MTN Group : Attractive despite political risks
Published April 27, 2021.
Look at this chart. Is it PayPal ? Spotify ? it could be, but it is MTN, benefitting from the demographic and technological dividend.
MTN Group, based in South Africa, is the biggest telco in Africa, with over 280 millions customers.
But it is not just a telco: It has over 45 millions mobile money customers: MoMo stands for mobile money.
Data is growing very fast, with a huge potential because eventually, these 280 million customers will all have data.
While, luckily I am up on my purchases, the stock is incredibly cheap at around 10 PE ratio (google). It barely recovered to pre pandemic levels, and is trending down over the past 5 years. we will go into that.
In this post, I will go over the following points:
1- my history with the stock
2- the strategy and product
3- the Nigeria risk
4- the management
5 -conclusion
It is a very complex company to analyse, so unfortunately my article will not cover every aspect of the company, I could miss many points.
1- my history with the stock
The long term chart for MTN (in Rands, so a currency with some depreciation), looks like a long term compounder that broke down after hitting some speed bumps. MTN was a favorite among emerging markets.
That status came to a sudden halt when in 2015 the Nigerian government slapped a 5.2 Billion dollar fine for not respecting some sim card registration requirements and other things. The stock tanked. Then after many months of negotiations, they settled for $1.671-billions and I bought the stock. Problem solved, I thought.
Alas, in 2018, the company was hit by another $2 Bln fine for tax reasons and was told to repatriate $8.1 Bln because apparently some paperwork was not done correctly when shipping funds out of Nigeria. This amount was huge compared to the company reserves and abilities. It did not have the money. The stock tanked.
In the end, it was fine and settled for $53 millions. The stock never recovered much because it took a few punches from Nigeria.
Then, covid. Emerging markets flight, the stock tanked more. I bought more. starting Mid 2020, it recovered strongly and results have been better.
2- the strategy and product.
A few things are different here from a traditional telco.
The company has a huge African and Middle East footprint.
It has a dominant Joint venture in Iran. There are some unique challenges with Iran: despite operating well locally, the US sanctions make it difficult if not impossible to repatriate funds to the headquarters, so we can almost write this one off, unless sanctions are removed.
Due to the frontier market development of its countries ex South Africa, many customers are having their first data use or even voice use to this day and it provides economic growth for MTN.
Even so, as a difference to a developed market Telco where the networks are mostly built up, MTN can reach more customers or upgrade customers by building 3G or 4G sites in many areas. In fact, it is still doing 3G and 4G capex.
On the plus side, MTN has been very active on getting a significant tech business in both Africa and the Middle East.
It had a stake in Jumia that it sold, and has stakes in Middle East Internet Holding and Iran Internet Group, which are leaders in their markets.
However, to my disappointment, MTN group is existing these promising ventures, They are not profitable (yet?).
These e-commerce holdings, while important investments, are not viewed as long-term strategic holdings for the Group and form part of the ARP.
It looks like a lack of long term patience on investments, but luckily, MTN Group has other digital assets and its strategy is clear:
Strategy update: Ambition 2025 – ‘Leading digital solutions for Africa’s progress’
MTN recognises the opportunity to win in digital services in our markets as customers come online for the first time.
So what do we have:
Digital: (rich media services, content VAS, eCommerce and mobile advertising), Rm 3133 (USD 219m) in 2020, up 30,4%.
Fintech (Xtratime and mobile financial services, Rm 13563 (USD 947m) in 2020, up 23%.
Combined, this is a bit under 10% of revenues, but it is a meaningful amount, Mobile Money has 46 million subscribers, and even though many uses are still basic, it has big potential. And it is profitable with 46% EBITDA margin in 2020. Maybe that is why they want to sell the unprofitable tech associate companies.
The company plans to have a solution with Payments, insurance, lending, mcommerce, and Saving, with partnerships a key to develop good products.
"Our aYo insurance joint venture had 11 million registered policy holders and 6 million active policies. In total, aYo generated US$6,4 million (R106 million) in service revenue and US$10,5 million (R172 million) premium income. We have concluded an agreement to increase our shareholding in aYo to 75% and will consolidate it in future once regulatory approvals are obtained"
https://www.ayo4u.com/
"
Ayaba is the messaging platform. I am more cautious on that one. But one clever way to get subscribers is to offer free data when used within the Ayaba app!
The company aims for 100m Momo and 100m Ayaba users by 2025. They also want to have 10m broadband users and 200m data users.
-On geographic footprint, the company plans to orderly exit the Middle East region, which is 10% of profits and a source of many issues, I do not know if its a good idea to dispose of self sufficient subsidiaries. it reduces profits. I think that they should keep then in run off mode if the prospects are not bright, and distribute the profits, that is if they can.
MTN group has been bidding to enter Ethiopia, an attractive 100 million customers market.
The last bit is the long term plan to separate infrastructure assets and platform, possibly to list the digital business at a high valuation.
3-Nigeria Risk
Nigeria has been slapping billion dollar fines on MTN for a few years, only to settle for less or retract later. Ultimately the fines were not justified, and in my opinion Nigeria was just pissed off that all the profit from their citizens was taken away and distributed as Dividends in South Africa.
The relationship is now better, MTN is working closely with the regulator to ensure smooth operation in Nigeria but you never know.
One good thing that it has done, as well as in Ghana, Rwanda and other places is to list the subsidiary in the local stock exchange.
it has 2 effects:
It allows Nigerians and Ghanians etc to participate and profit in the value generated in the countries and invest in building their wealth.
It creates a whole group of locals who will defend MTN if attacked by the government.
The problem is dilution, and MTN. is due to sell down a further 10-15% of shares. What it could and should do is buy back shares in the holding company.
A more recent issue with Nigeria, is that with Covid crisis and Opec cuts, it limits the amount of funds that can be sent out of Nigeria in order to protect the FX rate of the Naira. I view this as temporary. As a result it is difficult for MTN to repatriate Nigerian earnings.
Once the covid recession and currency flows normalise, it will become easier to transfer money out of Nigeria. It makes no sense to send billions out of the country in these difficult times for the local economy, and in my opinion, MTN should play the long game by supporting Nigeria now and reap the benefits when good times are back.
On further regulation risk, it is always possible, but I think the most pressing issue for Nigeria is to attract investments, so any crazy regulation will get appealed in the end.
The Nigerian market is very attractive in terms of demographics. It is linked to oil, and it needs production to increase (OPEP quotas) to support the Naira. Interestingly, Nigeria is starting to emerge as a tech hub, a culture centre. The industry is also growing, with Dangote investing in a 650,000 barrels per day refinery, as well as massive investments in the sugar refining industry,
4-Management
The management is good at dealing with the governments, listing subsidiaries is a smart move. It is reasonably good at building digital innovative and profitable products.
The big flaw of management, and of many non family controlled stocks, is to sell divisions for bargain prices when they are out of favour. MTN is guilty of this, and at times it feels that they do not care about profits, they just want out of challenging situations. It is the same for wanting to sell the internet businesses: it is just wrong. They should act as a long term investor to these businesses like Jumia and Middle East Internet Group.
However they are also good when it comes to developing their own digital businesses.
So the management gets a low grade from me. It comes down to: Can they build value by developing Data and Fintech business faster than what they destroy by selling down IT businesses and stakes in local markets?
5-Finance and Conclusion
We have a business with low quality pro cyclical management, challenging political situation in Iran and Nigeria.
Because MTN has difficulties sending funds to the holding company, they show the Leverage ratio of 0.8 for the group and 2.2 for the holdco.
And because. of the 2.2 for the holdco, they have their asset realisation program, which consists of selling assets when they are not expensive, and will not pay dividend for 2020, and will resume with one dividend for the year 2021, but in 2022.
On the other hand we got stellar operations, massive scale, brand, and organic growth.
The 2020 financial results have revenue at +12%, EBITDA at +13%.
ROE is improving at 17% from the 2018 through.
The main advantage of this company is scale and organic growth, riding the inevitable technological and demographic trends.
As a result I believe that the stock is a hold at the current P/E ratio of 10, and a buy in a diversified portfolio, but not in a concentrated one. Improved global economy post pandemic will push MTN group results higher and resolve its main issues (ex Iran).
Nice write up I'm trying to figure out the best way to invest in Africa. This might be the one but currently going with Helios Towers, do you have any thoughts on it?