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Vodacom profits rescued by expansion into Egypt

Vodacom, South Africa’s biggest telecommunications operator with connections to the British Vodafone Group, recently experienced a significant decline in its stock price.

This decline comes as a surprise for the otherwise stable stock price, which can be attributed to a variety of factors, primarily rising inflation, interest rates, and geopolitical tensions, all of which affect the services provided by Vodacom and their affordability to the average consumer.

These issues have been especially pronounced in Ethiopia, a country suffering from all three of these issues. As it stands, Ethiopia currently has inflation at over 50%, along with a currency depreciation of 20%, all of which have been severely affecting Vodacom’s overall profit margins.

When Vodacom initially launched its Ethiopian branch, Safaricom Ethiopia, last year in conjunction with Kenya’s Safaricom, Vodacom had the expectation that the branch would power the group’s overall growth within the first five years after the initial 2021 investment. While there is still time and potential for Vodacom’s initial bet to come to fruition, the first two years of the Ethiopian expansion have not lived up to initial expectations.

In an effort to mitigate these challenges, Vodacom had strategically diversified its portfolio with the acquisition of a majority stake, 55% ownership to be exact, in Vodafone’s Egyptian branch. This move, currently valued at approximately 2.3 billion USD, stands as the largest deal in Vodacom's history. The consolidation of Vodafone Egypt into its operations has contributed significantly to the growth of the group's service revenue, which expanded by 42.2% to 3.15 billion USD. This acquisition, completed in December 2022, played a crucial role in preventing a more severe decline in Vodacom's overall profits.

While Vodafone Egypt has been a positive contributor to the group's performance, the challenges in Ethiopia continue to weigh heavily on Vodacom's overall financial outlook. The Group Chief Financial Officer, Raisibe Morathi, has indicated that the Ethiopian business is expected to break even in the fourth year, with peak earnings before interest, tax, depreciation, and amortization losses anticipated in the fiscal year ending March.

Vodacom's recent stock price decline can be attributed to a confluence of factors, including economic challenges in Ethiopia, currency depreciation, and geopolitical tensions. While strategic acquisitions, such as Vodafone Egypt, have provided some respite, the company faces ongoing challenges in navigating the complex Ethiopian market and achieving its growth targets in the stipulated time frame. Investors and industry analysts will be closely monitoring Vodacom's strategic moves and financial performance in the coming months to assess its ability to overcome these challenges and return to a trajectory of sustained growth.

Despite the current challenges which affect overall business in Africa, Vodacom still remains as the one of the largest and most significant telecommunications and IT services on the continent, and its expansion into large, but still growing, markets such as its Egyptian expansion, could bode well for future growth, as these markets have great potential for internal growth as telecommunications services continue to become more integrated into the daily lives of millions of Africans.

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