- Imara says digital transformation compelled by COVID-19 pandemic has positioned BTC on a path for continued long-term sustainable growth
A buy rating, also known as a strong buy, is an investment analyst’s recommendation to buy a stock or security. Analysts make recommendations based on a rating scale that includes buy, outperform, hold, underperform, and sell.
Having depreciated by 8.75 percent year-on-year to P0.73 from P0.80 by 18 January 2021, BTC trades at a respective entrepreneurial value (EV) and Free Cash Flow (FCF) multiple of 0.60x and 0.66x which trails significantly behind its regional peer averages of 3.16x and 4.87x.
The counter’s significantly discounted price relative to its peers can somewhat be explained by its lack of price discovery, given the fact that its shareholding is limited only to citizens of Botswana and in general, the lower levels of public financial literacy and liquidity undermine the counter’s true value. “Factoring the above, our relative valuation yields a target price of P1.36, representing an 86.30 percent potential upside. We therefore assign a BUY recommendation for the counter,” the stockbroker said.
Imara notes that since the onset of the COVID-19 pandemic, employers have resorted to working from home solutions to mitigate the risk of contagion. While permanent work from home solutions are no longer the constant, there has been a continued trend of employers across the country over practising flexible working solutions which may well become a permanent fixture moving forward. This was largely due, in part, to the restrictions the COVID-19 pandemic imposed, and the attempts to mitigate the virus.
As such, aided additionally by an observed growing trend of consumers seeking further convenience, the public and private sectors sought alternative work arrangements, bringing about the work from home, e-education, e-commerce and other services to support digital transformation.
“This digital migration positions ICT companies such as BTC on a path for continued long-term sustainable growth particularly on its fixed broadband lines, given the need to maintain Internet connectivity as the world at large has and is continually adopting the new norms,” Imara said. “Such has been evidenced by statistics from the Botswana Communications Regulatory Authority (BOCRA) which indicated that countrywide fixed broadband subscriptions rocketed from 2020 to 2021, registering a 50.94 percent increase.”
Further statistics from BOCRA indicate a 16.50 percent increase in overall mobile money subscriptions over the period March 2020 to March 2021. BTC registered a significant rise in mobile money subscriptions by 128.78 percent, with its market share growing from 3.12 percent to 6.12 percent. Despite the current duopoly in the sector, the company’s momentum in the fast-growing space gives the suggestion that it may continue to eat away at the more established competitors’ market share.
Over the past five years, mobile money subscriptions have grown at an annualised rate of 21.47 percent and penetration levels have improved from 25.87 percent in March 2016 to 60.50 percent as at March 2021.
“In terms of mobile broadband subscriptions, total subscriptions grew by 11.58 percent and BTCL’s subscriptions rose by 8.53 percent over the one year period,” said Imara. “However, BTCL’s market share was relatively flat at 10.16 percent. Mobile telephony subscriptions remain dominated by BTCL’s competition, with BTCL experiencing a decrease of 7.27 percent in subscriptions over the period.”
Furthermore, its market share in this space decreased from 18.56 percent in 2020 to 16.77 percent. BTC had expected to grow its market share to at least 30percent through introduction of mobile number portability (MNP) as it hoped to increase its share by luring subscribers away from its larger rivals. Despite the 11th hour decision by the government to abandon the initiative, the company’s overall prospects for growth still remain geared towards the upside.
The government having identified ICT as the catalyst for the next wave of economic development positions ICT companies well advised to act as enablers of change. Areas signalled for development include provision of products and services such as ecommerce, social networking and entertainment, wider broadband access and Internet connectivity, and access for schools, libraries, and health centres and using the high mobile penetration rate to ensure the availability of government, health, agriculture, education, and e-commerce services on apps. On the downside, job losses and reduced consumer spending due to the effect of the prior lockdowns on the economy may see consumers spend less on telecoms services and devices.
Compared to its sub-Saharan counterparts, BTC’s return on capital employed of 7.70 percent falls below the benchmark of 18.74 percent, which may suggest that the company may not be efficiently allocating its capital. However, this was intentional as part of the company’s three-year strategic plan to 2020 which was premised on capital deployment to lay a solid foundation for future growth with a distinct objective of commercialising its investments.
Imara said looking at the margin performance, BTC’s gross margin declined by 824 bps to 57.17 percent as compared to 65.40 percent at H1 18 (the first reporting period of the three-year strategy to 2020) and its net margin was marginally lower at 12.23 percent vs. 12.34 percent at H1 18. “The slight improvement was however a result of improved cost management as opposed to a growing topline, evidence by a 599 bps contraction in the cost-to-income ratio to 75.05 percent from 81.04 percent at H1 18,” the stockbroker noted.
“The company’s current three-year strategic plan to 2023 seeks to build on the investments under the former, creating value through growing its mobile and broadband market share as well as optimising core solutions to offer superior customer experience. The aforementioned changing operating environment positions the company well to monetise its assets following intense capital deployment, thus our long-term outlook for the counter is positive, despite its downturn in performance.”