MTN Group Bouncing From Problem To Problem

Shares of pan-African mobile services provider MTN Group (OTCPK:MTNOY) are down less than 10% from the last time I wrote about the company. And yet, since that time, the company has reached a settlement with the government of Nigeria on a large fine, appointed a new CEO, and begun to make some significant changes to its long-term strategic plans. It's also worth noting that the iShares MSCI South Africa Index (NYSEARCA:EZA) is up more than 15% over the same time period, so MTN Group is definitely getting left behind.

The reasons are many and ought to trouble MTN Group's shareholders. Nigeria's economy remains a mess, the company's competitiveness in South Africa is still less than ideal, the company still has a significant leadership vacuum, and there are new allegations of serious financial malfeasance in Nigeria.

I've significantly cut back my expectations for MTN Group from a modeling perspective, as I believe the company will have to spend more on capex to drive growth, and I have also chosen to model MTN Nigeria separately (and with a significantly larger discount rate). After these changes, my fair value of around $10.50/ADR still leaves meaningful upside for a company leveraged to significant potential growth in subs and ARPU over the next decade and beyond, but "potential" is a dangerous word in investing and investors should approach MTN Group aware of the risks and challenges.

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MTN Group Bouncing From Problem To Problem

Seeking Alpha: Amidst Macro Worries, MTN Group Can Still Outperform

While a long-term bull on pan-African mobile phone services provider MTN Group (OTCPK:MTNOY), I was cool on the stock's near-term performance potential back in September. Since then, the ADRs have dropped about 25% while the local shares have fallen about 20%. That move hasn't occurred in a vacuum, with investors worried about the macro outlook in Nigeria and South Africa and company-specific concerns about MTN's performance in those large markets.

I remain bullish and I think the shares are looking more appealing on a short-term basis as well. I believe the market has over-corrected for the risks in Nigeria and underestimates the steps taken to improve results in South Africa and the long-term potential of mobile money services. Adverse currency moves have pushed my target down by about $1, but I think MTN Group remains a well-run play on growth in Africa and to a lesser extent the Middle East.

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Amidst Macro Worries, MTN Group Can Still Outperform

Investopedia: MTN Group Has The Growth, But Ample Uncertainties

One of the predominant issues in telco service stocks right now is the weak growth environment – penetration rates in most developed markets are quite high, and competition makes it difficult to sustain any sort of real edge. That's not nearly as much of a problem for Africa's MTN Group (Nasdaq:MTNOY), given the low penetration rates and per-capita incomes in much of its territory, but the company has its own set of challenges ranging from regulatory, political, and economic uncertainties to the potential deployment of capital towards M&A.

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Seeking Alpha: Taking Setbacks In Stride, MTN Group Should Be Ready To Outperform

To at least some extent, this has been one of those "if it can go wrong, it will" years for South Africa's MTN Group (MTNOY.PK). And yet, despite setbacks in Nigeria, Iran, and Syria, MTN Group continues to post solid revenue growth, expanding margins, and excellent returns on capital, while generating more cash than it needs to run the business. While political risk is always going to shadow MTN Group, this looks like an undervalued play on one of the best remaining growth stories in mobile services.

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Taking Setbacks In Stride, MTN Group Should Be Ready To Outperform

Seeking Alpha: MTN Group - A High-Quality Play On Africa's Potential

Africa really is the dark continent when it comes to investment options for American investors. While there are growing stock exchanges across the continent, there are few cross-listings in the United States and few liquid ADRs. While direct investment is always an option for the especially brave and ETFs like Market Vectors Africa (NYSE: AFK) or S&P Emerging Middle East & Africa (NYSE: GAF), I would suggest risk-tolerant investors take a look at MTN Group (Nasdaq: MTNOY.PK). Not only is MTN Group a well-run company in its own right, it's a potential direct beneficiary of rising incomes and standards of living across Africa.

The Basics
What MTN Group does is not very complicated. MTN is the dominant wireless service provider in much of Africa. It is an African version of Verizon (NYSE: VZ), America Movil (NYSE: AMX), or Vodafone (NYSE: VOD). MTN Group is presently licensed to operate in 21 countries and is further authorized to offer internet services in 13 countries.

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MTN Group: A High-Quality Play On Africa's Potential