MTN IS BACK
Finweek English|22 October 2021
It seems as if the MTN leadership is making the right calls. What can be expected from the company going forward?
Brendan Peacock

After a difficult few years, MTN has come roaring back, more than doubling its market capitalisation in the last year. While its share performance has brought the company back in line with historical valuations, the path ahead to a genuine rerating of the group remains challenging and will require faultless execution from management.

Investing is all about entry and exit points. Though shareholders holding MTN over five years would have reaped gains just shy of 20% in that time, anyone buying into a devalued MTN 12 months ago would have enjoyed a return of 150%. That seems like a startling rerating of the African telecommunications giant, and it reflects several tailwinds boosting its core business, in tandem with shrewd leadership.

It may seem surprising to speak of the oil price and television sets (see sidebar) in weighing up MTN’s performance, but it is critical to the company’s fortunes. Ninety One fund manager Samantha Hartard says MTN’s performance is inescapably linked to Africa’s commodity market performance – especially the price of oil.

“MTN’s resurgence is threefold. Firstly, the macro-economic environment has seen the African economy, and Nigerian economy in particular, move off the harsh lows of last year – the low base effect. We have seen an oil price rally and the rest of the continent seems to be emerging from the Covid-19 crisis. MTN’s delivery on operational performance has also exceeded expectations, with expanding earnings before interest, tax, depreciation and amortisation (ebitda) margins growing faster than revenue. This has allowed management to deleverage the group’s balance sheet,” says Hartard.

“Earnings growth exceeds ebitda growth, which exceeds revenue growth, and this looks like it can continue comfortably. It takes a long time to turn around a telco network operation, which requires many years of capital expenditure rollout and achieving the correct network density. MTN and other telcos were significant beneficiaries of lockdown and the work-from-home trend, with a huge increase in data demand. It’s taken time to get here, but MTN is now able to benefit from these raised volumes,” she adds.

What could drive a rerating for MTN from here?

MTN’s resurgence over the last 12 months likely still does not consider the group’s nascent fintech and digital service offerings. Just how much could nontraditional revenue boost the group’s fortunes?

Ninety One’s Samantha Hartard says while MTN’s asset realisation strategy has seen the group sell towers in Africa, it has a 29% stake in IHS Towers, which will list on the New York Stock Exchange soon.

“This could provide a large value unlock and is a long-awaited initial public offering (IPO). Management has begun to address it in roadshows, but there will be stringent terms dictating when and how MTN can sell down its stake in IHS. It could take three years for MTN to unlock that value. We are yet to see a finalised valuation for the IPO, but it could be a significant valuation underpin for MTN,” she says.

Peter Takaendesa of Mergence Investment Managers believes the listing of IHS will be useful in further deleveraging MTN’s balance sheet. “However, investors don’t often think of the give and take with listing tower assets. The company will get cash now, but it then consigns itself to ongoing rental of tower assets upon which the company depends. Vodacom has opted for a different approach, seeing its towers as a competitive advantage, and has indicated it will hold on to them for a couple more years to come.

“This seems sensible, given the health of Vodacom’s balance sheet. Vodacom doesn’t need the cash and is not excessively undervalued.”

There is no single infrastructure answer for all telcos. “Vodacom and MTN have different views on their current needs and extraction of value from their tower portfolio. Investors like tower portfolio businesses because they have a strong position of receiving cash from mobile operators through rentals. It makes sense for MTN to sell its 29% portion in IHS, which could be worth more than R30bn, though I don’t expect the company to sell down its whole stake right away. MTN has already lost control of the towers in the IHS portfolio and is now largely a passive investor,” says Takaendesa.

Then there is fintech. “This is an exciting space, particularly in Africa where there is such a large unbanked population and telcos have great distribution networks, making it easier for people to adapt to mobile money services and transact this way. MTN has been incredibly successful in Ghana, which I rank as probably their most successful operation in Africa. It shows MTN has the ability to execute in mobile money,” Hartard says.

While investors will want to see more evidence before factoring that business into MTN’s valuation, MTN is already forging ahead in separating the fintech business as a standalone entity – primarily in anticipation of now being regulated on a second front by central banks.

MTN’s exit from risky territories should further streamline the group and provide greater visibility into its value. However, red flags remain and Hartard says the key things for shareholders to look out for fall into the categories of game theory and regulation.

“Regulation will always be a primary risk for a telco. As exciting as fintech is, it is a different business and comes with different regulatory risk as a banking entity. New regulations are popping up all over Africa. However, fintech is a wonderful opportunity and the African demographic story must play out. I expect fintech will be the nearterm theme, followed by a four- to five-year infrastructure story – both in terms of the tower business and sharing MTN’s fibre backbone with other players,” Hartard says.

An analyst who asked not to be named says MTN management’s high targets for its fintech business – to contribute 20% of group revenue by 2025, effectively doubling its contribution from today – face some challenges, including achieving the correct licence to make a proper tilt at Nigeria’s market.

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