Vodacom’s glass ceiling

It has also continually lapped up the advantages of being the first mover with services – it was, for example, the first to bring 3G data services and its faster offspring HSDPA to bandwidth-hungry SA.

With around 34m SIM cards among 44m South Africans, growth prospects on local turf are no longer as forthcoming as before. The natural thing to do would be to take the know-how and conquer international markets; the problem, though, is that Vodacom is on leash placed on it Vodafone, which jointly owns the company with Telkom.

The agreement prohibits Vodacom from sniffing for opportunities in certain areas in Africa. Dobek Pater of Africa Analysis says that while Vodacom was initially not allowed to set foot north of the equator, it is allowed to bid for licences together with Vodafone: “It can’t bid as a direct competitor; while this is less of a concern, the fact remains that opportunities in Africa are few and far between now.”

“It’s a problem,” says Pater. “Vodacom’s growth rates could slip from double to single digits unless it is able to secure one or two lucrative markets and may see slip from double to single digits. And with the SA market approaching saturation, mobile firms have been digging into the low end of the market where revenues per user are far below the average. You can’t sustain growth this way.”

One area where growth may come from locally in by offering new services, in the hope that current customers will spend more. Pater says that while this is thelogical thing to do, growth could be limited by citizens’ low disposable income levels: “If Vodacom can think of ways to get people to spend more on telecoms but not see an increase in their budgets, it can work. Mobile banking is a good example of that; people pay for the convenience and save on petrol and time. New activity.”

Telecoms analyst and executive director at Renaissance Asset Management Khulekani Dlamini says that while it’s inevitable that subscriber growth would taper off, there are areas where it is relatively unconstrained: "Yes, there is an upper limit to human subscriber numbers; where there are better growth prospects in aggregated ARPU, which includes revenue from other services like data."

Developments are obviously a function of technological evolution, says Dlamini: "The aggregate value spent per SIM card will increase because of new technologies and thus new services."

In addition, Dlamini says the distinction between subscriber numbers and SIM cards in use will become more prominent going forward: "The number of human subscribers won’t grow as quickly as the number of SIM cards; in fact, SIM card growth will detach itself from number of people that are actually out there. Current subscription levels imply that babies have SIMs. Now, however, there are entities using cell technologies that didn’t before, such as companies sending mass SMSs, security services or banks offering mobile services."

These entities additionally create new instruments, but enhance the revenue that can be attained: "Penetration in terms of people is no longer interesting; growth from additional services is as we see increasing numbers of ‘non-human’ users of telephony. This is being driven by what corporates are using some of these services for."

Regarding the question of value in Vodacom’s 50% parent Telkom, Dlamini reckons holding the share is a no-brainer, especially since the company says it expects earnings to be up to 45% higher when it next reports: "Given that guidance, we are expecting headline earnings of between R16,50 to R17,80, placing the company on a single-digit PE. You do not find a lot of stocks at this juncture in these market conditions."

Even if one were to assume that both the earnings of the Telkom fixed line business and Vodacom, are not at normalised levels – due to expected competition and new regulatory tariff constraints – one is not paying more than a 12 PE for those normalised earnings.