BTCL RESEARCH NOTE: MARCH 2017 FY

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Edgar Fisher
5 years ago
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Tel: +267 318 8627 Dealing +267 318 8622 Fax +267 318 8629 E-mail- motswedi@motswedi.co.

mobile and data sales. Mobile revenues increased by 5% and is the biggest contributor to total revenue at 37%, followed by Fixed Telephony Revenues at 32% and Data services revenue at 29%.

1 Tel: Dealing Fax BTCL RESEARCH NOTE: MARCH 2017 FY Defensive business, strong cash generation BTCL FY Financial results for the year ended 31 March 2017 showed a 9% growth in sales driven by growth in fixed, mobile and data sales. Mobile revenues increased by 5% and is the biggest contributor to total revenue at 37%, followed by Fixed Telephony Revenues at 32% and Data services revenue at 29%. We expect the contribution of Fixed telephony to gradually decline in the future in preference of mobile phones which offers more convenience. GP margins improved to 58% from 51%. Total cost were trimmed by 26%, while no impairment were recognised for the year following an impairment assessment exercise carried out at year end. EBITDA grew strongly by 40% to P369mn (FY16: P263mn) with EBITDA margin improving to 23% from 18%. PAT bounced back strongly into the positive territory at P237mn from a loss of P371mn the previous year and this also pushed the net profit margin to 15% from -25%. BTCL growth strategy is centred on leveraging its fixed, mobile and convergent products and services potential. The strategy is intended to leverage on BTCL s unique market position as the only fixed and mobile network operator in Botswana by creating competitive advantages through the provision of traditional fixed and mobile broadband, information and content capabilities. It is interesting to note that BTCL is trading at a 35% discount to its NAV. (Current price P1.47). With a PE of 6.8x against the market average of 16.9x and a PBv of 0.8, we still maintain a LONG TERM BUY recommendation on BTCL. Trading & Liquidity Market Cap BWP1.5bn Market Cap US$142.9mn Shares in Issue 1,050,000,000 Year End March Free Float 49% Current Price P month high P month low P0.84 BSE Code BTCL LONG TERM BUY Share price below NAV KEY INVESTMENT THEMES a. BTCL has the widest network footprint and is the only operator with the capacity and capability to offer ADSL services. b. Has a monopoly in the fixed line business and the BTCL brand is well recognised in the country. 1

2 THE DOWNSIDE Increased competition in the telecoms sector within the country as a result of market liberalisation and this has led in some instances to BTCL losing some of its key clients to competitors. The business is a high volume business with profitability very sensitive to variation in margins. This is because, BoFinet determines the margins available to network operators and in some cases BTCL may not be able to pass on to the retailer any margin compression enforced by BoFinet and this will eat on margins and profitability. Expected decline in Fixed Telephone revenue in the future. Increased competition in the sector with Liquid Telecom expected to launch a new telecoms network provider with extensive reach across Botswana soon. KEY TAKEAWAYS FROM THE RESULTS Revenue Sales went up by 8.6% to P1.6bn (FY16: P1.4bn) lifted by growth in across the board increase in Mobile, Fixed and Data revenue. The 8.6% increase is commendable given that over the past two financial years sales have been virtually flat, growing by 0.4% in 2016, 2% in 2015, 7% in 2014 and 16% in Sales up 8.6% Source: BTCL Financial Results 2

3 Mobile and fixed sales Mobile sales is the biggest contributor towards revenue at 37%, followed by Fixed 32%, Data 29% and Others 2%. It is surprising to see revenue from Fixed increasing amidst indications that demand for fixed telephony may continue to decline in the future as consumers prefer mobile phones which offers more convenience such as mobility, internet on the go, etc. In fact the number of fixed telephone lines decreased by 13% between March 2016 and March 2017, therefore the increased in revenue from fixed is more attributed to increased usage, mostly by corporates and government entities. Mobile sales biggest contributor to revenue Surprise growth in Fixed revenue Source: BTCL Financial Results We however, expect revenue from fixed to grow at a small space before declining in the coming years as fixed line business is on a decline on a global scale. This business is being substituted by the use of internet and internet applications e.g OTT s. On the flip side this decline can be slowed through the introduction of value adds e.g Broadband offers, promotions and loyalty offers. Meanwhile, Data sales continue to grow much faster, growing by 21% and this is expected with the growing use of social media platforms. Revenue from the Fixed business to taper off Market Share Mobile sales expanded by 5% as BeMobile increased its market share to 17% from 15% previously. Mascom has the biggest market share estimated at around 53% (BOCRA 2016 Annual Report, page 22). BeMobile is steadily increasing its market share in an industry which is 17% Market Share in Mobile 3

4 almost saturated with an estimated tele density of above 171%. Over the past 10 years, mobile telephony subscriptions have increased from 1,151,761 in March 2007 to 3,460,331 in March 2016, representing a 200% increase, compared to 314% increase attained in the previous decade. It is also pleasing to note an increase in BTCL blended Average revenue per user (ARPU) to P98 from P88 (FY16) and this is higher as compared to Mascom (P71). MTN South Africa ARPU stands at ZAR92. ARPU up to P98 from P88 Cost cutting paying off Cost were well managed with total cost falling by 26% to P1.4bn (FY16: P1.88bn). Direct cost went down by 6%, other expenses fell 14% due to favourable exchange rate gains, reduction in other administrative cost. There were no impairments. Improvements in margins There was a marked improvements in margins as a result of the good performance with GP Margins rising to 58% from 51% previously. Net profit margins which were -15% in 2016 recovered strongly to 15% in Margins improved Source: BTCL Financials EBITDA margin grew from 18% to 23%, with EBIT margin improving to 16% from -33%. BTCL was able to improve the Efficiency with which its capital is employed with ROCE improving to 3.97 from 3.67 in 2016 and 2.94 in EBITDA up to 23% 4

5 OVERVIEW OF THE BOTSWANA TELECOMMUNICATION MARKET The telecommunications market is dominated by the three operators which operate under Public Telecommunications Operator (PTO) licence; namely: BTCL, Mascom and Orange Botswana. The other major player in the market is Botswana Fibre Networks (BoFiNet), which was issued with an interim licence to provide wholesale services beginning 1 April BoFiNet started offering services in October In addition, Private Telecommunications Network Licences (PTNL) have been issued to entities to build private networks for internal business use. Although the PTO licence allows the operators to offer both mobile and fixed telephony services and products, the industry still has 3 players with Mascom and Orange offering mobile telephony services only including mobile Internet and value add services, while BTCL provides both the fixed and mobile telephony services. This includes data network services, providing access and connectivity. Mobile Telephony Market Botswana has one of the highest mobile market penetration rates in Africa of over 170%. It is however, characterised by the use of multiple SIM cards from different operators. This is because consumers can shop around comparing service and pricing levels hence the use of multiple SIM cards to take advantage of any promotions availed by service providers. The practice also ensures that consumers have access to other networks by swopping sim-cards in areas of the country where their network of choice is not available or limited. Penetration above 170% rates BOCRA annual report for 2016 shows that mobile subscriptions increased from 3,405,887 in March 2015 to 3,460,331 in March 2016, representing a growth of approximately 2% compared to 5% growth recorded between 2014 and Teledensity grew from 168% in the previous year to 171% as at March Growth in Tele density to 171% 5

6 Over the past 10 years, mobile telephony subscriptions have increased from 1,151,761 in March 2007 to 3,460,331 in March 2016, representing a 200% increase, compared to 314% increase attained in the previous decade. Source: BOCRA In terms of mobile subscriptions, Mascom Wireless remained the leader at 53% followed by Orange at 32% and BTCL (BeMobile) at 15%. (This is now up to 17% according to latest revelations from BTCL management). BeMobile has been successful in eating away some of the market share from Mascom and Orange. Prepaid vs Post paid BOCRA 2016 annual report shows that the market share between prepaid and post-paid mobile telephony subscriptions has been unchanged at 98% and 2% respectively over the past 5 years. Although prepaid calls are more expensive than postpaid calls, prepaid is a service of choice as it allows consumers to control their spending through pre-payment of small airtime units. Mascom the leader in Mobile business More bias towards prepaid Fixed Market Segment BTCL is the only sole provider of fixed telephony. It is interesting to note that the fixed telephony segment has shown a slight but constant growth over the years. BOCRA statistics shows that this segment decreased from 169,474 subscribers in 2015 to 161,641 subscribers in 6

7 2016 and now sits at 140,804, mainly due to disconnections primarily for non-payment as well as migration to mobile networks. Steady decline in fixed subscriptions Source: BOCRA, BTCL In the previous year between March 2014 and March 2015, the decline was approximately 3%. Over a 5-year period, fixed line subscriptions increased from 150,549 recorded in March 2012 to 161,641 recorded in March 2016 a growth rate of approximately 7.3%. Teledensity for fixed telephony has slightly decreased from 8.4% in March 2015 to approximately 8.0% in March INTERNET UPTAKE a. Fixed Broadband There has been a strong growth in the take up rate in the ADSL fixed broadband with statistics from BOCRA showing a 177% growth over the past 6 years from 11,295 to 31,301 subscriptions. Orange Botswana used to have a fixed wireless internet known as WiMax and the number of subscriptions have been falling as this has been replaced by another fixed wireless internet service called Orange Konnecta. Strong growth in ADSL fixed broadband take up rate b. Mobile Broadband Internet access through the use of smartphones and other wireless technologies such as USB modems has led to an increased number of people with access to the internet, especially among the youth or digital active population. This is one area that BTCL can target to grow its 7

8 mobile broadband offering given its wider network coverage. It is projected that mobile Internet penetration is well over 1.3mn users with more room for growth. Mobile Money Services & financial inclusion Orange commands the largest market share of around 68% followed by Mascom at 31% and BTCL at a distant 1%. Mobile money has been very popular in Africa with Ecocash in Zimbabwe and M-Pesa in Kenya being some of the most success stories. Mobile money services plays a pivotal role in financial inclusion in the country and BTCL can take advantage of its wider network coverage to grow this business which is very crucial in improving financial inclusion in the country. Management are in the process of revamping this business so that it gets traction and have a clear strategy around international remittances as well as broadening merchants and bill payment. Mobile Money market share still low WHERE IS THE GROWTH STORY? a. BTCL has copper access network making it the only operator with the capacity to offer ADSL (Asymmetric Digital Subscriber Line Service). ADSL is a data communication service that enables faster data transmission over copper telephone services than convectional voice and modem can provide. BTCL could leverage on this competitive advantage by offering this ADSL product through its copper network, thereby increasing data sales. Steady decline in fixed subscriptions b. Wider Network footprint - BTCL through its BeMobile unit has the widest mobile coverage particularly in remote areas because of its extensive mobile coverage. No other operator has assets deployed as widely across both fixed and mobile services space as BTCL. The mobile network can leverage on this extensive coverage to grow its market share. Wider footprint Network c. Strong brand recognition and perception, especially in the fixed line business. 8

9 d. Increased Market Share. The BeMobile business is less than 9 years old but already it has gained a notable market share of around 17% which is commendable in this environment dominated by two other giants. e. BTCL is the sole provider of fixed telephony, with this segment being the second driver of revenue, contributing 32%. It is interesting to note that the fixed telephony segment has shown a slight but constant growth over the years in terms of revenue and is expected to continue holding its ground in the short to midterm mainly due to increased usage from the corporate and the government. Having said this, we are equally aware of the decline of this business on a global scale on the long term. Monopoly in the Fixed business f. Highly profitable business with a strong dividend distribution. BTCL bounced backed into profitability with all the profitability ratios growing exponentially. The positive numbers are expected to continue going into the future. g. Product innovation expected to continue improving due to the partnership with Vodafone, one of the world s leading communications services providers. h. The government remains the majority shareholder with a 51% stake in BTCL. The government may consider reducing its stake in BTCL to inject both liquidity, innovation and management skills that would better serve the country, investors, the entity and all its stakeholders. This would allow the company the swiftness it needs to remain competitive and profitable. The government can have both control and strategic influence in order to effect social and public policy, while maintaining a minority shareholding, with special voting rights (class A shares). This also promotes better price discovery, improved market liquidity, strategic alliances and partnership, improved competition and a diversified shareholder base and all these will feed positively into BTCL bottom line. 9

10 The downside a. BTCL operates in a highly competitive and mature market with intense price competition. Tele density level is above 171% and the only way for BeMobile to expand its market share from the current 17% is to take away subscribers from other networks. This might be a tall order given that the other two giant mobile networks will certainly do anything to protect their territories. Highly market competitive b. Increased competition in the telecoms sector within the country as a result of market liberalisation and this has led in some instances BTCL losing some of its key clients to competitors. Also Liquid Telecom will be launching a new telecoms network provider with extensive reach across Botswana soon. c. The business is a high volume business with profitability very sensitive to variation in margins. This is because, BoFinet determines the margins available to network operators and in some cases BTCL may not be able to pass on to the retailer any margin compression enforced by BoFinet and this will eat on margins and profitability. Expected decline in Fixed Telephone revenue d. Expected decline in Fixed Telephone revenue in the future. e. Regulatory risk still remain elevated. BOCRA has started implementing a Pricing Framework which seeks to align to cost, retail prices for mobile voice and mobile broadband. Implementation of the Framework has been phased over three years and has already began. The implementation has started with the removal of mobile Termination Rates and differences in prices between the off-net premiums (between networks) and on-net rates. This may impact negatively on revenue from the sector at large and by extension BTCL. Regulatory risk still remain elevated 10

11 f. Trading of the stock is currently restricted to citizens or wholly owned citizens companies. This may impact on liquidity and price discovery. The government may consider Market Liberalisation and opening up the market to international investors so as to give BTCL a wider brand exposure and investor base. Ratio Analysis FY 2017 FY 2016 FY 2015 FY 2014 FY 2013 Sales Growth 9% 0.4% 2% 7% 16% GP Margins 58% 51% 62% 44% 58% Net profit margin 15% -25% 10% 0% 20% EBITDA margin 23% 18% 23% 28% 32% ROCE 12% -29% 8% -1% 12% Asset Turnover Source: BTCL Valuation The BTCL growth strategy is centred on leveraging its fixed, mobile and convergent products and services potential. The strategy is intended to leverage BTCL s unique market position as the only fixed and mobile network operator in Botswana by creating competitive advantages for the company through the provision of traditional fixed and mobile broadband, information and content capabilities. It is interesting to note that BTCL is trading at a 35% discount to its NAV. (Current price P1.47). With a PE of 6.8x against the market average of 16.9x and a PBv of 0.8, we still maintain a LONG TERM BUY recommendation on BTCL at the current price. Long term BUY Recommendation 11

12 RECOMMENDATION SCALE Buy Hold Reduce Sell Sustainable Fundamentals Strong Opportunities and Growth Undervalued Balanced Potential Growth Par Valued Trading at a Premium Growth in the long term Overvalued at current levels Weak Fundamentals Threatened Outlook Over Valued Research Motswedi Securities (PTY) LTD Plot 113, Unit 30, Kgale Mews, Gaborone P/Bag 00223,Gaborone, Botswana Tel: Fax: garry@motswedi.co.bw moemedi@motswedi.co.bw Disclaimer: The views expressed in this research note reflect the views of Motswedi Securities (Proprietary) Limited based on the information available at its disposal at the time of writing and may change without notice, and is provided for information purposes only. While Motswedi Securities (Proprietary) Limited has taken all reasonable steps in carefully preparing the document, it does not take any responsibility for any action that may be taken on the basis of the information contained herein. Each recipient of it is advised to undertake its own analysis and evaluation of the terms and contents hereof, and obtain independent advice as appropriate, before acting in any way upon the information contained herein. Accordingly, this document is not intended, and no part of this document should be read, as constituting, in any way, an offer or other solicitation for the purpose of the purchase or sale of any of the securities referred to herein. This document may not be reproduced, distributed or published by any recipient for any purposes without the authorization of Motswedi Securities (Proprietary) Limited. 12

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