Econet Wireless last week released its much-awaited interim results for the half year to August 31.
Report by Collins Rudzuna
For a number of reasons, Econet’s results are always some of the most anticipated amongst listed companies in Zimbabwe.
With a market capitalisation of just under half a billion United States dollars, the telecommunications company is the second largest listed company on the Zimbabwe Stock Exchange.
Also, as a company serving a relatively new industry, the opportunity to achieve organic growth is better than in most other industries.
Most of the figures released in the interim results are just what the investment community was hoping to hear.
Growth in the subscriber base was 24% bringing the total number of subscribers to just over 7 million. Even the new product EcoCash had 1,7 million registered subscribers after just over a year of operation. Data services have 2,54 million users, up from 1,45 million.
Riding on this subscriber growth, Econet managed to record revenue growth of 17% to US$339,5 million. It was not revealed exactly how much of this revenue came from EcoCash and data services. So far, a total of about US$300 million has been moved across the EcoCash platform since its inception but it is unclear how much revenue has accrued to Econet from this business.
Operating profit margin came out at 35%, down from 38% in the comparable period last year. Margins have come under pressure as price competition among the networks intensifies.
Currently, all the networks are running a price cutting promotion of some sort for their prepaid customers. For the period under review Econet, however, managed to maintain the lion’s share of the market, commanding 72% of mobile call traffic. Telecel had 17% and NetOne 11%.
Econet has managed to secure market share by investing heavily in network infrastructure.
Currently the company has the widest nationwide reach. Since dollarisation, Econet has spent in excess of US$770 million installing base stations and expanding its network.
Finance costs declined by 17% to US$9,7 million. However, US$6 million of the finance costs have been capitalised in accordance with IAS 23 which requires that borrowing costs directly attributable to the acquisition, construction or production of a ‘qualifying asset’ are included in the cost of the asset. Adding back this amount, borrowing costs would have increased to US$15,7 million.
Overall, Econet managed to achieve profits of US$77,9 million, up just 5% from last year. Bottom line performance was affected negatively by higher charges for depreciation and tax.
No interim dividend was declared. Management stated they felt that despite an interim dividend being passed shareholder value had been enhanced through share buybacks worth US$19,4 million.
From the results discussed above, it is clear that Econet achieved a fairly decent set of results.
Unfortunately for investors, trying to decide whether this translates into Econet’s shares being a good stock market investment is not so simple.
There are a few points to ponder about the company; some which may deter would-be investors.
In fact, in investment circles it is widely accepted that the company’s shares typically trade below their true value as a result of investor apathy. Is this apathy well placed or is Econet undervalued by the market? Share valuation is always subjective but considering a few points on Econet may shed more light into the market’s attitude.
The first bone of contention is to do with related-party transactions. By definition a related-party transaction is a business deal or arrangement between two parties who were joined by a special relationship prior to the deal.
In the case of Econet the purchase of a 45% stake in TN Bank in which their chairman is founder and shareholder would be classified as a related-party transaction.
Market watchers are especially uncomfortable since the purchase was done at a price considered by many to be way above fair value. The 45% stake purchased for US$20 million is worth US$10,6 million at current market prices.
Another relationship involves some Econet retail shops which are housed in TN banking halls. To be fair, related-party transactions are not necessarily bad, especially when they are fully disclosed. In fact, it may be a case of capitalising on existing business relationships for the benefit of the company. But investors are a sceptical lot and generally look down on such deals. For this reason, such transactions are best avoided unless absolutely necessary.
Investors were also unhappy with the passing of the interim dividend. As mentioned earlier, Econet shares have performed below the expectations of the market and this limits returns for investors from capital gains.
This being the case, investors were hoping to get a dividend. Generally speaking, investors expect companies to maintain a predictable dividend policy unless there are unforeseen circumstances that prevent payment of a dividend.
Many factor a possible dividend into their expected return on shares that have paid dividends in the past. Investors were therefore not happy when an interim dividend was passed. Management explained that shareholder value had still been boosted by the share buyback done in the period. Impact of the share buyback on the share price was minimal, hence the discontent amongst some shareholders.
Econet has demonstrated that it is capable of outcompeting its two rivals in mobile telecommunications, at least as measured by market share. Success in technology based businesses is however very fickle and technology changes usually overtake even the best players.
This is yet another reason why it may make sense to pay out dividends now while the going is good.
Who knows what the future holds?
Econet is one of the most actively traded counters on the market and attracts a lot of attention from foreign investors. The market dominance and growth potential is hard to ignore. Yet it is also one of the counters whose price investors are not keen to push aggressively.
Based on certain metrics like the price to earnings ratio the counter usually trades at a discount to regional peers.
Econet is definitely a hard investment to ignore, but the market seems undecided on whether it is a blue chip or a dog. Indeed, that is a difficult one to call.