MTN interim results, stock through 200 ZAR

MTN have released their results for the six months to end June 2013, and at face value they do seem pretty impressive to me. The overall MTN subscriber base increased by 6.5 percent, clocking in excess 200 million for the first time. 201.5 million to be exact, notwithstanding the 3.2 million disconnections in Nigeria due to the subscriber registration process, much like we had here, remember?


Total group revenue increased 9.8 percent, buoyed by a combination of a stronger Dollar and a weaker Rand, as much as 16.3 percent worse in their reporting currency versus the greenback over the comparative period. Constant currency revenues increased a less exciting 1.9 percent, mostly a drag was felt in their large cluster business, the smaller cluster operation reported a very healthy 24.7 percent revenue growth.


In case you needed reminding, the "Large OpCo Cluster" segment of their business includes Iran, Ghana, Cameroon, Ivory Coast, Sudan, Syria and Uganda. The two big daddy businesses, South Africa and Nigeria report separately, because of their size and scale relative to the rest of the territories. The rest of the business is included in the Small OpCo Cluster, 13 countries in total.


The reason for this segregation is very clear. Nigeria contributes 34 percent to group revenue, but 51 percent to group EBIT. South Africa contributes 31 percent to overall group revenues, but a more modest 23 percent to group EBIT, indicating that the competition here is a whole lot more cutthroat. The "Large OpCo" segment contributes 28 percent to group revenue and 27 percent to group EBIT, whilst the smaller businesses are the balance, 14 percent of revenues and 11 percent of EBIT. This business is still dominated by Nigeria and South Africa, although the South African profit contribution relative to their Nigerian counterpart is falling quickly.

Margins are going to come under pressure here locally, that is the reality. Both call and data revenues are falling, but notwithstanding that, group EBITDA margins (42.5%) have actually been maintained as more and more customers move towards adoptions of smartphones and MUCH higher users of data. MTN refers to a weak consumer environment in South Africa and aggressive competition. This is something that we know well as consumers, it is certainly very tough out there. Perhaps there are a few signs of improvement, but not enough.


The company continues to invest heavily in their infrastructure, having invested 12.792 billion Rand for the first six months of their financial year. It is almost laughable to sit here in what is essentially the capital of Africa and expect world class bandwidth and mobile connections (well, we can always dream), when the reality is that MTN rolled out 2130 2G sites as well as 1800 3G sites during the period.


Average Revenue per user (ARPU's) are falling across the board, except strangely in Iran, that is probably a result of the stabilizing Iranian currency to the US Dollar. After a very tough period, sanctions have had a serious impact on the country, and MTN continue to deal with the "situation" as best as they can. Not just Iran, but Syria too. The commentary is as follows: "MTN continues to work closely with all relevant authorities in managing US and EU sanctions against Iran and Syria. MTN continues to retain international legal advisors to assist the Group in remaining compliant with all applicable sanctions."


Until anything is resolved, that Iranian segment is going to be a good business that is not really going to return cash at a group level. The accounting methodology has changed too for this 49 percent holding, indicating as much. Recent developments in Iran seem to be positive, the new political dispensation seems more open to talks and cooperation with the outside world. In the medium term that bodes well for the business.

The growth of the business is however in data services, voice revenues are declining in their most mature market, South Africa. But data now represents 20 percent of all revenues locally, notwithstanding prices down 25 percent for the service. But MTN added 1.6 million new data consumers for the period, up to 13.5 million in total. Data across the group looks really encouraging and in their Nigerian operation (the most important), they are making huge progress. 5.3 million smart phones and 230 thousand dongles hardly makes a dent, relative to the rest of the country. MTN have a fifty percent share in the Nigerian market, the country has 160 odd million inhabitants, but there are perhaps only 10 million smart phones in Nigeria. One smart phone per 16 people! That is way too low. And 13.9 percent of total group revenue! But MTN are investing heavily in Nigeria on the anticipation that the country will continue to grow at a pace comfortably above their African peers.


The future of the business no doubt lies beyond our borders, into economies that are at a far lower base than ourselves. The investment still seems very compelling. The stock trades on a multiple of 15 times forward, with a yield, pre-tax, of 4.9 percent at this lofty price close to 200 ZAR. Now that doesn't sound too expensive, does it? There are of course concerns around revenues not growing fast enough, margins being sliced, but this business was supposed to be ex growth over 90 Rands a share ago! We continue to accumulate on the basis that these businesses will continue to reinvent themselves as we have seen in the US, with the likes of AT&T and Verizon. But their more direct comparison with China Mobile and America Movil sees MTN trade at a significant premium to those for the first time in a while. Ironically those emerging market companies trade at half the multiple of the aforementioned US based companies. They were once all ex growth, before 4G, before the iPhone, before streaming video. Sigh, bandwidth to look forward to!