Vodacom is the largest supplier of cell phone connections in South Africa with 39 million local customers. It also has over 30 million customers outside South Africa. In the June 2017 quarter, the company added 2,5 million new customers – 2,3 million of them in South Africa. Vodacom is owned about 65% by Vodaphone.
By anyone’s standards, this company is a blue chip. Most of its income is in the form of annuity income and it has a relatively low working capital requirement because it is a service company. It does have some exposure to union action but appears to have that well under control. It is consistently profitable and is benefiting from the explosion of smartphone usage in South Africa.
Vodacom has always been relatively poorly rated compared to other blue chips on the JSE. It consistently trades at a dividend yield of between 4,5% and 5%, probably because its business depends heavily on new technologies and it is well-known that revenues from voice are declining while revenues from data are increasing.
Right now, however, the share is in a very interesting position. It is on its long-term upward trendline. Consider the chart:
This trendline has three touch points already and the bounce off that line which happened yesterday makes a fourth. The more touch points that a trendline connects, the more reliable it becomes.
More importantly, on 4th October 2017, it produced a classical “hammer” formation – indicating a cycle low point. The hammer formation in candlestick charting occurs where a candle has a “tail” which is at least twice as long as the body of the candle. It must also come at the end of a notable downtrend. Hammer formations show that the bears made a very serious attempt to push the share down through key support (the long-term upward trendline) but failed. A hammer formation requires that the tail is twice as long as the body of the candle. Consider the chart of the last three months:
Here you can see the hammer formation coming as it does at the end of a short sharp downtrend which took the price back to its long-term support.
In our opinion, this is a high-quality blue-chip share which is now under-valued and which is due for an upward move.