MTN Group: Light At The End Of The Tunnel, Or Another Oncoming Train?

For those who don't own MTN Group (OTCPK:MTNOY) shares, the experience has been like something out of a Charlie Brown cartoon. You think things are going to be different, that the company is going to push through its execution issues, only to end up flat on your back, looking at the sky, and wondering how you got fooled again and let the ball get yanked out in front of you. Although these shares actually have beaten the S&P 500 over the past year, currency moves had a lot to do with that and the shares are down pretty meaningfully over the last five years (not unusual for an emerging market stock, but still…).

So, now what? MTN Group has new leadership and a new plan, a plan that involves improving network quality, restoring some luster to the brand, and running the business on the basis of sound principles like risk-adjusted returns and ROIC. That sounds like exactly what the company should be doing, and there is significant potential to do better here, but that has to be set next to the risks. Those risks include over-spending on capex (and generating little-to-nothing from it), cutting the dividend, and regulatory and economic risk across its operating footprint.

In a bullish scenario, I could argue for a price in the $12-$13 range, but I can just as easily argue for a bearish scenario in the $8 to $9 range. Given the risk-reward trade-off, today's price seems fair - I believe investors can expect better-than-S&P 500 returns, but the real opportunity will come if and when management restores investor confidence and drives a rerating process.

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MTN Group: Light At The End Of The Tunnel, Or Another Oncoming Train?

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: MTN Group Doing Pretty Well Despite Operating Challenges

Up more than 30% over the past year and more than 10% since my last update, I can't really complain about MTN Group (OTCPK:MTNOY). Although the company still has a lot of work to do in South Africa, and maybe more work to do than is commonly appreciated in Nigeria, the company's overall trends in subscribers and margins are looking pretty good. 3G and data remain significant growth drivers, as does mobile money, but MTN Group's valuation seems to largely reflect those opportunities. I'm reluctant to sell a well-run and broad-based play on Africa that could generate double-digit long-term FCF growth, but I can't claim that today's price is a tremendous bargain for new investors.

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MTN Group Doing Pretty Well Despite Operating Challenges

Seeking Alpha: MTN Group One Of The Few Telcos With Real Growth Opportunities

I've lamented on more than one occasion that growth is getting harder and harder to find for many, if not most, global wireless service providers. Not only are most developed markets already saturated, but many so-called emerging markets have already emerged, leaving many service providers with few options other than to engage in withering price and marketing competition. That's not the case for Africa's MTN Group (OTCPK:MTNOY), as the company continues to see high single-digit sub growth overall across its 22 markets. Better still, data, mobile money, and higher end services (3G and so on) are only just starting to make real contributions to results. MTN Group doesn't offer a rock-bottom valuation, but the growth prospects are good enough to make this a name worth consideration.

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MTN Group One Of The Few Telcos With Real Growth Opportunities