7 Reasons to Be Bullish on MTN Group

MTN Group (MTN:SJ), Africa’s wireless telecommunications giant, had a rough start to the year.

Stiff competition, regulatory action, weakening currencies, and a labor strike in its home base, South Africa, conspired to slash the company’s first half earnings by 24.2%, and its shares have dropped 21% since their September high.

But don’t push the “sell” button quite yet.

I believe the stock is positioned to deliver solid returns over the next three to five years.

Here are seven reasons why.

1. Africa’s coming data boom

While the market for voice calls is all but tapped, Africa’s demand for wireless data services remains in its nascent stages.

Just 3% of the continent’s rural communities are connected to a fixed telephone network, and relatively few urban residents can afford the cost of a DSL or broadband cable connection in their home. Thus, for the vast majority of Africans, the easiest, most efficient way to use the Internet is with their mobile device.

And demand for internet access has thus far been limited only by wireless operators’ capacity to expand their 3G and 4G coverage areas. In 2006, MTN’s largest market, Nigeria, was home to 7.9 million internet users. Today, that figure stands at well over 79 million. Remarkably, this is still less than half of the nation’s total population.

As a result, MTN’s data revenue has soared, surging 33.2% in 2014 and 21.2% in the first half of 2015.

And it looks like this trend’s got legs.

Cisco Systems estimates that mobile data usage in the Middle East and Africa will expand at a 72% clip between now and 2019 – faster than anywhere else on the globe.

As the region’s largest wireless data provider with operations in 21 countries, MTN will be facilitating this growth.

2. Mobile Money

MTN launched its Mobile Money service in 2009. It allows MTN customers to send and receive cash via their mobile device – a huge deal in under-banked Africa.

Over the past 12 months, it looks like the venture is beginning to reach scale. Subscribers to the service have grown 46% to a total of 32.4 million users.

This presents the company with enormous potential to grow income from transaction fees and numerous other financial services ranging from small loans to insurance.

3. The Iran nuclear deal

MTN owns a 49% stake in Iran’s second largest wireless operator, MTN-Irancell.

The operation accounts for nearly 10% of MTN’s operating profit, but, due to sanctions imposed by the international community, the company hasn’t been able to repatriate the ZAR1.1 billion worth of dividends it accumulated over the past several years.

Now, with an agreement to limit Iran’s ability to produce a nuclear weapon nearly finalized, it appears that the sanctions will soon be lifted. MTN will thus be able to make more efficient use of its Irancell earnings.

4. Improving cash flow

Erecting a network of cellular masts and towers is a costly undertaking. Fortunately for MTN, much of this work is now complete. Existing 2G sites can be upgraded to 3G technology by simply switching out components.

This has resulted in a steady reduction in capital expenditure as a percentage of operating cash flow. MTN’s free cash flow has nearly tripled over the past five years, giving it the flexibility to pay down debt and create value for shareholders.

5. Regular share buybacks

One way MTN management creates value for shareholders is by repurchasing company shares. The company has reduced its total share count in each of the past five years, resulting in a cumulative decrease of roughly 3%.

That may not sound like much, but it effectively added 60 tax-free basis points to MTN’s dividend yield each year. A nice bonus.

6. A generous dividend

Speaking of dividends, MTN sports one of the juiciest payouts on the Johannesburg Stock Exchange (JSE). As of this writing, the shares yield 6.1%.

Management has boosted the total dividend 15% over the past 12 months and aims to increase it by 5-15% every year. This is a feat it’s managed to achieve every year since 2006 – nine consecutive years.

7. A nice price

Most importantly, MTN shares appear priced for a solid, long-term return.

Over the past six years, the company has grown its book value per share at an annualized rate of 11.5%. If it maintains this pace over the next five years (and I believe it can), its book value per share will end up in the neighborhood of R115.70.

MTN’s currently trades at a 3.1x multiple to book value. That’s near the low end of its historic range. In the past five years, the shares have never been priced lower than 2.7x book value.

If we assume that MTN’s price-to-book ratio drops to 2.7 five years hence, investors at today’s price stand to reap an annualized return of 14-15% including dividends. That’s a rate that I believe will comfortably outperform the JSE as a whole.

Dial up a decent return

MTN’s a big company, and the law of large numbers suggests that it won’t post your portfolio’s gaudiest performance figures between now and 2020. It should, however, provide a steady stream of dividend income coupled with a market-beating return.