Africa is a vibrant economic region in these times. It has had a average GDP growth rate of about 5% from 2003 to 2013, one of the highest regional growth rates globally, and is poised to maintain a high growth rate given its relatively small base and despite the current global economic situation. The enormous levels of monetary easing in developed nations, the Eurozone credit crisis, the slowing growth in China and deflation in Japan, have led to experienced investors in these regions being wary of potential bubbles in the asset classes and other troubling uncertainties there, resulting in them looking for more sound investment opportunities overseas. Overall political stability in Africa, previously a discouraging point, has seen much improvement which allows governments in the region to shift their focus to developing the necessary infrastructure for strong economic growth. This factor, when coupled with the vast deposits of natural resources found in Africa, explains why it is a subject of global interest among long-term investors. Domestic demand in the region has been on the rise owing to a burgeoning middle-class with growing disposable incomes. This increase in appetite of the African population has opened up several capitalistic opportunities.
Thriving business activity and the rise in general living standards in Africa has resulted in the need for extensive telecommunication services throughout the continent, which leaves telecommunications giant, MTN Group (OTCPK:MTNOY), in a very favourable position. Founded in 1994, MTN is a multinational group with telecom operations in 22 countries across Africa and Middle East, 15 of which it has the largest market share in. Based in South Africa, it had more than 189 million subscriptions after an annual growth of 15.1%, at the end of 2012. MTN Group's revenue was 125 billion rand (USD16.5 billion) after a CAGR of 7% since 2008. Its net profit, meanwhile, was 24.1 billion rand(USD2.95 billion) after a solid CAGR of 9% since 2008. The group announced last month, that its headline earnings for the first half of 2013 has risen by about 20-25% and had reached 200 million subscribers.
Voice has been the main source of revenue so far, but eventually data revenue shall surpass it. In the US, revenue from data is set to eclipse that of voice in the 4th quarter of 2013, according to Chetan Sharma Consulting. Last year, Japan became the first country in the world where this watershed occurred, according to GSMA. This transition could prove to be a rapid process in Africa as it has virtually bypassed the PC revolution which has naturally left the masses to seek mobile phones for internet access, a major opportunity for telecom service providers to effectively become pivotal internet service providers. MTN has realized this, and has acquired the necessary infrastructure to be on the forefront of the industrial movement to capitalize on the boom in demand for mobile data services.
The current internet penetration rates in the US and Europe are 78.6% and 63.2% respectively as compared to a penetration rate of 15.6% in Africa (Statistics from Internet World Stats). This leaves MTN with significant room for growth in the data services sector of its business.
Management has taken notable steps in creating shareholder value such as the aim to grow dividends in a range of 5% to 15% annually and the share buyback programme which, since its inception in 2011, has resulted in the repurchase of 22 million shares. These measures helped fuel a five-year dividend growth of 45.04% and a dividend yield of around 5%.
Currency is an important aspect to keep in mind for those investing in the ADR. USD/ZAR is currently hovering around 10.2070, which is close to the historical highs of the pair, much higher than the average levels for the past few years. The interest rate differential (4.75% in favour of ZAR) and the strong demand for South African exports could prove to be beneficial for ADR investors as they may profit from currency appreciation apart from the growth in the core price of the stock itself.
The group had a legal challenge last year due to allegations of corruption by rival Turkcell. The group commissioned a committee to investigate the case and the investigation cleared MTN of any illegal acts. This was followed by Turkcell's withdrawal of the lawsuit and MTN welcomed the move. Such anti-competition allegations against a dominating corporate giant are not uncommon, and MTN is glad to have survived this one without a scar.
With a significant annual dividend, serious growth potential and tremendous value, MTN is arguably one of the best options for the long-term investor with an appetite for risk.