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Our business
Operating context
Delivering on our strategy
Our governance structure
Administration
Enterprise business delivering
strong growth
Enterprise continued to grow, with revenue up 12.2% now
contributing 22.4%^ (2016: 20.5%) of service revenue. We
continued to leverage our network reliability and leading mobile
brand to move more deeply into fixed-line in South Africa. Fixed-line
and BMS revenue grew 8.3% to R1.8 billion with cloud and hosting
increasing 35.2%. IoT provided new and exciting opportunities with
revenue increasing 19.1% to R662 million. Having secured the
mobile voice and data communications contracts for national and
provincial government departments, focus will now shift to migrate
these customers to Vodacom from the first quarter onwards.
Cost efficiency delivering margin
expansion
We continued to make good progress with our ‘Fit for growth’
programme, which contributed to the Group EBITDA margin
expanding 0.5ppts to 38.4%. EBITDA growth in South Africa was
again strong at 7.2% to R26.8 billion, supported by good revenue
growth and a continued focus on cost efficiencies and contribution
margin improvement that resulted in a 1.2ppts expansion in EBITDA
margin to 41.4%. We focused on driving efficiencies across all
distribution channels. Other cost initiatives included self-providing
more of our mobile backhaul transmission and renegotiation of key
contracts with suppliers. The savings from these efficiencies assisted
us in offsetting higher network operating costs due to our continued
network expansion, as well as a trading forex loss of R250 million
(2016: R531 million gain).
In the International operations, EBITDA declined 15.6% (8.6%*)
to R4.5 billion, with EBITDA margin contracting 3.1ppts to 26.2%.
The impact of customer registration and exchange rate volatility
resulted in slower revenue growth, however, the impact of this on
EBITDA was limited by our contribution margin improvement
through the promotion of our own channels such as M-Pesa for
recharge, and continued savings in network operating expenses.
Our footprint has exposed us to volatile macroeconomic and
regulatory conditions, including access to spectrum, fluctuating
foreign exchange rates, inflation, interest rates and sovereign credit
rating downgrades, all of which had a negative impact on consumer
and enterprise spend, operating costs and capital expenditure.
Together with the Vodacom Group Board, the management team
has critically reviewed the strategic risks faced by the business and
provided mitigating actions presented on page 20.
Our segment performance is reviewed on page 52.
Key milestones
In June 2016, the Parliament of Tanzania passed The Finance Act,
2016 which amends listing requirements under the Electronic and
Postal Act, 2010, to introduce mandatory listing requirements and
require licensed telecommunications operators to list 25% of their
authorised share capital through an initial public offering (IPO) on
the Dar es Salaam stock exchange (DSE). Vodacom Tanzania
opened its offer in compliance with the legislation on 9 March 2017
and the offer period closed on 11 May 2017. The listing of shares is
expected to take place in June 2017, subject to approval by the
Capital Markets and Securities Authority (CMSA) and the DSE.
Subsequent to year end, Vodacom Group has agreed terms with
Vodafone to buy a strategic interest (34.94%) in Kenya’s market-
leading telco, Safaricom. It’s an opportunity to acquire a significant
interest in a quality telco asset. The proposed transaction also offers
an opportunity to diversify Vodacom Group’s financial exposure in a
single transaction. We are aiming to complete the transaction in the
first half of the new financial year.
Recently, the Vodacom Finance team received an unparalleled set
of awards for Strategy Execution, Finance Transformation and CFO of
the Year. This acknowledgement by the jury of CFO South Africa, the
Community for Finance Professionals in South Africa, underpins the
good work done by Vodacom’s Finance team.
Delivering shareholder returns
Our five-year average return on capital employed (ROCE) is 53.7%.
Delivering on key growth areas of data, enterprise and new services
will deliver top line growth. We continue to target EBITDA margin
expansion and together with lower capex, following two elevated
years, I am confident that our ROCE will stabilise and improve,
continuing to create long-term shareholder value.
Over the past five years, we have returned R59.0 billion in dividends
to our shareholders, maintaining an average dividend yield of
6.1%, while our share price has risen 40.5% over the same period.
This year, the Board has approved to pay out a final dividend of
435 cents, taking our total dividend to 830 cents, a growth of 4.4%,
in line with our current dividend policy of paying out at least 90%
of HEPS.
Looking ahead
The telecommunications landscape is rapidly changing; coupled
with high levels of political, regulatory and market uncertainty,
requires us to be more innovative and agile. Our steps to implement
the Vision 2020 strategy will ensure that Vodacom realises
opportunities in the market and mitigates risks that may hinder
our success.
The recent sovereign credit rating downgrade in South Africa
increases uncertainty and may lead to increased rand volatility,
consumer pressure and debt exposure. This highlights the need for
us to be agile to mitigate such risks. We are already driving the
localisation of foreign-denominated costs, utilising hedging
instruments, using big data to further enhance our personalised
and segmented offers, and reviewing our fixed-to-floating debt
structure to balance financing cost and risk exposure.
Our balance sheet remains strong, providing us with sufficient
capacity for leverage, enabling us to execute our growth strategy
and realise possible M&A opportunities where these contribute to
adding shareholder value.
We target Group service revenue growth of mid-single digit,
previously low-to-mid single digit, Group EBIT growth of mid-to-high
single digit, and capital intensity of 12 – 14% of Group revenue over
the next three years. The change to an EBIT target reflects a change
in management short-term incentive targets, which are now based
on EBIT, previously EBITDA. The main aim of this is to align to the
Board’s objective of optimising capital allocation and maximising
returns on investments. These targets are on average, over the next
three years and are on a normalised basis in constant currency,
excluding spectrum purchases and any merger and acquisition
activity. This assumes broadly stable currencies in each of our
markets and stable macro and regulatory environments.
In closing, I would like to thank the Board for their continued guidance
throughout the year, and personally wish our Chairman, Peter Moyo,
much success in his new role at Old Mutual Emerging Markets.
Till Streichert
Chief Financial Officer
2 June 2017
* Normalised growth adjusted for trading foreign exchange gains/losses and at a constant currency (using current period as a base), (collectively ‘foreign exchange’).