MTN: still not getting a full signal
The company’s return to profit is welcomed, but some investors are still cautious
The dark cloud that has been hanging over MTN for nearly three years is, by most accounts, finally starting to lift.
On Thursday last week, when the group released a confident earnings report, the market was afforded the certainty it’s been waiting for. It remains to be seen, however, whether this will translate into a sustained recovery in the share price, and whether management has done enough to court the most bearish analysts.
The mobile operator’s fall from grace in recent years is well known, thanks in part to a dramatic US$1.5bn fine in Nigeria for failing to disconnect unregistered Sim cards. The group also dropped the ball in its home market by letting its peers sprint ahead in terms of network quality — a slip-up that has cost MTN’s postpaid business dearly.
As was expected, MTN, headed by CEO Rob Shuter, returned to profit in 2017, with a profit after tax of R4.5bn from a loss of R3.1bn in 2016.
MTN’s shares rose 10.1% on the day the earnings report was released, winning back the losses incurred in the year to date after the company said it would not cut its dividend as much as many analysts had feared.
The stock also benefited from a positive earnings projection from management and the unwinding of some short positions.
Shuter gave fairly bullish growth projections, saying the rebased dividend — which is expected to be R5/share for 2018, from R7 in 2017 — could rise by 10%-20%/year over coming years. The stock is now trading at a dividend yield of about 3.9% and a normalised p:e of about 18.
That’s still not enticing enough for some investors, though.
"Let me put it this way: we like the story but we don’t like the valuation," says Imtiaz Suliman, portfolio manager at Sentio Capital. That is partly why Sentio prefers Vodacom.
Suliman thinks the R5 dividend is too generous in light of MTN’s relatively anaemic cash flows and high debt levels.
Further, MTN’s efforts to turn its SA business around will take some time. Even though the company says its heavy capital expenditure in 2017 catapulted its network into pole position, Suliman says Vodacom customers are unlikely to jump ship that easily.
MTN still needs to improve its customer service in SA meaningfully, though it has recruited a call centre head from MultiChoice, among other hires.
With its underweight rating on MTN, JPMorgan is one to watch. When MTN told the market what its earnings would be earlier this month, the US bank said the numbers were "below expectations", and that the weaker Iranian rial and stronger rand would hurt earnings.
"Also, we believe medium-term expectations for earnings and valuation remain too high," a research note read.
Local JPMorgan analyst JP Davids did not respond last week about whether the bank’s position had changed.
New Street Research is a bit less pessimistic. While fourth-quarter results were slightly below expectations, MTN’s guidance that service revenue would accelerate towards 10% was a surprise on the upside, the London-based research house said in a note.
Meanwhile, Investec Asset Management portfolio manager Samantha Hartard says the market is encouraged by the "solid" earnings result and management’s confidence that the big ship is back on course.
Hartard, a long-time bear on the stock, is warming to the investment case, though she is not yet entirely convinced. "But I can say [I definitely have] a more confident outlook," she says.
Johannesburg-based money manager Vestact has been optimistic for some time that a turnaround would materialise, and portfolio manager Bright Khumalo says the investment case is now even more compelling. "I wouldn’t choose any other emerging markets pure play," Khumalo says.
While operating in the Middle East and Africa has come with risks, shareholders have been well aware of this, and MTN has made provisions for negative events that may arise.
Take Benin, for instance. Authorities in that market have seen MTN as an easy source of revenue, demanding frequency fees for 2016 and 2017 worth an astounding $213m.
The group’s CEO in the country, Stephen Blewett, was asked to leave in November amid the dispute over fees, and MTN is struggling to come to an agreement on a more reasonable amount to pay.
But Khumalo says concerns may be inflated because of "recency bias", given that the market is prone to worrying in the wake of the shock fine in Nigeria.
In any case, exiting Benin would not be the end of the world for MTN, as it’s a relatively inconsequential market for the group.
Suliman agrees, saying MTN probably does not really want to be in smaller markets such as Benin and South Sudan, though management has no choice as there would be few buyers for the businesses.
MTN chief financial officer Ralph Mupita says the group is "fighting to stay" in Benin, but has intimated that it will have to walk away if authorities there do not budge on their demands.
Meanwhile, Suliman says MTN’s efforts to grow its digital business are well placed, given that these adjacent offerings encourage customers to use more data. "The telecoms business has to include digital — that’s the way the world is going."
MTN’s 40%-held ride-hailing business in Iran, for instance, has grown hugely over the past year, facilitating 850,000 rides a day in December.
Shuter says MTN also wants to build a financial services business, and is looking at introducing insurance, savings and other related products in SA and other markets.
The group abandoned its SA mobile money business in 2016 because few adults were unbanked, at least relative to other African markets. But elsewhere the active mobile money subscriber base increased by 5.7m to 21.8m in 2017.
Shuter, unsurprisingly, says investors will do well to put their money in MTN. "For investors looking for pure-play exposure to emerging-market mobile, we think MTN is a very good place to be."
He says service revenues are likely to grow in constant currencies by "upper single digits" in coming years, powered by a recovery in Nigeria. Earnings will grow at a faster rate, since margins will probably increase. Plus, the reduced dividend will allow debt — at above R50bn — to "stabilise".
Shuter argues that the group has "strong positions in the right markets", adding that the combined population of the 22 markets in which MTN operates is about 645m. That number is likely to grow by 50m in three years – effectively adding another SA to the portfolio.
These are also youthful populations, so potential customers are "born digital", which is reason for optimism, given that the adoption of data and digital services remains low in the region.
MTN will also look to grow its enterprise business and rent out its fixed infrastructure in Africa to other operators, Shuter says.