MTN is a risky bet

MTN remains a complex and risky investment case despite recent positive news out of Nigeria, Umthombo Wealth chief investment officer Alex Duys has said.

Speaking to Business Day TV, Duys said Nigeria’s recent approval of a 50% tariff hike for network operators on 20 January 2025 was a major boost to MTN.

It was the first time in twelve years the country has allowed telecommunications providers to increase tariffs.

However, the price increase was half of what operators had asked for.

“Shenanigans in Nigeria pretty much destroyed all equity of MTN,” said Duys. “The value of MTN Nigeria became pretty much negligible where it used to be by far the majority of the value of the business.”

However, Duys said a 50% price hike was necessary just to keep Nigeria’s telecom sector afloat.

He noted that MTN has gained some market share, which combined with the increase will help the business a lot.

“As a result, brokers have increased expectations substantially, and that’s why the stock is up more than 40% — since about the beginning of December.”

While things are looking up for MTN, Duys said many of the problems still remain.

“Nigeria is still not out of the woods,” he said.

“MTN might be making earnings, but can investors actually extract the cash out of Nigeria? That doesn’t seem likely either — but it’s certainly looking a lot better than it was a couple of months ago.”

Duys said if things continue to go well, investors could see further share price strength.

“There are some investors who have not owned MTN in the recent past and are starting to buy, which shows a change in sentiment,” said Duys.

“It’s one to look out for, but still remains a very complex and — I would say — risky investment case.”

MTN’s share price has suffered in recent years. The company experienced a particularly torrid start to 2024, as its share price plummeted by 28% due to the collapse of the Nigerian Naira.

Nigeria is MTN’s biggest market and the one where it makes a large chunk of its money. In the 2022 financial year, Nigeria contributed 40% to MTN’s total service revenue.

The country is even more important to MTN’s bottom line. MTN Nigeria contributed 46% to the operator’s earnings before interest, taxes, depreciation, and amortization (EBITDA).

This explains why MTN remains committed to Nigeria despite the country’s numerous economic and political challenges.

Over the years, Nigeria has been a troublesome region for MTN investors who have endured big swings in the share price.

For example, MTN’s share price traded between R200 and R250 a share from 2014 to 2015, and the company was doing well.

This ended abruptly in late 2015 after the Nigerian Communications Commission (NCC) handed MTN a $5.2 billion fine for non-compliance with SIM registration regulations.

MTN negotiated the fine down to $1.7 billion, but it was still significant for the South African operator.

Between 2015 and 2023, there were many further fines and disputes between MTN and Nigerian authorities, which hurt the company.

Its most recent beating came from the rapid decline in the value of the local currency, the Nigerian Naira, although MTN assured that this would be short-term pain for long-term gain.

To understand the situation, it is valuable to delve deeper into the Naira’s problems.

Nigeria has historically struggled to increase the liquidity of the Naira. It has not been easy to sell the Naira at its listed exchange rate value.

The low interest in the Naira has a few different dynamics. The Nigerian central bank pegged the currency to the US dollar to strengthen the Naira.

This move kept the Naira artificially inflated as its price was not determined by market forces but by a predetermined rate that constantly had to be managed.

Because the Naira’s value is artificially inflated, outside investors have little confidence in buying the currency at its official “predetermined” valuation.

A result was that many more individuals and businesses wanted to sell their Naira than those who wanted to buy Naira.

The lack of demand for the Naira means that Nigeria’s central bank cannot allow all the Naira sellers to act on their wishes and sell their currency.

This is because it must keep the Naira at a predetermined rate. Excessive selling of the currency would cause that rate to drop significantly. This is what causes the low liquidity.

This dilemma created a secondary black market for the Naira where it could be bought and sold informally at a much weaker rate than was market-determined.

The black-market rate is typically the exchange rate used within Nigeria between its citizens. However, foreign investors and businesses must pay the official exchange rate.

The black-market rate is known by investors, further lowering their confidence in the Naira.

In June 2023, Nigeria lifted the US dollar peg, and the Naira was allowed to trade freely.

However, government-regulated and multinational corporate transactions still had to be done at an official exchange rate.

The official Naira exchange rate lost 27% of its value overnight.

At the end of January 2024, the Naira experienced another extreme currency devaluation, where it fell by 40% relative to the US dollar in a single day.

This was due to the central bank revaluing the official exchange rate, bringing it closer to the black market rate.

MTN was a victim of the rapid currency devaluation and poor liquidity. In its 2023 Q3 trading update, it said the availability of foreign exchange has been constrained in Nigeria.

The company also stated that the previous official currency devaluation had a material impact on its results.

The Naira’s devaluation following that financial report was much more severe. As such, it put significant pressure on MTN’s finances, impacting its share price.

The recent positive news out of Nigeria bodes well for MTN’s future financial performance, which is being reflected in its share price.

Since mid-January, MTN’s stock has shot up from around R88 to over R118 per share.