Sonatel: Telecoms

THE COMPANY: Sonatel provides telecommunication solutions in the areas of fixed line, mobile, internet, television, as well as data services to individuals and businesses in countries including Senegal, Mali, Guinea and Guinea-Bissau.

The company also offers consulting services, as well as engages in the lease, sale, installation, and maintenance of hardware and software for telecoms networks for businesses. Furthermore, it has been offering its services under the Orange brand since November 2006, and services around 18.3m subscribers. Sonatel also has a strategic partnership with France Telecom Group.

In 2012, Sonatel’s revenues grew by 4.3% and it maintained its leading positions in Senegal and Mali, where the company gained a 2% and 4% market share respectively. The growing contribution of its subsidiaries in Guinea and Guinea Bissau make them key growth drivers for the coming years. Regarding the operational performance, Sonatel management puts a strong emphasis on maintaining the EBITDA margin above 50%. The company shows a higher EBITDA margin than its peers, and this cost-cutting strategy should result in strong value creation going forward.

Historically, Sonatel stock price has been undervalued compared to its frontier market peers. The share split 1 for 10 in November 2012 provided greater liquidity and accessibility for all investors. In addition, it was seen to be a positive catalyst, enabling local investors to afford investment in the company. Thanks to its renewed dynamism, company shares recorded a 65% growth since the split announcement was made.

The Malian crisis had a limited impact on Sonatel activity because the armed conflict took place in northern Mali, which contributes less than 15% of the company’s revenues. However, damaged assets that amount to CFA3bn (€4.5m), according to the first estimates from the company, are set to be covered by the Multilateral Investment Guarantee Agency of the World Bank, in the near future.

Sonatel, with a price-to-earnings ratio of 11.1x, is currently trading below the sector average of 12.2x. The historical dividend payout ratio is 73.6% over the past 10 years. It is expected that the company should be able to maintain its generous dividend policy, given the cash flow generation and the very low debt on its balance sheet.

Sonatel revenues are driven by mobile activity; the triggers for future growth are internet and mobile banking. Lower prices should boost the demand for 3G handsets and internet connection.

We note that 3G revenues account for less than 1% of Sonatel turnover. Orange Money’s contribution to turnover is not significant in Côte d’Ivoire, while it is a major source of growth for other operators like Safaricom in Kenya; we believe it is the result of lower literacy rates in the countries where Sonatel operates. Those factors will definitely help to drive growth in the long term.

DEVELOPMENT STRATEGY: Sonatel aims at maintaining its share in all its markets despite the emergence of more intense competition in recent years. The growth will be supported by the coverage extension of its networks, innovation and appealing mobile prepaid promotions, high-speed bandwidth and value-added services. The launch of innovative products will enable the company to differentiate itself from competitors.

The company hopes that organic growth will also be achieved thanks to its cost-cutting strategy, which aims to preserve current margin levels. Sonatel expects a greater contribution from Guinea in the group’s growth and cash flow generation. Sonatel’s management is working at overtaking MTN market leadership in Guinea by 2015.

Moreover, external growth is likely to come from an additional acquisition within the sub-region, where France Telecom Group is not currently active.