MTN has more room to im­prove than Vo­da­com

Financial Mail - Investors Monthly - - Opening Bell -

It is an ob­sta­cle course out there for mo­bile com­pa­nies MTN and Vo­da­com. Both are try­ing to grow their busi­nesses and at­tract in­vestor in­ter­est while deal­ing with a plethora of chal­lenges.

From their origins in the 1990s un­til fairly re­cently there was lit­tle to worry about apart from man­ag­ing bur­geon­ing growth. But over the past few years it has be­come a race to ex­tract growth in a sec­tor filled with price pres­sure, com­plex­ity and chal­lenges.

MTN has a slight edge, as it is in re­cov­ery mode from huge 2016 losses and has in­ter­est­ing de­vel­op­ments, in­clud­ing im­prov­ing its net­work and list­ings in Nige­ria and Ghana.

Its progress is not re­flected in the share price, which has lost al­most 6% in a year. Its p:e of 65 is prob­a­bly the rea­son.

Vo­da­com has not fared much bet­ter, with its price gain­ing just 2% over a year. It trades at a p:e of 16.

An­a­lyst con­sen­sus is to sell MTN and buy Vo­da­com.

Mo­men­tum Se­cu­ri­ties an­a­lyst Si­bonginkosi Nyanga says that based on cur­rent val­u­a­tions MTN is prob­a­bly over­val­ued by a mar­gin of 20%-30% com­pared with its peers.

MTN’s most re­cent re­sults were viewed as pos­i­tive for the group, which was plagued by a huge US$5.2bn Nige­rian fine, fi­nally set­tled at $1.6bn. In the year to De­cem­ber, group rev­enue rose 6.8% as data rev­enue grew 34.2% and cus­tomer ser­vice and net­works im­proved, with some pres­sure on mar­gins and earn­ings.

The com­pany has a to­tal of 217.2m sub­scribers and a fast­grow­ing num­ber of cus­tomers us­ing MTN Mo­bile Money.

Group pres­i­dent and CEO Rob Shuter has called the per­for­mance solid.

He points to dif­fi­cult con­di­tions and op­er­a­tional and reg­u­la­tory chal­lenges, as well as pos­i­tive achieve­ments in Nige­ria and SA.

Man­age­ment struc­tures and skills were strength­ened, the port­fo­lio is be­ing re­viewed and “con­flict mar­ket” op­er­a­tions mon­i­tored.

MTN still faces head­winds, in­clud­ing the Turk­cell law­suit over MTN Iran­cell, at present in SA courts, a sanc­tion from Cameroo­nian au­thor­i­ties and a dis­pute with au­thor­i­ties in Benin about fre­quency fees.

In­vestors prob­a­bly have to ac­cept that th­ese kinds of is­sues are an on­go­ing fea­ture of MTN’s busi­ness.

Shuter says MTN will de­liver up­per-sin­gle-digit ser­vice rev­enue growth as well as bet­ter mar­gins.

Vo­da­com’s quar­terly re­view to De­cem­ber showed rev­enue up 6.7%, and 2.5m new cus­tomers, bring­ing the to­tal to 73.6m — still a frac­tion of MTN’s num­bers. Data rev­enue in­creased 9.7%, well be­low the days when it grew ex­po­nen­tially and when data costs were not un­der scru­tiny.

Ac­cord­ing to Vo­da­com Group CEO Shameel Joosub, data prices fell 24.2% over 2017, though he might be hard pressed to con­vince cus­tomers.

Mo­bile com­pa­nies are mak­ing in­roads into mo­bile money. Like MTN Mo­bile Money, Vo­da­com’s M-Pesa’s rev­enue grew over 33% in the most re­cent quar­ter.

Vo­da­com also faces reg­u­la­tory and other pres­sures re­lat­ing to data billing and a gov­ern­ment con­tract, and it has had chal­lenges out­side SA, such as in the DRC.

Like MTN, Vo­da­com is fairly bullish, ex­pect­ing a mid- to high sin­gle-digit rise in earn­ings be­fore in­ter­est and taxes.

De­spite the group’s rel­a­tively high val­u­a­tion, Mer­gence In­vest­ment Man­agers an­a­lyst Peter Takaen­desa says MTN is bet­ter placed than its peers in the medium term as its mar­kets re­cover from re­ces­sions and cur­rency weak­ness.

He says MTN has very strong mar­ket po­si­tions. It is num­ber one in 15 mar­kets and num­ber two in seven. “Size matters in tele­coms,” he says. “MTN re­mains a high-qual­ity busi­ness that is emerg­ing from a patch of weaker man­age­ment and cycli­cal head­winds.”

He says mo­bile data rev­enue growth still has a long way to go, es­pe­cially in Africa.

MTN’s cur­rent net­work in­vest­ment lev­els are much higher than its peers and once th­ese nor­malise, there should be sig­nif­i­cant free cash-flow gen­er­a­tion and div­i­dend growth over three to five years.

Vo­da­com is a good div­i­dend play, Nyanga says, but MTN has pro­vided some clar­ity on its div­i­dend po­si­tion and its pro­gres­sive pol­icy should re­sult in div­i­dend pay­ments grow­ing 10% to 20%.

Oper­a­tionally, MTN is sta­bil­is­ing, he says. “Lo­cally, it has put a num­ber of big hit­ters in man­age­ment to trans­form, com­pete with Vo­da­com and re­gain cus­tomers, and there has been con­sid­er­able im­prove­ment in its net­work.”

Takaen­desa says MTN’s val­u­a­tion “looks . . . ex­pen­sive,” but earn­ings are close to the bot­tom of the cy­cle and still much lower than their nor­malised level. List­ing op­er­a­tions in Nige­ria, Ghana and 29%-owned IHS Tow­ers could im­prove its val­u­a­tion. Key risks, how­ever, are the com­mod­ity cy­cle and reg­u­la­tion, though it is in a stronger po­si­tion to nav­i­gate them, he says.

With a high p:e, it is dif­fi­cult to be­lieve MTN of­fers good value at its cur­rent price, but there may be more room for im­prove­ment at the group than at Vo­da­com.

Ei­ther way, mo­bile com­pa­nies are just not the mon­eyspin­ners they once were.

“Man­age­ment struc­tures and skills were strength­ened, the port­fo­lio is be­ing re­viewed and ‘con­flict mar­ket’ op­er­a­tions mon­i­tored

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