Why many analysts love Vodacom

Vodacom’s recent acquisitions and past performance show that the company offers a strong investment case.

Vodacom’s share price has done very little over the past five years, which shows why many fund managers and analysts prefer MTN as an investment.

However, Vodacom is a different company from what it was five years ago because of its geographical expansion.

FNB analysts Peet Serfontein and Jalpa Bhoolia recently picked Vodacom as a trade idea with a price target of R144. It implies an upside potential of 13%.

Serfontein and Bhoolia highlighted that Vodacom has strong cash generation which allows it to pay high and consistent dividends. Since 2013, Vodacom has paid out an average dividend yield of 6.08%.

The FNB analysts also pointed to the 55% acquisition of Vodafone Egypt, which is expected to deliver strong growth and positively impact the share price.

Another thing which works in Vodacom’s favour is speculation that Vodafone, its main shareholder, is looking to sell the operator. It could have a significant positive impact on the share price.

Good capital allocation

Over the past decade, Vodacom has had a much better capital allocation than MTN and Telkom and outperformed its rivals when looking at return on invested capital (ROIC) since 2011.

Efficient capital allocation is particularly important in the telecommunications industry, as network expansion is core to running an operator.

Continuous capital expenditure on existing and expanding networks ensures future competitiveness and relevance.

Vodacom has enjoyed lower borrowing costs on its capital than MTN or Telkom, which aids in higher profitability.

Vodacom’s weighted average cost of capital (WACC) – a measure showing the average borrowing cost for a company, considering all its sources of finance – is lower than MTN and Telkom.

African expansion and primed for acquisition

Over the past six years, Vodacom has significantly increased its portfolio of African companies.

In 2017, Vodacom acquired an 87.5% interest in Vodafone Kenya from Vodafone, indirectly obtaining a 34.94% stake in Safaricom. Safaricom is Kenya’s leading operator, with a 71% market share.

Mobile penetration in Kenya is much lower than in South Africa, which translates into a larger potential for growth.

Safaricom also has a competitive mobile money platform called M-Pesa which delivers essential financial services to low-income users in Africa.

Vodacom’s most recent expansion into Africa was through its 55% acquisition of Vodafone Egypt from Vodafone.

Vodacom is also part of a global consortium behind Safaricom Ethiopia, which recently launched its mobile network in the country.

Besides its recent expansions, Vodacom also operates in the DRC, Mozambique, Tanzania, and Lesotho.

The addition of Vodafone Kenya and Vodafone Egypt to Vodacom signals Vodafone grouping its major African assets into one company – Vodacom.

There has been speculation that it is a strategic move from Vodafone to make Vodacom an attractive acquisition target for an international mobile operator wanting to expand into Africa.

Bloomberg reported that the Emirates Telecommunications Group is looking to make a move on Vodacom, a deal that could be highly advantageous to Vodacom shareholders.

Expanding service offerings

Apart from Vodacom’s geographical expansion, Vodacom is also growing its product portfolio with financial services, fixed broadband, and IoT.

Vodacom is buying a 30% stake in CIVH, which owns DFA and Vumatel, to grow its presence in the fibre market.

This acquisition will position Vodacom as a fibre-to-the-home leader and grow its advantage over MTN in South Africa.

Vodacom is also a significant financial services provider with the inclusion of M-Pesa in its portfolio.

Vodacom expanded its financial services offering by including other products like funeral cover, life cover, insurance, and payment services.

These factors all contribute to making Vodacom a favourite among many analysts who said it is a good company to include in your portfolio.