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Sierra Leone – no easy diamonds for Bharti Airtel
~ Action
Sierra Leone is known for its poverty, civil unrest, poor infrastructure and diamonds.
Luckily, for Bharti, it is the smallest market in its African portfolio with only 1%
revenue contribution and negligible EBITDA. For a 6mn population, there are three
key operators with 36% current penetration and we understand Bharti has reduced
prices by around 60% in recent months. Average on-net price is USc8 and ARPU is
under US$6-7, we estimate. Bharti’s margins used to be in mid-teens in recent
years, but the current rate is in low single digits. It is the number three player with
23% market share.
aCatalysts
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.
Sierra Leone – no easy diamonds
c Country overview and competitive landscape
Sierra Leone is one of the poorest nations in the world with GDP per
capita of US$800 (PPP). Agriculture is the key contributor to GDP,
while mining is 5%, but it accounts for 80% of its exports. Diamonds
are a key export item, accounting for 60% of exports. The trade in
illicit gems, came to be known as "blood diamonds" for their role in
funding conflicts and perpetuating the civil war.
Pre 2008/09, there were five key players, which is now rationalised to
three. Africell is the market leader with 43% share, followed by
Comium with 34% share and Bharti at number three wi th 23% share,
we estimate. The state-owned fixed-line incumbent Sierratel began
offering fixed wireless services on CDMA in 2009, but we believe is
struggling in the market. We also understand that the regulator had
issued two new licenses in 2008 to Cellcom (Israeli telecom player)
and Libya’s Lap Green with the latter expecting to launch services in
2010. However, we have not been able to verify the progress on this.
We believe Sierra Leone is another market where Bharti reduced
tariffs last year. In July 2010, Bharti reduced off-net call rates by 32%
and subsequently in November, further reduced these to Le 432
(USc10) per minute or 36% lower. We understand there has also
been a 60% reduction in on-net rates, which are now at Le 324 per
minute (USc8) as well as the introduction of per-second billing.
d Significance to Bharti
Sierra Leone is the smallest market in Bharti’s Africa portfolio
contributing 0-1% to subscribers/revenues/profitability. Annual
revenues are around US$45mn with US$2-4mn in EBITDA, with low
single digit margins. In 2006, its margins used to be in mid-teens.
Bharti is looking to invest around US$25mn to expand coverage from
80% to 95% in the next few years.
Economic overview
Sierra Leone is one of the poorest nations in the world with GDP per capita of US$800
(PPP). IMF forecasts GDP growth rate of 4.5-5.2% in 2010-11F, likely to be helped by
buoyancy in agricultural production and services and rising exports, according to African
Economic Outlook. We understand the economy is quite vulnerable given widespread
poverty, risk of policy reversal and social instability. Agriculture contributes to 56% of GDP
and employs two-thirds of the population and hence remains a key sector. The mining
sector is only at 5% of GDP, but accounts for 80% of exports and is the second largest
sector in terms of employment in the country. Diamonds are a key export item, accounting
for 60% of exports. The trade in illicit gems came to be known as "blood diamonds" for their
role in funding conflicts and perpetuating the civil war.
Key political facts
The nationwide presidential and parliamentary elections in August 2007 were
conducted peacefully and were declared fair, making it an important milestone in
Sierra Leone’s transition to peace. This was the 2nd election since the civil war and
first since the UN peace keeping forces departed in 2005. Ernest Bai Koroma was
sworn in as Sierra Leone’s new president; his party, All People’s Congress (APC), also
won a majority, overtaking the then incumbent Sierra Leone People’s Party (SLPP) in
the parliamentary elections. The next elections are set to happen in 2012.
(Source: African Economic Outlook - http://www.africaneconomicoutlook.org and BBC
Country profile)
Telecom landscape
z With a population of around 6mn, Sierra Leone is again a tiny market with telecom
penetration of around 36%. Pre 2008/09, there were five key players, which has
now rationalised to three key players with notable share. Africell acquired Tigo in
2009 to become the market leader and currently has 43% share. It is followed by
Comium with 34% share and Bharti at number three wi th 23% share.
z The state-owned fixed-line incumbent Sierratel launched CDMA/EVDO services in
2009 and was providing fixed wireless access and broadband, we understand.
However, we believe Sierratel’s operations have been floundering and recent press
suggests the government is looking to privatise it.
z Sierratel’s EVDO was the first 3G Service in Sierra Leone. We do not believe other
carriers have 3G; however, Bharti has noted that it has recently received an LOI for
3G licenses.
z ARPU in this market used to be around US$7 as per Zain reports, but have likely
trended lower we think.
Competition
z This market has seen some consolidation in the past couple of years leaving
behind 3 main players. Africell purchased the #4 player Millicom’s operations in
2009 and another player Datatel ceased operations around the same time, we
understand.
z Sierratel, the state owned fixed player began CDMA services in 2009, but has been
struggling; so, we believe it may not have made much headway in the market. More
recently, press reports suggest that the government may be seeking privatisation of
Sierratel and has called for expressions of interest. (Sierratel Launches CDMA
network, Cellular News, 3
rd
May 2009; Sierra Leone moves to sell Sierratel,
Computerworld 26 July 2010)
z We understand that the regulator had issued two new mobile licenses in 2008 to
Cellcom (an Israeli telecom company) and Libya’s LapGreen; the latter was
expected to launch operations in 2010, though we have not been able to verify the
status of this yet.
z We believe Sierra Leone is another market where Bharti reduced tariffs last year. In
July 2010, Bharti reduced off-net call rates by 32% to Le 675 (~USc16) we estimate.
In November, Bharti further reduced these to Le 432 per minute (~USc10) or 36%
lower. We understand there has also been a 60% reduction in on-net rates, which
are now at Le 324 per minute (or~ USc8) as well as the introduction of per-second
billing.
z We believe Africell has also reduced its tariffs to match those of Bharti’s. It is not
clear if Comium has also followed.
(Zain reduces off-network tariff, Sierraexpressmedia.com, 22 July, 2010; Zain’s offnet tariff is unbeatable in Salone, Sierraexpressmedia.com, 5 Nov 2010; Zain SL
adopts per-second billing for international calls, computerworldzambia.com, 15 Oct
2010).
Significance to Bharti
z Sierra Leone is the smallest market in Bharti’s Africa portfolio contributing 0-1% to
subscribers/revenues/profitability. Annual revenues were around US$45mn with
US$2-4mn in EBITDA, with low single digit margins as of 2009. In 2006, its margins
used to be mid-teens.
z Bharti, since its entry has reduced tariffs by around 60%. We understand the Zain
network has around 80% coverage and Bharti expects to expand this to about 95%
and expects to spend US$25mn over the next few years. (Zain reduces off-network
tariff, Sierraexpressmedia.com, 22 July, 2010)
About Africell…
z Africell has a 43% share in Sierra Leone on our estimates and crossed the 1mn
subscriber mark in 2010. The company completed the acquisition of Tigo in 2009 to
become the market leader from a number two player.
z Africell is a subsidiary of Lintel Holdings, which is of Lebanese origin and has
ambitions to expand its mobile telephony operations to the entire African
subcontinent but is currently focused on Gambia and Sierra Leone. In Gambia,
Africell started operations in 2001 and has held a market leadership position since
mid 2006.
About Comium Mobile…
z Comium Mobile is the #2 player with a 34% share as per our estimate and over
750K subscribers in this market. Comium launched services in 2005 in Sierra
Leone and currently has around 80% population coverage. In addition to
GSM/GPRS, the company claims to have WiMAX in this market.
z The company is looking to expand GSM operations in the markets of Gambia, Cote
D’Ivoire, Liberia and Sierra Leone. Comium Data, a subsidiary of the Comium
Group, also has WiMax licences in Congo, Burundi, Rwanda, Zambia and Lebanon
in addition to the above four markets. WiMax licences seem to have been acquired
with a view to tap the business data opportunity in the region. However, the group
does not see an appetite for 3G services currently in the African market and
therefore will not look to invest in 3G.
z Comium signed a US$160mn funding agreement with the International Financial
Organisation in 2009 for expansion plans in Africa. It also signed a US$30mn
funding agreement with a subsidiary of China Telecom in June 2010 primarily to
expand the network reach of the GSM operations in Ivory Coast.
Regulatory overview
z 3G licence awarded to Airtel Sierra Leone: The Regulator has intimated its intent
to offer Bharti a 3G license at a l icense fee of US$1mn and an annual spectrum fee
of US$350,000.
z Decrease in interconnect rates: In July 2010, the Regulator decided to decrease
the interconnect rate from USc 10 to USc 7.
z Subscriber registration: NATCOM has noted that effective 1 November 2009, all
operators will start registration of new subscribers
z The regulator in 2010 conducted a Commonwealth African Rural Connectivity
Initiative (COMARCI) workshop on improving rural penetration; enablers were
identified
Valuation: Our DCF-based price target for Bharti is based on a WACC of 9% and a
terminal growth rate of 3%.
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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