Investors seeking diversification may want to consider Vodafone Group (VOD) as a way to invest in developing African markets. The stock offers exposure to the region while being domiciled in the more secure capital markets of the United Kingdom. The stock itself is competitively priced for a wireless communications company.
Vodafone is an Africa Play
Vodafone Group's biggest African business, Johannesburg-based Vodacom Group, surpassed its British unit by profit in 2010 and the Spanish division the following year. Profits from African operations have been expanding rapidly, even at an amazing 50% annual rate in some African nations. It is projected that operating profit from this geography will surpass operating profit from southern Europe's operations in about three years.
Vodafone's African Operations head Nick Read said, "There's a massive opportunity in penetration that we need to drive forward on. Everyone in Africa wants to be on Facebook. They want e-mail. They want social networks." The African continent will be the fastest growing region for the mobile phone industry in the next five years according to consultant AT Kearney. Phone ownership is projected to grow from 73% last year to 85% of the population in 2015, estimated at 900 million users.
Aside from Vodacom, which covers the Democratic Republic of Congo, Lesotho, South Africa, Mozambique and Tanzania, Vodafone has a 70% stake in Vodafone Ghana, 40% stake in Safaricom in Kenya and co-owns Telecom Egypt. Vodafone reported 939 million pounds ($1.5 billion) in EBITDA from its 65% share in Vodacom for the semester ending in September, a 15% increase from a year earlier. Vodacom's profit margin increased to 34.2% from 33.7% a year earlier, in contrast to 1.9% and 5.5% drop for Italy's and Spain's respective margins.
Vodafone in Africa is not just a regular phone company; it also acts as internet provider and virtual bank. In sub-Saharan Africa, 16% of people say they've used a mobile phone to pay bills or receive money. The World Bank estimates that only about 25% of adults have bank accounts and around 70% of the adult population live on $2 or less per day.
The company's mobile payment system M-Pesa is patronized by 15 million customers in Kenya and accounts for 31% of the country's gross domestic product in equivalent financial transaction. Safaricom CEO Bob Collymore said, "You can pay hospital bills; you can pay taxi bills; you can pay your satellite" TV bill. M-Pesa charges a fee for each transaction that passes through its system, ranging from 3 shillings (3 cents) to 100 shillings depending on the amount. M-Pesa covers eight countries and is now offering banking services such as savings accounts in some markets. The system's efficient way of sending small sums which doesn't require a bank account makes it preferable over traditional banks.
Higher Risk in Frontier Markets
Notwithstanding the high growth prospects for Africa, Vodafone and rivals like France Telecom (FTE) have to contend with lack of infrastructure and tight competition from MTN Group, which serves 183 million subscribers in 22 Middle Eastern and African markets. The competition forced Vodacom to slash mobile broadband rates to get market share resulting to a 24% decrease in average revenue per megabyte amidst 46% smartphone usage growth for the six months ending in September.
Network installation costs involve tens of billions of dollars. Limited infrastructure forces telecom companies to provide for backup generators and batteries to ensure continuous signals during power failures. African wireless tower company IHS CEO Issam Darwish said, "In Africa, it's a totally different game - you have to install your power supply in most cases. It's a massive, massive capital expenditure."
Competitor Financials
Most other large-cap wireless companies trade at either a higher p/b ratio or are financed by more debt:
Ticker | Company | Country | P/E | P/S | P/B | P/FCF | D/E |
China Mobile | Hong Kong | 11.56 | 2.66 | 2.12 | 6.32 | 0.04 | |
Vodafone Group | UK | 1.92 | 1.15 | 0.51 | |||
America Movil S.A.B. de C.V. | Mexico | 14.83 | 1.6 | 4.09 | 1.46 | ||
China Unicom (Hong Kong) | Hong Kong | 47.72 | 1.06 | 1.21 | 3.62 | 0.55 | |
Telefonica Brasil, S.A. | Brazil | 19.81 | 1.73 | 1.31 | 8.24 | 0.18 | |
Rogers Communications | Canada | 15.28 | 1.84 | 6.33 | 27.63 | 2.96 | |
TELUS | Canada | 16.63 | 1.96 | 2.61 | 39.1 | 0.82 | |
Mobile Telesystems OJSC | Russia | 21.76 | 1.52 | 6.07 | 37.27 | 2.38 | |
Sprint Nextel | USA | 0.49 | 2.01 | 2.51 | |||
Turkcell Iletisim Hizmetleri AS | Turkey | 13.3 | 2.7 | 2.17 | 0.25 | ||
VimpelCom | Netherlands | 26.88 | 0.6 | 1.58 | 1.85 | ||
SK Telecom | South Korea | 7.75 | 1.24 | 1.69 | 42.38 | 0.54 | |
TIM Participacoes S.A. | Brazil | 14.09 | 1.05 | 1.43 | 0.26 | ||
Portugal Telecom SGPS SA | Portugal | 20.74 | 0.56 | 1.49 | 4.67 | ||
Clearwire | USA | 3.54 | 4.82 | 4.4 | |||
PCS | MetroPCS Communications | USA | 6.26 | 0.68 | 1.04 | 9.67 | 1.43 |
United States Cellular | USA | 19.68 | 0.68 | 0.79 | 0.23 | ||
Telephone & Data Systems | USA | 21.16 | 0.44 | 0.6 | 0.38 | ||
InterDigital | USA | 6.83 | 2.79 | 3.22 | 7.29 | 0.35 | |
NII Holdings | USA | 0.18 | 0.37 | 1.58 | |||
Ubiquiti Networks | USA | 12.55 | 3.11 | 9.29 | 12.39 | 0.44 |
Source: Finviz.com
Only United States Cellular and Telephone & Data Systems trade at a lower price to book ratio and have a lower debt to equity ratio.
Conclusion
Vodafone is an interesting way to participate in the growth of African markets. It is rare to find a company that is positioned for frontier growth with developed nation investor protections that trades at reasonable price multiples.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
