Pricing Vodacom’s YeboYethu: Gardee sizes up whether it is worth R50/share

Trading in YeboYethu kicked off this morning, with shares in Vodacom SA‘s Black Economic Empowerment security changing hands at around R50. Many YeboYethu shareholders will be wondering whether this is a good price – or whether they can get much more by holding out for longer.

Unpacking the numbers for Biznews.com‘s community members is Riaz Gardee, a chartered accountant who loves applying his knowledge to the investment field. In his usual style, he cuts through the figures and corporate puffery to deliver clear insights.

Riaz reckons there will be more money for investors who are prepared to be patient.  The key value trigger for YeboYethu will be the removal of trading restrictions after five years resulting in value uplift of the price, he says in this briefing note on YeboYethu’s real worth. – JC

By Riaz Gardee

riaz-gardee

Vodacom SA’s 2008 BEE initiative, Yebo Yethu, commenced over-the counter trading on the 3rd of February at around R50 per share. Shareholders originally acquired these shares at R25 resulting in a return of 15% p.a. for the last 5 years. The ownership structure is shown below:Screen shot 2014-02-03 at 11.28.54 AM

In 2008 JSE-listed Vodacom Group implemented its R7.5bn BEE transaction resulting in a 6.25% equity disposal in its South African operations, Vodacom SA. The deal was funded by BEE equity of R25 per share, a 10% discount from Vodacom and notional funding at 10% interest p.a. The notional funding is reduced by dividends and the balance outstanding after the facilitation period will be settled by equity, as required. The beneficiaries were the public, Vodacom employees, Royal Bafokeng Holdings and Thebe. Yebo Yethu shareholders consist of the public and Vodacom employees who together own 3.44% of Vodacom SA.

The over-the-counter trading platform now allows the public to trade their Yebo Yethu shares to other black participants for the remainder of the 5 year ‘BEE only’ trading restriction period.

Ownership structure and Vodacom SA value

Vodacom SA is not the JSE-listed Vodacom Group which is majority-owned by British based Vodafone Group and currently trading at around R118 per share.

Screen shot 2014-02-03 at 11.35.27 AM

Source: Vodacom, Yebo Yethu

Yebo Yethu and the JSE-listed Vodacom Group thus have no direct correlation in terms of their respective share prices as they are separate companies with different assets as well as number of issued shares. The key difference is Vodacom SA comprises only of the South African operations whereas Vodacom Group has interests in South Africa (93.75%), Tanzania, Mozambique, Democratic Republic of Congo and Lesotho.

The South African business comprises 85-90% of the value of the JSE-listed Vodacom Group and can therefore also be used as a reference for valuing Vodacom SA in which Yebo Yethu has a 3.44% shareholding. On this basis using Vodacom Group’s end January market cap of R174bn the value of Vodacom SA would be R147bn. As another reference using a 7x EBITDA multiple less net debt provides a valuation of R144bn for Vodacom SA. The value range of c. R150bn reflects a growth of just over 4% p.a. in the last 5 years from the R120bn valuation at inception of the transaction. This is broadly in line with the inflationary growth in the country. Similar growth can probably be anticipated over the next 5 years. Vodacom was the dominant player in the SA market during this period with limited growth opportunities compared to its competitors.

Assuming a R147bn value Yebo Yethu’s 3.44% is worth R5.1bn less notional debt of R3.2bn results in Net Asset Value of R1.9bn. Its NAV per share is thus R70 and this will be discounted by market participants as five years remain for the trading restrictions to lapse. A 30-40% discount will imply a trading range of around R42 – R50.

Vodacom SA Prospects

Vodacom SA remains the dominant player in the South African market with 45% market share by subscribers. The entity will be restricted to the South African market which has lower growth prospects in the next 5 years than other emerging markets. Vodacom SA is aiming to improve profits over the next few years by providing more data and other services. Recent asymmetric MTR pricing will also impact Vodacom more negatively than other players – this essentially means Vodacom pays more to smaller operators when using their networks than they would pay Vodacom for using its network. It is likely that Vodacom SA will grow at a modest pace over the next few years due to a combination of these factors as well as price/volume pressures.

Price vs Value

As Oscar Wilde famously said a cynic is one who knows the price of everything and the value of nothing and a sentimentalist is one who sees the absurd value in everything and doesn’t know the market place of a single thing. The key value trigger for Yebo Yethu will thus be the removal of trading restrictions after five years resulting in value uplift of the price. Five years is also much longer than the three years remaining in MTN Zakhele and many things can change during this period. Yebo Yethu is thus suitable for the patient long-term investor who can buy/hold his shares and exit when the restrictions lapse after 5 years – targeting a return of 15% p.a during this period.

* Riaz Gardee is a Chartered accountant who specialised in mergers & acquisitions and corporate advisory for a number of years. In recent years he has been working on expansion and development of businesses in sub-Saharan Africa. 

For more by Riaz Gardee, see:

Gardee analyses MTN Zakhele – postponed trading disappointed, but its value appreciation certainly hasn’t

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