MTN Group Stock: Reliable Execution Has Done A Lot Of Good For The Company (OTCMKTS:MTNOY)

Another year has gone by and sentiment around MTN Group (OTCPK:MTNOY) is as good as it has been in quite a while. CEO Ralph Mupita has proven that he and his management team can deliver on a number of value-creating moves without dropping any balls across this pan-African telco provider’s vast business footprint (272M subs). Better still, the company’s relationships with regulators seem to be on better footing, while economies across Africa are benefiting (to varying degrees) from higher export commodity prices and waning burdens from the pandemic.

The good and bad of MTN Group as a stock is that valuation is driven so much more by sentiment around emerging markets (Africa in particular, naturally) than underlying financials. I thought the shares were exceptionally cheap a year ago, but they had been that way for some time. In the last year, though, sentiment has shifted significantly, driving the ADRs up more than 100%.

I continue to view these shares as undervalued and capable of delivering double-digit annualized returns for some time, largely on the back of strong growth in higher-value data and fintech services. This is a harder stock to recommend to casual investors, though, as there are a lot of moving pieces to track and sentiment on emerging markets can swing so wildly.

Delivering The Goods On Value Realizations

One of the ongoing stated goals of CEO Mupita has been to extract more of the value that he has believed has gone unnoticed or underappreciated in the share price of MTN Group. To accomplish this, he has sold down partial stakes in operating units (MTN Nigeria, MTN Ghana, MTN Uganda, and so on), while also working with IHS Holding (IHS) on a tower deal that brought over ZAR 46B to the company.

Enhanced value realization has also taken the form of exiting less-promising markets. The company effectively abandoned its operations in Syria and transferred its stake in MTN Yemen during 2021. The company continues to explore an exit from MTN Afghanistan, but has been cagier about its plans for its 49% stake in Iran. Practically speaking, this has been a pretty good business for the company even with the sanctions and disposing of it for anything close to fair value would be a challenge in the near future.

The next step in value realization may involve the company’s fintech operations, which include its fast growing mobile money operations. MTN is looking to legally separate the fintech operations by midyear – a move that would make it easier for the company to either partially list the business (which would almost certainly get a higher multiple than the company as a whole) or use it as currency in striking partnerships with other companies.

Two Of The “Big Three” Are Operating Well … But South Africa Needs Work

There’s not much to really say about the operations in MTN Nigeria or MTN Ghana. These have been two star businesses for MTN Group for some time, and nothing has really changed. If anything, a more cooperative and collegial relationship seems to have emerged with Nigerian regulators, and that can only help a business that represents over a third of total company revenue and around 40% of EBITDA.

In addition to winning one of two 5G licenses offered in Nigeria back in 2021, MTN Nigeria received provisional approval for a payment service bank (or PSB) license. This has meaningfully boosted the company’s mobile money operations within the country, as it can now accept deposits, process payments and remittances, issue cards, and operate fully-functional mobile wallets. Prior to this, MTN Nigeria’s fintech operations had to go through partner banks and users could not actually store money in their MTN mobile wallets.

Fintech revenue was up 63% year-over-year in the fourth quarter in Nigeria, with mobile money subs up over 100% year over year and over 40% quarter over quarter, so yeah, I’d say it’s had a positive impact on the business. While final approval of the license hasn’t been announced yet, there’s no reason to expect that it won’t come.

There has been even less drama in Ghana, as this continues to be an exceptional market for MTN Group. Data and mobile money remain strong drivers in this market, with Ghana actually the largest market for the company’s mobile money services in terms of subs, with over 11M of its almost 57M total subs. This is also handily the most profitable of MTN Group’s businesses, with 55% full-year EBITDA margin and 55.6% margin in the second half of the year.

South Africa remains a different story. While a more stressed economy could explain some of it, I believe longstanding network quality issues and a history of catering to a less affluent customer base continues to hamper progress here. The recent spectrum auction could be a sign of change, though, as the company paid only slightly less than Vodacom (OTCPK:VDMCY) for new spectrum, including significant mid-band acquisitions (4 x 10Mhz in 2.6GHz and 4 x 10 Mhz in 3.5Ghz) which suggest to me that the company is looking to improve service quality as a means of driving more data revenue growth.

Familiar Drivers In Place

There’s really not much drama or controversy around MTN Group now, and I consider that a very good thing. There is a national SIM registration effort underway in Nigeria that will likely need to be extended again, but MTN Group has been making progress (64% of customers and 74% of revenue were registered by year-end) and shouldn’t have any particular issues with regulators (there’s a country-wide reticence to register).

Growth is going to continue to be driven by data and mobile money, with the former growing 41% in 2H’21 and the latter 24% against overall service revenue growth of 2%. I expect overall acceleration in the business in 2022 as the pandemic wanes, and I continue to see opportunities to grow the data business in markets like Nigeria and South Africa through system upgrades and mobile money through increased market penetration.

Digital wallet users were up 23% in FY’21, and I think management’s target of 100M in FY’25 is credible, as is the target of growing its active merchant base from about 800K in FY’21 (up 78% yoy) to 3M. As more merchants join, the network effect becomes more meaningful, and mobile money serves a very real need in underbanked markets across Africa (it’s less meaningful, and less successful, for MTN Group in South Africa, where banks actually look to serve consumers).

Other than some meaningful mobile money partnerships, the only real opportunity for meaningful change I see in the short term would be entering the Ethiopian market. Vodacom won the first license back in 2021 with a bid that was 30% above MTN’s bid, and it seems as though the Ethiopian government has slowed the process for the second license in the interest of trying to get a better deal – something that seems less likely given ongoing unrest and violence in the country. While Ethiopia would be a good market for MTN on the right terms, “on the right terms” is the key, and nothing about the current management team’s behavior suggests they’ll overpay to chase growth now.

The Outlook

For FY’21, MTN Group was within 1% of my revenue estimate (slightly better) and within 5% of my EBITDA estimate (also better), while FCF was quite a bit better, but some of that was due to capex I expected for FY’21 moving into FY’22 and beyond. All in all, MTN Group is progressing financially very much how I expected the company to, with the share price driven less by operating outperformance (in my opinion) and more by improved sentiment on Africa and, perhaps, more confidence in management as they’ve delivered on several key “checklist” items.

With stronger economies across most of its operating area, I’m expecting a meaningful step up in revenue next year, with revenue growing about 9% (about 4% above my old number). I also expect MTN to reap the benefits of ongoing growth in mobile money usage and improved data traffic as the company invests in 5G capacity in Nigeria and South Africa, as well as infrastructure upgrades to other markets. With that, the changes to my year-by-year estimates drive a higher long-term revenue growth – a little above 6% now versus close to 5% before.

I’m also still expecting strong long-term FCF growth as the company benefits from a more lucrative mix of data and mobile money revenue relative to voice revenue. While capex spending will weigh a bit on FCF margins in the near term, I believe high-teens margins are possible down the road, driving high single-digit FCF growth.

As far as capital returns go, MTN Group’s final dividend for FY’21 was a bit underwhelming perhaps, but I think management is trying to balance its ongoing deleveraging goals with the upcoming capex spending, and I believe dividends can accelerate more meaningfully in a couple of years.

The Bottom Line

Such was the undervaluation here a year ago that a doubling of the stock still leaves meaningful upside today. I believe the shares are at least 15% undervalued now and priced to generate a long-term double-digit total annualized return. I do again note, though, that these shares often seem to trade with only a vague linkage between financial performance and investor sentiment; while that may be true of all stocks to some extent, it has seemed more pronounced to me with MTN in the time I have followed the company and owned the shares. Accordingly, while I do still see meaningful value here, and I like this stock as a way of investing in the growth potential of Africa, it’s not at all suitable for all readers/investors.