MTN: PIC may be on a fishing expedition, but it’s still fishy
Something smells not quite right about the colossal share purchase by the Public Investment Corporation
What do investors do with MTN? Perhaps more importantly, what is the Public Investment Corporation (PIC) doing with MTN?
Let’s look at general investors first. Over the Christmas period MTN got what I suppose you could call excellent news, in the sense that the previous bad news was obviated. MTN announced it had escaped from its $8bn spat with the Nigerian central bank with a token $53m settlement, which was a fraction of the $800m touted by the Nigerian media when the dispute broke out.
Rather strangely, at least to me, the share price responded fairly well initially to the news, but nowhere nearly as much as it fell when the news first broke and it gave up its gains quickly. In some ways this is understandable. MTN is still in a dispute with the Nigerian government over a different issue. Given that Nigerian authorities have already tapped the MTN piggy bank once for $1bn two years ago, the prospect of this happening again sometime in future will always now hang over the company. Until demonstrated otherwise, investors are being cautious.
This is rather depressing. If there is any one company that ought to be absolutely at the forefront of investors’ choices, you would think it would be MTN. The company is something of a proxy for African growth, which can be spotty but generally is on the up. It has all kinds of new business opportunities such as providing quasi-banking services which are generally under-serviced. It is large enough to be fairly protected from bumps in the road, and it has a heft to ensure good procurement pricing. The outlook for in the industry generally is stable.
On the risk side, apart from cash-grabs by stressed African governments, the problem is that margins from selling data may end up being lower than margins from selling voice as competition increases. MTN’s other big problem is that it just doesn’t seem to be moving forward. Its revenue over the past decade has been confined to a fairly tight range. Its 2018 income of R131bn was a little less than what it was in 2013.
If you go down the income statement, the picture starts looking pretty gloomy. In 2013, its net income was R30bn; last year it was R4bn. In 2013, not the company’s best year, by the way, earnings per share were R14.60; last year they were R1.86.
The reason for that drop is not just extraordinary items, as massive as they were. Even excluding extraordinary times, there has been a big falloff in basic earnings from around R42bn in 2013 to around R14bn today, according to data compiled by S&P Capital IQ. I guess this is what happens when all your management time is devoted to putting out fires left, right and centre; growth projects get delayed and you stop watching the till so closely.
The analysts community is equally befuddled. Of the 11 recognised financial analysts who cover the stock closely, one is recommending a “strong buy”, three say “buys”, four say “hold” and three say “underperform”. That is about as wide a spread as I have ever seen.
What a contrast to Vodacom, which is much smaller by the number of customers. Vodacom has 103 million subscribers across Africa and a market capitalisation of R236bn; MTN has 233 million subscribers across its operations 20 countries and a market cap of R156bn. You look at those numbers and you think, shouldn’t that be the other way around? Revenue does not account for the difference either since Vodacom is earning about two thirds that of MTN, although their profitability is roughly even. It’s a conundrum, but it does demonstrate how governments really can dramatically affect investment decisions with uneven and arbitrary policy.
So what about the PIC angle? In November 2018 the PIC plonked what I estimate to be about R12bn into the share. The investment lifted the PIC’s stake in MTN from about 13% of outstanding shares – about the same as its stake in Vodacom and indeed the market as a whole – to 23.6%. MTN announced the purchase in a one-line statement on November 28, just noting the PIC’s new interest but not specifying the eye-popping size of the transaction.
This purchase worries me because it just smells of an attempt at a quick trading turnaround, and opens the possibility of insider knowledge. The PIC said at the time that it was a straightforward purchase, making the somewhat outdated claim that MTN had the capacity to be a “digital and communications powerhouse in Africa”. But the purchase was made after MTN’s dramatic share price drop in September when the Nigerian news broke from R107 a share to around R60 a share and only 30 days before the resolution was announced.
The PIC has all kinds of other problems with its investments in various dubious schemes. Maybe someone thought, here is a way to fix everything in one fell swoop? The question is, did someone know, or was told, that the negotiations with the Nigerians were going well, promoting a big purchase from an organisation that ought, you would think, to be focusing on growth stocks as opposed to stocks which have not grown an inch in a decade?
I don’t know, but it’s suspicious.