MTN promises more superb growth
Markets in Africa and Middle East could yield many millions of new subscribers
WPrice follows growth and the key to superb performance in the stock market is picking the companies with the best potential earnings growth. Everything else is secondary – Richard Driehaus, well-known and very successful US portfolio manager HEN A BRITISH portfolio manager was imported by a South African financial institution about four years ago to focus on growth shares, he was asked at a presentation which share he’d choose on the JSE as the one with the most potential. His reply, without any hesitation, was MTN (see cover story).
That he made a good choice is again confirmed by the group’s results for the year to December 2006. Probably the most striking feature was the enormous growth in its number of subscribers. The figure increased by 73% to 40m, which to a large extent was thanks to the takeover in July of Investcom, a cellphone group operating in the Middle East and Africa. The price was US$5,5bn (around R40bn).
But even without Investcom, MTN’s number would have shown impressive growth – up by 36%. Investcom itself pushed up its total by 38% since July.
However, the most important thing for investors – who, like Driehaus, focus on the momentum of a company’s earnings growth – is that the future potential is still so great. The penetration of mobile telecommunications in the countries where MTN carried out takeovers is still low.
There are foreign exchange and regulatory risks attached to emerging economies, but those are offset by the spread over several countries it has already achieved.
Group income rose by 49% to R52bn (32% if Investcom’s R6bn were left out). Nigeria made the best progress in percentage terms, growing by 31% to R15bn, with SA not far behind with 22% to R25bn. In addition, Nigeria’s margin increased by 4% to 57,2%, while SA’s also was a strong 33,9%. MTN’s market share in Nigeria is 46%, after its subscriber tally surged by an amazing 46%.
In Iran there were 154 000 subscribers at end-December, fewer than expected. But there had been delays in launching the product. MTN Group’s interest is 49% of MTN Irancell, while 51% is owned by the Iran Electronic Development Company. There’s been strong progress since the end of the financial year and by end-March it already had more than 1m subscribers.
Iran’s population is around 70m and cellphone penetration is still very low. Management hopes to attract 6m new subscribers this year. And the Sudan now also has more than 1m subscribers.
Earnings per share were 584,7c (338,2c in the previous year, but this figure covered only nine months) and the dividend was increased by 38,5% to 90c.
As for its prospects for the current financial year, management expects that it will attract a massive 16m to 17m new subscribers. However, earnings growth could suffer, because of its large expansions in markets such as Iran and Sudan and also because of the tax benefits in Nigeria that came to an end at the beginning of this month.
At its current price of around R96/share it’s at a high price:earnings ratio of 16. The dividend yield is only 0,94%. But it’s likely that the distribution will be increased sharply again.
Driehaus, who has spent a lifetime tracking down companies with exceptional growth potential, says his experience is that they are almost always expensive and that one needs to be courageous to buy them. However, the rewards can be great.