leadership position in a highly competitive market makes ... · leadership position in a highly...

8
Leadership Posion in a Highly Compeve Market Makes For a Long Term Investment Opportunity EXECUTIVE SUMMARY Highly Compeve and Crowded – Too Many players Recent entry of Halotel – Pressure on tariff and margins. Tradionally margins lower compared to SSA Large Geographic area with low & uneven populaon density resulng in High CAPEX High Operang Cost Average Industry ROE - Less than 10%. Spectrum Allocaon due in 2017 - To significantly chart future growth story Opportunity lies in Data / Internet – Penetraon Level sll at 30% levels, Rural Spread Effecve ulisaon of Mobile money ecosystem viz. Merchants, Micro Loans and Saving Account etc Cost Management Leadership Posion & Powerful Brand (30% Market Share) Established Product in Potenal Growth Areas – M-Pesa & M-Pawa Extensive Distribuon Channel Quality Network Parental Strength & Deep Pocket for CAPEX INDUSTRY VODACOM TZ PROFILE FINANCIAL & VALUATIONS RECOMMENDATION Number of Sites Network Reach 2G 2730 88% of Populaon 28% of Populaon LTE Network in Dar es salaam 2014 278 3G 4G Peer Comparison Safaricom, Ke 43% 19% 33% 4% 18 6 Vodacom, SA 38% 16% 59% 5% 18 10 Vodacom, Tz (2017) 25% 5% 8.1% 1% 31 2 Vodacom, Tz (2018) 28% 10% 10.9% 3% 2 EBITDA % PAT % ROE Div Yield P/E P/BV 20 Safaricom and Vodacom, SA have a superior PAT margin of 19% and 16% respecvely vis a vis VT, TZ at 10%. ROE is also significantly high at 33% and 59%. Dividend yield is at 4% and 5% respecvely for Safaraicom and Vodacom, SA as compared to VT at 2-3%. Based on 2018 Forward earnings , the IPO Price values VT stock at 20 mes its esmated EPS This values VT at similar levels to SAFARICOM and Vodacom - SA. Short to Medium Term - Industry Dynamics makes it difficult for Vodacom TZ to improve Margins and profitability. Also CAPEX to put pressure on Cash flows. Thrust to be on retaining Market Share which will add pressure on boom-line. Long Term -Being a Industry Leader with Strong Parental Support, Experienced Management, Established Product profile to benefit from Industry consolidaon, Increased penetraon in Internet services and Next Leg Development of Mobile Money eco system to include Merchants , Loans , Savings etc. Exit of stake from Helios tower IPO REVIEW NOTE VODACOM TANZANIA PLC (“VT”) CORE Securies Limited (Licensed Dealing Member of the Dar es Salaam Stock Exchange) E-Mail: [email protected]/ [email protected] Contact: +255-684693439 / 622303759/ 754303759 / 685740148 /754890629 / 755201517 Website: www.coresecuries.co.tz IN VIEW OF THE SAME, IT IS RECOMMENDED TO SUBSCRIBE TO IPO FROM A LONG TERM INVESTMENT PERSPECTIVE.

Upload: truongthuan

Post on 15-Apr-2018

224 views

Category:

Documents


3 download

TRANSCRIPT

Page 1: Leadership Position in a Highly Competitive Market Makes ... · Leadership Position in a Highly Competitive Market Makes For a Long Term Investment Opportunity EXECUTIVE SUMMARY

Leadership Position in a Highly Competitive Market Makes For a Long Term Investment Opportunity

EXECUTIVE SUMMARY

Highly Competitive and Crowded – Too Many players Recent entry of Halotel – Pressure on tariff and margins.Traditionally margins lower compared to SSA Large Geographic area with low & uneven population density resulting in High CAPEX High Operating CostAverage Industry ROE - Less than 10%. Spectrum Allocation due in 2017 - To significantly chart future growth storyOpportunity lies in Data / Internet – Penetration Level still at 30% levels, Rural Spread Effective utilisation of Mobile money ecosystem viz. Merchants, Micro Loans and Saving Account etc Cost Management

Leadership Position & Powerful Brand (30% Market Share) Established Product in Potential Growth Areas – M-Pesa & M-Pawa Extensive Distribution Channel Quality Network Parental Strength & Deep Pocket for CAPEX

INDUSTRY VODACOM TZ PROFILE

FINANCIAL & VALUATIONS RECOMMENDATION

Number ofSites

Network Reach

2G 2730 88% of Population28% of PopulationLTE Network inDar es salaam

2014278

3G4G

Peer ComparisonSafaricom, Ke 43% 19% 33% 4% 18 6Vodacom, SA 38% 16% 59% 5% 18 10Vodacom, Tz (2017) 25% 5% 8.1% 1% 31 2

Vodacom, Tz (2018) 28% 10% 10.9% 3% 2

EBITDA % PAT % ROE Div Yield P/E P/BV

20

Safaricom and Vodacom, SA have a superior PAT margin of 19% and 16% respectively vis a vis VT, TZ at 10%. ROE is also significantly high at 33% and 59%. Dividend yield is at 4% and 5% respectively for Safaraicom and Vodacom, SA as compared to VT at 2-3%. Based on 2018 Forward earnings , the IPO Price values VT stock at 20 times its estimated EPS

This values VT at similar levels to SAFARICOM and Vodacom - SA.

Short to Medium Term - Industry Dynamics makes it difficult for Vodacom TZ to improve Margins and profitability. Also CAPEX to put pressure on Cash flows. Thrust to be on retaining Market Share which will add pressure on bottom-line.

Long Term -Being a Industry Leader with StrongParental Support, Experienced Management,Established Product profile to benefit from Industry consolidation, Increased penetration in Internet services and Next Leg Development of Mobile Money eco system to include Merchants , Loans , Savings etc. Exit of stake from Helios tower

IPO REVIEW NOTEVODACOM TANZANIA PLC(“VT”)

CORE Securities Limited(Licensed Dealing Member of the Dar es Salaam Stock Exchange)E-Mail: [email protected]/ [email protected]: +255-684693439 / 622303759/ 754303759 / 685740148/754890629 / 755201517Website: www.coresecurities.co.tz

IN VIEW OF THE SAME, IT IS RECOMMENDED TO SUBSCRIBE TO IPO FROM A LONG TERM INVESTMENT PERSPECTIVE.

Page 2: Leadership Position in a Highly Competitive Market Makes ... · Leadership Position in a Highly Competitive Market Makes For a Long Term Investment Opportunity EXECUTIVE SUMMARY

Company & Business

Vodacom Tanzania PLC (“VTL” or “The Company”), a subsidiary of international mobile giant Vodacom Group Limited is a leading mobile operator in Tanzania. The Company has approx 12 Mn customers equivalent to 31% market share. The Company provides voice, data, leased lines, PABX connectivity, international connectivity, WIMAX solutions and Mobile money solutions. In terms of network & coverage infrastructure, the Company has following key facilities:

The Company has invested approx TZS 485 Bn during last 3 years in CAPEX and network up gradation.

Further the Company products include Vodacom M Pesa (“M-Pesa”) which is Tanzania’s leading mobile money service with approx 7 Mn customers supported by 85000 agents across the country. The platform enables VT customers to send money to each other, make merchant payments, business to business payments, withdraw and deposit money to about 40 banks. M Pesa has recently migrated to a new platform resulting in improved services. The Company also has Vodacom M-Pawa savings and loans platform which enables customers to take loans and pay through mobile. The product issues 350,000 loans per month distributing approx TZS 5 Bn loan amount. The Company also provides wireless solutions, Fixed line, VPN solution etc to Corporate.

The Key Strengths of VTL are: Leadership Position and Powerful Brand Established Product in High Potential Growth Market - M-Pesa and M-Pawa Presence in High Growth Market (Data) – Mobile internet penetration in TZ is 34% as compared to 85% in Kenya Extensive Distribution Channel - 189 nationwide retail points/ 17000 free lance distributors/ 75000 mobile money agents Good penetration among Corporate and Enterprises Quality Network – Network available in excess of 99% of time , Call drop rate <0.6% Experienced Parent ( Part of Vodafone Group) and Management Team and Deep pocket for CAPEX

Number of SitesNetwork Reach

2G 2730 88% of Population

28% of Population

LTE Network in Dar es salaam

2014

278

3G

4G

IPO REVIEW NOTEVODACOM TANZANIA PLC(“VT”)

CORE Securities Limited(Licensed Dealing Member of the Dar es Salaam Stock Exchange)E-Mail: [email protected]/ [email protected]: +255-684693439 / 622303759/ 754303759 / 685740148/754890629 / 755201517Website: www.coresecurities.co.tz

Page 3: Leadership Position in a Highly Competitive Market Makes ... · Leadership Position in a Highly Competitive Market Makes For a Long Term Investment Opportunity EXECUTIVE SUMMARY

Industry

MARKET SIZE - Approx USD 1 Bn in 2015, almost 2% of GDP of country VOICE SUBSCRIPTION - Second largess telecommunication market in East Africa after Kenya, with 40 Mn users and penetration of approx. 80% of population. Mobile subscription increased from 21 Mn to 40 Mn in last 5 years. INTERNET SERVICE – 17 Mn customers in 2015, approx 34% of population. Major growth in mobile wireless users. BROADBAND MARKET – Underdeveloped due to limited reach of fixed line network. Majorly all retail customers use broadband using mobile networks and hence mobile operators have become key player in internet service provision. GEOGRAPHICAL - Rural areas still under served by 3G connectivity Existing Market Share as follows:

Operator

Vodacom

Tigo

Airtel

Halotel

Zantel

Smart Telecom

TTCL

Market Share

31%

29%

26%

7%

4%

2%

1%

CAPEX – High - Continued investment in 4G and rural connectivity required CHALLENGES – Extremely Competitive - Entry of new player Halotel in 2015 further crowded the market Limited availability of radio spectrum - TCRA is seeking to address by completing migration and auction additional spectrum. High CAPEX – Substantial Continued investment is required in Network infrastructure in rural areas to maintain market share and quality of service. This will result in pressure in cash flows and increased gestation period for handsome return on Equity. High Operating Cost - Inconsistent Power Supply resulting in High Maintenance cost for Networks Regulatory Risk – Issuance of New licenses in an already crowded market, government policy to increase taxes and implementation of new ICT policy to affect profitability of the sector

IPO REVIEW NOTEVODACOM TANZANIA PLC(“VT”)

CORE Securities Limited(Licensed Dealing Member of the Dar es Salaam Stock Exchange)E-Mail: [email protected]/ [email protected]: +255-684693439 / 622303759/ 754303759 / 685740148/754890629 / 755201517Website: www.coresecurities.co.tz

Page 4: Leadership Position in a Highly Competitive Market Makes ... · Leadership Position in a Highly Competitive Market Makes For a Long Term Investment Opportunity EXECUTIVE SUMMARY

Opportunity

Future Outlook

Rural sector where 2/3rd of population resides Acquisition of 4G customers in coming years Differentiated Product- Both on Hand Sets & Tariffs Data Opportunities – Significant growth potential due to low smart phone penetration Mobile Financial Services – TZ has one of the most advanced mobile money ecosystem, which can be expanded to new products and services viz. saving & loan platform, merchant services. M-Pesa, a established product can be revenue driver with focus on SME, Corporate , loans and savings products Large Customers – Gain Market share from large business customers through managed services and aggressive marketing strategy Consolidation - Expected consolidation in the sector going forward for economies of scale Managing Cost – By optimising network roll out, Increase in Sales efficiency and streamlining administrative functions thus positively impacting bottom-line

Short To Medium Term Industry to remain highly competitive and face regulatory and macro-economic risks Significant Growth expected in Data and Mobile Money services Customer registration to de-grow for established players including VT Retail Tariff to experience downward pressure which should result in increase in usage Increase in CAPEX and Operating Cost to retain market share to disrupt market dynamics Market Share to Drive Business Focus Spectrum Allocation due in 2017 – The decision taken by the government on timing, fees and allocation of digital spectrum to have a major impact on Vodacom and other market players.

Long Term Industry Consolidation expected to drive economies of scale and Exit of Small players Industry Leader to sustain and benefit from overall industry becoming more profitable in long run Data and Mobile Money to be engines of growth Vodacom expected to benefit from changes in Industry dynamics

IPO REVIEW NOTEVODACOM TANZANIA PLC(“VT”)

CORE Securities Limited(Licensed Dealing Member of the Dar es Salaam Stock Exchange)E-Mail: [email protected]/ [email protected]: +255-684693439 / 622303759/ 754303759 / 685740148/754890629 / 755201517Website: www.coresecurities.co.tz

Page 5: Leadership Position in a Highly Competitive Market Makes ... · Leadership Position in a Highly Competitive Market Makes For a Long Term Investment Opportunity EXECUTIVE SUMMARY

Financial Analysis

Profitability Statement

Total Revenue

Other Operating Income

Total Income

Direct Expenses

Staff Expenses

Publicity Expenses

Other Operat Exp

EBITDA

Share of Loss from Associate

Depreciation & Amor

Finance Income

Finance Cost

Translation Loss/Gain

PBT

Tax

PAT

Dividend

Net-worth

CAPEX

Dividend Yield

EBITDA %

PAT%

ROE

Active Customer

Active Data Customer

MPESA CustomerARPU

TZS Bn

Mar-15

909

19

928

349

60

37

219

263

33

144

27

35

1

79

47

32

533

201

2%

29.0%

3.5%

6.2%

12,172

5,265

6,8766,530

Mar-16

923

6

929

301

64

35

250

279

39

158

41

44

(4)

75

45

29

16

562

216

2%

30.2%

3.1%

5.3%

12375

5,415

7,0305,972

Mar-17

934

934

312

62

38

284

238

148

52

47

(13)

82

35

47

17

593

141

1%

25%

5.0%

8.1%

12,247

6,049

6,062

Mar-18

994

994

317

63

29

309

276

167

69

40

(0)

137

41

96

48

1,159

158

3%

28%

9.6%

10.9%

12,846

6,631

6,299

Operational data (000) Mar-15 Mar-16 Mar-17 Mar-18

Key Ratios Mar-15 Mar-16 Mar-17 Mar-18

IPO REVIEW NOTEVODACOM TANZANIA PLC(“VT”)

CORE Securities Limited(Licensed Dealing Member of the Dar es Salaam Stock Exchange)E-Mail: [email protected]/ [email protected]: +255-684693439 / 622303759/ 754303759 / 685740148/754890629 / 755201517Website: www.coresecurities.co.tz

Page 6: Leadership Position in a Highly Competitive Market Makes ... · Leadership Position in a Highly Competitive Market Makes For a Long Term Investment Opportunity EXECUTIVE SUMMARY

Revenue Analysis

Overall Revenue has improved by 2% in 2016 after a dip in 2015 manily on account of growth in M-Pesa and Data services. Data Revenue has grown by 38% in 2016 up from 9% a year ago M-Pesa has grown by 10% during 2016 Voice Revenue declined by approx 4% primarily due to lower minute use Average Revenue per user ( ARPU) has been declining at approx 9% following entry of Halotel in marketIt is very clear that Voice is on a declining trend and growth engines are Data and M-Pesa. VT has a competi-tive advantage in terms of established M-Pesa eco system and quality data services. PROFITABILITY -VT profitability margin is low at 3% on account of – Higher depreciation, Losses from Associate (Helios Tower) amounting to TZS 39 Bn and Effective tax rate at 60% as compared to statutory rate of 30% on account of share of loss from associate PROJECTED PROFITABILITY ANALYSIS – 2017 & 2018 EBITDA is expected to decrease in 2017 as compared to 2016 manily on account of revenue pressure, decrease in customer registration and higher interconnect cost. Further it is expected to stabilise during 2018 at TZS 276 Bn which is same as posted during 2016, on account of increase in customer base and ARPU. The PAT growth for 2018 is manily driven by Interest income of TZS 21 Bn expected from investment proceeds from IPO and slight increase in operating profit driven by better ARPU and cost management MID TERM PROFIT OUTLOOK BEYOND 2018Beyond 2018, we estimate that Profit will marginally improve on account of following – Improved Revenue and margins on account of better M-Pesa and Data services performance EXIT of 24% stake in Helios Tower, losses from which has been historically dragging the profit Utilisation of CAPEX from IPO proceeds resulting in improved network infrastructure Repayment of parent loan to reduce interest expenses Better cost management and economies of scale

The IPO proceeds of TZS 476 Bn is expected to be utilised for Repayment of loan from parent company – TZS 217 Bn, Inorganic growth and Working capital

IPO REVIEW NOTEVODACOM TANZANIA PLC(“VT”)

CORE Securities Limited(Licensed Dealing Member of the Dar es Salaam Stock Exchange)E-Mail: [email protected]/ [email protected]: +255-684693439 / 622303759/ 754303759 / 685740148/754890629 / 755201517Website: www.coresecurities.co.tz

Page 7: Leadership Position in a Highly Competitive Market Makes ... · Leadership Position in a Highly Competitive Market Makes For a Long Term Investment Opportunity EXECUTIVE SUMMARY

Valuation

Comments:In absence of any domestic listed telecom company, We have compared Safaricom listed in Nairobi Stock exchange and Vodacom South Africa as comparable peers. Safaricom and Vodacom, SA have a superior PAT margin of 19% and 16% respectively vis a vis Vodacom , Tanzania at 10% for 2018. This is also translating to a lower return on equity at 11% for 2018 as compared to 33% and 59% for Safaricom and Vodacom respectively. Dividend yield is at 4% and 5% respectively for Safaraicom and Vodacom , SA as compared to VT which is expected at 3% Based on 2018 Forward earnings , the IPO Price values VT stock at 20 times its estimated EPS 2 times its estimated book value Considering Telecom industry dynamics in Tanzania, we believe in short term it would be difficult for Vodacom Tanzania to reach to a PAT level of 20% and consequent ROE on account of challenging Industry dynamics. However in long term, Vodacom being a Industry Leader with Strong Parental Support, Experienced Management, Established Product profile will benefit Industry consolidation Increased penetration in Internet services and Next Leg Development of Mobile Money eco system to include Merchants , Loans , Savings EXIT of stake in Helios Tower Cost Management

In view of the same, it is recommended to Subscribe to IPO from a Long Term Investment perspective.

Safaricom

Vodacom

Vodacom

Vodacom

Vodacom

Year

2016

2016

2016

2017

2018

EBITDA

%

43%

38%

30%

25%

28%

PAT

%

19%

16%

3%

5%

10%

ROE

33%

59%

5.3%

8.1%

10.9%

Dividend

Yield

4%

5%

2%

1%

3%

P/E

18

18

24

31

20

P/BV

6

10

1

2

2

Country

Kenya

SA

Tanzania

Tanzania

Tanzania

We have adopted Relative Valuation based on Peer Comparison of comparable listed stock :

IPO REVIEW NOTEVODACOM TANZANIA PLC(“VT”)

CORE Securities Limited(Licensed Dealing Member of the Dar es Salaam Stock Exchange)E-Mail: [email protected]/ [email protected]: +255-684693439 / 622303759/ 754303759 / 685740148/754890629 / 755201517Website: www.coresecurities.co.tz

Page 8: Leadership Position in a Highly Competitive Market Makes ... · Leadership Position in a Highly Competitive Market Makes For a Long Term Investment Opportunity EXECUTIVE SUMMARY

Disclaimer:

Though utmost care has been taken in the preparation of this report, we do not guarantee the accuracy or completeness of the information contained herein nor will CORE Securities Limited be held liable for the information contained herein.The views expressed in this report are solely those of the Research Department of CORE Securities Limited and are subject to change without notice. CORE Securities Limited endeavours to provide objective opinions and recommendations.The information in this report is not an offer for the sale or purchase of Vodacom Tanzania Limited. This document should only be considered a single factor used by investors in making their investment decisions.This publication may not be distributed to the public media or quoted or used by the public media without prior and express written consent of CORE Securities Limited.This material was produced by CORE Securities Limited solely for information purposes and for the use of the recipient in Tanzania and East Africa. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. This document is not meant for circulation in United States of America, Europe, Asia or any other part of the world except East Africa. This document does not constitute an offer of, or an invitation by or on behalf of CORE Securities Limited or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from CMSA approved Prospectus, published information and other sources. None of CORE Securities Limited accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expression of opinion and other subjective judgements contained herein are made as of the date of this document. Emerging securities markets may be subject to risk significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.

Application Mode

For Tanzanian Nationals: Through CORE Securities Limited or any of Exim Bank (T) Limited branches for a minimum of 85,000 TZS and a multiple of 8,500 TZS Through Umande Unit Trust for a minimum of 15,000 TZS.For Foreigners: Through Umande Unit Trust Equity Fund

FOR MORE INFORMATION, PLEASE CONTACT CORE SECURITIES LIMITED USING THE ABOVE CONTACT DETAILS

IPO REVIEW NOTEVODACOM TANZANIA PLC(“VT”)

CORE Securities Limited(Licensed Dealing Member of the Dar es Salaam Stock Exchange)E-Mail: [email protected]/ [email protected]: +255-684693439 / 622303759/ 754303759 / 685740148/754890629 / 755201517Website: www.coresecurities.co.tz