Renaissance Capital Telecoms Outlook for Sub-Saharan Africa
Tuesday, 15 February 2011
Price wars and regulation are concerns: We are cautious on the 2011 market outlook for voice telecoms in many sub-Saharan Africa (SSA) markets. This is despite penetration levels that are low by global standards (around 60% weighted average penetration); and expected robust economic growth, driven by the upcycle in commodity prices. Aggressive price competition – mainly from Bharti Airtel, which entered African markets via the purchase of Zain assets last year – and a worsening regulatory environment in some cases are our major concerns. We think the usage elasticity to tariff declines will be important, and although the initial signs here are encouraging, elasticity may be insufficient in the short term to compensate for price cuts.

Operators to seek growth elsewhere: As we expect voice revenues to remain under pressure over the next 12 to 18 months, we think operators will seek growth in other telecoms segments. Given low broadband penetration levels in SSA (around 1%, on average, excluding SA) and the region’s lack of fixed-line infrastructure, we think mobile operators will be the major beneficiaries of demand growth for data. The relatively low penetration of banking products makes money transfer systems appealing, and a potential revenue generator for mobile operators.

Our top picks: Econet, Sonatel. Given our concerns about price wars and regulation, we think investors should stick to markets with more favourable regulation, and stocks that pay high dividends. Econet is the highest-growth stock in our SSA telecoms universe, and provides exposure to a relatively healthy telecoms market. Sonatel, although its growth rates are unexciting, pays a hefty dividend (an 8% yield, after tax, for 2010E). Accordingly, Econet Wireless Holdings (BUY; TP increased to $6.8 from $5.9 recently) and Sonatel (BUY; TP up to XOF187,000 from XOF176,000) are our top picks. We remain HOLDers of Safaricom (TP cut to KES4.8 from KES5.6) and Access Kenya (TP cut to KES15 from KES17), as we expect competition to weigh on their core business. We think Starcomms has a vulnerable business model, and we reiterate our SELL rating (TP reduced to NGN0.8 from NGN1.6), despite the stock’s recent underperformance.

Outlook: Unexciting

Key indicators:
  • •    Total sector market capitalisation: USD6,393m
  • •    Target Market capitalisation: USD7,444m
  • •    Weight In MSCI: 0%
  • •    Average sector P/E: 9.2
  • •    Average sector EV/Sales: 1.7
  • •    Average sector EV/EBITDA: 4.5

For the full report on the outlook for sub-Saharan African telecoms, contact Renaissance Capital .

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