Motswedi Securities’ has released a thorough assessment of the Botswana Telecommunications Corporation Limited (BTCL) issuing a Long Term Buy recommendation on BTCL at the current price.
The Research team at Motswedi Securities notes that the BTCL growth strategy is centred on leveraging its fixed, mobile and convergent products and services potential. He says the strategy is intended to leverage BTCL’s unique market position as the only fixed and mobile network operator in Botswana by creating competitive advantages for the company through the provision of traditional fixed and mobile broadband, information and content capabilities. It is interesting to note that BTCL is trading at a 35% discount to its NAV. (Current price – P1.47).
“With a PE of 6.8x against the market average of 16.9x and a PBv of 0.8, we still maintain a LONG TERM BUY recommendation on BTCL at the current price.”
WHERE IS THE GROWTH STORY?
According to the report BTCL has copper access network making it the only operator with the capacity to offer ADSL (Asymmetric Digital Subscriber Line Service). ADSL is a data communication service that enables faster data transmission over copper telephone services than convectional voice and modem can provide. BTCL could leverage on this competitive advantage by offering this ADSL product through its copper network, thereby increasing data sales.
Further the Motswedi Securities team notes that the Wider Network footprint and report that BTCL through its BeMobile unit has the widest mobile coverage particularly in remote areas because of its extensive mobile coverage. No other operator has assets deployed as widely across both fixed and mobile services space as BTCL. The mobile network can leverage on this extensive coverage to grow its market share. The researchers also recognize BTCL’s Strong brand recognition and perception, especially in the fixed line business.
The company’s Increased Market Share also speaks to the growth story. According to the report, the BeMobile business is less than 9 years old but already it has gained a notable market share of around 17% which is commendable in this environment dominated by two other giants.
“BTCL is the sole provider of fixed telephony, with this segment being the second driver of revenue, contributing 32%. It is interesting to note that the fixed telephony segment has shown a slight but constant growth over the years in terms of revenue and is expected to continue holding its ground in the short to midterm mainly due to increased usage from the corporate and the government. Having said this, we are equally aware of the decline of this business on a global scale on the long term.”
The Motswedi Securities team is convinced that the BTCL runs a highly profitable business with a strong dividend distribution. It notes that BTCL bounced backed into profitability with all the profitability ratios growing exponentially. The positive numbers are expected to continue going into the future. Further, the researchers point out that Product innovation is expected to continue improving due to the partnership with Vodafone, one of the world’s leading communications services providers. Another plus for BTCL is the fact that the government remains the majority shareholder with a 51% stake in BTCL:
“The government may consider reducing its stake in BTCL to inject both liquidity, innovation and management skills that would better serve the country, investors, the entity and all its stakeholders. This would allow the company the swiftness it needs to remain competitive and profitable. The government can have both control and strategic influence in order to effect social and public policy, while maintaining a minority shareholding, with special voting rights (class A shares). This also promotes better price discovery, improved market liquidity, strategic alliances and partnership, improved competition and a diversified shareholder base and all these will feed positively into BTCL bottom line.”
THE POSSIBLE CHALLENGES
The Motswedi Securities research team has not ignored the possible challenges to the BTCL beautiful story. They acknowledge that BTCL operates in a highly competitive and mature market with intense price competition. Tele density level is above 171% and the only way for BeMobile to expand its market share from the current 17% is to take away subscribers from other networks. This might be a tall order given that the other two giant mobile networks will certainly do anything to protect their territories.
Another factor is the increased competition in the telecoms sector within the country as a result of market liberalisation and this has led in some instances BTCL losing some of its key clients to competitors. The researchers further indicate that Liquid Telecom will also be launching a new telecoms network provider with extensive reach across Botswana soon.
“The business is a high volume business with profitability very sensitive to variation in margins. This is because, BoFinet determines the margins available to network operators and in some cases BTCL may not be able to pass on to the retailer any margin compression enforced by BoFinet and this will eat on margins and profitability,” write in the BTCL assessment report.
Expected decline in Fixed Telephone revenue in the future could also add to the downside of BTCL, they say. According to the Motswedi Securities researchers, the Regulatory risk still remain elevated. BOCRA has started implementing a Pricing Framework which seeks to align to cost, retail prices for mobile voice and mobile broadband.
“Implementation of the Framework has been phased over three years and has already began. The implementation has started with the removal of mobile Termination Rates and differences in prices between the off-net premiums (between networks) and on-net rates. This may impact negatively on revenue from the sector at large and by extension BTCL,” reads the report.
Meanwhile trading of the stock is currently restricted to citizens or wholly owned citizens companies. The Motswedi Securities team argue that this may impact on liquidity and price discovery. Further, they say, the government may consider Market Liberalisation and opening up the market to international investors so as to give BTCL a wider brand exposure and investor base.
STRONG FINANCIAL RESULTS
BTCL FY Financial results for the year ended 31 March 2017 showed a 9% growth in sales driven by growth in fixed, mobile and data sales. Mobile revenues increased by 5% and is the biggest contributor to total revenue at 37%, followed by Fixed Telephony Revenues at 32% and Data services revenue at 29%. “We expect the contribution of Fixed telephony to gradually decline in the future in preference of mobile phones which offers more convenience,” the Motswedi Securities researchers observe.
GP margins improved to 58% from 51%. Total cost were trimmed by 26%, while no impairment were recognised for the year following an impairment assessment exercise carried out at year end. EBITDA grew strongly by 40% to P369mn (FY16: P263mn) with EBITDA margin improving to 23% from 18%. PAT bounced back strongly into the positive territory at P237mn from a loss of P371mn the previous year and this also pushed the net profit margin to 15% from -25%.
“BTCL growth strategy is centred on leveraging its fixed, mobile and convergent products and services potential. The strategy is intended to leverage on BTCL’s unique market position as the only fixed and mobile network operator in Botswana by creating competitive advantages through the provision of traditional fixed and mobile broadband, information and content capabilities. It is interesting to note that BTCL is trading at a 35% discount to its NAV. (Current price – P1.47). With a PE of 6.8x against the market average of 16.9x and a PBv of 0.8, we still maintain a LONG TERM BUY recommendation on BTCL.”
TELECOMMUNICATION MARKET OVERVIEW
The telecommunications market is dominated by the three operators which operate under Public Telecommunications Operator (PTO) licence; namely: BTCL, Mascom and Orange Botswana. The other major player in the market is Botswana Fibre Networks (BoFiNet), which was issued with an interim licence to provide wholesale services beginning 1 April 2013. BoFiNet started offering services in October 2013.
In addition, Private Telecommunications Network Licences (PTNL) have been issued to entities to build private networks for internal business use. Although the PTO licence allows the operators to offer both mobile and fixed telephony services and products, the industry still has 3 players with Mascom and Orange offering mobile telephony services only including mobile Internet and value add services, while BTCL provides both the fixed and mobile telephony services. This includes data network services, providing access and connectivity.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”