Econet Wireless released their financial results for the six months ended 31 August 2021. It appears the biggest mobile network operator in the country is doing quite well. Revenues are up, leading to profits, as last year’s losses are put firmly in the rear view mirror.
Revenues up 95% to ZWL$29.6 billion
As lockdowns were a feature in the six months from March through August, we expected both data and voice traffic to increase. All because more people were forced to work from home and to settle for distant socialising.
Indeed both are up, there was a 56% increase in data traffic and a 29% increase in voice traffic. With EcoCash now a separately listed entity, these two are the bread and butter of Econet.
Data is becoming more important to the company’s profitability. The 56% increase in data traffic resulted in a 136% increase in data revenue. Whilst the 29% increase in voice traffic led to a 92% increase in voice revenues. Meaning data’s contribution to total revenue in percentage terms increased.
This all led to a 95% increase in revenues, from $15.2b to $29.6b.
A crazy 5259% increase in profit
Econet posted a profit of $6.6 billion in the period, as opposed to a loss of $128m in the same period last year. That makes it a 5259% increase in profit.
We saw that revenues were up 95% but that cannot be enough to see a 5259% increase in profit. It so happens that costs were down too. The major factor being the 96% decrease in exchange losses, from $15.2b to $481 million.
The exchange losses are paper losses, not realised losses. They occur because Econet has obligations that are in USD, and so when converting them to ZWD to prepare financial statements, the value is affected by the exchange rate movements. Read more about that here.
127% increase in EBITDA
Stands for Earnings Before Interest, Tax, Depreciation, Amortisation
As you saw above, things like exchange losses do affect the profits. Yet, they do not have much to do with the operational performance of the company. What if we wanted to know how the company performed as pertains to their actual core operations? Not considering costs of funding or even Zimra’s cut. EBITDA should give an indication of the health of the core business.
To do this they looked at the profit/earnings before subtracting interest, tax, depreciation, amortisation and the exchange losses. So before those deductions, profits are up 127%. Meaning the movement in exchange losses is mostly responsible for the 5259% increase we saw above. Disregarding that leads to a more modest but impressive 127% increase.
To note is that Econet has $28.2 billion worth of property, plant and equipment. From buildings, to cars, to base stations, to generators etc. These assets lose value over time, especially due to wear and tear as the $5.4 billion depreciation figure indicates. The major downside of EBITDA is that this wear and tear of assets used during operations is not taken into account.
That was for context. The 127% increase in EBITDA is a good result and Econet rightly emphasises this increase. A dividend was declared as a result.
Challenges in the economy
The results above are even more impressive when you consider the economic environment they operated in.
The weakening Zimdollar, high inflation and foreign currency shortages present their challenges. They need spares for repairs, new machinery etc and so to be able to maintain high quality service is quite the challenge.
Then comes the load shedding. Some people live in neighbourhoods where the moment ZESA cuts them off, service dramatically deteriorates. This is because Econet’s base stations need power and when there is load shedding, they have to run generators if there is no solar power option at the particular station. With the high frequency of load shedding, it becomes hard to ensure every single station is powered 24 hours a day.
You don’t need reminding about the challenges and costs of acquiring fuel in Zimbabwe. To remember also is the need to maintain those generators. Econet is upgrading their stations to solar and diesel but it takes time and money to cover the whole nation.
Add the global pandemic to the mix and you realise just how good these financial results are.
Auditors not happy with the financial statements
We have discussed how auditors and accountants are in a bit of a war with accountants. They cannot seem to agree on the proper accounting for certain items in these financial statements. It mostly has to do with the hyperinflationary environment we are in. Read more about that here.
In Econet’s case, their auditors say the statements ‘do not present fairly the financial position of Econet Wireless Zimbabwe Limited as at 31 August 2021.” They cite the valuation of property, plant and equipment figures adopted from previous periods, the valuation of investment in Cassava and such other issues.
This needs to be resolved. The Public Accountant and Auditors Board and the concerned parties should sit down and come up with a solution. The auditor’s adverse opinion means nothing if every single company gets one, as what’s going on for ZSE-listed companies.
This should not take away from a good half year for Econet, even taking into account the auditors saying the financial statements may be misleading. The following half year should continue in the same vein. However, the Zimdollar was especially unstable since August and so I expect to see the exchange losses rise significantly. I wouldn’t be surprised if we saw losses for the full year. That’s the unfortunate reality when you have USD denominated obligations and an unstable local currency.
Econet did however reduce exposure to these exchange losses when they redeemed some debentures early. They also have shares in Liquid Telecommunications which are denominated in USD and the gains on that holding should offset the losses from the debenture holdings.