On July 5, France Telecom put additional substance in its plans to expand its emerging markets. Unveiling a so-called “Conquests 2015” plan, the company aims to double its revenues in the Middle East and Africa (MEA) region by 2015. That is ambitious, and will require the “acquisition” of around EUR 2.5bn in revenue.  

 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.

We are pleased to announce the release of an Investor Report on Sonatel Group (Senegal), written by the Banque Regionale de Marchés (Dakar) in partnership with AfricaNext Investment Research.  This assessment of one of the leading telecom assets in West Africa aims to provide investors and operators with a unique inisght over Sonatel’s performance and valuation perspectives.:

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

 South African fixed carrier Telkom announced in a preliminary statement that it expected EBITDA losses at its Nigerian unit, Multi-Links, to be higher than during last fiscal year (ending March 2009). The Company has announced impairments of ZAR 2.1bn (US$260m) on Multi-Links goodwill, and a full impairment of the unit’s net asset value. Last fiscal year, Multi-Links recorded losses of around $185m, off of a negative EBITDA of around $25m. This is clearly of utmost concern.

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.

Vodacom’s latest trading statement shows a resilient performance, in the face of what the company called a “challenging environment”. Group revenue rose 6% for the quarter ending in December 2009, but the overall picture is mixed, with stable growth and a relatively positive outlook contrasted with some weakness in its international operations. Over the past four quarters, Vodacom’s revenue has grown by less than 2%, with slower, if solid growth in the mature South African market not compensated by international operations, where revenues have declined by about 10% over the same period. A few highlights:

In South Africa, year-on-year revenue growth was solid at 7.5%, with subscriber growth stable and revenue now largely driven by strong performance on the broadband front, where the company has emerged as the largest broadband retail provider. Overall ARPU is at the same level year-on-year at ZAR140, but 12% higher than over the previous two quarters.

International operations are a pressing concern.   Revenue declined 7% for the quarter and has been on a 10% downward trend over the past four quarters. The key factors of decline are a combine drop in subscriber growth and overall subscriber revenue.

• In DRC, Vodacom’s subscriber base fell from 4.4 to 3.5m, the result of tough economic conditions, competition and a clean-up of its subscriber base. The company’s subscriber share has declined from 52% in 2006 to an estimated 38% at the end of 2009.
• In Tanzania and Mozambique, Vodacom’s leading position is also under threat. Despite a good product portfolio, the operator has seen a decline in subscriber gross adds and the gap with rivals Zain and Tigo is narrowing. The differential between Vodacom and Zain’s subscriber base stood at 59% at Q22008. It dropped to 35% at Q42009. Nonetheless, Vodacom should keep its first place over the coming years with a market share around 37%.
• ARPU across international operations has declined by an average of 15% over the past four quarters, a trend the company attributes to competitive promotions and economic pressures, and one that complicates matters when subscriber growth seems to be contracting.
• Revenue from international wholesale business Gateway has been largely flat, an evolution not entirely surprising, as the company expands and has to face sharp declines in bandwidth prices in many of its markets. The business retains substantial upside.  

The list of shortlisted bidders for a 75% stake in Zambia’s state-owned telco Zamtel makes for a most unusual group. The Zambia Development Agency (ZDA) announced that the bidders were BSNL of India, Lap Green of Libya, Unitel of Angola and Altimo/Vimpelcom of Russia.

With the exception of Lap Green, all the shortlisted operators are looking for their first African asset. The traditional pan-African players have sat out of this opportunity after manifesting initial interest, an implicit indication of perceived value. BSNL’s involvement is in line with the recent forays of Indian operators into Africa, though past behavior suggests they are unlikely to overpay. Lap Green Libya has already won licenses and privatizations in a number of markets; on history alone, this is the favorite in this process, thanks to its propensity to pay well above value for its targets. 

The presence of Angola’s Unitel is most intriguing. It is an underpublicized fact that Angola has the third largest mobile market in sub-Saharan Africa in revenue terms (behind South Africa and Nigeria), with about $2bn in annual services revenues. Unitel is the country’s dominant player, and one of the most profitable mobile operators in the African continent. The company has cash to spend, thanks to the $600m+ it generates annually in free cash flow.    

The core question is what exactly the buyer would be getting. Zamtel largely fits the typical profile of an African state-owned fixed carrier: inefficient, loss-making, strong unions and debt levels so high privatization appears to be an alternative to bankruptcy. Should the buyer be able to get the government to take on much of the debt and offer some tax breaks, there is some underlying value in the operation. Cell Z, the company’s cellular unit is Zamtel’s most attractive assets.

It holds 5% of a Zambian mobile market we expect to grow by about 10% annually over the next five years, and in which competition is relatively moderate. We believe a better-managed (and better capitalized) Cell Z can raise its market share to at least 15% and grow its revenue six to tenfold over the next ten years. The fixed segment is similarly attractive, thanks to the opportunity to offer bandwidth to Zambia’s carrier and corporate markets. In essence, we’ve seen worse opportunities, as long as the $150m+ debt can be wiped out.