Share Analysis: MTN - Telecommunications

The Company

MTN is a multinational telecommunications company, headquartered in South Africa, with operations in 22 countries across Africa and the Middle East. MTN’s offerings include voice services through 2G or GSM networks and data services through 3G networks. Incorporated in 1994 under the name M-Cell, the company was awarded the second national licence in South Africa, commencing commercial operations in June of 1994. Having established itself in South Africa, M-Cell expanded its telecommunications network by obtaining licences in Swaziland, Uganda and Rwanda in 1998. In 2000 M-Cell commenced operations in Cameroon following the acquisition of Camtel. M-Cell acquired a licence in Nigeria in 2001, and started building its radio transmission backbone in 2002. Subsequently, Nigeria has become the company’s key asset, contributing 48% to group EBITDA in the year ended December 31, 2014. In October 2002 the company rebranded to MTN.

Phuthuma Nhleko joined MTN in 2001 as chairman and was elevated to group president and CEO a year later. He was at the helm for nine years. During his tenure MTN expanded across the continent and the Middle East. In 2005 the company acquired interests in operators in the Republic of Congo, Iran, Botswana, Zambia and Côte d’Ivoire. MTN acquired the entire share capital of Investcom in 2006 for R33.5bn ($2.9bn), expanding to an additional 10 countries, thus making the group one of the world’s largest emerging markets telecommunications players. In late 2010 Sifiso Dabengwa was appointed to replace Nhleko as CEO. Nhleko returned to the group as chairman in 2013, replacing Cyril Ramaphosa.

As at the end of June 2015, MTN recorded 231m subscribers across its operations. This makes it the largest operator in Africa by some margin. With scale has come profitability. MTN reported EBITDA of R65.5bn ($5.7bn) in 2014, doubling this metric in seven years. The company has a sector-leading organic revenue profile potential, driven by its exposure to penetration upside across is markets. Nigeria makes up almost 37% of group revenues and the growth outlook is supported by a de-risked voice price environment, mobile financial services and mobile data. From a cash returns perspective, the company has committed to 5-15% dividend per share growth over the medium term.

Development Strategy

Nhleko stepped down as CEO of MTN in March 2010. This decision was closely followed by two failed merger attempts with India’s Bharti Airtel. Dabengwa was appointed as his successor. Dabengwa was with the group for 11 years prior to this appointment, having managed both the Nigerian and South African units. MTN has a policy of promoting internal candidates into leadership roles. This change in leadership has seen the focus of the company steered away from mergers and acquisitions, though MTN has communicated that such opportunities will still be considered.

The company is guiding to 2015 group subscriber growth of 8%, having delivered 7% in 2014. We estimate that MTN will generate R16 ($1.38) per share of equity free cash flow in 2015. This, along with being in a negligible net debt position, means that the company will be able to deliver on shareholder returns.

MTN’s medium-term strategy is focused around five pillars, which have been shaped to deliver strong financial performance in a new digital world. The company’s digital adjustment was confirmed through its investment into Africa Internet Holdings, one of the continent’s largest e-commerce players. We believe MTN’s growth profile will continue to benefit from its strong market positions. We see material opportunities from services like mobile money, with the vast majority of the company’s subscriber base unbanked. We note that an operator like Safaricom generates 20% of services revenues from mobile money. For MTN this revenue stream is still nascent.