Vodacom: Growth Prospects And 6.4% Yield Makes It Attractive For Income Investors

| About: Vodacom Group (VDMCY)

Previously, I've recommended MTN Group (OTCPK:MTNOY) as a good way to play the telecommunications growth expected in Africa. However, as the company is present in some high-risk countries such as Iran and Syria, some investors may not feel comfortable with that exposure. Another interesting income investment in the telecoms industry in Africa is Vodacom (OTCPK:VDMCY), one of MTN's biggest competitors. Vodacom is 65% owned by British giant Vodafone (NASDAQ:VOD), which also helps to reduce some of its risk profile. The company has a market capitalization of $18 billion, and is traded in the U.S. as American Depositary Receipts [ADR] in the Over-the-Counter [OTC] market.

Vodacom is an African mobile telecommunications company, based in South Africa, like MTN. It is the incumbent operator in South Africa and still remains the market leader, although its market share is not much higher than MTN's. It currently has more than 52 million customers. Its largest shareholder is Vodafone, followed by the Government of South Africa with a 20% equity stake. This provides a stable shareholder's ownership as both shareholders are long-term investors. Moreover, Vodacom also benefits from a financial, operational, and technological perspective of being part of a world leading group in the industry.

The company also has international operations, but only in four countries while MTN is present in 20. Thus, Vodacom's diversification is clearly lower, but is not exposed to volatile countries in the Middle East. Vodacom has operations in Tanzania, the Democratic Republic of Congo [DRC], Mozambique, and Lesotho. Its international operations account for about 40% of its customers, but its weight on the company's earnings is much lower; the income level abroad is much lower than in South Africa, leading to lower revenues per customer than in its domestic operation. This also leads to lower profitability margins, reducing international operations' weight on the group's earnings. In its last fiscal year, which ended in March 2013, Vodacom's foreign operations were responsible for 17% of group revenues but for only 10% of its EBITDA.

Mobile penetration rates remain relatively low in Vodacom's international markets, given that it ranges from 21% in Lesotho to 57% in Tanzania. Thus, there still exists impressive customers' growth potential abroad. On the other hand, the South African mobile penetration rate is currently high at close to 135% so its growth prospects are scarce. On average, Vodacom's mobile penetration rate is only 58% which is lower than for MTN, but taking into account only its international markets it is below 40%. DRC shows an enormous growth potential due to its large population of 72 million and very low market penetration, among the lowest in the world. Therefore, international operations should increase its weight within the group and be the company's major growth engine over the long-term.

Regarding its financial performance, Vodacom has reported over the past couple of years growing revenues and stable operating margins. In its last fiscal year, which ended on 31 March, 2013, its revenues increased by 4.5% to about $6.4 billion. International markets continued to report strong growth, with a revenue increase of 22%. In its domestic market, revenue increased by only 2.9% due to fierce competition. Its EBITDA grew by 10% to more than $2.3 billion, or an EBITDA margin of 36%. Even though its profitability is quite good, MTN has a higher EBITDA margin due to its higher exposure to international markets. Its earnings-per-share increased by 23% due to lower taxes abroad.

Vodacom's dividend history is very recent, given that it only started to pay dividends in 2009 related to the fiscal year 2010. Since then, it has increased its dividend annually with an impressive CAGR of 41% over the past four years. Vodacom's shareholder remuneration policy is to pay 90% of its earnings through dividends, so a growing dividend must come from higher earnings going forward. Its last annual dividend was $0.74 per share, up by 13.4% from the previous year. At its current share price, Vodacom offers a dividend yield of 6.34%. The dividend withholding tax in South Africa is 15%.


Vodacom is a good way to play the growth potential in the African telecom market, being exposed to countries with below-average mobile penetration rates and high growth prospects. Therefore, even though its international operations weight within the group is still relatively small, this should increase considerably over the next few years and boost Vodacom's growth. The company is currently trading at 13.6x forward earnings, which is relatively undemanding taking into account its high-dividend yield, the stability of its business, and good growth expected over the long-term. Moreover, to investors looking for a safer alternative to MTN Group to play the African telecom growth theme, Vodacom seems to be a good alternative given that it has a lower perceived risk than MTN, which is present in several high political risk countries such as Syria or Iran.

Disclosure: I am long MTNOY, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.