Vodacom results surprise Mr. Market

Vodacom results, the other day, did you see them? Here they are: For the six months ended 30 September 2013. With the payoff line Power to you. Nice. Highlights for the period include the subscriber base having expanded to 53.8 million folks with the prepaid active customer base having increased by 927 thousand.


The company has invested (in this half alone) 3.1 billion Rand in infrastructure in South Africa. Think about that for a little. That number is roughly 22 and a half percent of the entire market capitalisation of Telkom, during the six months alone. Quarterly nominal GDP in South Africa (Q2 2013) clocked 836 billion ZAR, so this investment in South Africa is roughly 0,185 percent of entire GDP. Not massive, but in terms of making us work, communication and the ability to work seamlessly, this service is invaluable. And I guess you could also add in that Vodacom spent 1.029 billion Rand on publicity expenses and paid 2.289 billion Rand in salaries in that half just passed. An integral part of society they are, that is for sure! That is for the group, so it includes outside of South Africa.


The better the communication in our market, the more efficient the economy. So for that, I salute you Vodacom and I salute your shareholders for having made this decision (65% Vodafone, 13.9% Government and 3.16% PIC) to grow the network. As an aside, something that you possibly don't think about enough, the government stake in Vodacom is worth 24.5 billion Rand. The government stake in Telkom (39.76%) is worth 5.5 billion Rand. Government could do a book build with part of their stake and take out the minorities in Telkom if they wanted, relatively easily. If government wanted to, they definitely could.


However, with Vodacom having a juicy yield, and an intention to pay as much free cash as they can, it would not really make sense for government to sell. Think about it this way. Government own 206.825 million Vodacom shares. With the payout of 26.35 Rand a share in 9 dividend payments (including this one to be paid December 2nd), the Government has received dividends of 5.449 billion Rand from Vodacom. Would government pay tax on the dividends? Let me know you tax nerds out there.

But that is the point I often make, in money terms this Vodacom stake for government and by extension the citizens, is wildly more valuable. The dividend flow has nearly been more than their equity stake in Telkom currently. And to think that the Telkom share price over the last 12 months is up 58 and a half percent! But over five years is down 51 percent, the stock still needs to double from here. Which one do you think gets spoken about more, and which one do you think government thinks is more important? Telkom probably gets spoken about too much, relative to the value, but that is probably all to do with the shareholding size (40 percent versus less than 14 percent) that government has.


Back to Vodacom numbers though. What strikes me about these numbers is how quickly data continues to move, and the base is moving higher and higher at a rapid rate. Data revenues amongst the international customers (23.7 million strong) increased a whopping 100.6 percent, whilst data customers increased only 41 percent. Indicating to me that the users inside of that base are using the product a whole lot more, that is natural.


In the local market revenue topped 30 billion, strong tablet and smartphone sales (41.2 percent growth in equipment sales) saw data grow above 20 percent. Total contract customers are 4.8 million here in South Africa, so realistically if I were the company I would look at it that less than 10 percent of all my customers are actually locked in for contracts, the growth still exists. And do not tell me for a second that those folks don't want to have contracts and subsidised handsets that are a lot better than the prior ones. Of course consumers want that, aspiring to have the best handset that they can afford.


The next moves are natural, to grow data revenue which is less than one sixth of total group revenue and to grow the international part of their business, which is only a little more than that. I often make the comment that Vodacom is essentially a South African business, and it is, but that will continue to evolve as customers ARPU's in their international operations rise with the faster growing economies in those regions. You will be able to tell when the countries in the international cluster report with separate lines in the segmented analysis. That is when you will be able to tell that Vodacom is no longer a South African dominated business.


What is also important to note is that Vodacom essentially do not operate in the same markets north of our border. Lesotho (2 million people), Mozambique (25 million people), Tanzania (48 million people) and the DRC (72 million people) collectively with South Africa (52 million people) all add up to nearly 200 million people. That essentially is 20 percent of the continents population.


Whilst earnings growth is expected to be muted over the coming years, somewhere above local inflation, the stock remains very attractive from a dividend point of view. Expectations are for about the same amount to be distributed by way of dividends in the next three years as have been distributed since the company was a stand lone entity. Nearly 27 Rand on a 118 ZAR share price. Post dividend tax around 20 percent returned to you over the next three years. Sounds decent if not mind blowing. As you well know, we continue to recommend and own MTN in this space, their growth prospects continue to appear far better than Vodacom. But they (MTN) are of course priced for higher growth.