Econet consolidates market dominance

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ECONET’s modest 5% earnings rise and the passing of a hugely anticipated interim dividend was not well received with some investors saying the development could be a sign of bad times ahead.

Report by Clive Mphambela

However, others interpreted the results as those of a company that is gearing for a renewed phase of growth after experiencing rapid growth in the last three years as it consolidated its dominant market position and significantly fortified its “economic moats”.

An “economic moat”, refers to a business’ ability to build and sustain a competitive advantage over its competitors enabling it to protect its long-term profits and market share from those firms in the same or similar industry.

A wide or deep “economic moat” means that the competitive advantage cannot be easily breached by competing firms and such moats are usually related to costs, size or intangibles such as brand strength.

Whilst top line revenue surged 17% to US$339,5 million in the half year to August 2012 on the back of a 24% growth in voice subscriber base to over 7 million subscribers a year ago, Econet’s profit after tax margins declined by 2% to 23% reflecting slowing momentum.

Market analysts were however not very happy with the passing of a hugely anticipated dividend.

“I am not convinced that Econet could fail the market by not paying a dividend when they are sitting on a US$108 million dollar cash pile,” FBC Securities said.

The Securities firm said the fact the company had spent almost US$20 million on the share buyback meant that there were free cash resources that should be paid back to shareholders directly as a dividend and not indirectly via a share buyback.

However, as the market did not seem convinced by management’s explanation, the company’s share price responded negatively to the news dropping to US$4,79 from an earlier high of US$5 per share the previous week.

Econet’s huge subscriber base of over 7 million subscribers and US$800 million network investment  and huge brand equity represent significant economic moats that will ensure business maintains its dominant market position.

“We will leverage our strong brand equity and high quality network performance to maintain our market leadership postion,” CEO Douglas Mboweni said.

The business is pinning a significant portion of its future prospects on new investments in value added service such as its Ecocash money transfer and payments platform. The mobile money platform already has almost 1,7 million subscribers signed up, with US$300 million transacted in the last twelve months.

Management is upbeat about the product and they have reason to do so. The product has recorded the fastest uptake rate of any mobile money transfer service ever launched and management attributes this to its huge investment in promoting not only the Econet brand but the service.

“The mobile money service will set Econet apart from its competitors. We want your mobile phone to be more than just a communication device but your wallet as well,” Mboweni said to analysts.

The control of the crucial fibre backbone through Liquid Telecom  albeit via common shareholding creates another huge moat that clearly gives Econet a competitive advantage that will be difficult for competitors to dislodge.

In order to drive the EcoCash product, Econet acquired rights to a strategic 45% stake in TN Bank.

EcoCash offers Econet a huge opportunity to transform the hugely costly distribution model based on scratch cards which are distributed by vendors.

This distribution chain which all the major mobile networks use generally eat up at least 10% of gross revenue via commission margins to vendors and wholesale agents.

Mobile operators are getting about 88 US cents in every dollar of airtime sold on the street with 12% being commission earned by vendors and airtime wholesale agents.

According to Mboweni, moving airtime sales will not necessarily result in the loss of livelihood for the vendors but they should move with technology.

The company distributes between 80 and 90% of its airtime sales via prepaid cards and this translates into potential cost savings of over US$43 million a year.

Airtime sales contributed 66% of revenue, down 1% and 10% towards revenue growth while the company is also growing its interconnection and roaming revenues, Data and SMS and internet services.

Econet seems clear that the company has to grow other non-voice revenues.  Sales showed a marginal 1% growth to a 5% contribution on last year, whilst data revenues picked up 50% to US$21 million on the back of a 74% surge in broadband subscribers which grew to over 2,5 million from 1,448 million at half year last year.

The company said the growth was mainly from corporate subscribers and swelling smartphone usage by individual subscribers.

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