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Mobile Telecommunications Network (MTN) will be the stock in focus: (Price at time of writing: R131.08 (10 May 2016))
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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.
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.
Scroll over or click on the funnel chart to get more details of MTNs latest financial results
Financial review:
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. In MTN's latest set of financial results (for the year ended December 2015), they made provisions for a fine to the tune of just over R9billion
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
MTN took the NCC's fine to court and the fears arose that an expensive legal battle will be playing out in MTN's biggest market. After weeks of discussions MTN has decided to withdraw its legal action against the NCC, and they made a $250million "good faith" payment to the Nigerian authorities, hoping this would help speed the process along in trying to settle the fine and other outstanding issues outside of the court.
While recent developments is some relief to MTN, the NCC remains steadfast in demanding payment of $3.9billion fine for failing to deactivate sim cars they were requested to deactivate.
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
MTN took the NCC's fine to court and the fears arose that an expensive legal battle will be playing out in MTN's biggest market. After weeks of discussions MTN has decided to withdraw its legal action against the NCC, and they made a $250million "good faith" payment to the Nigerian authorities, hoping this would help speed the process along in trying to settle the fine and other outstanding issues outside of the court.
While recent developments is some relief to MTN, the NCC remains steadfast in demanding payment of $3.9billion fine for failing to deactivate sim cars they were requested to deactivate.
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. And its share price reflects it. Its share price has dropped almost 34% in the last 12months (and has dropped 45.2% from the high reached during the last 12months). 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.
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 came in at R7.44 a share, placing them on a PE ratio 18.5, 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.
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 came in at R7.44 a share, placing them on a PE ratio 18.5, 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.
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 R7 per share in cash during the 2015 financial year) and has paid solid dividends over the years (something we are sure will continue once the NCC fine debacle has been sorted out).
Since MTN's financial results looks considerably worse for the year end 2015, compared to their mid year results we felt the need to update our valuation for MTN slightly (as we still feel that over the medium to long term they will offer investors great returns). But with the current issues surrounding them and the countries they operate in, investors should know what they getting in for and that they might have to wait a while for MTN to reward them.
We value MTN at between R147.80 and R149. It offers good 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.
Since MTN's financial results looks considerably worse for the year end 2015, compared to their mid year results we felt the need to update our valuation for MTN slightly (as we still feel that over the medium to long term they will offer investors great returns). But with the current issues surrounding them and the countries they operate in, investors should know what they getting in for and that they might have to wait a while for MTN to reward them.
We value MTN at between R147.80 and R149. It offers good 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.