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MTN Group: Connecting Africa to the World

July 28, 2014 | About:

Africa is the most promising investment destination of the next 20 years. And it won’t be foreign development aid or Western generosity that makes the continent boom but rather the doggedness and ingenuity of its own people. As an investor, you want to be part of this by owning shares of some of Africa’s world-class companies.

Looking at Africa today, you see the same pioneering spirit that defied all odds to settle the American West in the late 1800s. Consider the story of Liquid Telecom, a phone and internet infrastructure company based in southern Africa. Liquid has done something that no Western company would have the audacity to do: String fiber optic cable from South Africa, through Botswana and Zimbabwe, and across the Zambezi river into Zambia, a landlocked country deep in Africa’s interior. All work had to be completed by day, as using work lights attracts wild animals, and a section of cable was dug up by elephants and had to be reburied. These are not problems faced by Verizon (VZ) or AT&T (T), to say the least.

Liquid, unfortunately, is not a publically traded company. But my favorite play on the rise of Africa most certainly is: South African mobile phone operator MTN Group (MTNOY).

MTN Group can be thought of as Africa’s AT&T or Verizon Wireless. It is headquartered in South Africa, but it has more than 200 million customers spanning 22 countries across Africa and the Middle East. And roughly a quarter of its subscribers are from Nigeria, Africa’s largest economy and one of its fastest growing.

Why invest in African mobile phones? Let me count the reasons.

The mobile phone is the single most important possession of the emerging global middle class. We may think of our phones as primarily a source of entertainment. But in much of the developing world, a mobile phone is a vital lifeline to the connected world and even an important medium for money transfers. Africa will have its booms and busts along the way, but I do not see demand for mobile services abating any time in the foreseeable future.

Looking at the fundamentals, there is a lot to like about MTN Group stock. Revenues and earnings are up by more than a third since 2008, a period in which growth has been hard to come by in most markets. MTNOY trades at a reasonable price/earnings ratio of 14.5 and pays a respectable, growing dividend currently yielding 4.6%. In the past five years, it has grown its dividend by about 40%. (Though fair warning: Exchange rates can skew ADR payouts.)

Is there anything not to like here?

Well, first I should state the obvious. MTN Group is based in Africa and does business in the world’s most dangerous hotspots. It’s a leading provider in Syria and Iran, for crying out loud. This is a company that is constantly exposed to macro risk.

But it’s also a company that has proven very capable of operating in those environments over its history. There could be short-term bumps, but overall, MTNOY should be able to navigate whatever unexpected surprises come its way. And its willingness to jump into markets that would give most executives heartburn gives it a first-mover advantage in the countries with the fastest potential growth rates.

Currency fluctuations are also a problem, and weakness in the South African rand have been a major drag on the returns of U.S. investors. But here too, I expect to see improvement. The rand is one of the cheapest currencies in the world, according to the Big Mac Index. U.S. investors should get a nice one-two punch in the next year: a rising stock price in South Africa combined with a rising currency value should make the U.S.-traded ADR shares a solid performer.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


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