5 Misconceptions You Didn't Know About the Ethio Telecom Share Sale

With Ethio Telecom's landmark share sale underway, many people are rushing to participate, believing they’re getting a great deal. However, there are several key details that prospective investors may not fully understand. Here’s a breakdown of important misconceptions and insights you should know before investing.

1. You're Buying at a Premium

Many people assume they are paying the intrinsic value of the shares, but this is not the case. Ethio Telecom’s shares are being sold at ETB 300 per share, while the par value of each share is ETB 100. This means you’re buying the shares at three times their nominal value. The difference reflects factors like Ethio Telecom’s market dominance and expected future profits, but it’s important to know that you're paying a significant premium upfront.

2. You’re Buying From Ethiopian Investment Holdings (EIH), Not Ethio Telecom

Here’s something that often gets overlooked: the shares being sold belong to Ethiopian Investment Holdings (EIH), not Ethio Telecom directly. This means that none of the proceeds from this sale will go into Ethio Telecom itself. The money you pay goes to EIH, which currently owns 100% of Ethio Telecom. While you are becoming a part-owner of the company, your money is not being reinvested into its operations or growth initiatives.

3. Earnings Per Share (EPS) and Dividend Per Share (DPS) Might Be Lower Than Expected

Many investors expect immediate high returns, but the reality might be more modest. Let’s break down the Earnings Per Share (EPS) and Dividend Per Share (DPS), and what they mean for you as an investor.

For the fiscal year ending June 2024, Ethio Telecom posted a net profit of ETB 19.01 Billion and declared 9.67 Billion in dividends. With 1 billion shares outstanding, this results in:

• EPS (Earnings Per Share): ETB 19.01 per share
• Maximum Shares: The maximum number of shares one can buy is 3,333 shares (ETB 999,900).
  • Calculating the EPS (Earnings Per Share) for the maximum investment would be:
    • 3333 shares × 19.01 ETB = 63,360.33 ETB

In terms of return on investment it would only be 6.3% of your ETB 999,900 investment.

However, this figure is before legal reserve deductions so the dividend per share will be lower than this. Additionally there is a 10% dividend tax applied, reducing your actual earnings.

N.B. This calculation is based on the current fiscal year’s performance (ending June 2024). Future profits may increase, and with that, your earnings could rise. However, it’s important to manage your expectations and understand that past performance does not guarantee future returns.

4. The Shares Are Illiquid for Now

Another key point to be aware of is that your shares are not immediately tradable. Ethio Telecom shares can’t be sold on the open market yet because the Ethiopian Stock Exchange (ESX) hasn’t been launched. You won’t be able to sell your shares quickly if you need cash, so think of this as a long-term investment until the stock exchange is up and running.

5. Dividends Are Not Guaranteed and May Vary

While Ethio Telecom has declared dividends for the 2024 fiscal year, it’s important to understand that dividends are not guaranteed. If the company’s performance declines in future years, they may reduce or withhold dividends altogether. Investors sometimes assume dividends are automatic, but they are decided annually by the company’s board, depending on profits and future growth plans.

Note: All data presented in this article is sourced from the Ethio Telecom prospectus.