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The investing public is not yet fully satisfied with Econet’s level of financial disclosure

Linda Tsarwe Business Correspondent
Econet has been one of the most outstanding companies in its industry both in terms of performance and innovation. Many have admired its novelty, which seems to be paying off in this current environment where voice revenue, which was its mainstay for years, is gradually declining.

Cheaper products such as instant messaging are fast gaining popularity, and as they become more developed, are emerging to be substitute products for voice.

Management of Econet Wireless has indicated that the company has chosen to “ride with the wave” of the new technology and work towards developing products that exploit such technological developments.

Econet has therefore managed to maintain its relevance in a rapidly changing market, although this has come with its own costs.

Revenue for the six months to August 2014 increased by 4 percent to US$392 million compared to the same period in 2013. This was despite a 7,1 percent fall in voice revenue as well as a 1,2 percent decline in SMS revenue.

Voice is the main contributor to revenue as well as a strong pillar for supporting profit margins. For the six month period to August 2014, voice contribution to revenue was 67 percent, a significant fall from the 77 percent contribution achieved in 2013.

Regardless of this slump, the growth in non-voice revenue was able to compensate for the slide in voice and also resulted in an overall growth in total revenue.

In the current tough operating environment, the topline growth was quite remarkable. Major revenue growth drivers for the period were EcoCash whose revenue jumped by 110 percent to US$27 million, while broadband revenue increased by 68 percent to US$56 million.

Revenue was further boosted by the growth in overall subscribers. For the 2014 interim period, subscribers increased by 5,8 percent to 9,026,332 subscribers.

Continued investment in value adding services has probably given Econet the leverage to be the select cellular network provider relative to their competition.

Econet is an aggressive marketer and the introduction of products such as EcoCash increased their footprint in the country and gave them competitive edge over others.

Market share as at August 2014 stood at 65 percent, while the other two cellular operators shared the remaining 35 percent of the market.

Resultantly, products such as EcoCash have thrived on numbers while competitor products such as One Wallet, whose revenues were recently reported as a paltry US$1,194, have suffered.

However, despite growth in revenue as well as subscriber base, Econet is faced with shrinking profits.

Earnings before interest, tax, depreciation and amortisation (EBITDA) for the period to August 2014 fell by 8,3 percent to US$155 million.

Management attributed the decline to the change in product mix, where data and overlay services are increasingly becoming material in their contributions to both revenue and profit.

However, these products are relatively low value and they have a dilutive effect on profit margins.

For the six month period to August 2014, EBITDA margins dropped by five percentage points from August 2013 to 45 percent.

Current technological developments are pointing to a future where such low value products will become even more dominant. If that is the case, then Econet has quite a struggle ahead to increase margins to their historical levels.

It is, however, hoped that as revenue for the non-voice products increases, then costs are spread over a broader turnover base, which will result in improved margins.

Liquidity challenges might, however, cap their ability to increase revenue to optimal levels as users might limit their spending to only what they would deem basic.

Other than just the liquidity challenges, the fight to improve revenues might be weighed down by Econet’s cost structure which seems blotted.

For example, capital expenditure, although it is coming down is still arguably high. Notwithstanding the benefits it has brought in terms of improved service delivery, it has also had the impact of chewing into EBITDA through high depreciation costs.

A resolution to share infrastructure among the cellular providers ought to be reached so that each individual company does not have to spend huge sums of money on infrastructure development.

Furthermore, operating costs might need to be put in check considering that they continue to grow at a rate that is faster than that of revenue.

Direct costs increased by 94 percent to $31 million in August 2014, administration costs also went up by 15 percent to $46 million, while employee related costs went up by 21 percent to $47 million.

Expenses should at least grow in line with revenue, and small deviations to cater for inevitable costs such as product development are always understandable.

Steward Bank is possibly another unit that has had a negative effect on profit margins.

According to Econet management, the bank made a loss of US$3,6 million for the six months to August 2014. Same period last year, the bank made a loss of US$20 million following the cleaning up of their loan book.

After having completed the clean-up exercise, the bank was expected to at least break even in the current period.

Many have questioned whether Econet needs to own a bank to support its overlay services.

Alternatively, a simple partnership with any bank could almost equally yield the same benefits but without the hassle of manning a bank.

To date, Econet seems to be fully supporting Steward Bank, while the reciprocal benefits from the bank are yet to be seen.

Other than just the faltering margins, the investing public is not yet fully satisfied with Econet’s level of financial disclosure. Although there has been notable improvements in information provided over the years, especially at year ends, the investing public still has questions that has remained unanswered despite repeat efforts of seeking clarity.

For example, how much is EcoCash contributing to profitability? Is it even profitable? Management has managed to cleverly duck these questions by giving a number of reasons as to why they are unable to disclose these statistics yet.

The product is said to be only three years old and it would be premature to disclose such figures as yet. It is acknowledged that the start-up costs for EcoCash must have been huge and investors likely expect the payback period to be longer.

Revealing whether EcoCash is making a profit or loss, and by what magnitude would assist in tracking the progression of yield of the product.

EcoCash has undoubtedly played a pivotal role in the mobile money revolution in the country, and the value it is adding to Econet is undisputed. This should give management the confidence to be more upcoming in disclosing the profitability figures of EcoCash.

Generally, although their current disclosures are in fulfilment of corporate governance requirements, companies are also encouraged to disclose over and above the requirements, which inculcates more confidence in investors.

Econet remains a relatively preferable investment stock by many. The company is stable, is still profitable and is currently paying a dividend.

However, although the business is solid, it is faced with challenges such as the decline in margins which has resulted in lower profits.

Given the decline in voice revenue, there is a high probability that profit margins will remain stifled.

The share price, on the other hand, took a 6 percent knock the day after the announcement of the results as a rerate to the lower earnings figures.

The market will obviously be watching for improvements in margins which will a boost to the valuation of Econet.

Furthermore, enlightening investors on certain grey areas of the business will give them a full appreciation of the company and this will work in reconciling the valuation of Econet with its peers in the continent.