Vodacom and MTN have invested R50 billion each in their mobile networks over the last five years, but their capital intensity reveals very different investment strategies.
Capital expenditure (Capex), also known as network investments, is a sensitive topic, and big adjustments in expenditure can scare investors.
For example, when former Telkom CEO Papi Molotsane announced a plan to scale up Capex in 2006 to make the company more competitive, the share price plummeted by 7%.
However, the inverse can have even more devastating effects. Unless a telecommunications operator invests in its network, it will become uncompetitive and die.
The reality is that telecommunications is a capital-intensive field where continual network investments are needed to remain competitive.
Vodacom and MTN’s South African Capex over the last few years shows just how expensive it is to remain competitive.
Vodacom increased its capital expenditure from R8.9 billion in the 2017/2018 financial year to R11.1 billion in the 2021/2022 financial year.
The increased network investment is needed to keep in touch with MTN, which has built up a substantial lead over Vodacom in data network quality.
MTN was forced to react. After reducing Capex to R7.5 billion in 2020, MTN South Africa increased it to over R10 billion in 2021.
Telkom and Cell C, in comparison, cannot match South Africa’s top players in network investments, as shown in the chart below (courtesy of Analytico).
While tracking the Capex of a telecommunications operator is instructive, capital intensity is of even more value to investors.
Capital intensity is capital expenditure as a percentage of revenue. It tells you what percentage of income an operator spends on their network.
MTN, which generates less revenue in South Africa than Vodacom, has a much higher capital intensity.
Over the last financial year, Vodacom invested R11 billion in its network, which was approximately 14% of its revenue. MTN, in comparison, used 21% of its revenue to invest R10 billion in its network.
Vodacom’s strategy is to keep its capital intensity stable to give investors certainty and ensure good earnings.
Over the past five years, Vodacom’s capital intensity in South Africa was always between 13% and 14%.
MTN, in comparison, has a more flexible capital intensity strategy. Over the last five years, its capital intensity fluctuated between 17% and 25%.
The charts below, courtesy of Analytico, show Vodacom and MTN’s capital intensity over between 2018 and 2022.