Smoke sig­nals: BAT VS MTN

BAT shares have fallen sharply but this is such a rare event that it is still a tempt­ing in­vest­ment

Financial Mail - Investors Monthly - - Front Page - Petri Redlinghuys

The trou­ble is not that MTN has to pay a fine, but that it is sim­ply un­will­ing to play by the rules

Bi­ases are dif­fi­cult things to shake. Re­cently I have be­come some­what bear­ish re­gard­ing the prospects of a con­tin­ued bull mar­ket.

Calling the top is one thing, but get­ting it right is another. So I am go­ing to stop short of calling the end of the end of the bull mar­ket, but I will say that we have had a very long bull mar­ket from a his­tor­i­cal per­spec­tive and that it would not come as a sur­prise if, some time within the next six to 18 months, the mar­ket en­ters a bear phase.

Global mar­kets have come down sig­nif­i­cantly al­ready and I don’t think it would take much more panic for them to slide another 10% or so.

So, to find shares wor­thy of in­vest­ment dur­ing trou­bling times, I turn to non­cycli­cal stocks to find “de­fen­sive” in­vest­ments. Bri­tish Amer­i­can To­bacco (BAT) might not seem like a log­i­cal pick con­sid­er­ing that its shares have dropped 40% this year, the biggest de­cline in two decades. But if you con­sider that it has only had two an­nual de­clines in the past 19 years and that much of the rea­son for its un­der­per­for­mance this year is a chang­ing reg­u­la­tory land­scape, it may seem that the short-term pres­sure is a lit­tle over­done.

Re­cently the stock was sold off on the back of news that reg­u­la­tors want to ban men­thol cig­a­rettes and flavoured vape oils, as they be­lieve these “sweet flavours” are en­tic­ing teens to smoke. No doubt this will have a neg­a­tive im­pact on BAT, but as we have seen in the past, rules change, yet peo­ple keep smok­ing. Also, one must won­der how long it will take large to­bacco com­pa­nies to recog­nise the po­ten­tial of the newly le­gal mar­i­juana in­dus­try.

If global stocks do end up en­ter­ing a bear mar­ket, emerg­ing mar­ket cur­ren­cies will be sold off. BAT is dual-listed and thus should act as a de­cent rand hedge in the event of sig­nif­i­cant rand de­val­u­a­tion.

Buy­ing a de­fen­sive stock at the low­est price it’s been in five years and at a div­i­dend yield of 6.59% makes sense — at least within the con­text of try­ing to pro­tect my port­fo­lio from a po­ten­tial bear-mar­ket sce­nario.

We’ve all come to know the woes of MTN rather well over the past few years. Pri­mar­ily it is reg­u­la­tory is­sues in Nige­ria that have been plagu­ing it. I’m not sure if that is the right way to put it though. Rather, pri­mar­ily it is its in­abil­ity to fol­low reg­u­la­tions and poli­cies that get it in trou­ble and end up cost­ing it, and share­hold­ers, a ton of money.

To re­cap round one in Nige­ria: first MTN was fined for al­low­ing users to make use of its net­work with­out com­ply­ing with Rica laws and hence stood ac­cused of aid­ing ter­ror­ism in this way (by in­ac­tion, or fail­ing to im­ple­ment Rica rules that it helped cre­ate).

At the time, it was fined $3.9bn, though af­ter some ne­go­ti­a­tion and a com­mit­ment to list some shares on the Nige­rian stock ex­change, that fine was set­tled for less than half the orig­i­nal amount. You would think that MTN had learnt its les­son.

Round two, and this time Nige­ria has fined MTN about $10.1bn for tak­ing money (earn­ings) out of Nige­ria with­out fol­low­ing the reg­u­lated and re­quired pro­cesses as set out by the cen­tral bank. Once again, MTN has put on its ne­go­ti­at­ing hat and Nige­ria might set­tle for around one sev­enth of the orig­i­nal amount. This is great news, you would think. The trou­ble is that the “sharp re­cov­ery” that this news started on the day it was re­leased lasted only about an hour be­fore the share trimmed back those gains.

In other words, the mar­ket was un­con­vinced.

The trou­ble is not that MTN has to pay a fine, but that it is sim­ply un­will­ing to play by the rules. It in­sists that it has done noth­ing wrong, yet is will­ing to pay a set­tle­ment.

This sends a mes­sage of ac­cept­ing guilt. Its in­sis­tence that it is not do­ing any­thing un­to­ward seems hol­low.

MTN is los­ing the trust of its share­hold­ers, not by some ma­jor over­sight that it has ad­mit­ted to and won’t do again, but rather by a sec­ond ma­jor over­sight in which, again, it is claim­ing in­no­cence and yet again is opt­ing to set­tle.

Com­bine that with a po­ten­tial bear-mar­ket sce­nario in which emerg­ing mar­ket cur­ren­cies are sold off (and keep putting a drag on MTN’s earn­ings) and we have a recipe for a short po­si­tion.

Pic­ture: SUZANNE PLUN­KETT/BLOOMBERG NEWS

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