HARARE – Econet Wireless is the leading Mobile Network Operator in the Zimbabwean market providing network (voice, data, SMS) services to 9,4 million subscribers.
The company has a monopoly in network services with over 65 percent and 76 percent market share of mobile subscribers and internet and data traffic respectively.
Industry
There are three main telecom companies operating in Zimbabwe which are Econet, Netone and Telecel. Other smaller players include Liquid Telecom (Econet’s associate), Africom and Telone but these attend to niche markets like fixed broadband which accounts for less than 2 percent of subscribers.
Zimbabwe has a population of 15,2 million, 14,3 million telecom subscriptions and a mobile penetration rate of 93 percent. In this respect it is a mature market.
Netone was the first mobile telecom company to be launched in Zimbabwe when it set up shops in 1996.
As a result of their slow innovation, Econet, which was launched two years later, went ahead of them an—d took a market leadership position that they haven’t given up since then.
This company has demonstrated a record of market leadership emanating from its drive to be the first to roll out new technologies that improve customer experience.
This culture of capturing prime-mover advantages and nurturing continuous innovation has helped lure and retain new subscribers resulting in network effects that further strengthen Econet’s market position.
Investment case
A mobile network operating business is fundamentally simple to understand, but in light of high inflation and different exchange rates applied in Zimbabwe, it’s becoming difficult to predict the company’s future prospects with a sufficient degree of certainty. What it means is, we will pay less attention on earnings and focus more on factors that drives value — the business story.
Econet controls 65 percent of the Mobile Voice Market in Zimbabwe, that means the majority of calls and SMSs terminates on Econet network resulting in a disproportionately large amount of interconnect fees being directed toward them. With this set-up, every MNO has to pay Econet money and by virtue of their sizes, it looks like all other voice call operators are working for Econet.
However, with severe macro-economic headwinds facing the Zimbabwean economy, it is critical to examine the ability of Econet to defend its revenue in USD terms.
Is the business able to raise prices above inflation and defend revenue in USD terms?
Prior to 2018, Econet used to be among the highest average revenue per user (ARPU) earners in the region averaging $7 between 2013 and 2018. Now, things have changed.
Although the company is still able to attract customers from Telecel and Netone, steadily growing its customer base at a charge of 5 percent over the last 5 years, the company’s ARPU has since gone into a free fall from US$7 to around US$4.
Prices are controlled by POTRAZ. More interventions from the regulator means less pricing power for Econet which is losing to continuous local currency depreciation and failure to set tariffs that are optimal and above inflation.
Consequently, its first mover advantage is failing to defend revenue in USD terms.
Furthermore, Zimbabwe has some of the lowest data tariffs in the region.
A quick survey from the company’s website shows that this company is charging an average of $1 per 1GB of private data, a price far below what other regional network service providers like Orange-Botswana, MTN-SA and Safaricon-Kenya are asking.
In other countries, this would have suggested an inherent pricing power in the business, however, in Econet’s context, suboptimal prices are putting the kibosh on the company’s ability to internally generate enough for Capex requirements which therefore hampers its quality service delivery and future growth.
Econet’s major costs are capex spending which entails importing telecom equipment and software upgrades from overseas.
These are USD denominated and tend to rise faster than output prices in local currency. As a result, capital intensity has become a hot button-issue for the company.
They are finding it difficult to achieve the industry’s benchmark of 15 percent — 20 percent, yet the mobile network demand is unrelenting for massive infrastructure investments — including continuous quality improvement to support internet and data traffic growth which has been averaging 33 percent per year over the last 5 years.
Mobile internet and data traffic saw a remarkable surge to record 22 052 Terabytes in the first quarter of 2022 from 5 230 Terabytes in Q1 2017.
Despite this capex shortfall, Econet’s dominant market position in the network services business and its reputation places it in an unassailable position compared to its struggling rivals which enables it to provide the most appealing mobile network services and products in Zimbabwe.
Evidence of this is in its current partnership with Ericsson to launch 5G services in Harare. With around 65 percent market share and a first mover advantage, it is highly unlikely that Econet will be toppled from this extremely enviable position.
Quality
The company has $24 billion in free cash flows, $9 billion in debt and that gives us a free cash flow (FCF) to debt ratio of 2,53.
That means Econet is generating enough cash-flows to cover debts including lease liabilities in the shortest space of time if need arise, but not sufficient to drive capex which I think should be upped 10x from $ 3 billion in the previous period to around $30 billion — to support the currently surging data traffic and improve service quality. A FCF yield of 8 percent might be a good suggestion that the stock could be trading at a discount.
This is a profitable business, boasting operating profits margins of 35 percent, a pre-tax ROIC of around 41 percent. At a share price of $109,95, the stock was trading at a PE ratio of 23x and a Price to NAV of 4x on the writing date.
My estimated intrinsic value (DCF) is just above $265 making it fairly valued and a potential 2 bagger. However, caution is advised in applying these valuations. Our macro-economic environment is too volatile and so is my attitude in tweaking assumptions overtime.
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