Apart from gold, the shares to be in since the start of the year have been the cellphone network operators, and one of the biggest turnarounds has been MTN, which is up almost 26% this year so far. Yet over a longer period, MTN has been the share that has flattered to deceive. Is now the time to take the call?
It’s just possible that the people most surprised by the jump in the share prices of cellphone network operators this year might be the operators themselves.
Granted, for MTN in particular, the news flow has generally been pretty good – which marks a huge contrast with any given moment over the past decade. Last week, MTN Ghana reported service revenue growth of nearly 40% with inflation at 22%. And for MTN Nigeria, so often the problem child in the portfolio, the result was almost exactly the same. Huzzah!
The result in Nigeria is really the consequence of the naira stabilising against the US dollar, which meant that MTN Nigeria went from a thumping loss of N392.7bn (about R4.5bn) in the comparable period to a profit of N133.7bn (about R1.5bn) in this period.
So far so good. But this is MTN we are talking about, so there is bad news too. Earlier this week, the Supreme Court of Appeal granted Turkcell the right to bring its corruption case against MTN, which incredibly dates back to 2013, in South African courts. The case concerns the award of a GSM licence in Iran, and Turkcell was one of the bidders. The Turkish company alleged MTN paid off both Iranian and South African officials to overturn a public tender, which it lost to Turkcell, for a multibillion-dollar opportunity to run an Iranian GSM telecom licence. MTN denies the charge.
The case is full of irony, because MTN’s network in Iran has been financially problematic, but the cell operator has up to now managed to avoid confronting the charges by arguing jurisdictional issues. Turkcell is seeking $4.2bn in damages, which is massively more than MTN has ever been able to repatriate from the Iranian business. Due to US and EU sanctions, MTN has accumulated unrepatriated funds of about $400m-500m historically, which are classified as a “loan receivable” on its balance sheet.
But overall, the news flow for MTN has been positive, which is such a marked contrast to its normal status as a company forever enduring bad news, partly because it is embroiled in some of the most difficult operating environments.
Skeletons falling out the closet
The improvements in the cellphone network operators have generally been driven by increased adoption of smartphones, particularly in regions like Africa, and therefore an increase in 5G revenue growth, on top of better cost management. This applies to MTN too, with impressive fintech expansion happening on top of that.
Anchor fund manager Mike Gresty says the question for MTN is this: what would separate the company from other network operators?
Partly the answer would be the fintech part of the business, though it’s not huge. The fintech race has been comprehensively won by the banks everywhere except in Africa, so this constitutes a genuine growth area for the African operators. Fintech revenue for MTN is now about R22.7bn a year out of a total revenue of about R210bn.
But other than that, it’s hard to consider cell companies as a structural growth story. For one thing, the market has become very habituated to the idea that pricing will come down, Gresty says.
This is completely out of kilter with the amount of utility people get out of their cellphones, but cell companies are hostages to regulators, and there is a kind of utility mindset that surrounds cell companies, he says.
On top of that, they have very limited pricing power. “Generally, not an industry I’m particularly excited by,” Gresty says. And in addition, as far as MTN is concerned, “there always seems to be a bunch of very scary skeletons about to drop out of the closet”.
Generally, analysts are strongly supporting a “buy” rating on MTN – and Vodacom for that matter – in part precisely because they are now seen as defensive stocks with solid customer bases in troubled times.
The big potential positive with MTN is the huge valuation gap between it and any number of operators around the world. MTN has 30% more customers than Vodacom but is valued at $3bn less. It has roughly the same number of customers as Orange, but is valued at a third of the France-based company (though its earnings are a quarter that of Orange).
Sometime these values should come closer into balance, if the company could just get the skeletons under control.
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