This article was first published in the third-quarter 2012 edition of Personal Finance magazine.
In my previous column I looked at three shares that I consider foundation stones of a South African portfolio of shares. The early February ink was hardly dry when short-term investors must have begun to worry as things started to unravel.
A fickle electorate in Europe, disenchanted with the harsh economic austerity programmes being implemented across the continent and the eurozone in an attempt to address the excesses of the past, swept out the governments of Spain, Greece and France, and dealt the British and German governments a battering in local elections. One can understand the electorate’s lack of appetite for the severe measures, but after years of financial excesses, austerity is bound to follow.
No matter which parties are elected to power, the bitter reality remains that drastic measures have to be taken if the European economy is to be steadied and returned to growth and the books balanced. Imaginative and cost-effective methods will have to be adopted to stimulate job creation. Towards the end of the year, the Americans will hold presidential elections, and the Chinese regime is also poised for change. A recipe of economic and political uncertainty is never conducive to festive markets.
The welfare systems that have become so comfortable and worked so well since the Second World War are simply no longer sustainable as the post-war “baby boomers” retire, leaving a shrinking workforce to foot the spiralling bill.
At the same time, across the globe in the East, the Indian and Chinese economies began to show signs of slowing down, which resulted in a steady fall in all commodity prices – particularly oil, gold, copper, steel and platinum. So Sasol, Anglo American and BHP Billiton, which I believed were “as cheap as chips”, are now even cheaper.
Market pundits are singing the inevitable “sell in May and go away” lullaby. This adage is just a market myth relating to the start of the northern hemisphere summer but it is uncanny how it seems to pop up every few years to unsettle short-term investors.
British American Tobacco, which has a reputation for being a good defensive stock in difficult times, has, thus far, weathered the storm very well and it paid out a handsome dividend in April. So I am happy with that one.
I picked MTN because it is transforming from a strong growth company into one that is entering a more mature phase, which is traditionally accompanied by the payment of higher dividends to shareholders. This, coupled with the fact that the share price had managed to deal with two pieces of negative news that emerged towards the end of 2011 and early in 2012, made it appear attractive in valuation terms.
I wrote in my previous column that “the recent squabble between the United States/Europe and Iran, coupled with the violence in Nigeria, has pulled back the price of MTN to a price that represents good value at a time when it is anticipated that the dividend yield could well increase”.
In what began to look like a perfect storm out of the blue, Turkcell, a Turkish cellphone monolith, brought a lawsuit against MTN. In summary, it seems that Turkcell alleges that MTN colluded with the South African government to bribe corrupt Iranian officials into granting MTN a licence that the Turkish company clearly believes it ought to have won.
This saga has the signature tune of an epic in the making. The supposed corruption ostensibly took place in 2004, when Turkcell failed to win the licence, and it is unclear why it has taken so long for the complaint to be lodged. Even more bizarre is the fact that a Turkish company is attempting to sue in the US a South African company that operates in Iran.
I imagine that in the litigious US this is going to be a long, drawn-out affair that will prove highly costly to all parties and draining to their executives. If it ever gets to the point of a verdict being handed down, it is far from certain how it could be enforced. MTN has to take the $4.2-billion lawsuit very seriously, because there will be enormous and debilitating ramifications should the allegations prove to have substance.
When it rains, it usually pours, and in mid-May it became apparent that more allegations of corruption were being levelled against MTN, this time in Nigeria – a country not noted for being a paragon of virtue.
The allegations were contained in an affidavit submitted as part of a suit brought against MTN and the Nigerian Communications Commission by the People’s Democratic Party (PDP).
The PDP alleged that MTN provided incomplete and doctored call data records to a probe by the National Judicial Council into alleged corruption in the judiciary. The PDP has filed a suit against MTN and has asked the courts to revoke the company’s operating licence in Nigeria.
So there is a cacophony of negative noise for MTN to deal with, and the case for investing in the share has become bogged down in a mire of sentiment and allegations of an extremely serious nature. The integrity of MTN and its management is under scrutiny.
I am probably very naive, but I find it very difficult to believe that a major South African corporate could have indulged in such impropriety with the support of the South African and Iranian governments and their officials – even in the modern world where corruption seems endemic. It looks much more like the plot of a Cold War spy movie than the way in which business is really conducted.
The graph “MTN moves sideways” (link at the end of this article) on the previous page shows the MTN price movements at the time when the Turkcell event became public knowledge, and when the violence related to the Nigerian oil subsidy broke out.
A great deal of murky water is going to flow under this bridge before the end of what could well be a protracted and ugly drama, but I still believe that MTN offers good value at this juncture.
If things do go pear-shaped, it probably will not be for a long time, and opportunities to sell will appear before then. In the interim, there is almost certainly money to be made by resolute investors.
THE MORE THINGS CHANGE ...
The graph “MTN’s share price” (link at the end of this article) shows movements in MTN’s share price from October 2011 to April 2012. The activity is characterised by a fair amount of volatility in a R20 trading range. It was a trader’s dream, but, when all was said and done, the share price ended the period at almost the same level at which it had started.
The steep plunge at the beginning of January this year coincided with news of violence, strikes and protests in the important MTN market of Nigeria. The protests were caused by the removal of fuel subsidies, which resulted in the doubling of fuel prices.
To put MTN’s Nigerian operation in perspective, it contributed about R34.9 billion to MTN’s total revenue of R121.9 billion in the year to December 31, 2011, according to the company’s annual report. This is a healthy 28.62 percent.
Nigeria has 41.6 million individual subscribers.
Despite the market’s negative response to the violence, MTN showed its confidence by announcing plans to spend more than $1 billion on its Nigerian network in 2012 – the same amount it committed the previous year.
In February, news of the “Turkcell debacle” became public and MTN’s share price slumped fairly sharply on big volumes as the market digested the possible implications and outcomes.
Iran accounted for a more modest R11.05 billion (or 9.07 percent) of MTN’s total revenue in 2011, while South Africa accounted for R38.67 billion (31.67 percent) of total revenue in the same year.
MTN has 35 million subscribers in Iran.
Iran has presented other problems to MTN. Tougher Western sanctions, which are a consequence of Iran’s supposed nuclear ambitions, have made it difficult for MTN to get money out of the country. Sanctions have been imposed on the Central Bank of Iran and other financial institutions. While the sanctions are in place, they are preventing certain foreign shareholders from increasing their holdings, and others from making new investments, in MTN.
* David Sylvester is a stockbroker with Investec Wealth and Investment.