MTN unfazed by difficult regimes
Profits are up in all the Middle Eastern operations, bar Yemen, and opportunities remain despite the risks
MTN is now talking to authorities in both Ethiopia and Angola about operating there, the group has announced.
It might seem odd that MTN, whose shares have more than halved over the past three years, should be looking to new markets when it has a hefty debt burden and many of its existing operations seem fragile. In particular, there is rank instability in its Middle Eastern businesses — Syria, Afghanistan, Yemen and Iran. CEO Rob Shuter would have been entirely justified in sitting tight until that storm passed.
Instead, he said after MTN’s half-year results last week that while MTN might exit more markets, after selling out of Cyprus, its keen on adding to its portfolio, and Ethiopia and Angola are in its sights. "These are two attractive markets for us — they’re squarely in our geography and have large populations and relatively low [mobile phone and internet] penetration."
Ethiopia is particularly attractive, as it is a big country, with about 108 million people, and there is only one operator — state-owned Ethio telecom. In May, the Ethiopian government said it was planning to open up the telecommunications sector partially to private operators.
"It is still assessing and deciding exactly how to do that, so we have engagement there," Shuter said, adding that MTN has had staff on the ground in Ethiopia for years.
However, indications are that the process is likely to take time.
"Angola is a bit different, because it has embarked on a formal process to award a fourth licence, and we are participating in that. Again, I think that will take some time.
"These are exciting opportunities for us — but obviously the business case must make sense."
MTN already operates in 24 markets, though it is exiting its business in Cyprus, its only European operation. The group is conducting an ongoing portfolio review of its markets to assess its businesses.
Shuter said the group will consider divestments where it cannot be the number one or two player, where growth prospects are dim, where the regulatory regime is a hindrance, or where the trading environment is unstable.
"This means, for example, that some of the markets in the more war-torn areas will always be under review, to make sure that the risks of continuing there are outweighed by the long-term benefits we foresee in being in those countries."
All MTN’s Middle Eastern businesses are experiencing a period of instability. Brutal wars are ongoing in Syria — MTN applies "hyperinflation accounting" to that unit – as well as in Afghanistan and Yemen.
The group has written down the value of its operation in Yemen by R149m.
Further, it now faces the prospect of not being able to bring back the R3.4bn still trapped in Iran after the US decided to reinstate sanctions on that country.
Despite this, all its Middle Eastern operations, bar Yemen, are still growing profits.
In Syria, earnings before interest, taxes, depreciation and amortisation (ebitda) in local currency terms were up 31% in the six months ended June. Ebitda rose 10% in Afghanistan and 16% in Iran, but fell 23% in Yemen. The Iranian business performed well in the six months ended June. Things are about to get a whole lot tougher in that country, however.
Analysts say the group may have a problem if it decides to leave one or more of its more challenging territories, as it may struggle to find eager buyers.
MTN reported last week that group ebitda rose 17% in constant currency terms, thanks to a 10.2% rise in service revenues and healthier margins. Shuter said standout performers were Nigeria and Ghana.
But analysts say the strong operational result was offset largely by risks in Iran and an unexpected increase in debt, which MTN blames partially on currency movements — as much as 53% of its holding company debt is dollar denominated.
Group net debt rose to R69.8bn at the end of June, from R57.1bn six months earlier, though Shuter said gearing would fall in the second half thanks to the sale of the Cypriot business and public listings of the Nigerian and Ghanaian units.
JPMorgan says it is surprised by the soaring debt levels, having expected net debt to reach just R61.1bn. "Our existing net debt forecasts temper the company’s dividend growth outlook … The miss in the half-year adds to this pressure, in our view," the US bank writes in a note.
At the results announcement Shuter said MTN is piloting a smartphone financing initiative aimed at prepaid subscribers in a bid to boost internet penetration across Africa.
"It’s not a subsidy, it’s financing. There are a lot of new technologies now that let you sell a handset on an instalment basis. If the customer misses an instalment, you deactivate the handset, and when payment is made again you reactivate it," Shuter said.
This is similar to many solar energy financing models across the continent.
To raise smartphone penetration, MTN plans to make sure that its SIM cards are pre-installed in as many handsets as possible, "with a very attractively priced entry-level bundle".
The group is "investigating the role" of smart feature phones, which tend to be far cheaper than standard smartphones but can still run Facebook, WhatsApp and low-data browsers.
Shuter said this could raise MTN’s long-term prospects, as studies have shown that increased internet use boosts economic growth.
It’s been a tough road for MTN’s shareholders. After the share reached highs of nearly R260 in 2014, it is hovering at close to R100, and the group has had to cut its dividend as it reins in debt.
Vestact, a long-time shareholder, is now slightly less bullish than it once was. Portfolio manager Byron Lotter says the asset manager has no plans to sell as "there’s certainly value there", but it’s also not buying aggressively.
Even though the group now has a strong management team and is generally doing the right things, "it just operates in horrible business environments" that are marred by wars, and in unfair regulatory regimes in places like Nigeria. Also, Lotter says he feels frustrated as a shareholder that progress for the group in one market can be affected in another, by the tariffs US President Donald Trump has imposed on Iran.
"I can’t imagine how Shuter and the rest of the management must feel. Having said that, the fundamentals are there, and you can understand why MTN operates in such countries.
"What it is doing in these places is very exciting — it is banking the unbanked and connecting the unconnected, so there is huge room for growth."