MTN whipped, but still a good buy

MTN’s share price is likely to remain wobbly as jittery foreign investors face massive pressure from United States authorities and lobby groups to quit their exposure in Africa’s R255-billion cellphone giant because of its business activities in Iran.

The company is in danger of being smacked with US sanctions for allegedly providing the Iranian government with technology and spyware to perpetuate what US President Barack Obama claims are “grave” human rights abuses.

Jittery investors
Foreign investors, nervous about possible US sanctions and an airstrike on Iran, have been dumping shares in the cellphone giant over the past month since Turkcell filed its explosive $4.2-billion lawsuit in the court for the District of Columbia in Washington DC.

Turkcell has implicated MTN in a bribery and weapons scandal and alleged that it influenced South Africa’s votes in the United Nations Security Council to favour Iran in exchange for a 49% stake in Irancell.

“MTN has already lost investors,” said Stephen Meintjies, head of research at local stockbrokers Imara SP Reid. “Although it has recovered a bit from the lows of early and mid-April, there are still risks and fears of sanctions. The share price is not discounting the larger risk of MTN losing its licence in other key jurisdictions if the [Lord Leonard] Hoffman inquiry was to find substance to some of Turkcell’s claims.”

Foreign owned shares
About 55% of MTN’s shares are foreign owned and US investors hold about 15% of them. US lobby group United against Nuclear Iran has waged a war against MTN, calling on US investors to quit their exposure in the JSE-listed blue-chip stock, accusing it of providing the Iranian regime with the data necessary to commit human rights abuses.

The nervousness over MTN’s future performance is reflected in its share price over the past month. It has yo-yoed from R143.25 on March 12 (when details of the claims started to surface) to a 12-month low of R127.55 on April 4 (a few days after Turkcell’s court papers were filed), before slowly recovering to levels of around R135 now. A year ago, it was trading in the range of R150.

“We are concerned with the quantum of damages being sought and … advise shareholders to exercise caution until the allegations have been tested in [court],” said Meintjies. “With all the negative news still to come, the share price will definitely remain under pressure.”

One solution is for MTN to walk away from Iran. But looking at the numbers it becomes clear why the cellphone giant is reluctant to disinvest despite pressure from the US. Iran is a lucrative market and an important part of MTN’s Middle East portfolio and subscriber numbers grew by 16.6% last year to 35-million. MTN’s total subscriber base is 164-million.

Triple profits
Profits from MTN’s operations in the Islamic republic have more than tripled over the past four years. Earnings before interest, taxes, depreciation and amortisation were R3-billion in 2008, R5.4-billion in 2009, R7.7-billion in 2010 and R9.5-billion last year.

Iran contributed about 9% of the group’s total revenue of R121-billion last year. Of the 6.3% rise in group revenue in 2011, the Iran operation was the biggest contributor with 20.1%, compared with South Africa (4.1%) and Nigeria (7.7%).

MTN can still repatriate cash from Iran, although its management is not keen on repatriating dividends. Even though the situation in Iran remains tense, the country is said to be in a position to retain its majority 51% share in Irancell.

If MTN was forced to withdraw from Iran, the company could only sell its stake to the Iranian government, or it would have to take the hit of huge write-downs as Turkcell, or any other company, might also be prohibited from bidding for the 49% stake in Irancell that MTN holds.

Despite all the uncertainty, now is the time to buy MTN shares, say fund managers. And if you have MTN shares, there is a sound investment case for holding on to them.

The company is operationally sound and has good growth prospects and attractive cash returns. The outlook from all rating agencies is positive. The dividend payout ratio has been raised from 65% to 70% and management has hinted that there are chances of it increasing.

Local institutional investors such as Coronation and the Public Investment Corporation, which holds an 18% stake in MTN, ­recognise the long-term value in the stock and are holding on until the Hoffman inquiry releases its findings on the corruption claims.

“A lot of value has already been wiped out of the share and it could still derate, but we believe the hit has already been taken,” said Coronation’s Pallavi Ambeker. “We’re investing in MTN with a long-term view of three to five years. The cash-flow generation is very strong and they are operating in markets that are still underpenetrated … we believe profitability will continue.”

MTN is operating on a forward price-earnings ratio of 10:5 and looks set to enjoy healthy growth this year.

“It has survived regulatory and competition challenges. It has good dividend yields and is in a good cash position,” said Meintjies.

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