MTN trading update

Ah, one of our favourite stocks, MTN came out with a good looking trading update this morning. The company expects adjusted headline earnings per share to increase between 18-23% for the year ended 31 December 2010.

However earnings attributable to shareholders are expected to be between -5% and +1% for the year and basic HEPS is to decrease by between 3% and 8%.

There are two reasons for the big difference between adjusted and basic HEPS. (I am not an accountant so if you have a better explanation please send it through).Firstly there was the impact of a reversal of put options that shareholders have on the Nigeria and Afghanistan operations. To translate that into English, a put option allows the holder to sell the stock at a given price. So if the share goes down the holder can sell at a higher agreed upon price. This is anti-dilutive because shares are going from the holder back to the company. However there was a reversal of put options which makes the process dilutive. Basically it is a revaluation of a financial instrument based on the share price. Complicated, I know and hard to evaluate without all the details. All you need to know is that it is once off adjustment that does not reflect operations.

The second reason was the MTN Zakhele BEE scheme which was also dilutive as a large sum of shares are issued to the BEE participants from the company.
Also included are the costs incurred by both the process of the issuance and the discounted issue of the shares.

So which numbers are the ones we are supposed to look at? In MTN's last results release it was the adjusted HEPS that were significant. These were the ones that were focused on and included the negative currency adjustments. For financial year end December 2009 the company reported adjusted HEPS of 754.3c and a dividend 192c. So add 20% to that and we should be expecting just over 9 bucks a share plus an increase in dividend.

For the six months to June adjusted HEPS were 438.6c so it looks like they managed further growth for the last six months (5.2% assuming 900c earnings).

That is obviously a good outcome especially for a company gone "ex-growth." If the earnings are around 9 bucks and the stock trades at R125 we are looking at a P/E of 13.9. Does that seem cheap? Unfortunately MTN operates in some unstable economies and current unrest in the Middle East and the Ivory Coast is definitely spooking investors. However one man's fear can be another man's opportunity and we feel MTN's access to these undeveloped markets gives them great potential to increase subscribers and consumption off a low base. We are more than happy to add at these levels.