Corporate Financing Analysis - Tanzanian IPOs Leading By Example In Africa - 20 MAR 2017

Adding credence to our view that the African Continent will become a more involved player on the global equity capital markets (ecm) landscape during the 2017 rally in ecm activity (see 'African ECM Taking Its Chance', January 26 2017), Vodacom Tanzania has caught the eye of the global investment community with an application to go public on the local Dar es Salaam Stock Exchange (DSE). The subsidiary of Vodacom Group South Africa plans to issue stock worth 25% of the company, equivalent to 560mn shares. If successful in its current form, the deal will rank as the largest offering ever made on the local DSE bourse.

A Government Directive

We note that this is no opportunistic move on the part of Vodacom Tanzania. Rather, it is a float that has come out of the decree of government under the broader implementation of the Electronic Postal and Communications Act, which requires all telecoms firms operating in the East African country to issue 25% of their shares on the local exchange as part of its broader campaign to boost greater domestic participation in the bourse. Despite the revised government directive being introduced in June of 2016, we note that Vodacom is the first of the leading players in the sector to make it through to the listing stage. Going forward, other key players, namely Vodacom's rivals Airtel, Tigo and Viettel, are all expected to follow suit, albeit rather more reluctantly. The Tanzanian government's directive is, of course, good news for the DSE exchange and the stocks listed on it as it will add much sought after depth to its liquidity. But that is also the very same source of the telecoms firms' concern about being forced to spin off a share of their companies on the exchange, the fact that low liquidity means that solid investor demand for their stock is far from guaranteed - something which could potentially damage the company and is exactly why Vodacom's peers have been dragging their feet about floating on it.

On A Path To Growth
Tanzania Real GDP Growth Forecasts, %
Source: BMI , UN

DSE A Regional Outperformer

To soften the blow, we highlight that at the present time - at least - the telecoms firms will be listing on a bourse that is performing relatively well in comparison with a number of its regional peers. As Bloomberg data correct to March 13 show, y-t-d returns of the DSE's benchmark index is outperforming returns in Nigeria, Botswana, Kenya and regional powerhouse South Africa. Indeed, The Tanzania All Share Index, or the DARSDSEI as it is otherwise known, is up 2.70% in the y-t-d period, a positive return that is supported by our core view that the Tanzanian economy will grow at a quick pace over our 10-year forecast period as the construction, retail and manufacturing sectors record robust gains. We are forecasting average annual real GDP growth in the country to come out at a level of 6.2% over the next ten years, starting with a growth rate of 6.3% in 2017 and outpacing the 10-year 4.2% average across Sub-Saharan Africa in our forecasts. As a result, the DARSDSEI is currently outperforming the Nairobi Securities Exchange Ltd 20 Index (KNSMIDX), which is down by 7.00% since the turn of the year, the Botswana Gaborone Index (BGSMDC), down by 2.98% on the BSE this year, the Nigerian Stock Exchange Main-Board Index (NGSEINDX), which has slumped by 6.09% in 2017 and the FTSE/JSE Africa All-Share Index in South Africa, which, although up by 2.6% in the y-t-d period, trails behind the DARSDSEI's return. While that is good news in the short term, it can only go far to help deal with the bourse's low market capitalisation (USD9.2bn at the end of November 2016), which is equated to 47% of its EAC (East African Community) peer Kenya (USD19.468bn) as of the same date. Before international investors get too excited about the deal, we note that the float is largely restricted to local domestic investors, with overseas ecm investors only being given the green light to get involved in the secondary market - a move that flies in the face of the EAC Common Market Protocol which provides for free movement of capital, labour, goods and services between EAC nations (the remaining four being Burundi, Rwanda, South Sudan, and Uganda).

Two-Speed Floatation Process

While all Tanzanian telecoms operators were initially required to have listed 25% of their stock on the LSE by the end of 2016, the fact that Vodacom is set to become the first to do so implies that the process is behind track. Will a successful deal for Vodacom encourage its peers to finally join by going public? We believe it will. Rival Millicom is already halfway down the road to going public, while Airtel and Viettel are expected to follow suit, again albeit reluctantly. With the former having an aggressive low-cost strategy that has yet to yield profits for its African operations and with the latter being reliant on state subsidies in order to grow and targeting areas of the Tanzanian telecoms market that are not as profitable, we believe the short-term returns for both appear limited and are unlikely to appeal to investors in the same way that Vodacom is able to thanks to its footing in the sub-sectors of Internet of Things and machine-to-machine solutions, which it is able to commercialise. After all, Vodacom is currently the only operator reporting average revenues per user in Tanzania. Airtel and Viettel's constant delays may incur financial penalties but our Telecoms team believes this would be mitigated by the benefits of continued independence, even if only for a short time.