Mobile Telecommunications Network (MTN) will be the stock in focus: (Price at time of writing: R126.75 (3 March 2017))

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chart created with amCharts | amCharts
Background and overview of MTN (MTN)
According to MTN's website: "We are a leading emerging markets telecommunications service provider and are headquartered in Johannesburg, South Africa. Our company has a primary listing on the JSE Securities Exchange where it ranks sixth with a market capitalisation of R409 billion (December 2014). Through our extensive investment in advanced communication infrastructure in the past two decades, the talent and experience of our people, as well as the strength of our brand, we have grown rapidly to now have operations in 22 countries across Africa and the Middle East. We offer an integrated suite of communications products and services to our customers, including traditional and mobile voice anddata, digital and mobile financial services as well as enterprise services to SME, public sector and corporate clients"

Their main rival on the African continent is their biggest rival in South Africa too, which is Vodacom, but MTN has the far larger African footprint than Vodacom, Vodacom has a bigger share of the South African market than MTN.

MTN as a company and it's share price has struggled over the last couple of years. And the source of their problems are largely due to regulatory issues in Nigera, and money of their's that they could not access due to sanctions against Iran, which affected MTN's earnings from IranCell. More about this later.

​But before we take a look at MTN's latest set of financial results, we will show an interactive candlestick chart of MTN's share price, which shows it's history, high, low, open and closing values etc. Readers can change the chart colours, edit the chart and download it as a image, and readers can even download the data used to draw this chart.

Percent change:

Financial Results review

So let's get down to what is contained in MTN's latest set of financial results. We will start off with a funnel chart that represents information from MTN's income statement.
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​Scroll over or click on the funnel chart to get more details of MTNs latest financial results
funnel | amCharts
Over the last couple of months news regarding MTN has been overwhelmingly bad. And the source of the bad news has been Nigeria. Nigeria is MTN's biggest market by far (in terms of revenue's and EBIDTA). And the bad news was announced by Nigeria's communications ministry, in which they announced that MTN will be fine 200 000 Nigeria Naira per sim card that was not deactivated (as per a request by the Nigerian authorities). The sim cards that had to be deactivated were sim cars which has not been registered properly (no residential address attached to it, or proof of the owner's residence and greater details of the sim card owner). The total amount of the fine first announced was $5.2billion (or roughly R83billion (using Rand/Dollar=R16/$). To put that in perspective, thats almost 2 full years net profit of MTN, that was imposed as a fine. The fine was later reduced to $3,9billion  (or roughly R62,4billion). That is an astronomical amount of money to be levied as fine against a single entity. 

MTN has been trying to resolve the matter with the Nigerian Communications Commission (NCC) for months. While the deadline for the revised fine came and gone, negotioations regarding the fine is still ongoing in a very public spat between MTN and the NCC

In MTN's latest results they paid an amount equal to R10,499billion (leading to a roughly R3billion loss after write offs and depreciation etc). It's the first time in two decades that MTN reported a loss, but based on the share price spike after the release of the results we suspect that the market believes the worst is over for MTN and things can only improve from here on in.

In addition to the fine imposed by the Nigerian authorities MTN suffered significant losses due to exchange rate movements (losses to the effect of almost R5.9billion). ​ 
While issues in Nigeria remain, some of MTN's other big markets are not exactly the most pleasant places to do business in currently (think Iran and Syria). And growth in the South African market (both in terms of subscriber growth and average rate per user (ARPU) has been sluggish ​in the recent past. Its clear from the above that MTN has been having a tough old time recently. While the share price drop has been arrested, it is trading mostly sideways, with MTN now trading at basically exactly the same value it was trading at when we first valued MTN at the end of February 2016). Below a graphic showing the contribution to MTN's revenue and EBIDTA from some of their biggest markets for financial year ending 2016.
3D donut | amCharts
As can be seen from the pie chart, Nigeria contributes a lot to nt only MTN's revenue but their EBITDA earnings. The fact that their EBITDA contribution is far larger than revenue contribution highlights the healthy profit margins they are achieving in this country. This is not the case in South Africa where MTN's margins are squeezed.

Even with all its issues, MTN remains an extremely cash generative share and as the current bad news built into the share price does offer long term investors with a great opportunity to by MTN. While things will get worse before they get better for MTN, one must remember its always darkest before dawn, and that markets and share prices are largely driven by two things. They are fear and greed. And currently MTN's share price is dominated by fear, once that dissipates, greed will kick in again and the share should recover sharply once greater clarity regarding the fine and MTN's future in Nigeria becomes available.

The above we wrote in our previous analysis and we still believe this to be the case. MTN has an extremely strong foot hold in Africa's most populis country, Nigeria, and regardless of the regulatory issues they are facing in that market, it still is a very lucrative place for MTN to do business in. But to be fair, MTN needs to lower their dependence on some of these more volatile markets such as Nigeria, Iran, Syria etc. Results will tend to be irratic as and when issues in these volatile markets of theirs arise.

MTN's headline earnings per share (before Nigeria fine and exchange rate losses) came in at R7.42 a share, placing them on a PE ratio 17, which does look expensive, but with earnings set to recover in the medium term, their forward PE is substantially lower. We believe investors should not stare them blind at the current high PE for MTN.  And a PE ratio of 17 is lower than the JSE market average of 19 (as at end of February 2017). Below a few financial ratios for MTN
A few financial ratios for MTN  (calculated using our Financial Ratios Calculator):
  • Debt to Equity Ratio: 1.55   (more than 2 shows high levels of financial leverage). 
  • Current Ratio: 1.02 (A measure of liquidity. Less than one signals possible trouble in paying off current liabilities).  
  • Quick Ratio: 1.02  (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).  
  • Return on Assets (ROA): 4.96%
  • Return on Equity (ROE): 12.66%
  • Net Profit Margin: 9.0% (when one excludes Nigeria fine and exchange rate losses reported)
  • Dividend Yield: 5.52%
Valuation: 
While the consumers in South Africa are under pressure, and the continued run ins with the Nigerian telecommunications authorities will have a significant impact on MTN's medium term earnings, we believe their strong foothold in various markets outside of South Africa puts them in good stead in the longer term. They are extremely cash generative (generating around R10.90 per share in cash during the 2016 financial year) and has paid solid dividends over the years even with the large MTN Nigeria fine they still manage to declare a R4.50 per share final dividend.

Since MTN's financial results looks considerably worse for the year end 2016 compared to 2015 investors should know what they getting in for and that they might have to wait a while for MTN to reward them. But they remain a quality company with extremely strong foothold in very lucrative markets with very high barriers to entry. Based on their financial results and the information in this article we value MTN at between R149.10 and R149.70. It offers excellenmt value for the patient long term investor.

​We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.

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