The catalyst of the latest cuts was regulatory body CCK’s decision to cut mobile termination rates further, to around $0.02. The CCK will continue to cut MTRs annually, with a long term target of KES0.99 ($0.01) by 2013, the lowest in Africa.

The CCK’s cuts, combined with increased competition and the emergence of Zain from its long slumber, will offer the stiffest challenge to Safaricom’s market’s dominance. This will be good for consumers, not so much for margins. Impact on revenue growth will be negative, and all operators will have to move quickly to broadband to make up for the voce shortfall. This may be a harbinger of what will happen elsewhere, though that is unlikely. No other regulator has cut MTRs this quickly, and this deeply.

In Senegal, GVG signed a deal to managed inbound international calls into Senegal. The government subsequently raised Senegal’s termination rate to EUR 0.215 per minute, from EUR 0.14 per minute, and effective tax of EUR 7 cents per minute. Under the terms of the deal, GVG receives 49% of the “tax” on incoming calls, with the government retaining 51%. The company has signed similar deals in Ghana (where termination rates rose from $0.12 to $0.19), Congo-Brazzaville and a handful of other African markets.

The impact of GVG is not inconsequential. In Senegal, local operators terminate about 100m minutes in international calls each month; the GVG tax would generate about $10m a month, around half of which would go to GVG. By our estimates, GVG generates around $7-$10m a month combined, in Congo, Togo and Guinea-Conakry. In Ghana, GVG would stand to make another $4-$5m a month.

The GVG approach is fairly cunning. The company deals directly with African governments, who are starved for cash, and can use their power to impose new rules. It rarely intervenes directly, only providing monitoring equipment and training. There is increasing resistance. Besides Sonatel and Vodafone Ghana, other operators are becoming increasingly vocal. In Cote-d’Ivoire, the government has backtracked on its initial decision to allow GVG. The regional ECOWAS organization has formally protested and requested an exemption for regional traffic. Some foreign operators are already applying reciprocity. Senegal may ultimately backtrack, but the lure of fresh revenue remains too strong for many governments to resist.

 France Telecom has 19 operations in the MEA region; the region generated EUR 3.4bn in revenue in 2009, up 5% from the previous year, with EBITDA margin solidly at 42%. The company expects organic growth around 5%-6% over the medium term, which means that the realization of its target will have to be primarily acquisition-based. France Telecom estimates that it’d have to spend around EUR 5-7bn, a not inconsequential amount.

 In Africa, the company’s options are multiple, though many have narrow value. There are few mid-scale to large value options; large pan-African players such as MTN or Zain are either too large or not for sale. Other pan-African players are only moderately attractive. A market-by-market approach may be best, if painstaking. FT still has no operational presence in sub-Saharan Africa’s largest markets, South Africa and Nigeria. Cell C would fill the South African gap, while Etisalat or Bharti may be talked out of their Nigerian operations, though that’s unlikely. Cross-segment deals are more likely, with more acquisitions in the Internet space, though most operations there may be too small.

Over the past few years, Globacom has advanced meticulously, like a spider spinning its web. From its base in Nigeria, the company acquired licenses in Benin, Ghana, Cote-d’Ivoire and now Senegal. While the mobile portion of the licenses typically garners the most attention, it is mere pretense. In all these markets, Globacom would be the fourth mobile operator at best, with challenging profitability prospects. The value is elsewhere, rooted in the upcoming launch of Globacom’s Glo-1 submarine cable.

The licenses provide Globacom with more than landing points; they are a beachhead into West Africa’s burgeoning and underexploited wholesale market, a starting point to offering services in typically neglected landlocked West African countries. With its current coverage, Globacom will be in a position to challenge France Telecom and its primary West African vehicle, Sonatel, by selling bandwidth and corporate services into such markets as Mali, Burkina-Faso and Cote-d’Ivoire, and leveraging the volumes afforded by its Nigerian presence.

Globacom is too often under-estimated, primarily because  the company is information-shy and somewhat nebulous. It’s a mistake to do so; on evidence alone, we find Globacom’s strategic acumen to be as good as any; they know precisely what they are doing.

THE ORASCOM SIREN: an African born company like MTN, Orascom Telecom is the most attractive opportunity of the bunch. It operates in two of the largest North African Markets (Algeria and Egypt), has a presence in a few small but high growth sub-Saharan African markets and features EBITDA levels well above the African average. But an Orascom deal may also be the toughest to pull off, with uncertainty looming over key assets. First, the company is embroiled in a geo-political tussle in Algeria where the government has rejected a possible buyout of Orascom unit Djezzy by MTN. Further, Orascom’s second most profitable operation, Egypt’s Mobinil, is partly owned by one MTN’s main competitors, France Telecom, who has negotiated an option to purchase Orascom’s remaining share by 2013. As for the remaining Orascom Telecom assets, they accounted for 44% of group revenues in 2009 but only 30% of the EBITDA. In other words, an Orascom without Algeria and/or Egypt is only remotely attractive.

THE RELIANCE SIREN: The Reliance siren resumed its singing last week when the Ambani brothers announced a truce in their longstanding feud by agreeing to do away with their “non-competing” agreements. This allows Anil Ambani to sell Reliance Communications without prior consent from his brother Mukesh; it also means that MTN, who had looked to purchase Reliance Communication through a share swap mechanism, can now go back to the negotiations table. Nonetheless, the asset looks a little less attractive than it did a couple of years ago. Reliance is facing substantial pressure on profitability as a result of stiff competition at home. Its revenues and earnings have dropped significantly over the past year. In addition, MTN may have a rival in Etisalat, which is also said to be interested in the Indian carrier.

THE LITTLE MERMAIDS: We believe MTN should go for smaller and sweeter assets providing both consolidation at home and a beachhead outside its current geographic footprint. Millicom would be a compelling option. The Luxemburg based operator provides some consolidation opportunities in key African markets such as Ghana and Rwanda and fills key African gaps for MTN. In addition, it would open the doors to new markets in Central and South America where the operator holds a strong position.

A sustained revenue performance despite slower overall growth. We firmly believe in Sonatel’s unique positioning: its superior network coverage (to almost every single village in Sénégal and Mali), strong distribution network, strong brand name – Orange – and solid management team strengthen the investment case. With an attractive ROE of 33% at YE2009, profitability is still very high with a 56% EBITDA margin (56% at year-end 2008) while growth opportunities remain for the Sonatel. Earnings per share (EPS) rose 20% to top FCFA 16 000 in 2009, allowing for high dividend payment in line with the Company’s traditionally high dividend payout.

Attractively low trading multiples. Despite shedding about 31 % over the past 24 months, we are cautiously optimistic on the Group’s 2010 outlook. At 31 December 2009, Sonatel traded at 4.0x EV/EBITDA 2009A, with a P/E multiple of 7.3x. In terms of relative value and when compared to peer firms in the sector, these multiples suggest that the stock is undervalued. Today Sonatel trades at 4.4x EV/EBITDA, a 27% discount to peer company valuation and a 46% discount to Maroc Télécom on the same basis.

External opportunities are nowhere near faltering. Beyond internal opportunities in the markets in which the Group operates, external opportunities abound. The Group’s total population under coverage is around 37.2 million with an average penetration of 24.7% at YE2009, a level weighted down by Guinee Conakry and Guinee Bissau. Given the low penetration levels in the region, we remain confident in Sonatel’s ability to identify opportunities and capture growth through product innovation and differentiation.

We set our target price at 170 140 Fcfa using DCF valuation, relative valuation and a dividend discount model. We believe Sonatel’s stock price (currently trading at FCFA 135 000) is good value at current levels and when compared to peer companies in the sector and region (Maroc Telecom).

Priced at $500, this 25-page report is available for purchase on our site (www.africanext.com). For more information, please contact info@africanext.com

Telkom has now written off Multi-Links’s entire net asset value, a move that will raise further questions about its presence in Nigeria. We continue to believe that the company has some good assets in that market (though perhaps not that good since their assessed net value is now zero), notably in the wholesale and corporate segments. But competition in Nigeria has been tough. In the carrier’s carrier segment, Multi-Links has to contend with MTN Nigeria and a variety of other rivals, with competition putting downward pressure on bandwidth prices and Multi-Links still lacking nation-wide scale.

The consumer side has arguably been the biggest problem, as CDMA operators engaged in destructive price wars to win customers. Investors will be watching intently to hear which steps Telkom is looking to take in Nigeria, a Jekyll and Hyde market that has as much the capacity to pull up earnings as it does to destroy them. Without adequate strategy, Nigeria will be a money pit, one for which there are no easy solutions. One strategic option may be to get out of the consumer business altogether (or combine it with that of another CDMA player) and bulk up the carrier’s carrier side, or alternatively become more disciplined with subsidies, even at the cost of losing subscriber share.

 TARIFFS: as we found in our latest report on the Future of African Broadband, the landing of submarine cable on the east coast of Africa will divide end-user’s access price by 2-5. In Kenya and South Africa, for example, the arrival of Seacom and TEAMS cables have already led to a more than 50% decline in retail prices from 2008 levels in some speed categories.

 ADRESSABLE MARKET: while some inhibitors will remain such as end-users’ equipment cost (PC, router, 3G device) will remain the lower access tariffs mean that a larger share of East Africa population will be able to afford the service. We found in our latest report that the EASSY cable will provide bandwidth to countries where the addressable market for an internet access at US$25 per month varies between 1% for Rwanda and 20% for Botswana. 

 ADOPTION: the landing of EASSY is not the solution to all broadband adoption issues in East Africa. Adoption levels will increase substantially but are bound to remain relatively low for some markets over the next five years. Penetration levels at YE2015 will vary between 0.67% of households in Zambia to 40% in Botswana.  Some major questions remain. How fast operators will be able to invest in the last mile network infrastructure needed to deliver the bandwidth? Can manufacturer provide smart phones to Africans? Are Broadband Computing bundles a solution?

 Our latest report on the “Future of African Broadband” sponsored by the WIOCC, provides investors and operators alike with some crucial elements to answer those key questions in the development of broadband in Africa.

After years of slow growth and outright despair at whether broadband would ever take off on the African continent, our research suggests that the market is inching ever closer to a tipping point. Our latest report, “the Future of African Broadband: Economics, Business Models, and the Rise of 3G”, makes a number of key points with regards to supply and demand, some of which are summarized below:

There is strong demand for broadband in Africa, if the price is right. We estimate that the African addressable market for household retail connections is about 25m, based on 2007-2009 household income data. North Africa and South Africa account for about 70% of this estimated African household addressable market; outside of those countries, many markets have a household addressable market of 150,000 (e.g. Mozambique) to as many as 400,000 households (e.g. Kenya) depending on their individual structural and income characteristics. The business segment is similarly attractive. The enterprise installed base – defined as registered, tax-paying formal companies- is at about 3m; outside of North and South Africa, the corporate market base varies between 3,000 in low income economies to more than 100,000 units in larger intermediary African economies.

Longstanding supply bottlenecks are being slowly, but surely removed; last mile competition is an increasing reality, wholesale segments are being liberalized, wireless technology has improved enough to provide alternatives to wireline broadband; over the next five years, a combined 500 Gbps+ in initial, available international capacity will be brought into the market. The domestic backhaul segment remains a major supply bottleneck, and in our view, the weak link in the emerging African broadband infrastructure value chain. Even here, however, things are improving.

We see the best broadband opportunities in markets with strong household addressable demand in volume terms, yet one that is currently underpenetrated. The opportunity matrix screen we developed to identify such markets yielded Nigeria, Kenya, Cameroon, Angola, Madagascar and a small few others as markets with the highest upside in this respect.

• Revenues:  MTN’s revenue growth has decelerated markedly; for the first time, group revenue growth has slipped into single digits.  African revenue rose 6% only to about $13.5bn (vs. 20% in South East Africa and 55% in West Africa in 2008). This evolution owes as much to  a tougher competitive environment, lower ARPUs and slower growth in volumes as it does to the negative impact of foreign exchange depreciation across African markets. At constant FX, revenue growth was a solid 20%.  
• EBITDA: The EBITDA picture is also challenging. Group EBITDA rose by 7% only, a sharp decline from the average of 27% experienced over the three years to 2008. EBITDA margin dropped three percentage points to 41%, with most markets feeling the pressure. The operations in WECA (West, East and Central Africa) and Nigeria showed EBITDA growth in line with group figures at around 7-8% while SEA (South and East Africa) were hurt by bad results in South Africa. The mother operation witnessed a -2% decrease in EBITDA as a result of regulatory pressures and an EBITDA margin down by 4%.The foreign exchange impact was notable here as well, with EBITDA growing at close to 20% prior to the exchange effect.     
• Data & CapEx: Data revenues in South Africa are in strong progression representing 14% of revenue at YE2009; a year on year growth of 22% vs. 11% in 2008. Most importantly non-messaging data is in strong progression representing 55% of total data revenues at YE2009 against 50% a year earlier. The evolution to data is ongoing at group level. In Nigeria the operator reported 78k active mobile internet users via data modems. MTN now operates WiMAX networks in 7 African markets and is rolling out 3G across operations.  Also notable is the fact that MTN’s 2009 CapEx actually rose, in a year when many operators cut CapEx in the face of the global credit crunch. CapEx level reached 28% of revenues, up 31% from 2007 levels (21% to revenues). These efforts reflect MTN’s investment efforts in terms of 3G roll out as well as network expansion to Greenfield areas.