Major South African telecommunications company set to go from zero to hero

MTN is set to bounce back after a challenging year, mainly due to a significantly weaker Nigerian Naira. The company is well-positioned to capitalise on Africa’s favourable demographics and strong economic growth. 

This is feedback from Aslam Dalvi, portfolio manager at Camissa Asset Management, who outlined the case that MTN presents an attractive buying opportunity for investors. 

MTN came under immense pressure during the 2024 financial year as the African markets in which it operated faced significant economic headwinds. 

Chief among these was the sharp devaluation of the Nigerian Naira in response to the government’s drastic steps to normalise monetary policy. 

These interventions are expected to be broadly positive for the Nigerian economy in the long run but have had severe negative consequences in the short term. 

The country has been hit by high inflation and elevated interest rates, and international companies, such as MTN, have seen their earnings decline in dollar terms. 

Nigeria is MTN’s second-largest market, after South Africa, with a large US dollar cost base that increases in Naira terms as the currency weakens. 

The combination of higher costs and the upward revaluation of dollar liabilities will result in MTN Nigeria reporting material near-term losses. 

These losses will flow through onto MTN’s income statement, with the company reporting a R11 billion loss for the 2024 financial year largely due to foreign exchange headwinds. 

MTN’s Nigerian business is further complicated by the country’s regulatory environment, with cost increases having to be approved by the government regulator. This severely limits the company’s ability to pass on rising costs to consumers. 

Thus, MTN’s poor performance in Nigeria was largely anticipated by investors, with many continuing to expect earnings growth to be muted in the short term. 

However, Dalvi is optimistic that the longer-term future of the Nigerian business will be better as the company implements cost reductions, reduces discounts, and renegotiates lease contracts. 

As the Nigerian headwinds fade and earnings recover, Dalvi said investor focus should shift back to MTN’s fundamentals. 

MTN beyond Nigeria

MTN has rapidly expanded its presence across Africa in the past three decades, with it now servicing over 300 million subscribers across 17 countries. 

Excluding South Africa, it is well exposed to favourable long-term demographics in Africa as the continent’s population continues to grow and is very young by global standards. 

The population across MTN’s current markets is over 500 million people, with mobile penetration at 70% and rapidly growing per capita incomes. 

Dalvi said this presents an opportunity for the company to double its revenue over the next decade in US dollar terms. 

In this regard, MTN benefits from the relative underdevelopment of the rest of the continent, which lacks fixed-line networks. 

This means most of the African population relies on mobile data for access to the Internet. Since 2015, MTN’s annual data revenue has grown by 21%. 

Data revenue now accounts for over 40% of the company’s total revenue, and the outlook remains strong, supported by shifts towards data-intensive services such as gaming, music, and video streaming. 

Substantial growth in data usage remains across MTN’s markets, with only half of its customers currently using data services, using less than 5GB of data per month on average. This is far below the 25 GB average seen in developed markets. 

A key enabler of this growth is the rapid expansion of high-speed 3G and 4G services across the African continent. 

Today, around a quarter of MTN’s subscribers still use legacy 2G services and devices with limited internet capability. 

As affordable smartphones become more widespread, data consumption is expected to surge, with 4G users typically consuming three to five times more data than 2G users.

Mobile money

MTN has also begun diversifying its revenue streams through the development of its Mobile Money (MoMo) product across Africa. 

While this service has not taken off in the highly developed financial services market of South Africa, it is extremely popular in the rest of the continent, where financial inclusion remains low. 

Supported by rising mobile penetration, the demand for mobile money services continues to grow as access to financial services benefits consumers through lower friction and transactional costs. 

MTN’s large customer base and vast distribution network give it a strong advantage over small telcos and banks in this space, with the company growing its MoMo operations by an annual rate of 25% since 2015. 

Despite this growth, only 25% of MTN’s existing client base uses this service, providing a large growth runway for the product. 

Dalvi estimated that the future addressable market for mobile money services across MTN’s markets will be as large as $15 billion per annum. The company currently generates around $1 billion from its MoMo service. 

The mobile money business model has strong economics, with high returns on capital, low capital intensity and strong free cash flow generation. These capital-light businesses typically attract high financial market valuations.

The combination of MTN Nigeria’s expected recovery, the company’s strong presence across Africa, and the rapid growth of its MoMo offering makes the telco an attractive opportunity for investors. 

Despite the near-term challenges, MTN’s long-term fundamentals and growth outlook remain very positive, Dalvi said. 

These opportunities should be combined with improved financial returns through more efficient capital spend, enhanced digital solutions and perhaps corporate restructuring to make expenditure more effective.