This analysis is from Standard Bank equity research January 28th this year. Telkom SA Ltd - Vodacom Q3 update Local currency ARPU weakness - is affordability becoming an issue? Share price (c) 11250 One-year target price (c) 20000 OUTPERFORM Event: Vodacom reported Q3 subscribers and ARPU with revenue growth of 13.7% for the first 9 months of FY 09E. This is in line with our FY 09E revenue growth forecast of 14%. View: South African subscriber growth of 4.8% QoQ remains solid, while ARPU grew 2.3% in a seasonally strong quarter. Although, less of a concern for Vodacom, since it is only 10% of EBITDA, we have become increasingly concerned over the competitive threat and affordability issue for mobile operators in Africa, post the Sub-prime crisis. Vodacom's African operations of Tanzania, DRC and Mozambique have reported QoQ declines in local currency of 11% (Tanzania) to 19% in the DRC. Obtaining accurate currency rates in Africa are a challenge, but the trend is a concern. Catalyst: We re-iterate our preference for Telkom over MTN (OP, PT R150) as we warn against affordability issues, MoU declines and ARPM pressure for the sector. Given the Vodacom lack of MoU data, we are unclear as to what is causing the pressure at present. We believe the catalysts continue to be the performance of Multi-links, the W-CDMA rollout and mobile opportunity. The special dividend of R17 will underpin value for now. Valuation: We value Telkom using a DCF at R180 per share (PT R200), with the Wireline asset at R55 and Multi- Links at R29 per share. Relative to the peer group, Telkom's PE of 8.4 to March 2009E is cheaper than the Eastern European peer group.
