It’s time once again for the AfkInsider Africa Stock Showdown, the contest that pits two similar companies against one another to determine which one boasts the best combination of profitability, growth and value.
Squaring off are Africa’s two largest wireless telecom companies.
In one corner is Johannesburg-based MTN. Boasting the widest geographic network of any African cellular company, it operates in 21 countries stretching from Syria to South Africa. The $36.9-billion-firm is helmed by CEO Sifiso Dabengwa and has been listed on the Johannesburg Stock Exchange since 1995.
In the opposite corner is the challenger, Vodacom. A subsidiary of the U.K.-based telecom giant, Vodafone, it serves 50 million customers across five African countries from its Johannesburg headquarters. CEO Shameel Aziz Joosub took the reins of the company soon after it split from South Africa’s legacy fixed-line phone company, Telkom.
The match will consist of six rounds, each focused on a different facet of the business. The company that wins the most rounds will be declared the victor.
Let’s get ready to rumble!!
A business isn’t much of a business if it’s not profitable, so that’s where our showdown begins. We want to see which company does the best job of deploying the resources available to generate cash in the bank. To do this, we compare return on assets (ROA), which measures the amount of net income a company earned in proportion to its average assets over the past year. We also want to see whether the companies are becoming more or less profitable, and we’ll do this by measuring the change in ROA over the preceding year.
With its higher, and more rapidly-growing ROA, Vodacom is clearly the more profitable business.
Winner: Vodacom
Profitability is essential, but great companies also consistently find ways to grow. While growth is often measured in terms of earnings, I prefer to use cash flow from operations (CFO). Why? Because it measures the amount of cash that is actually moving in and out of the business as a result of its daily operations. Earnings figures, meanwhile, often include non-cash items and are more easily manipulated with accounting tricks.
No contest here. Vodacom grew its operating cash flow, albeit at a tepid pace, while MTN’s dropped by well over 25%. Vodacom clearly wins the round.
Winner: Vodacom
Now, let’s consider how much of each company’s sales is eaten up by inventory, distribution, and administration costs. To do it, we’ll compare their operating margins (which is simply operating profit divided by revenue). We want companies with high, widening operating margins.
MTN’s got a slightly higher operating margin than its competitor, but it narrowed significantly from last year, while Vodacom’s widened by almost 9%. Let’s call it a draw.
Winner: Draw
Big debt loads squeeze profit margins and can be a constraint to growth. We should look for companies that have low levels of long-term debt in relation to total assets, and for management teams that do a good job of reducing this ratio from year to year.
While both companies have similar long-term debt loads, Vodacom’s is slightly lower, and, more importantly, shrank while MTN’s grew. The advantage is clearly with Vodacom.
Winner: Vodacom
We also need to make sure that the company is able to meet its short-term cash obligations like taxes and accounts payable. To do this we will compare the health of both companies’ current ratios. This helpful metric simply divides current assets (like inventory, cash, receivables) by current liabilities. The higher the ratio is, the more nimbly the company can deploy capital.
MTN’s current ratio is substantially higher than Vodacom’s, and while it slimmed a hair over the past 12 months, Vodacom’s deteriorated more rapidly. MTN wins its first round!
Winner: MTN
Finally, we need to see which company is least favored by the market. We’ll do this by comparing two important value metrics – the price/book ratio, which measures the price placed on the company’s net assets, and the price/cash-flow ratio, which shows us how much the market currently values each dollar the company generates. In both cases, lower ratios indicate less-demanding valuations.
An even split here. MTN is cheaper on a price to book basis, while Vodacom generates more cash in relation to its market price.
Winner: Draw
And the winner of this edition of Africa Stock Showdown winning three rounds to one is:
Vodacom! The wireless giant beat its even larger rival thanks to its better profitability, faster growth, and lower debt load.
Do you agree with the outcome? Tell us what other factors we should have considered in the comments.
Ryan Hoover is an investment analyst with Africa Capital Group and the founder of InvestingInAfrica.net. Contact him at ryan@investinginafrica.net.
Disclosure: Ryan holds a beneficial interest in Vodacom shares.
