Last June, Nigerian carrier Globacom revealed it had received a license from the government of Senegal; the announcement created much ado, for the license was awarded outside of traditional channels, with the country’s regulator ostensibly not aware of it. The process was certainly a step back for Senegal’s telecoms regulatory framework. As for Globacom, it’s another step in the company’s relentless effort to build a strong challenger to France Telecom in French-speaking West African markets.
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.
Much as Ulysses endured the enchanting music of sirens trying to lure him to shipwreck, South African carrier MTN has been threatening to succumb to the sirens of consolidation. As the chants mount –the latest from Reliance- and MTN itself stays on the prowl for opportunities, we remain somewhat skeptical of the promise of the proposed deals. We review some of the proposed combinations.
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.
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.
On Monday, WIOCC’s CEO Chris Wood announced completion of the EASSY submarine cable, of which WIOCC is the largest investor, for the end of June 2010. After much delay due to shareholding structure divergences, the much awaited infrastructure will bring 1.4 Tbps in additional capacity to the African East coast. The cable owned by 16 different investors aims to provide fast and reliable international bandwidth access to 10 countries including Botswana, Burundi, Ethiopia, Lesotho, Malawi, Rwanda, Swaziland, Uganda, Zambia and Zimbabwe. Only the coastal countries will initially benefit from access to the cable while inland international terrestrial links are built. The cable is bound to compete in the mid to long term with Seacom’s cable which already offers a capacity 1.2 Tbps to South Africa, Mozambique, Tanzania and Kenya. The implications of the arrival of EASSY are multiple for Africa’s eastern markets.
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.