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Congo B, although small with a 4mn population, is a relatively more prosperous
nation within Africa, with GDP per capita (PPP) of $4,500 and wireless ARPU of
US$11. With rising competition over the past three years, Bharti has lost its market
share lead from 70% to around 46% and margins have also dropped a hefty 20pp
to 25%. MTN and Warid are the other players with 42% and 12% share (as of
2009). Another player, Bintel, entered the market last year, which could make
turnaround more challenging; nevertheless the market appears appealing (no 3G
yet), and we build in gradual margin recovery to mid-30% by FY13F at this stage.
Catalysts
Operational improvements in Africa and progress on 3G/data would be positive
catalysts. Regulatory risks on MNP, USO and spectrum prices remain.
Anchor themes
The subscriber growth cycle is by no means over, but returns on incremental
subscribers are uncertain. 3G/data should offer further growth opportunities.
Congo B – scope to regain share?
Country overview and competitive landscape
The Republic of Congo or Congo Brazzaville (Congo B) is one of subSaharan Africa's main oil producers, with a relatively higher GDP per
capita of US$4,500. However, it is one of the smaller telecom markets
within Africa with a population of around 4mn and around 80%
wireless penetration. ARPU levels are high at around US$11, we
estimate.
There are three incumbent operators – Bharti, MTN and Warid – while
the fourth operator, Bintel (a Bahrain-based telecom operator) only
entered the market in 2009. Bharti was the market leader with a 46%
share as of 2009, according to Nomura estimates, which has declined
from a peak of 70% in 2007. A fourth GSM license was issued to
Equateur Telecom Congo, a subsidiary of Bintel (a Bahrain-based
telecom operator) in 2009 and it launched its operations under the
brand name ‘Azur’ only in September 2010; hence, we believe, it
currently has a negligible market share. We anticipate competition
could be strong in this market and we cannot rule out some further
market share loss in 2010; however, we do not forecast an ongoing
market share loss for Bharti in the near future.
Significance to Bharti
Although it is a small market for Bharti in a regional context – Zain
used to dominate this market with around 70% share, but is now
running at around 45% share, we estimate. Zain’s profitability has also
declined from a peak margin of mid-40% to mid-20% over this period.
This, we believe, reflects rising competition from both MTN and Warid
since 2007. We are currently only assuming a gradual but moderate
recovery to mid-30% margins over the next three years.
Economic overview
The Republic of Congo or Congo Brazzaville is one of sub-Saharan Africa's main oil
producers, and the economy is heavily reliant on this commodity. Congo grew by 7.5%
in 2009 and is expected to grow by 11% according to the International Monetary Fund
(IMF). We understand that Congo B has made significant progress in restoring internal
political peace and also in applying reforms launched under a three-year programme in
agreement with the IMF as part of the Poverty Reduction and Growth Facility (PRGF)
programme, according to African Economic Outlook. Private-sector growth is however
hampered by a large informal economy, complicated bureaucracy and dilapidated
infrastructure.
Key political facts
President Denis Sassou Nguesso is one of Africa's longest-serving leaders, having
first come to power three decades ago and he was re-elected for another seven-year
term in July 2009. After the 2009 presidential elections, Congo Republic's legislative
elections are to be held in 2012.
(Source: African Economic Outlook - http://www.africaneconomicoutlook.org and BBC
Country profile)
Telecom landscape
Congo B is one of the smaller telecom markets in Africa with a population of around
4mn, but with around 80% wireless penetration. Its high GDP per capita levels are
also reflected in one of the higher ARPU in Africa at around US$11 based on
MTN’s last reported ARPU. Zain reported ARPU of around US$12 in 2009. There is
no evidence of 3G rollout in this market. MTN, however, notes that it has rolled out
WiMAX in December 2009.
Competition
There are three incumbent operators – Bharti, MTN and Warid – while the fourth
operator, Bintel only entered in 2009. Bharti was the market leader with a 46%
share as of 2009, according to Nomura estimates, which has declined from a peak
of 70% in 2007.
The fourth GSM license was issued to Equateur Telecom Congo, a subsidiary of
Bintel in 2009 and it launched its operations under the brand name ‘Azur’ only in
September 2010; hence, we believe, it currently has a negligible market share.
We anticipate competition could be strong in this market and we cannot rule out
some further market share loss in 2010; however, we do not forecast an ongoing
market share loss for Bharti in the near future.
Significance to Bharti
Although it is a small market for Bharti in a regional context – Zain used to
dominate this market with around 70% share, but is now running at around 45%
share, we estimate. Profitability has also declined from a peak margin of mid-40%
to mid-20% over this period. This, we believe, reflects rising competition from both
MTN and Warid since 2007. We are currently only assuming a gradual but
moderate recovery to mid-30% margins over the next three years.
Regulatory overview
New interconnect rate: The interconnection termination rate was reduced from
FCFA 75 (US$0.15) to FCFA 50 (US$0.09) on July 1, 2010, in line with an
agreement signed between all operators in December 2008.
Subscriber identification: The government has decided to institute the
identification of all subscribers from January 2011 and has mandated completion of
this process by December 2011.
Valuation methodology: Our DCF-based price target for Bharti is based on a WACC
of 9% and a terminal growth rate of 3%.
Downside risks to our price target include stronger-than-expected competition and
unfavourable regulatory developments related to various fees and charges. Upside
risks include benign competition and faster-than-anticipated stability in pricing.
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