Investment Analysts at Motswedi securities have strongly recommend investors to BUY the stock during the IPO and also subsequent to listing as Botswana Telecommunications Corporation Limited (BTCL) provides significant growth potential to investors.
BTCL has opened an Initial Public Offering (IPO) of 462mn shares at a price of P1 per share with a minimum offer of 1,000 shares. The offer is expected to close on Friday, the 4th of March 2016 with the shares expected to list on the Botswana Stock Exchange (BSE) on the 8th of April 2016.
“With a listing PE of 5.5x, which is way below the market average PE of 14.7x, the share price has more scope for upside potential. We are targeting a price of 180 thebe for the stock, using a conservative valuation method. This gives an 80% upside potential against the IPO price of 100 thebe per share,” writes Gary Juma and Tlotlo Ramalepa who had embarked on a research project to appraise investors on the viability of the BTCL stock.
WHERE IS THE GROWTH STORY?
According to Juma and Ramalepa, the BTCL growth strategy is centred on leveraging its fixed, mobile and convergent products and services potential. 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.
The two investment analysts further state that the BTCL’s strategic plan focuses on: • Leveraging BTCL’s unique market position in Botswana, as the sole fixed and mobile operator, combining its mobile and fixed networks coverage, to smartly package unique fixed and mobile value propositions.
Moving BTCL Wholesale to higher value managed services, by offering managed (hosted) data services to mitigate the threat posed by direct competition with BoFiNet and others entering the managed data services market; • Defending the existing business through sophisticated bundling and packaging of traditional products, promoting BTCL tariffs, which are the lowest in Botswana, and marketing the BTCL network presence, and increased focus on customer satisfaction. • controlling costs through business transformation by unifying networks and minimising the IT platforms estate, ensuring flexibility and agility in products and service offerings. •innovating and growing revenues through building strategic alliances and partnerships, so as to improve levels of innovation, research and development capabilities within BTCL;
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 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. However, Juma and Ramalepa point out that BTCL has a profitable and strong business model. They opine that the company has been able to increase its revenue from P1.0bn in 2011 to P1.47bn in 2015, while profit after tax has risen from P177mn in 2011 to a high of P273.6mn in 2013 before falling to P146.8mn in 2015. “BTCL has been paying a very good dividend of 5.66thebe per share in 2011, 7.11thebe in 2012 and 50.68thebe per share in 2014, reflecting a healthy cash flow position and profitability.”
WHY INVEST IN BTCL
Juma and Ramalepa demonstrate that BTCL has a number of strengths and competences which translate to certain key advantages over other players in the Botswana communications sector.
They first show a measure of the BTCL as a Profitable Company : “BTCL has a profitable and strong business model. The company has been able to increase its revenue from P1.0bn in 2011 to P1.47bn in 2015, while profit after tax has risen from P177mn in 2011 to a high of P273.6mn in 2013 before falling to P146.8mn in 2015.” BUSINESS MODEL
The two analysts share on the BTCL business model: “BTCL offers its products and services through two operating business units namely: a. BTCL Wholesale – the wholesale arm of BTCL’s business; and b. FMC Organisation – which combines beMobile, Broadband and Fixed into a single business unit.” Wider Network footprint
Juma and Ramalepa write that BTCL through its BeMobile unit has gained significant competitive advantage in the mobile domain, BTCL has a PTO Licence issued by the regulator, BOCRA. It is one of the three local PTO Licence operators (with the others being Mascom Wireless and Orange Botswana).
“BTCL is, however, the only PTO Licence holder operating both the traditional fixed and mobile networks. The BeMobile unit has gained significant competitive advantage in the mobile domain, particularly in remote areas because of its extensive mobile coverage. This network strength resulted in a 65% market share in fixed broadband and data services, 90% in fixed network voice services and 17% in mobile connections,” they state.
According to Juma and Ramalepa, the mobile market share is notable in so far as it has been achieved within seven years against two very prominent and well established brands. No other operator has assets deployed as widely across both fixed and mobile services space as BTCL. Vodafone Partnership
According to the Motswedi Securities analysts, BTCL has entered into a strategic partnership with one of the world’s leading communications services providers, Vodafone.
They state that this partnership will enable Vodafone and BTCL the option to cooperate and deploy certain products and services (including third party products and services); enabling BTCL to gain access to the Vodafone knowledge bank; and permitting the parties to carry out capability assessments and co-operate on procurement for the benefit of BTCL in Botswana for a period of three years.
Juma and Ramalepa argue that the existence of BTCL’s copper access network means BTCL is the only operator with capacity and capability to offer ADSL services. They posit that this affords BTCL a market opportunity to offer voice and ADSL services through the copper network to its clients. With the advent of new technologies such as Ethernet over Copper BTCL will in future be able to offer improved broadband internet speeds over its copper network.
BTCL IN BRIEF
“BTCL was established in 1980 to provide, develop, operate and manage Botswana’s national and international telecommunications services. Since then, BTC has evolved to become one of the leading providers in Botswana of voice telephony (both fixed and mobile), as well as national and international internet, data services, virtual private networks and customer equipment to the nation. Part of the Company’s growth and success stems from the acquisition of the PTO Licence in 2007, which was one of the three licences issued by BOCRA (then the Botswana Telecommunications Authority).
The PTO Licence permits BTCL to offer services of any kind, using any technology, connected with public telecommunications. BTCL is the only PTO Licence holder operating both the traditional fixed and mobile networks,” shares Juma and Ramalepa in their research document.
‘IPO Ya Rona Rotlhe’
Juma and Ramalepa state that BTCL was identified in the Privatisation Master Plan of 2005 as a candidate for privatisation. To facilitate BTCL’s privatisation process,
Parliament, in 2008, passed the Transition Act to enable Government to convert BTC from a statutory body to a limited liability company under the Companies Act. Government further adopted a privatisation model for BTCL in 2010. The key features of the Privatisation Model include, amongst others, the following: 44% of BTCL’s equity would be made available for ownership by Batswana via the BSE;
Government would retain 51% equity, together with the Trans- Kalahari Optic Fibre Network, the Gaborone-Francistown Loop and other backbone infrastructure assets and contracts which would be placed under a separate entity, wholly owned by Government.
Prior to Listing, 5% of the total equity of BTCL would be allocated to BTCL’s citizen employees and an Employee Share Trust will be established to manage and hold these shares for the employees.
Trading of shares in the BSE would be permitted amongst Citizen investors only;
Provide an opportunity to Batswana, who have supported BTCL over the years.
Allow Batswana to share in the growth and profitability of BTCL.
Raise the company profile and investor awareness of BTCL locally.
Raise equity capital for the company.
Enable government to privatise BTCL in line with the Privatisation Master Plan of 2005.
WHO CAN INVEST?
The Offer is available only to:
a. Natural persons who are citizens of Botswana. b. Corporate entities registered or operating in Botswana which are wholly citizen owned. c. Unincorporated associations, partnerships, and investment funds (whether managed directly or by institutional investors registered in Botswana) which are wholly Citizen owned. d. Trusts whose ultimate beneficiaries are all Botswana citizens. e. Local Pension Funds managed by institutional investors registered in Botswana.
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”