After nearly a decade of declining earnings in real terms, could mobile giant Vodacom finally be poised for growth? Vodacom management struck a confident tone at a recent investor day, signalling higher growth expectations for the medium term. We are broadly constructive on the share, and as we now see a path to stronger returns on invested capital versus the cost of capital, we’ll be considering Vodacom for our clients’ portfolios.
At their well-attended investor day, Vodacom management raised their earnings growth guidance towards 2030, projecting double-digit earnings before interest, taxes, depreciation and amortisation (EBITDA) growth per year – an upgrade from their previous high single-digit forecast.
GROWTH IN EGYPT
They anticipate improvements across the board, with a significant portion of this growth coming from Egypt (the group acquired a controlling stake in Vodafone Egypt in December 2022). Organic growth in Egypt is outpacing the country’s high inflation. Regulatory conditions are highly favourable – authorities have permitted price increases, creating a supporting environment that is rare for a telecom operator.
Furthermore, following a devaluation of the Egyptian pound of more than 40%, the currency has now stabilised. As a result, the previous hit to Vodacom Egypt’s profits from currency conversion will no longer be a factor when converting earnings back into rands.
The business case is proving itself, as Vodacom expects to sustain double-digit growth, both in data revenues and financial services through VodaCash. With Egypt being largely underbanked, fintech adoption has significant room to grow, likely accelerating over time. Another advantage is that most of Vodacom’s expenses in Egypt are in local currency rather than US dollars, which helps keep costs for sites and towers at more manageable levels.
OPPORTUNITIES
Although data costs have dropped significantly worldwide, maintaining network quality requires continuous capital investment for Vodacom in many of the geographies in which it operates – especially as traffic increases with more users coming online. Think of it like road congestion: every year, more cars mean longer commutes until highways are upgraded to ease the jams.
Telecoms are capital-intensive, but in South Africa the industry is reaching a phase where network sharing is becoming more viable. Better spectrum utilisation should provide a boost, allowing telcos to redirect some spending – such as offering subsidies and financing of smartphone penetration. This, in turn, could drive higher average revenue per user (ARPU).
Vodacom SA has made progress in migrating more customers from basic 2G phones to entry-level smartphones, which has already started lifting ARPUs. Currently, an estimated 15-20% of the subscriber base in South Africa is still on 2G, presenting further growth opportunities. Additionally, with loadshedding largely behind us, the reduced need for backup power is driving cost efficiencies – Vodacom has identified up to R3 billion in annual cost savings.
The international segment is more of a mixed bag due to geopolitical challenges. The Democratic Republic of Congo (DRC) faces conflict-related disruptions, while Mozambique has moved past its worst and is expected to finish the year on a positive note. Despite the issues in the DRC, growth remains on track, and Tanzania continues to perform strongly.
EARNINGS OUTLOOK
Overall, Vodacom is delivering strong commercial performance across the group. Management have highlighted currency stability in their operating regions outside South Africa and, importantly, confirmed that there are no cash repatriation issues – dividends are flowing upstream as expected.
Vodacom’s stake in Safaricom is also well positioned, with Kenya set to report positive numbers and Ethiopia’s break-even timeline not likely to be pushed out further. Meanwhile, the ‘beyond mobile’ segment – primarily financial services, including fintech – currently contributes 21% to group revenue, with guidance that it should approach 30% by 2030. This is an important number to track, as ‘beyond mobile’ has higher margins and requires less capital investment than traditional telecom operations, ultimately enhancing Vodacom’s overall valuation.
KEY TAKEAWAY
Telcos face some big existential questions: How irrelevant is voice? Will data growth eventually plateau? And how bankable is the fintech opportunity within telcos? Despite these uncertainties, our key takeaway is that Vodacom now presents a stronger investment case.
Regulators in its markets have shown greater willingness to allow price increases and set price floors, particularly when currency devaluations occur – evident in both Egypt and via Safaricom Ethiopia. While currency fluctuations will always be a factor, recent stabilisation efforts suggest future weakness impacts may not be as severe. This provides Vodacom with a clearer path to stable and improving returns, supporting a potential re-rating.
Management’s revised guidance establishes a floor to Vodacom’s fair value while pointing to greater upside than before – with promises of dividends along the way (currently ~6%). Overall, therefore, we are broadly constructive on the share, and as we see a path to stronger returns on invested capital versus the cost of capital, we will be considering Vodacom for our clients’ portfolios.
