The MTN board must have hoped life would become a little easier once it shed its troublesome Middle East operations and focused on Africa, as part of a decision taken back in 2020.
Sadly, it seems the directors may not have reckoned with Nigeria, where events conspire to ensure a far from easy life for investors. It’s led to a stomach-churning reversal in the group’s share price in the past 18 months, after MTN finally (after a seven-year toil) topped R200 a share in March 2022.
Its recently released quarterly results remind us just how troublesome this potentially lucrative market can be. As CEO Ralph Mupita said: “Naira devaluation had a material impact on our results, particularly in Q3.”
That was to end-September, when the Naira closed at N777/$, compared with end-December’s N461/$ rate. October’s currency developments mean there’s much worse to come.
MTN’s strategy of setting up business in countries frequently on the US state department’s advisory list — Yemen, Syria, Afghanistan and Iran — did pay off for a while.
But for more than a decade before the 2020 announcement, it became a lot more trouble than it was worth. Management was embroiled in one legal challenge after another: there were allegations of sanctions-busting, funding terrorists and paying bribes.
In almost no time at all, MTN was able to get out of Yemen and Syria and is now in the process of an “orderly exit” from Afghanistan, which is more than the US army managed. Iran was a little more problematic, but the disposal of its 49% stake in MTN Irancell through an IPO is now set for the end of 2024. Peter Takaendesa, head of equities at Mergence Investment Managers, suggests there were possible complications due to the need to get US government approval to repatriate whatever money it makes on the IPO.
Nigeria is, by a long shot, the single most important contributor to the group’s top and bottom line
But hopes for a quieter life were soon dashed by Nigeria. The West African country is, by a long shot, the single most important contributor to the group’s top and bottom line. In the six months to end-June 2023, Nigeria reported a service revenue increase of 21.6% to R43.6bn and a 20.8% hike in earnings before interest, tax, depreciation and amortisation (ebitda) to R23.3bn. Its ebitda margins are a spectacular 53%.
A comparison with the South African figures reveals just how impressive the Nigerian business is. Service revenue from its home turf, which has to contend with Eskom’s existential threat to the economy, was up just 1.9% to R20.4bn and ebitda shrank by 6.8% to R9.2bn. The ebitda margin was a robust but comparatively unspectacular 36.1%.
Lonwabo Maqubela of Perpetua Investment Managers tells the FM that given domestic growth prospects, MTN has little option but to invest outside South Africa — and particularly, in a country where it grows at 20% a year.
Little wonder that MTN is happy to tolerate so much anguish from the Nigerian government and its regulators. Recall the $5.2bn levied in 2015 by the Nigerian Communications Commission for MTN’s failure to disconnect unregistered SIM cards. The fine was subsequently reduced to $1bn.
Then in August 2018, the Central Bank of Nigeria ordered MTN to return $8.1bn in allegedly illegal foreign exchange repatriations made over the previous 15 years. The matter was resolved by end-December 2018, with MTN having to pay a fine of just $53m.
Meanwhile, in September 2018, during investigations into the $8bn forex allegations, the Nigerian tax authorities determined that MTN owed $2bn in taxes relating to the importation of foreign equipment. MTN countered that all tax due had been paid. The matter was resolved in 2020 without any additional payment by MTN.
But, as it turns out, it wasn’t. Last month the Nigerian tax authorities came back with a R1.4bn claim relating to the same disputed foreign equipment imports. MTN is appealing.
So, whichever way you look at it, Nigeria is huge in MTN’s life. And, scarily, it is set to get even bigger. In July the telecoms giant announced it would invest $3.5bn in that country over the next five years. That announcement was regarded as a vote of confidence in Nigeria’s recently elected President Bola Tinubu as well as his major economic reforms. It also, however, reflects the need for big investment just to stay ahead of the game.
From MTN’s perspective, the biggest of the new president’s reforms was the decision, taken a month earlier in June, to abandon the dollar peg and allow the Nigerian naira to trade freely. Within days, the naira had dropped 40% and was trading at N750 to the dollar.
The hope was that abandoning the currency peg would end years of foreign exchange rationing and encourage investment into the country. But so far there’s been little sign of that.
Instead, the currency has continued to slide and then it plummeted in the last week of October. In the face of a continuing shortage of dollars, as the country struggled to produce even its daily Opec quota of oil, it dropped to a low of more than N1,000/$ before making a slight recovery.
At the current share price, Nigeria is a free option
— Lonwabo Maqubela
Inevitably the MTN share price is a proxy for the Nigerian currency, which means it’s not for the faint-hearted. Maqubela acknowledges the trouncing the share price is taking, but says it remains an attractive investment. “At the current share price, Nigeria is a free option.” And despite the pain, he believes the Nigerian government is making the right economic decisions for the long term.
The naira’s woes not only mean MTN’s largely dollar expenses have soared, but Nigeria’s inflation rate is rocketing. “This causes additional problems for MTN because the industry is heavily regulated and prices cannot necessarily be increased in line with inflation,” says Maqubela.
At the quarterly results announcement, Mupita told investors: “The [Nigerian] business remains engaged with authorities to secure tariff increases.”
All in all it must be frustrating for MTN’s board given, says Takaendesa, that management is executing well in all the areas it can control, “but there’s much in its external environment it can’t control”.
“The Nigerian market is doing well, but MTN needs to get cash out of there and it can’t.” In both Ghana and Nigeria, MTN has had to accept scrip dividends in lieu of cash, says Takaendesa, adding that this puts pressure on the South African business to keep the balance sheet sound.
Anchor Capital’s Peter Armitage decries the regularity with which Nigeria shocks MTN shareholders. He agrees management has done well and “delivered the goods as promised”, but adds: “The big issue is Nigeria — every two or three years, just as investors are getting comfortable and things are looking good, there’s some shocker,” he says, though he argues that the share price reaction is generally always overdone.
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