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.
The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.
The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.
University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.
According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.
The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”
The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”
According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”
The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.
Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”
According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”
Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.
The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.
Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.” He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.
It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.
He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.
The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.
On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.
BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”
Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.
In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.
Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.
Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.
The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.
The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.
“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.