth of the business in Egypt is outpacing the country’s high inflation, and regulatory conditions are now favourable. 

Regulators have begun permitting price increases, creating a rare supporting environment for a telecoms operator in Africa. 

Crucially, the country’s currency is stabilising after a devaluation of more than 40%. This should limit any negative foreign exchange impacts when the earnings in Egypt are converted back into rands. 

Furthermore, Vodacom’s fintech offering is gaining traction in Egypt, which has a population that is largely underbanked. 

VodaCash has been vital for the company’s ability to sustain double-digit growth in both data revenue and financial services in the country. 

Chiume said that Sanlam Private Wealth expects earnings from the fintech business to accelerate over time as adoption increases. 

Another advantage is that most of Vodacom’s expenses in Egypt are in local currency rather than US dollars, which helps keep costs for sites and towers at more manageable levels.

Challenges remain

Vodacom’s major hurdle in the coming years is the significant amount of capital it has to consistently reinvest in its network to maintain quality and reliability. 

Chiume explained that this is only expected to increase as the operator expands its network in Africa and traffic picks up. 

One benefit for Vodacom is that while telecoms are capital-intensive businesses, the South African industry is reaching a phase where network sharing is becoming more viable. 

This enables the use of spectrum to become more efficient and enables telecom operators to redirect some spending to other areas of their business. 

Chiume is confident that this, in turn, will result in a higher average revenue per user (ARPU). Vodacom has made progress in migrating customers from basic 2G phones to entry-level smartphones, boosting ARPU. 

Currently, an estimated 15-20% of the subscriber base in South Africa is still on 2G, presenting further growth opportunities. 

Additionally, with load-shedding largely behind us, the reduced need for backup power is driving cost efficiencies – Vodacom has identified up to R3 billion in annual cost savings.

The international segment is more of a mixed bag, with the Democratic Republic of Congo (DRC) facing conflict-related disruptions, while Mozambique has moved past its worst and is expected to finish the year on a positive note. 

Overall, Vodacom is set for strong earnings growth across the board as currencies stabilise across Africa and its management team confirmed that there are no cash repatriation issues. 

Vodacom’s stake in Safaricom is also well positioned, with Kenya set to report positive numbers and Ethiopia’s break-even timeline not likely to be pushed out further. 

Meanwhile, the ‘beyond mobile’ segment — primarily financial services, including fintech — currently contributes 21% to group revenue, with guidance that it should approach 30% by 2030. 

This is an important number to track, as ‘beyond mobile’ has higher margins and requires less capital investment than traditional telecom operations, ultimately enhancing Vodacom’s valuation.

Management’s revised guidance establishes a floor to Vodacom’s fair value while pointing to a greater upside than before, with promises of dividends along the way.

Overall, Chiume said Sanlam Private Wealth is broadly constructive on the share, and as we see a path to stronger returns on invested capital versus the cost of capital, we will consider Vodacom for our clients’ portfolios.

This article was first published by Daily Investor and is reproduced with permission.