Blackouts stymie Vodacom’s growth

Vodacom has put expansion of its rural coverage and 5G network on hold to divert funds to back-up energy for its base stations to deal with Eskom’s intensifying power cuts and warnings that stage 8 load-shedding is on the cards over the winter months.

Since 2020 the group has spent R4bn on back-up power solutions such as batteries and generators in South Africa and a further R300m in the past financial year on diesel, security and maintenance.

It has been spending R11bn a year on its network and pledged R60bn over the next five years at the recent South Africa Investment Conference.

CEO Shameel Joosub said this week that load-shedding has been “disastrous” for the group.

The billions of rand the company is spending to keep customers connected during electricity blackouts “could have been spent on accelerating our rural coverage, 5G network, financial and enterprise services. There are a lot of things we could have done with the money but we had to reprioritise”, he said.

MTN SA will spend R1.5bn this year on generators, diesel and batteries, and it has also temporarily halted building new network sites and rolling out 5G as a result of the blackouts.

“It has been a tough year ... in terms of the level of complexity that it [loadshedding] has created. I think we have navigated it well, although it comes with a cost,” said Joosub.

Moreover, data demand and usage increase during power outages; hence the need to ensure that there is sufficient capacity and availability for customers, he said.

Clarity from the government and Eskom is needed on the extent of the energy problems and level of load-shedding to enable the company and the industry to plan and be better prepared, he added.

Vodacom runs networks in seven countries besides South Africa, where its base stations run on generators. Its local base stations and those of MTN were not built to operate with generators, and the two companies are in talks to share back-up electricity solutions and related costs.

Joosub said Vodacom’s pilot project with Eskom, in which the mobile network operator is generating its own power and contributing excess supply to the grid, is expected to be accelerated beyond the pilot phase, with other sectors replicating the model.

Vodacom SA operating profit declined by 1.2% to R20.9bn in the third quarter to endMarch, while subscribers fell 2.7% to 44.2million, which included deleting 1.5-million inactive accounts.

While Vodacom SA’s service revenue growth slowed further to about 1% in the three-month period in line with that of MTN SA Peter Takaendesa, head of equities at Mergence Asset Managers, said Vodacom appeared to be managing costs better to limit the effect on its profitability in South Africa.

Service revenue includes monthly access charges, airtime usage, roaming, incoming and outgoing network usage by non-Vodacom customers and interconnect charges for incoming calls.

Vodacom CFO Raisibe Morathi said at a presentation the group has renegotiated contracts with 8,000 suppliers to “refresh pricing for different products”. Where possible it will move its foreign currency spending to local currency to “protect us from exchange rate changes”.

Takaendesa said Vodacom has suggested that service revenue growth should improve due to recent contract price increases in South Africa, but “we think the business will find it harder to achieve its midterm targets given signs of deterioration in the consumer environment over at least the next 12 months and increasing competition in the market”.

Joosub said the price hikes came with increased value, more data and voice minutes.

Vodacom expects growth of mid-single digits in South Africa, while the target for group service revenue has been revised from mid-single digits to mid-to-high single digit growth. Group EBITDA is expected to grow by high-single digits.

Claude van Cuyck, portfolio manager at Denker Capital, said the improved guidance is welcome and “achievable”.

“The higher levels of inflation and recent price increases, supported by improved data and fintech growth, could assist in achieving their revised mid-to-high single digit revenue growth,” he said.

Overall, Vodacom’s performance was largely lifted by the inclusion of the recent acquisition of Vodafone Egypt. Without acquisitions or the diversification of income streams, the group faced limited growth, said Craig Pheiffer, Sasfin Wealth’s chief investment strategist.

“South Africa continues to provide the bulk of the revenue and operating profit, but the diversification into Egypt and the additional product segments are helping reduce the reliance on a single operating territory and a single product offering,” he said.

South Africa’s level of contribution to the business is coming down with the addition of Egypt, said Joosub.

About 55% of group revenue comes from South Africa and the rest is from other operations.