EXECUTIVE SUMMARY Econet Wireless Zimbabwe Limited ... - Imara

EXECUTIVE SUMMARY
Recent results released by leading hoteliers point towards
improving occupancies, RevPARs and ADRS locally. We
expect this positive earnings outlook to continue, given the
positive outlook for the tourism sector. Our range of
scenarios for RevPAR growth is xx, given the limited supply
growth until 2013.
With occupancies recovering towards peak levels we could
see room supply coming at a premium. Prospects for
discount business with corporate transient customers.
Tight supply environment an important tailwind for African
Sun
An increase in local salaries should boost local consumer
spent while investment interest in the country should boost
foreign business visitors
An improvement in the global economy will also support the
tourism industry.
Better earnings visibility for Cresta Hospitality and Meikles,
because of their simpler more defensive business model.
Business travel and tourism is less fickle than leisure travel
so the group’s profits are likely to show defensive qualities.
We also like African Sun because it has already expanded
regionally, and is more diversified.
Operating cost inflation, and subdued consumer and
corporate profits.The lack of incremental costs on new
management contracts should buoy results for African Sun
Not cash generative because of capex projects.
Prospects for hotels have strong longer term drivers,
Economic growth and varied and unique tourist offering.
Econet Wireless Zimbabwe Limited – Virtually compelling
Analyst : Addmore T. Chakurira
Email : addmore.chakurira@imara.co
Tel : +263 4 700 000
+263 772 265 454

EQUITY RESEARCH
ZIMBABWE
18 May 2012
TELECOMMS
Virtually compelling
Econet is the dominant player in the domestic telecoms
market, commanding a market share of 70% with a subscriber
base of 6.4m. Econet has a head start over other players, in
terms of penetration in data, which is expected to be the next
growth avenue. To us, this secures high revenue visibility. In
our view, the weak competition provides excellent growth
prospects for Econet.
• Strong cash generation
Cash generation was solid with EBITDA/OCF of 115%. Given
the high cash generation, Econet will fund most of its
capex requirements from internal resources and increase
dividend pay outs post peak capex funding.
• Margins and ARPUs remain healthy
Although EBITDA margins eased to 47% from 49%,
negatively impacted by increased cost of the network,
they remain healthy and higher than regional peers of
approximately 45%. ARPUs increased 6% to US$ 10.33.
Nonetheless, as expansion unfolds we expect EBITDA
margins to ease as ARPUs decrease and costs increase.
Furthermore, Econet has also entered into the handset
sale market.
• Solid infrastructure to support future growth
In our view, Econet has a robust transmission backbone
given its access to optic fibre. The company has invested a
approximately US$ 614.0m in capex since 2009. The
introduction of new products should continue to attract
revenues for the company as well as increasing its
subscriber base.
• Valuations remain compelling
We have valued Econet at US$ 6.12 a share and believe
that the market is ignoring the company’s dominant
market share and the tremendous potential in the sector.
We believe that the share has been oversold and current
levels provide a good entry point. Buy.
Econet - volume vs price
600
500
400
300
200
100
-
Feb-09 Feb-10 Feb-11 Feb-12
Volume (m) RHS
Price (USc) LHS
4
2
0
BLOOMBERG: ECWH:ZH
BUY
Current price (USc) 420.0
Target price (USc) 612.0
Upside/Downside (%) 45.7
Liquidity
Market Cap (US$m) 720.5
Shares (m) 171.6
Free float (%) 17.6
Ave. daily vol ('000) 105.2
Share price performance
6 Months (%) 13.5
Relative change (%)* 23.7
12 Months (%) (14.8)
Relative change (%)* 4.6
*Relative to ZSE Industrial Index
Financials (US$m) - FY 28 Feb 2012 2013F 2014F
Turnover 611.1 693.6 780.3
EBITDA 290.9 327.1 364.8
Net finance income (8.1) (21.7) (19.5)
Attributable earnings 165.7 188.0 209.8
EPS (USc) 97.8 110.9 123.8
NAV/share (USc) 224.2 299.9 382.4
DPS (USc) 11.9 37.0 41.3
Valuation Ratios
Subscribers' 000 6,409.0 7,063.9 7,539.9
PER (X) 4.3 3.8 3.4
PBV (X) 1.9 1.4 1.1
EV/EBITDA (x) 3.0 2.6 2.4
ARPU (US$) 7.9 8.2 8.6
EV/Subscriber (US$) 135.2 122.7 114.9
EBITDA margin (%) 47.6 47.2 46.8
Earnings Yield (%) 23.3 26.4 29.5
Dividend Yield (%) 2.8 8.8 9.8
Gearing (%) 38.5 32.8 15.6
RoaA (%) 22.9 21.1 20.7
RoaE (%) 49.7 42.3 36.3
STRENGTHS
Market leader
Strong brand locally and regionally
High tarriffs
Economies of scale
3G network in place
OPPORTUNITIES
New products/services
Weak competition: Telecel/NetOne
Mobile banking
Expansion of data services
Economic recovery
WEAKNESSES
Low disposable incomes
Energy disruptions
High gearing
THREATS
Entery of stronger players eg. MTN
Price wars
Resurgence of beer market
as a percent of wallet
Addmore T. Chakurira
addmore.chakurira@imara.co
+263 4 700 000
+263 772 265 454

Imara Edwards Securities
FY 2012 results overview
Robust results broadly in line with expectations
For FY 2012, Econet released a solid set of results
which were broadly in line with our expectations. The
solid performance was driven by a 25% y-o-y
subscriber growth, improved network efficiency,
increased MoU and the launch of new products. The
24% revenue growth was supported by a 16% increase
in subscribers to 6.4m and strong growth in voice and
data. Airtime and subscriptions’ contribution to
revenue increased to 68% from 66% in the prior period
while the contribution of interconnect & roaming
declined to 15% from 17%.
Local airtime remained dominant
Interconnet &
Roaming 15%
Data & SMS 13%
Source – Company, IES
Revenue contribution
Other 4%
Airtime & Supscriptions 68%
Increased MoU aided ARPUs
ARPUs increased 6% to US$ 10.33 on increased usage,
supported by data, broadband and VAS e.g. Ecolife
and eTXT. Econet maintained its dominant position
commanding a market share of over 70%. Local mobile
penetration improved to 74%. Subscribers connected
to broadband were in excess of 2.0m while the new
service EcoCash closed the period with approximately
1.4m subscribers.
Network costs pressured margins
EBITDA margins eased to 47.6% from 49.0% negatively
impacted by increased network expenses. Opex surged
31% to US$ 336.0m as network costs increased 89% to
US$ 70.0m. Opex grew on account of higher
transmission costs to increase capacity and reliability
as well as building of internal capacity to manage and
sustain growth as the company expanded the fibre and
WiMax networks to enhance network optimisation.
Network costs increased on increased power failures
and increased maintenance costs. The non-payment of
local interconnect fees also negatively impacted
Econet as outstanding interconnect fees increased to
approximately US$ 85.0m. Econet didn’t disclose the
amount of provision made for the delayed payment of
local interconnect fees.
Network costs pressured margins
Other 26%
Network 21%
Source – Company, IES
Econet Wireless Zimbabwe Ltd
FY 2012 Results
Opex split
Interconnet &
roaming 17%
Marketing 11%
Employee 13%
General
Admin 13%
No final dividend was declared as the company is in
the final stages of concluding a syndicated US$
307.0m loan facility (full details will be provided in
due course). The company bought back approximately
6.8m shares at US$ 28.5m.
Strong cash generation
Cash generation remained strong with EBITDA/OCF of
115%. Capex was US$ 184.0m and gearing improved to
65% from 86%. EBITDA interest coverage was high at
35.9x, although finance charges increased 12% as the
company reached peak funding. Management state
that future expansion shall be funded mostly from
internally generated cashflows.
Included in the current liabilities is a short-term loan
(vendor financing facility, which we estimate to be
approximately US$ 144.0m) that is due to be
restructured as part of the US$ 307.0m syndicated
loan facility.
Gearing is set to recede
Capex % of
200%
sales
150%
100%
50%
400%
300%
200%
0%
-50% 2007 2008 2009 2010 2011 2012
100%
2013F 2014F
-100%
0%
Capex as % of sales
Source – Company, IES
Capex and gearing
Gearing (net debt/SHF)
Gearing
3

Imara Edwards Securities
Econet Wireless Zimbabwe Ltd
FY 2012 Results
Outlook
Strong competitive positioning
The demand for group products remains strong given
the weak competition. In our view, price and quality of
service will be a key differentiator in the telecoms
market. The company’s infrastructure investment in
fibre and Wi-Max networks places it at an advantage
over competitors. Econet is focusing on growth and
returns through, a viable subscriber base, improved
network efficiencies and a pipeline of new products.
Product innovation has been key to the company’s
profitable growth in volume and market share gains.
The introduction of new products should continue to
attract revenues for the company as well as increasing
its subscriber base.
Given the higher subscriber base, the company’s
incoming MoU are significantly higher than outgoing
with on net Econet traffic comprising approximately
80% of total. Econet has the ability to promote airtime
usage through a number of product and service ideas
such as call back home cards in South Africa. This type
of innovation bodes well for revenue growth.
Nonetheless, ARPUs are likely to be pressured on an
expanded subscriber base compounded by the effects
of multiple SIM card ownership to and we expect ARPUs
to settle at circa US$ 8.60, although management
states that these will be defended at US$ 10.00.
Expanded new revenue streams
Management states that the future of the company lie
in innovation and providing value added services to its
subscribers. Econet has introduced loyalty programmes
such EcoCash, the company’s mobile money transfer
service. Data presents significant opportunities for the
company. Econet has three data revenue streams:
internet services, SMS (text messaging) and Ecocash.
The new products such as Econet mail and eTxT are
expected to help Econet retain customers and record
the highest proportion of net adds in the industry.
Econet has a head start over other players, in terms of
penetration in data which is expected to be the next
growth avenue.
Margins likely to be squeezed
We believe Econet’s margins are likely to ease and
settle around 45%, in line with African peers. The
reasons being the roll out of the retail units, increased
competition and the high base the company is coming
off from. In addition we believe the company’s revenue
from international roaming is likely to ease given the
high termination rates charged by Econet as opposed to
its competitors. Higher margin revenue items include
the likely growth in contribution from data traffic.
Although the hopes of new services remain high, the
demand for such high speed services remains limited.
It is unclear which applications will be able to attract
average customers into paying higher bills especially
post the euphoria of a new product launch. We note
that Econet’s charges for VAS are at the high end
especially at launch. Furthermore, Econet has also
entered the handset selling market, offering branded
handsets. Nonetheless, management states that
operating margins will be defended at 49%.
Subscriber growth to decelerate
Zimbabwe has an estimated total population of
approximately 13.0m people, and data estimates
indicate the addressable population (i.e. between age
15 and 55) is approximately 48% of the total
population. In our view, the Zimbabwean mobile
telephony market is approaching saturation with an
estimated potential market of 7.0m users including
fixed line subscribers. Due to the near saturation of
the addressable telephony market in Zimbabwe, with
penetration at close to 90%, we expect to see
Econet’s subscriber base increase marginally in FY
2013 and the company to lose market share as
competitors roll out their network expansions. We
expect the company’s market share to recede to
approximately 68% by end FY 2013.
Subscribers and penetration
Total Econet
subscribers'
9,000
000
7,500
6,000
4,500
3,000
1,500
0
2007 2008 2009 2010 2011 2012 2013F 2014F
Econet Subscribers
Source – Company, IES
Penetration
Penetration
100%
80%
60%
40%
20%
0%
Source: IES, company reports
Improved free cashflows as capex has peaked
The company is post its peak funding period having
rolled out the network countrywide. We expect that
capex to revenue will probably recede to between 15%
and 20% by FY 2014 as the company focuses on
sweating the existing assets. We expect Econet to
generate higher cash flows from operations over the
next few years. Over 99% of the company‘s customers
are on the prepaid package, thus mitigating the
company‘s receivables position. Once past its peak
capex funding, we expect Econet to increase its
dividend payout.
4

Imara Edwards Securities
Econet Wireless Zimbabwe Ltd
FY 2012 Results
Tower sharing presents opportunities for Econet
Although the rise in competition creates risk of a decline
in market share for Econet, it opens up opportunities of
participating in the higher demand for telecom towers.
Infrastructure sharing, especially tower sharing is in the
spotlight as operators are focusing on reducing costs and
times to roll out networks. Although we consider tower
sharing a win-win situation for the industry as a whole,
we do not see high sharing possibilities in the short-term.
Investment Risks
There are risks to the stock’s multiples and our valuation
assumptions.
Cost pressures
Industry wide cost pressures, especially network related,
could have a negative impact on our earnings
expectations. For example, higher utility costs, high
labour costs, and higher commodity costs (like oil) could
restraint profitability.
Competition a major threat to viability
The mobile telephone industry is highly competitive
Econet currently competes with two main rivals, Telecel
(60% owned by Orascom) and Net-One (government
owned). An aggressive network roll out by any of the
competitors could potentially harm Econet’s market
position, sales and margins.
Although competition is set to intensify, we expect
Econet to continue to do well. Our expectations are
based on the wide scale expansion program and
aggressive marketing initiatives that Econet is
implementing. The proper implementation of the
strategies could give Econet the edge. Given the higher
costs for fixed lines, we do not foresee any aggressive
growth in subscribers in the near term.
Dependence on marketing expenditures to build
brand awareness
Econet depends heavily on its marketing campaign
to build brand awareness in order to generate sales
and earnings growth. If the company fails to deliver
an effective marketing campaign going forward,
sales could potentially be negatively affected. In
addition, marketing expenses represent a major
component of its fixed cost structure. If the
company is unable to manage marketing expenditure
appropriately, its operating results could
deteriorate.
Although the hopes for the new services remain
high, the demand for such high-speed services is
limited. It is unclear which applications will be able
to attract average customers into paying higher
bills.
Expansion delays
The company’s growth rate of sales and profits
would be negatively impacted by delays of projected
network expansion.
Regulation
Econet’s license is due to expire and will be up for
renewal in 2013. The cost of the license is unknown
although this could be significant and could be in
the region of US$ 100.0m (the current fee for an
initial application). We believe that it is unlikely
that the renewal will not be granted given the
cordial relationship between the company and
POTRAZ, the regulatory body.
5

Imara Edwards Securities
Valuation and Recommendation
We believe Econet represents one of the mobile
telephony sector’s most long-term investments, based
on its attractive growth prospects.
Assuming an EV/subscriber multiple of US$ 160 (15%
discount on the weighted average for African
operators), indicates a fair value of US$ 1.0bn i.e. US$
5.83 a share. Applying an EV/EBITDA of 3.1x (20%
discount on weighted average for African peers) yields
a fair value of US$ 1.1bn i.e. US$ 6.41 a share.
Econet Wireless Zimbabwe Ltd
FY 2012 Results
Our two valuation methodologies indicate to a fair value
of US$ 6.12 a share for Econet. Given the underlying
industry dynamics, we believe Econet is perfectly
positioned to capitalize on the strong projected growth
that the telecoms industry is expected to experience
over the next few years. The scrip is tightly held
limiting downside risk. BUY.
6

Imara Edwards Securities
Econet Wireless Zimbabwe Ltd
FY 2012 Results
Financial Summary
ECONET - 5 YEAR CGR COMPARISON
28 FEBRUARY (US$m) 2007 2008 2009 2010 2011 2012 2013F 2014F
Growth record
National cellular penetration % 8.1 8.4 15.5 37.6 61.7 70.7 80.6 89.7
Addressable pop penetration % 26.4 27.2 50.1 121.8 199.7 228.8 260.9 290.3
Econet subs ('000) 634.4 653.9 1,200.0 3,551.0 5,510.0 6,409.0 7,063.9 7,539.9
Subsciber growth 38.8 3.1 83.5 195.9 55.2 16.3 10.2 6.7
Market share % 60.4 60.4 60.0 73.0 69.0 70.0 67.6 64.8
Econet ave. subs ('000) 545.8 644.2 927.0 2,375.5 4,530.5 5,959.5 6,736.5 7,301.9
Ave contact subscibers ('000) 67.8 57.6 26.4 33.3 60.3 62.6 80.5 102.4
as % of total Econet sub's 10.0 7.9 0.1 1.8 1.0 1.1 1.3 1.5
Ave pre-paid subscribers ('000) 323.0 481.5 626.1 1,381.5 3,784.0 5,897.0 6,656.0 7,199.5
as % of total Econet sub's 90.0 92.1 99.9 59.5 99.0 98.9 98.7 98.5
ARPU average (US$ per month) 5.3 2.8 7.9 12.7 9.1 8.5 8.6 8.6
Balance Sheet
Shareholders' equity 49.2 61.3 81.2 163.2 286.7 379.9 508.1 648.0
Minority interests 0.0 0.2 5.7 2.3 2.8 2.8 2.9 2.9
Total shareholders' equity 69.7 81.1 127.2 201.2 335.1 453.5 556.9 687.6
Interest Bearing Debt 0.6 0.0 9.1 138.7 240.9 247.0 291.5 256.4
Trade creditors 1.3 1.7 40.0 14.4 53.9 101.9 115.6 104.1
Current Liabilities 3.1 1.8 40.1 52.8 60.7 112.0 124.3 113.8
Total Liabilities and equity 73.4 82.9 176.4 392.7 636.6 812.4 972.7 1,057.8
Fixed Assets 54.2 38.5 134.4 267.5 498.9 561.7 611.7 661.7
Investments 15.7 42.8 13.3 0.0 31.1 9.0 9.4 10.4
Stock - Trade net 0.1 0.2 25.3 8.7 33.6 110.0 168.5 189.6
Debtors 1.2 1.2 0.1 30.5 0.5 0.8 0.9 1.3
Cash at bank 0.2 0.1 0.1 13.9 34.7 100.8 124.6 155.1
Current Assets 3.0 1.5 25.6 53.2 68.9 211.9 294.6 347.2
Total Assets 73.4 82.9 176.4 392.7 636.6 812.4 972.7 1,057.8
Income Statement
Turnover 34.6 21.4 87.9 362.8 493.5 611.1 693.6 780.3
EBITDA 16.1 6.1 26.6 179.3 242.7 290.9 327.1 364.8
Associate income 2.5 8.4 (1.1) 1.9 0.0 2.8 3.0 3.1
Profit before Tax 22.3 58.3 3.1 148.1 196.5 239.1 250.6 279.8
Taxation 5.9 11.7 5.1 34.9 55.5 73.4 62.7 69.9
Profit after Tax 16.4 46.6 (2.1) 113.2 141.0 165.7 188.0 209.8
Minorities 0.0 0.0 0.1 (1.4) 0.5 0.0 0.0 0.0
Attributable Income 16.4 46.6 (2.2) 114.6 140.4 165.7 188.0 209.8
Weighted shares 171.6 171.6 171.6
EPS (USc) 9.7 27.5 (1.3) 67.7 82.9 97.8 110.9 123.8
Cash EPS (USc) 10.2 27.8 9.6 78.3 105.9 125.3 145.0 164.4
DPS (USc) 3.2 0.8 - 22.6 12.0 11.9 37.0 41.3
NAV per share (USc) 29.1 36.2 47.9 96.3 169.2 224.2 299.9 382.4
Growth Ratios
Sales growth (%) 8.7 (38.1) 310.4 312.5 36.0 23.8 13.5 12.5
Pre-interest profit growth (%) (3.4) (63.1) 44.6 1,850.5 28.8 20.0 10.2 9.9
Earnings growth (%) 32.8 184.5 (104.7) (5,282.6) 22.5 18.0 13.4 11.6
Margins
Gross margin incl finance chgs (%) 76.6 84.0 78.6 80.0 80.0 80.8 80.8 80.8
EBITDA margin (%) 46.5 28.2 30.2 49.4 49.2 47.6 47.2 46.8
Pre-interest margin (%) 43.9 26.2 9.2 43.6 41.3 40.0 38.8 37.9
Interest cover (times) n/a 1.2 9.1 35.7 28.1 30.2 12.4 15.2
Pre-tax profit margin (%) 64.5 272.0 3.5 40.8 39.8 39.1 36.1 35.9
*Note: Financial figures for 2007 to 2009 were derived using the Old Mutual Implied Rate (OMIR), which may not reflect a true
account due to variability of exchange rates during that period.
7

Imara Edwards Securities
Econet Wireless Zimbabwe Ltd
FY 2012 Results
Notes
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