BROKERS’ NOTES: Buy MTN, sell Kumba Iron Ore

Buy: MTN 

MTN is certainly not for the faint-hearted. Any business operating in far-flung African geographies carries a special type of risk. But where there is risk, there is also opportunity. MTN and rival Vodacom have comparable market capitalisations, but MTN has by far the larger footprint. It is Africa’s largest mobile operator and, if “big yellow” can capitalise on Africa’s growing population via its increased requirement for connectivity and data, shareholders will be well rewarded. Nigeria, which accounts for about a third of MTN’s revenue, recently showed double-digit increases in subscribers in spite of SIM restrictions. The telecoms company is also playing nicely with the Central Bank of Nigeria, which has just approved its mobile money licence. This will extend its reach into the financial services sector of a growing and largely underserviced population. Entry range is between R135 and R145 a share.  

Sell: Kumba Iron Ore 

China might be opening up, but Kumba Iron Ore’s share price could be headed down. The opening of the Chinese economy will offer many international resource counters the opportunity to increase volumes and prices. Unfortunately, to take advantage of the robust Chinese commodity appetite, South Africa-centric miners such as Kumba need to ship product. Based on its fourth-quarter production report, Kumba is expected to show a decline in earnings of between 38% and 44%. The lack of reliable transport infrastructure has resulted in high levels of inventory building up at the mines. This has prompted further production cuts and lowered forecasts. The one saving grace for Kumba may be its high-quality lump (which does attract a premium) and the weaker rand. That said, I’m comfortable to enter a short position at current prices (R526 a share). My target is set between R400 and R420. A word of warning: commodity prices are volatile and increase forecasting risk significantly. A good way of playing this type of short position is to pair one’s exposure with another international counter which does not face the same domestic risks.