MTN's global expansion means its investors can say 'hello profits'

Time of article published Feb 14, 2004

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You may remember the blistering set of results MTN delivered for the six months ended September 30, 2003. Revenue was up 30 percent, earnings before interest, taxes, depreciation and amortisation by 61 percent, adjusted headline earnings per share by 102 percent, and total subscribers by a staggering 39 percent.

MTN illustrates what a dominant player in a new industry can achieve. MTN now generates free cash flow of over R8 billion - more than that generated by Sasol, which has been around since granddad fell off the bus. (Free cash flow is the amount of money that a company has left over after it has paid all its expenses, including investments.)

The interim results showed that MTN had given arch-rival Vodacom a run for its money. Vodacom still has the greater share of the South African cellular market - 55 percent compared with MTN's 39 percent - but in many respects MTN appears to be more successful.

The key to MTN's recent success has been its forays into the Nigerian and Ugandan markets. In Nigeria, MTN increased its subscriber base by 33 percent to 1.3 million in the first six months of the 2003 financial year. In Uganda, its subscriber base increased by 40 percent to 416 000.

For the first time in its nine-year history, MTN is now more profitable than Vodacom. It posted a net profit of R2.1 billion, compared with Vodacom's R1.4 billion for the six months ended September 30, 2003.

Both companies had similar revenues. MTN's was R11.2 billion compared to Vodacom's R11.3 billion, but MTN squeezed out an extra R700 million in profit.

Investors were wondering how MTN would improve on its success. In a cautionary notice issued to coincide with the interim results, Phuthuma Nhleko, the chief executive, said MTN might no longer limit itself to expanding in Africa.

Now the cat is out of the bag. MTN is one of six consortia to be short-listed to receive Iran's second cellular licence. The licence fee will be an initial $380 million (R2 584 million).

On top of this, MTN will have to share revenues with the Iranian government.

The biggest cloud on the horizon for MTN is the rival bid by Orascom Telecom. The market appears to be signalling that Orascom will be successful - its share price has appreciated by 26 percent in the past month. In the past week, Orascom's share price increased by seven percent.

With a population of 66 million, the Iranian market offers strong growth potential. The Iranian government has also undertaken not to issue a third cellular licence for another two to three years.

The steady privatisation and liberation of the Iranian economy will be critical to the success of an MTN operation in Iran. If this occurs, it will be a most profitable subsidiary. Analysts are predicting it could be worth somewhere between 400 and 800 cents per MTN share.

No doubt there will be significant risks involved in entering the Iranian market, but MTN management has delivered in the past.

In highly competitive times, successful companies continually re-invent themselves. To stand still is to be obliterated. After forecasting the probable risks and returns, successful companies stake significant amounts of capital on expansion.

Such an approach may be unacceptable to risk-averse investors, who would rather invest in stable, dividend-paying companies that are mature - and probably in decline. The price of being risk-averse is missing an opportunity to double your investment in a year, as MTN investors have done several times.

The volatility may be extreme, but don't worry. Ask any subscriber about his or her cellphone charges and then take another look at MTN's cash flow statement.

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