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At the Market With Tetrad

Payphone business boosts Celsys earnings

By Brian K Mugabe

THIS week saw the commencement of the non-priority auction targeted at individuals and small-to-medium enterprises (SMEs) wh

o hitherto have not really had access to the forex auction system that sought to prioritise productive sector requirements.

The first auction saw US$174 383,07 being allotted, this representing the 104 bids that were accepted out of 146. The allotted amount was out of a total amount on offer of US$250 000. This auction has as one of its objectives, to assist in the contraction of the forex black market.

Unfortunately, one of the steps taken by the central bank in the second quarter monetary policy review which is likely to fuel the black market and take currency out of the official “Homelink” system was the removal of the concession that allowed recipients of funds from the diaspora to receive their monies in forex. Perhaps to mitigate the potentially negative ramifications of that change, one option would be to let the second auction be a completely “free” auction where individuals with free funds from the diaspora or wherever, can put up their forex for auction and bids are allowed to go as high or low as the market determines.

This would be similar to the concessionary funds and market-related interest rate scenario currently prevailing as the bidders at this auction are presumably not requiring the funds for productive reasons. This would at least keep the forex in the formal arena, if only for the purpose of monitoring diaspora currency inflows while also perhaps giving a guideline as to where the rate might settle if allowed to be freely determined by the forces of supply and demand.

The reporting season continued in earnest this week with most results released falling in line with or below market expectations unlike in the past few years where most predictions were blown out of the water. The impact of the results released so far on the stock market has thus been more negative than positive with the market displaying a weak bias over the first three trading days during which it shed a further 3%, having lost 1% during the shortened holiday week.

The two listed telecoms/technology stocks, Celsys and Econet, both published their year end results to 30 June and these sets of results are the ones we look at this week.

Beginning with Celsys, turnover for 11 months to June, (the company changed its year end from July to June), was up over 12-fold to $128 billion compared with the 12 months to July 2003. This growth was driven in the main by the successful, ongoing roll-out of the payphone network which provides the company with a recurring revenue base.

Operating profits grew at a far lower, but still well above inflation pace of 771% to $56 billion. A significant deterioration in the operating margin was thus experienced, down from 62% to 43% as staff-driven costs in particular saw expenses growth well ahead of the increase in turnover. The reduction in the margin was also due to the increased contribution to the business of the payphone division whose margins tend to be lower than the other business units.

Net finance income of $17 billion was recorded, up from $3 billion in 2003 and with this income item only growing at a relatively lower 446%, as well as the fact that the deferred tax charge went up 997%, bottom line earnings growth was diluted to 583%, going from $8 billion to $52 billion.

The payphone business is expected to continue driving growth going forward with the company having secured additional capacity for its roll-out from two of the three networks in a market it believes to be at just 16% saturation.

The acquisition of Nokia Zimbabwe is also expected to add to the company’s performance while regional avenues will continue to be pursued. In line with the growth targets, particularly relating to the payphones, Celsys intends to undertake a rights issue in the early part of the next financial year.

Turning to Econet, revenues for the group grew by 700% to $200 billion, mainly due to the 1 000%, 45% and 35% tariff increases effected in December 2003, January and June this year respectively as well as the increase in subscribers from 144 353 to 173 606. The hikes saw Average Revenue Per User also improving from an all time low of US$5,44 prior to December to US$19,66.

Operating expenses on the other hand, grew at a slightly higher rate of 707% to $102 billion spurred on mainly by a massive 961% growth in staff costs and a material increase in marketing costs. Operating margins were however stable increasing by only a percentage point to 49%.

The group which some time last year was heavily criticised by some quarters of the market for its aversion to debt given the negative interests then prevailing and its need to expand and upgrade its network, appears to have been vindicated, as it recorded net interest income of $5,2 billion compared with a $486 million charge in 2003.

Equity accounting of the 14% stake in Mascom Wireless Bostwana which was acquired effective July 1 2003, saw the group booking in $8,4 billion, further enhancing the bottom line. Thus attributable earnings of $76,5 billion were realised, up 912% on 2003 and a massive 512 percentage points above the June inflation figure. Earnings per share however increased by 477% due to the substantial dilution effect of the shares issued to the major shareholder in exchange for the aforementioned 14% stake in Mascom.

Network upgrade, growth in subscribers, efficient use of current network capabilities and cost efficiencies will be the focus of the group going forward. The raising of international termination rates, resumption of roaming services, finalisation of interconnect fees and the switch to a cost-based tariff structures are expected to boost revenues in the next financial year.

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