MTN Group: Growth Should Continue

| About: MTN Group (MTNOY)
  • This post expresses a bullish view on MTN Group (OTCPK:MTNOY), an Africa-based wireless operator
  • MTN’s recent merger with India-based Bharti collapsed two weeks ago, creating an opportunity to purchase a standalone MTN Group at a somewhat depressed valuation
  • MTN is a leading wireless operator in Africa and the Middle East, with operations in (i) fast-growing emerging markets like Nigeria, Ghana and Iran and (ii) South Africa, a market that’s more mature but where MTN is generating solid free cash flow. Overall, MTN has been a rapidly growing business since inception and that growth should continue for at least several more years. Key countries where it has large operations still have relatively low wireless penetration, implying continued organic expansion over the next several years
  • The current valuation is cheap (5x EBITDA and 14x PE) given MTN’s growth potential. The valuation is low, in my opinion, because (a) Bharti was not offering a particularly high price for MTN and (b) the proposed merger was complicated, due to share swaps, equity raises and other unusual features, which resulted in MTN’s stock price remaining depressed as public holders waited for transaction details to finalize
  • Materials on MTN referenced in this post are available here (.pdf)

I discussed the emerging markets wireless sector in a prior post. In this post, I’m going to recycle some of that information, but with a specific focus on MTN Group.

MTN can be purchased through its common shares traded on the Johannesberg Stock Exchange, or via its American Depository Receipt MTNOY, traded over-the-counter. MTNOY is small and illiquid, and care should be taken to make sure that the current ADR stock price is mirroring the more liquid South African shares. The simple math is to take the MTN share price in South African rand, divide by the rand exchange rate, and compare it to the MTNOY price. There is 1 South African MTN share in each US-based ADR. There should be less than a 2% difference between the two prices – if the difference is greater, wait until the differential converges to less than 2%.

Two weeks ago, MTN’s proposed merger with India-based Bharti collapsed, leaving a standalone MTN Group trading at a fairly low valuation. The MTN-Bharti merger structure was complicated, and rather than a simple acquisition by one business of the other, the two companies were going to exchange ownership stakes through a combination of equity raises, stock swaps, cash contributions, etc. These complications, and Bharti’s somewhat low initial bid, kept MTN’s stock price depressed for several months as the two sides negotiated. Ultimately, the South African government vetoed the deal. The merger itself never made much sense. The two companies have few overlapping geographies and both already have economies of scale. I doubt that a combined MTN-Bharti would have achieved much in the way of cost synergies or other added advantages. I think the deal was driven by the egos of the executives involved and the desire to create a behemoth wireless giant just for the sake of creating a behemoth wireless giant. It didn’t make much sense for shareholders, and fortunately, the merger fell apart.

MTN has the best portfolio of emerging market wireless assets amongst the wireless companies I’ve looked at. Now, because of the failed Bharti merger, it’s also trading at one of the cheapest valuations.

I’m bullish on MTN.

Company Description

MTN Group is a leading wireless cell phone operator in the following developing countries: South Africa, Swaziland, Uganda, Botswana, Rwanda, Zambia, Cameroon, Congo, Nigeria, Cote D’Ivoire, Iran, Guinea, Ghana, Liberia, Yemen, Sudan, Benin, Guinea, Syria, Cyprus, and Afghanistan. Geographic breakdown by FY2008 EBITDA is: Nigeria (42%), South Africa (25%), Ghana (6%), Syria (4%), Iran (3%), Sudan (1%), Other Southern Africa (5%), Other Africa (10%) and Other Non-Africa (3%).

MTN is the #1 or #2 player in most of its markets, and the wireless powerhouse in Africa. In its middle east countries, MTN is also one of the main players.

I’m going to avoid a discussion of the wireless telephony business in emerging markets – I’d be repeating what I’ve written in the previous post about emerging market telecoms. Suffice it to say, the wireless telephony business is a terrific one in the first 5-10 years of a country’s wireless buildout as long as the emerging market can avoid currency depreciation and political turmoil, and does not foster competition among more than 4-5 carriers.


MTN’s two most important assets are in Nigeria and South Africa. First, we’ll discuss Nigeria. This is the crown jewel of MTN’s portfolio, and comprises 45% MTN’s EBITDA as of 6-30-09. Here are Nigeria’s subscribers, EBITDA, and capex over the past 6 years, as well as the overall wireless penetration of the market.

2003: 1.7mm
2004: 3.9mm
2005: 8.4mm
2006: 12.3mm
2007: 16.5mm
2008: 23.1mm

EBITDA ($USD, mms)
2003: 215mm
2004: 565mm
2005: 938mm
2006: 1,211mm
2007: 1,648mm
2008: 2,244mm

CapEx ($USD)
2003: 278mm
2004: 496mm
2005: 597mm
2006: 522mm
2007: 680mm
2008: 1,182mm

Overall market penetration
2003: 3%
2004: 7%
2005: 13%
2006: 20%
2007: 27%
2008: 36%
1H09: 39%

Nigeria is materially cash flow positive now, with EBITDA less capex margins of 27% in 2008. Mobile penetration in Nigeria is only at 39%, implying tremendous room for continued subscriber acquisitions and overall growth. ARPU is at a healthy $12/subscriber. The segment’s strong results continued in the first half of 2009. Subscribers grew by 19%. Revenue was up 33% in Rand and EBITDA was up 39%.

MTN has also been gaining market share in Nigeria – its share grew to 48% at 6-30-09 from 44% at the end of 2008. The Nigeria market has 3 main players, with MTN at 48%, with Zain and Globacom in the estimated 20% to 30% range. Per a CSFB report, Zain had 29% market share while Globacom had 21% as of December 2008.

Zain, a Kuwaiti-based telecom, is the second-largest wireless company in Africa and has been falling behind MTN in both Nigeria and other African countries. Rumors have been circulating that Zain is looking to sell its African wireless business and analysts have said that Zain has been underinvesting in Nigeria relative to MTN. Globacom is a subsidiary of a Nigerian conglomerate – it lacks the best practices of a global wireless player like MTN. The current competitive environment looks like it will continue to be friendly towards MTN, given that the country features only three major wireless players and with the non-two MTN players doing a poor job of challenging MTN’s market leadership.

On currency issues, while the Naira has depreciated 20% against the Rand since the end of 1H09, it’s only depreciated against the dollar 3%. So currency concerns haven’t yet been a problem in 2H09 for U.S.-focused investors.

South Africa

Turning to South Africa, here are MTN’s subscribers, EBITDA, and capex over the past 7 years, as well as the overall wireless penetration of the market.

2002: 3.9mm
2003: 4.7mm
2004: 6.3mm
2005: 10.2mm
2006: 12.5mm
2007: 14.8mm
2008: 16.8mm

EBITDA ($USD, mms)
2002: 372mm
2003: 350mm
2004: 717mm
2005: 1,069mm
2006: 1,184mm
2007: 1,394mm
2008: 1,310mm

CapEx ($USD, mms)
2002: 261mm
2003: 269mm
2004: 442mm
2005: 719mm
2006: 845mm
2007: 990mm
2008: 931mm

Overall market penetration
2002: 22%
2003: 27%
2004: 36%
2005: 62%
2006: 74%
2007: 86%
2008: 97%

Unlike Nigeria, South Africa has become a fairly saturated market. The growth rate in subscribers, revenue and EBITDA now resemble that of mature wireless markets. Subscriber growth was 14% in 2008 but was flat in 1H09, which the company blamed on “challenges on the network and supporting systems, slowing GDP growth, pressure on consumer spend, and competitor activity in the first half of the year.” Revenue was up 5% in constant currency terms in 1H09 while EBITDA was up 2.3% in constant currency. ARPU declined in 1H09, by 5% in the prepaid business and 10% in the postpaid business.

Nevertheless, South Africa still generates solid cash flow. It generated $400mm EBITDA less capex in 2008 and should perform similarly in 2009. Deutsche Bank believes the capex will peak in South Africa in 2009 and expects to see a marked reduction in capex in 2010, which would increase free cash flow.

There are three main operators in the South African market, with Vodacom at 55%, MTN at 37% and Cell C at 9% at year-end 2008. The 3-competitor nature of the South African market should prevent excessive competition from eroding cash flow.

The other note to keep in mind is that the South African government is in the process of reducing interconnection rates in South Africa. Interconnection rates refer to the revenue the company receives when it connects calls from other networks to its network. South Africa has among the highest interconnection rates in the world, and these rates are in the process of being lowered. While serious, the potential interconnection rate cuts are fairly minor in the whole scheme of things. UBS has a 50% cut in South African interconnection rates reducing MTN’s valuation by 2%.

Ghana, Iran, Syria

MTN’s third largest country is Ghana. Ghana comprised 5.4% of MTN EBITDA in 1H 2009. Ghana has been performing well in local currency terms, but is flat year-over-year in dollar terms due to depreciation in the Ghanian Cedi. Subscribers increased by 12% in 1H09 compared to the year-earlier period and local currency revenues increased 23%. The Ghanian currency, however, depreciated 15% compared to the Rand and 30% compared to the US dollar over this period. In Rand terms, Ghanian EBITDA was flat in 1H09 compared to the prior period. In 2008, Ghana revenue grew 30% and EBITDA grew 34%, in Rand terms. Ghana is free cash flow positive, and had a 15% EBITDA less Capex margin in 2008.

The company’s market share in Ghana is 55%. Mobile penetration in Ghana is only at 56%, implying plenty of room for future growth. ARPU is a decent $8/subscriber.

MTN’s Iranian operations are also growing fast and will become a meaningful contributor to EBITDA over time. Mobile penetration is 72% in Iran and MTN’s market share is 37%. The competitive landscape is attractive in Iran, with only 3 total operators and only 1 other private operator. Syria is also attractive. Mobile penetration is 40%, the number of operators is 2, and MTN’s market share is 44%. MTN has positive EBITDA less capex in both countries. Iran and Syria comprise 5.5% and 3.2% of EBITDA, respectively.

MTN is executing well in virtually all of its countries. Aside from South Africa, the emerging markets that the Company operates in provide attractive competitive environments and substantial potential for future growth.


Here are the Company’s consolidated numbers, in US dollars. Note that the South African rand, as well as most other emerging market currencies, depreciated sharply against the dollar in 2008 and 1H09. But that trend appears to be over.

Revenue ($USD in mms)
2006: 7,329
2007: 10,390
2008: 12,611
LTM 1H09: 12,866

EBITDA ($USD in mms)
2006: 3,186
2007: 4,537
2008: 5,315
LTM 1H09: 5,431

Capex ($USD in mms)
2006: 1,273
2007: 2,320
2008: 3,490
LTM 1H09: 3,838

Growth may appear to have slowed, but that’s mainly because of the rand’s depreciation during 2008 and 1H09. The rand has rallied hard over the past few months against the dollar and is now back to where it was in 2007. So its temporary depreciation in 2008 and 1H09 should hardly factor into our analysis. In constant currency terms using the rand, EBITDA has grown at 43%, 35%, and 22% from 2006 to 2008. From a free cash flow perspective, much of that EBITDA is reinvested in the business as capex, which makes sense given the return on capital MTN is generating. MTN boasts a return on equity in the 25% range.


With Nigeria at 36% penetration, and other up-and-coming countries like Iran, Ghana, etc. increasing their share of total MTN EBITDA, growth should continue at a similar pace over the next few years. Weighted mobile penetration across the group’s 21 operations was approximately 49.5% at June 2009, according to Deutsche Bank. As well, MTN’s operations are mostly in three to four operator markets, which are relatively less competitive than a number of emerging markets such as India with its eight operator market.

And at what valuation are we buying this business that grows EBITDA at 22% a year and has an ROE of 25%? 5x EBITDA and 14x PE. When the Bharti deal fell apart, a standalone MTN was left trading at quite low valuations.

Comps trade higher. Two of the other most promising wireless operators are America Movil and Millicom, which trade at 7.8x EBITDA and 6.1x, respectively. And MTN’s assets are better. Comparable companies aside, it’s difficult to find companies with MTN’s near-term and long-term growth profile, as well as its high historic return on equity, trading at 14x PE.

I would not be surprised if MTN appreciates in the near-term – it’s a widely covered, liquid stock, and most analysts who cover MTN are bullish, citing its low valuation post-Bharti. But if it doesn’t appreciate in the near-term, this is still a great long-term story. MTN is a business where EBITDA and earnings are very likely to grow materially over the next several years, and I don’t think that the valuation multiples will contract as the business grows. So the stock should go up.

Disclosure: I may buy, sell or short any of the stocks mentioned at any time. If I discover an error with my analysis, or a new fact that discredits my thesis, I will not inform you of the change in my analysis and thesis. I may be wrong; it won’t be the first or last time.