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MTN has more room to improve than Vodacom

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