Barbican Asset Management
Econet trading at a discount to its intrinsic value.
ECONET Wireless Holdings Ltd (Econet), a company
incorporated in August 1998, released its excellent interim results for the half year ended December 31 2003.
It is the holding company of a number of subsidiaries in the telecommunications industry, namely Econet Wireless, Data Control and Systems (Pvt) Ltd, Transaction Processing Systems (Pvt) Ltd and Franchise Development and Management.
Econet Wireless -This division specia-lises in the provisionof telecommunications services to the public. In addition to cellular services the firm is established in satellite services, phone shop services, Internet services and transaction processing.
Ecoweb (data control systems) – Ecoweb is an Internet access service provider with an unlimited bandwidth thanks to its wireless infrastructure.
Its services include Ecoweb Online, Ecoweb on Air and Web Hosting and Design.
Transaction processing systems – Develops transaction delivery and processing systems for the local business environment. Among those developed are mobile and Internet banking systems, ATM-based cellular prepay systems and point of sale systems.
Franchise development and management – Provides community phones to both rural and urban areas where privately-owned lines are expensive through their numerous phone shops.
Currently the top four shareholders are shown in the table below.
The bulk of the investors are investments and trusts, followed by insurance companies and then nominees (local). The institutional investors have a huge stake, which positively contribute to the stability of the counter.
Historical turnover grew by 760% to $62 billion for the period ended December 31 2003. This can be attributed to the increase in tariffs from US2 cents per minute in June 2003 to US12 cents per minute in December as well as subscriber growth of 10%.
Profit before taxation went up by a significant 1 600% from $2 billion in 2002 to $35 billion in 2003 (with Mascom contributing $4,5 billion).
This shows excellent management innovation as they managed to translate their marginal growth in turnover into even greater profits.
Net margin increased from 16% in 2002 to 38% for the half-year ended December 31. This shows the continued effort in cost control on the part of management.
Earnings per share went up by about 965% to $14,70 in December 2003, a growth rate that is way above year-on- year inflation.
This shows management’s ability to adjust to the ever-worsening operating environment.
At the same time return on assets grew from 16% to 37% in 2003, an indication of improved operational efficiency and improved utilisation of the company’s assets.
The firm also managed to create wealth for its shareholders, as is evidenced by the increase in its return on equity ratio from 30% to 42% in 2003.
The gearing ratio declined from 39% in 2002 to only 1% in 2003 against a rise in the interest cover from six times in 2002 to 38 times in 2003.
This was beneficial to the firm given the sharp rise in interest rates to above inflation levels in the later part of the half-year period. With this cautious debt management policy, the firm managed to hedge itself against the interest rate risk, which would have caused wealth erosion.
The inclusion of the telecommunications industry in the productive sector category by the central bank means that Econet is in a better position to fund its network expansion programmes at a lower cost. Econet also has a favorable cash- flow position, which it could translate to huge profits in the money markets.
Its foreign operations in the diaspora provide a steady flow of foreign currency for the firm.
Economic activity has been characterised by hyperinflation and a shortage in foreign currency. This has necessitated the increase in tariffs, further causing the usage by prepaid customers to drop off by nearly half.
Consumer resistance to a further increase in tariffs is imminent, and this may further hamper the increase in turnover.
For a firm with a very low financial risk factor and a growth in earnings per share of above inflation levels, market forces should leave it trading at above $400 levels by the next reporting season.
Judging by the above valuation and the fact that the counter has a high affinity for growth and expansion, we view the counter as trading at a discount to its intrinsic value.