Vodacom’s secret weapon 

Vodacom’s relationship with government-aligned shareholders in Egypt and Ethiopia enables it to relatively easily implement tariff increases, even during periods of currency volatility. 

This reduces its foreign exchange risk as it can minimise the impact of currency fluctuations by adjusting pricing in key markets. 

Coupled with the growth of its fintech businesses, including Safaricom in East Africa, and the steady performance of its South African franchise, the telecoms giant is becoming increasingly attractive to investors. 

Sanlam Private Wealth revealed earlier in August that it has added Vodacom to its clients’ portfolios, after years of wondering where potential upside would come from for South Africa’s telecoms players. 

In this sector, Vodacom has emerged as Sanlam Private Wealth’s preferred investment, as the telecoms giant recently raised its guidance to above 10% growth in earnings per annum for the next five years. 

Vodacom expects this to be mostly driven by its Egyptian business, which posted strong growth of 33.7% year-on-year in the company’s latest quarterly update. This division contributed R8.5 billion to the company’s quarterly revenue. 

Sanlam Private Wealth expects further upside from Egypt, particularly through Vodacom’s associate ownership in Safaricom’s operations in Kenya and Ethiopia. 

“In our view, the market is still underestimating both the scale of this shift and the compounding impact of growth in these higher-return markets,” the asset manager said. 

The key to this growth is Vodacom’s secret weapon, which is having significant partnerships with government-aligned stakeholders in Africa. 

In Egypt and Ethiopia, the telco’s relationship with government-aligned stakeholders has enabled smooth tariff increases, even during periods of currency volatility. 

Sanlam Private Wealth explained that this minimises foreign exchange risk, as the company can adjust pricing quickly. 

Other South African telcos in different African markets have notoriously struggled to get regulatory approval for tariff increases, harming their financial performance. 

Egypt and Ethiopia remain underpenetrated, youthful markets with strong demand for data and mobile money, and Vodacom is already recording robust growth in local currency terms. 

Another advantage is that most of Vodacom’s expenses in Egypt are in local currency rather than US dollars, which helps keep costs for sites and towers at more manageable levels.

Further upside on the way

Apart from the growth expected to come from its African operations, Sanlam Private Wealth expects Vodacom to benefit from its immense investment in its fintech operations. 

Fintech now contributes around 12% of group earnings, and momentum is building in Egypt, South Africa, Kenya, and Ethiopia. 

“With Vodacom now disclosing more about fintech and beyond mobile earnings, we expect the segment to attract greater investor recognition,” Sanlam Private Wealth said. 

As a result, the earnings from these operations may command a premium multiple of 15 times or more and unlock significant upside to the group’s valuation.

Fintech earnings and operations tend to attract higher valuations as they are faster-growing, more capital efficient, and, in Vodacom’s case, make the business less sensitive to regulatory changes in the telecoms space. 

Vodacom’s fintech offering has gained traction in Egypt, which has a large underbanked population it can tap into. 

VodaCash has been vital for the company’s ability to sustain double-digit growth in both data revenue and financial services in the country.

Sanlam Private Wealth analyst Dumisani Chiume said the asset manager expects earnings from the fintech business to accelerate over time as adoption increases. 

Vodacom’s major hurdle in the coming years is the significant amount of capital it has to consistently reinvest in its network to maintain quality and reliability. 

Chiume explained that this is only expected to increase as the operator expands its network in Africa and traffic picks up. 

One benefit for Vodacom is that while telecoms are capital-intensive businesses, the South African industry is reaching a phase where network sharing is becoming more viable. 

This enables the use of spectrum to become more efficient and enables telecom operators to redirect some spending to other areas of their business. 

Chiume is confident that this, in turn, will result in a higher average revenue per user (ARPU). Vodacom has made progress in migrating customers from basic 2G phones to entry-level smartphones, boosting ARPU. 

Currently, an estimated 15% to 20% of the subscriber base in South Africa is still on 2G, presenting further growth opportunities. 

Additionally, with load-shedding largely behind us, the reduced need for backup power is driving cost efficiencies – Vodacom has identified up to R3 billion in annual cost savings.

“Add to this a secure 5% to 7% dividend yield, full upstreaming of cash and a valuation that remains attractive, and we see a compelling opportunity,” Sanlam Private Wealth said.