Senegal: Sonatel taps African growth but liquidity a concern

Mergers, Acquisitions and Financial Results

Solid growth in West Africa's telecommunication markets will buoy shares in Senegal operator Sonatel throughout 2010, but the illiquidity of its stock on the regional bourse could hold back gains, analysts said.

An 18 percent increase in 2009 net profit to 185 billion CFA francs announced last month, plus a dividend yield near 10 percent has helped push its shares to a year-high of 140,000 CFA francs by Tuesday's close.

Analysts point to healthy operating margins and the still largely untapped potential for mobile telephony and Internet in Sonatel's markets including Senegal, Mali and Guinea as likely to support its earnings and share price through 2010.

"Generous and stable dividend policy coupled with good profitability and growth prospects in the countries where the group operates augurs well for Sonatel's investors," said Africa analyst Binta Cisse Drave at frontier investment firm Exotix, which this month initiated coverage of the stock as a "buy".

Sonatel is 42 percent-owned by France Telecom, with 27 percent in state hands and around 5 percent staff-owned.

Drave saw scope for Sonatel shares to appreciate by around a third to 186,400 CFA, underpinned by earnings growth averaging an annual 5 percent over the next five years. She noted its price-earnings ratio of just over 8.0 was "not demanding" compared to an average for African peers of around 14.5.

Barely 40 percent of Senegalese are mobile subscribers and 27 percent of Malians have mobile phones, according to 2008 figures, compared to 90 percent take-up in South Africa.

Sonatel clung on to 67 percent of Senegal's mobile market in 2009, ahead of Millicom International Cellular Inc's Tigo unit and Sudatel. Its Orange brand occupies 80 percent of the Malian and 37 percent of the Guinean markets.

In Senegal, Tigo has a third of the market and Sudatel just 2 percent after its first year in operation -- allaying some investor concerns last year that competition would heat up.

Yet the major drag on Sonatel shares remains the lack of liquidity of the stock on West Africa's regional BRVM (Bourse Regionale des Valeurs Mobilieres) based in Ivory Coast, still prone to political unrest seven years after its civil war.

With a market capitalisation around $2.9 billion, Sonatel by itself accounts for just under half the BRVM composite index.

But the fact that bids and offers are matched only once a day is limiting the ability of investors to do multiple trades. On Tuesday trading on the BRVM reached barely 74.8 million CFA, with a mere 88 Sonatel shares changing hands.

And while 26 percent of Sonatel shares are free-floating, potential investors say many of those have long been sucked up by local investors happy to sit on its healthy yields.
"Only the foreigners are interested in trading," said MediCapital Bank's Luca Del Conte, who forecast the stock could hit 150,000 CFA if economies in Senegal and Mali strengthen.

Ivan Kim, analyst at Moscow-based Renaissance Capital, said the illiquidity effect meant that Sonatel shares are trading at around a 30-35 percent discount to African peers such as Kenya's Safaricom or South Africa's MTN Group.

For those who get their hands on Sonatel stock, that could mean value waiting to be unlocked once the liquidity problems are resolved. Few expect that outcome soon given a political stalemate in Ivory Coast that is holding back economic reforms.

For now, the lack of liquidity is giving pause for thought to even the most enthusiastic investors.

"We don't want to be getting into a name that we can't get out of in a certain number of working days," said Daniel Broby, chief investment officer at Silk Invest, an asset management firm specialising in Africa, the Middle East and Central Asia.