A look at Vodacom's full year results

Vodacom Full year results came in slightly below consensus, with normalised revenue for the group increasing by 3.4% and headline earnings for the group increasing by 4.5% per share.

South Africa

South African operations grew marginally in FY17, now equating to nearly 80% of total group revenue and more than 90% of group Earnings before Interest & Tax (EBIT). 

The local operations saw services revenue boosted by another (expected) strong performance from data sales which increased by 19.70% and enterprise revenue which grew by 12.7% over the period.

Equipment sales negatively affected the South African and group revenue figures, contracting 4% over the year. Management has sighted a weaker ZAR against the Euro and USD as reasons for the revenue decline, although the ZAR has in fact been strengthening over the reporting period. Perhaps ZAR volatility the more accurate description in terms of being a significant negative catalyst.

The South African customer base managed to increase by a healthy 8.6% to 37.1m, with the Average Revenue Per User (ARPU) also increasing, by 2.8%. 

International

The international operations had a relatively lacklustre year with service revenue contracting by 5.5% over the period. Exchange rate volatility and customer disconnections in DRC, Mozambique and Tanzania, for regulatory compliance purposes (particularly in the previous year), have been cited as reasons for the decline. The non-SA business did however manage to increase the customer data base by 9.3% to 29.7m.

Safaricom Acquisition

In addition to the results, Vodacom has announced that it will acquire a 35% ($2.6bn) stake in Kenya’s Safaricom, from Vodafone. The deal will take the form of an equity swap, where Vodacom will issue 226.8m new shares to Vodafone for the 35% holding, in what is Kenya’s leading telecoms provider, boasting over 70% of the region’s subscribers.

Technicals

Vodacom chart

A daily chart of Vodacom shows the share price to be trading in the middle of a broad range between levels 14600 to 15800 longer term. The initial reaction to the results shows the share price breaking out of a short term consolidation (highlighted triangle). The short term breakout suggests that a move towards resistance of the longer term range at 15800 is likely, although the anticipated upside move relative to placement of a stop loss or risk level from this entry appears unfavourable.

Thoughts

Vodacom is a highly cash generative business which rewards shareholders with a good return in terms of its dividend offering (in excess of 5%). Outside of South Africa, conditions, although improving remain challenging in the current economic climate, particularly in Mozambique and the DRC. The Kenyan acquisition supports a strong market leadership position in an economy which is growing at nearly 6% (5.8% year on year in 2016). The bulk of group earnings is however, derived from a heavily saturated South African market and future growth will be dependent on further growth in data and investments in fibre and the Enterprise division. Trading at on a Price to earnings (P/E) value of around 17 times, while earnings growth remains muted suggests Vodacom to be trading at or around a fair value at current levels. 

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.