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Investment guide: MTN

By Jessica Anne Wood

Despite the fine imposed on MTN in Nigeria for failure to disconnect unregistered numbers and the impact this had on its share price, reports indicate that the mobile network provider may still be a good investment. This guide looks at the impact of the Nigeria fine on MTN’s stock performance and whether or not the network provider is a good investment.

The Nigeria fine

The fine impose by the Nigerian authorities wasn’t the only action that caused concern for investors. Pheiffer pointed out that there have been other cases of litigation based around accusations of bribery.

“Apart from the substantial financial impact of the fine, the fine raised questions around corporate governance at MTN. The company had already had a major scare when Turkcell tried to litigate against MTN’s Irancell for alleged bribery in obtaining the license to operate in Iran. That cloud eventually went away but investors nerves soon became frayed again with the imposition of the massive Nigerian fine. While the fine was reduced somewhat, the final outcome nevertheless hurt financially and tarnished the company’s reputation,” said Pheiffer.

Stefan du Toit, a stockbroker at PSG Wealth Durbanville, noted that historically the company has not been invested in MTN as they were “concerned with the quality of management.”

According to du Toit, this proved costly for MTN, losing roughly 50% of its market capitalisation over the last few years as a result of a Nigerian fine and weak Nigerian earnings. MTN derives roughly 40% of its revenue from Nigeria and is therefore a very important market for the company. However, subsequent to the Nigerian fine, MTN underwent a rigorous restructuring at senior management level.

Following the Nigeria incident, Pheiffer explained that the appointment of previous CEO Phutuma Nhleko was made to steady the business and improve corporate governance with changed management and reporting structures. This temporary appointment provided some reassurance to investors during the negotiations with the Nigerian authorities.

As of March 2017 MTN will have a new CEO in the likes of Rob Shuter, du Toit noted that Shuter has a wealth of experience to bring to MTN, having previously worked as an executive for both Vodacom and Vodafone.

“We are positive that the new management has the potential for a material turnaround of the company, but are concerned about the immediate future and negative news flow surrounding MTN. MTN is the leading operator in Nigeria with approximately 40% of revenue derived from the country. With the decline in the oil price the Nigerian economy has been struggling with low to negative growth, also causing its currency to devalue significantly,” added du Toit.

According to Pheiffer, there are still a lot of growth opportunities for MTN within the data communications sphere, however, he notes that the overall pace of earnings growth has slowed markedly.

“The Irancell and Nigerian incidents highlight the inherent risks in operating in developing economies and the regulatory challenges that exist in the telecoms sector. Following the developments in Nigeria, it’s fair to say that the investment risks in MTN have increased or at least become more visible,” pointed out Pheiffer.

MTN’s performance

Pheiffer revealed that the Nigeria fine not only hurt MTN’s reputation, it also resulted in a loss for the last interim reporting period, and as the retained earnings were reduced to pay the fine, the dividend was cut. “The company has also announced that it expects to report a loss for the full financial year 2016 (results will be announced on 2 March 2017).”

MTN’s share price has been range bound for the last 18 months, trading between R110 and R150, according to du Toit. On the JSE, MTN is the largest in its market against competitors Vodacom and Telkom. MTN has a market capitalization of R224 billion, Vodacom has R223 billion and Telkom is at R38 billion.

“It has been a particularly tough year for both MTN and Vodacom. Over the last 12 months MTN’s share price declined by 7%, with Vodacom flat over the same period. MTN is trading 50% below its peak reached during September 2014, currently trading at R118 per share. In addition to the fine, with the decline in the oil price, the Nigerian currency also depreciated significantly, further hurting ZAR revenues for MTN,” explained du Toit.

What to consider when investing

There are a number of factors that need to be taken into consideration when looking at investments. These include valuation versus price, earnings and dividend growth prospects, management strength and depth, and industry prospects.

Pheiffer stated: “With MTN one has to consider the prospects of an earnings recovery after the debilitating fine, the regulatory and economic environment in which it operates its licenses (including South Africa), its opportunities to repatriate profits from foreign operations and the outlook for the company with a new CEO and CFO.

“There is definitely a recovery story to be played out with MTN and the very patient investor might see their reward in time but there are numerous investment risks currently and more conservative investors might wait for more clarity or certainty of the turnaround before getting their toes wet.”

Du Toit added: “MTN remains relatively cheap when compared to historic measures. Mobile telecom companies further provide investors with historically good dividends as the companies are very cash generative and generate a high level of recurring income. However, MTN’s dividend has declined significantly, with management guiding the full year dividend to be lower by approximately 46%.

“MTN’s dividend is expected to remain depressed in the short to medium term as it has been neglecting infrastructure spend, which will have to increase to maintain the quality of its networks. Further taking into account the negative news flow surrounding MTN and all the once off factors influencing the company, the risks when investing in MTN remain significant. These risks include the instability of management and new leadership causing some uncertainty, the repatriation of cash remains problematic and the significant foreign currency exposure.”


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