"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."
To market, to market to buy a fat pig. We saw selling going into the weekend here at the foot of Africa, we often forget how far away we are from the rest of the world. Hong Kong to London is nearly twelve hours and I am sure that those fellows see that as the other side of the world. Here locally, a trip to Europe is seen as a par for the course overnight flight, ten and a half hours to Frankfurt from here. Frankfurt to New York is seven and a half hours. OK, the world is a big place and supersonic flight was for the rich and famous, the Concorde "retired" over ten years ago now. Three and a half hours across the Atlantic, with limited headroom and legroom, but hey, who cares when the speeds you were reaching were 2000 km per hour plus and altitudes of 18 km high. Wow. The good news for consumers is that there are many moves afoot to reintroduce ordinary commercial passenger supersonic flight, cost is obviously the biggest issue, and those mostly being weighted towards fuel. The A380 boasts a fuel rate consumption per passenger of 3 litres per 100km. Concorde? 16.6 litres per passenger per 100km. Cost wins.
OK, back to Mr. Market. Locally we shed around 0.6 percent on the day, down to 49160 points, another slog back up to the 50 thousand mark! Over the seas and far away (three quarters of a day to get there in fact) in New York, stocks ramped up towards the end of the session. There is plenty of deal related activity around, AT&T looking to buy DirecTV for 49 billion Dollars. That is huge, but far bigger is a Pfizer sweetener for AstraZeneca. This time it stands at 119 billion Dollars. But, as far as I understand it from the information that I take in, the board of AstraZeneca are going to reject this one. In fact the stock is down around 14 odd percent as we speak. I would now want to know what the shareholders are going to ask the board, how they are going to truly unlock value. DirecTV, that deal hardly looks expensive, amazing to think that DirecTV is not even 20 years old, but has managed to create nearly 50 billion Dollars of wealth. You see, that is the thing about private enterprise, the jobs of the regulators and law makers is to make sure that the same rules apply for everybody.
My only interest in this is the number of subscribers that DirecTV has (nearly 20 million) and the size of the deal. Not all consumers are the same, but this certainly should put a premium on the DSTv business, don't you think? And if the calculator is that you get that for free, well then time to change that, right? I am not sure, but the whole argument that this time is the same as last time does not apply for me, in 2000 there was no processing power to speak of on the hardware side (let alone a computer in your pocket), the software does not compare and lastly user adoption nowadays is huge. Be careful when comparing X with Y from a bygone era.
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.
Home again, home again, jiggety-jog. Markets are higher here, commodity prices are better, but the Rand is weaker. Futures are lower, erasing all the late gains Friday. I guess that is why we are higher. The good news is that deals are being turned down. Don't get me wrong, I like the fact that businesses are being targeted, but often if the companies are thinking they are worth more. That is possibly good or bad, boards having a preconceived idea of what businesses are worth. Anyhows, I like it!
Sasha Naryshkine, Byron Lotter and Michael Treherne
Follow Sasha, Byron and Michael on Twitter
011 022 5440
No comments:
Post a Comment