Voice falling, but data on a tear

A company evolving right now is Vodacom, with only one more hurdle left. And quite possibly a huge one, in an announcement this morning Vodacom have agreed with Neotel to buy all of it for 7 billion Rand. But the deal remains "subject to regulatory approvals". But how would you, the consumer benefit? Well, it seems that the more lucrative business market would benefit: "Vodacom's customer base will benefit from Neotel's extensive fibre assets and enterprise capabilities which will allow Vodacom to accelerate its fixed enterprise strategy and stimulate greater competition in the South African fixed telecommunications sector."


We here at Vestact are current Neotel subscribers, so the move for us would be welcomed and hopefully in the end the consumer can benefit from higher broadband speeds that compare favourably to international standards. But remember, we are far away from the rest of the world. The one thing that struck me about this transaction is that government would then directly be invested in the two fixed line companies, should the deal happen. How? Well, the Government of South Africa owns 13.9 percent of Vodacom and 39.76 of Telkom. Those are worth 26.6 and 8 billion Rand respectively. That is right, Government's (and by extension all of us) stake in Vodacom is three times plus the size of the fixed line operator. The one has a dividend yield of zero, the other has a very progressive dividend payout policy, see below.


That is one announcement from the company, the other more exciting news of course is that Vodacom have released results for the full year to end March. You may well know that MTN is our preferred mobile company, but we do hold Vodacom for many clients who are looking for a superior yield. The total customer base is now 57.5 million strong, up 7 million on the year, that is worth talking about. Most of those customers were added in Vodacom's international business (Tanzania, Mozambique, Lesotho and the DRC). We have often pointed out that the amount of customers that they can potentially cover is 200 million folks, with the only overlap in South Africa (from an investment point of view) being MTN of course. You can include Telkom, but from an investment point of view, we think that they are a no-no. Legacy business with a shareholder with a strange agenda, if you are looking for a reason why the big mobile companies are so profitable, it is because the government and the regulator are fumbling. The consumer would be so much better off if the market were free and open.


That aside, we should not credit the business with the failure of the fixed line operator, although once joined at the hip, Vodacom have now been independent of Telkom for some time now, the company has been listed since 2009, just around five years exactly. Fabulous. There is a payout ratio of around 90 percent and that was introduced in recent years. That was the point I was trying to make earlier about government placing importance on their stake in Vodacom. It is a huge income generator for National Treasury (I presume it flows in that direction), 207,038,100 shares netting 1.7 billion Rand in dividends. Pre-tax of course, how would that work? Government's last annual dividend from Vodacom is roughly 21 percent of their stake in Telkom. Again, this is only to illustrate how important an asset Vodacom is. But the general view in the office is that Government should not interfere in business in any shape or form. Ironically through the Neotel acquisition, they are more involved.

Quite simply what we are seeing in the mobile industry across the continent is a shift to more data spend and lower call spend as a result of lower call rates. The richer people get, the more data they will be able to consume through their smarter smartphones, which themselves are sucking more and more data. Let us face it, the younger (and not so younger) generation want a mobile phone that can perform infinitely better applications than before. Data traffic increased by 80.4 percent in South Africa. Data usage outside of South Africa on the Vodacom networks more than doubled. I am not sure where the point is that data will become a more important part of their group revenue, but the slowdown in voice and the frenetic pace of user adoption of their data offerings (and it is still relatively low, the data consumption average), but inside of the next half a decade one would think that will change.


In conclusion we can have a look at the earnings, the prospects and the fabulous dividend underpin as reasons why if you own it, it is still one to hang onto. Their (Vodafone) African businesses might well be integrated (Barclays Africa style) into one tradable entity down here in Joburg. Maybe, maybe not. EPS clocked 896 cps (excluding a once off empowerment charge it would have been 917 cps), the dividend as discussed was 825 cps for the full year. After dividend tax that equates to 701 cps. The share price currently at 12672 cps (down 2.1 percent on the day), which means that historically the company trades on 14.1 times earnings. With an after tax dividend yield of 5.5 percent. That dividend yield underpin is very important, because let us presume that earnings increase somewhere in the region 6-8 percent per annum would mean that your dividend yield should keep pace with inflation. Expect somewhere in the region of 18.50 ZAR worth of dividends in the next two years, roughly 12.5 percent returned to you in the next two years.


I think that we are in a transitional phase with these businesses, mobile businesses. There are an enormous amount of users on the network that have a hunger for more data. The infinite number of related applications from payment and banking to simple life changing "other" category means that the business will evolve with the hardware and associated hardware (better handsets, better internet speeds). I would say that they are in another changing phase of their business, and will continue to progress.