Vodacom | In search of growth

Regulatory and competitive pressures continue to limit growth in the SA telecommunications industry where Vodacom generates 71% of its Operating profit despite the acquisition of Safaricom in FY'18. Data repricing and regulations slowed H1'20 SA service revenue growth to 0.3% y/y from 4.6% previously. The growth slowdown reduced SA EBITDA margins 300bps. Our SA growth outlook remains muted given aggressive pricing competition, spectrum auction delays and weak consumer spending. Consequently, we do not expect SA service revenue to accelerate back to its three-year CAGR of 4.2% (FY'20: +2.1%, FY'21: +3.2%, FY'22: 3.8%). However, the auction of spectrum and potential entry into Ethiopia (R60bn market at maturity) could positively impact our outlook for the Group.

We rate VOD as a good capital allocator, having opted to return c.R100bn in cumulative dividends to shareholders over the past nine years and maintaining a ROIC above 45%. The Group has not pursued non-core operations and risky markets which has protected shareholder value compared to peers such as MTN (Nigeria and e-commerce assets). However, VOD's DPS has remained flat (-35% real) since FY'13 as the Group struggles to grow whilst it converts its large SA subscriber base from voice to data. We believe the Safaricom acquisition and potential Ethiopia entry should reignite VOD's growth trajectory and de-risk the Group's overexposure to a mature SA market.