In a telecommunications research report, independent investment bank Renaissance Capital has downgraded MTN to Hold, from Buy previously. It also spells out growth prospects for the local communications giant in SA and Nigeria.
“Our TP has increased to ZAR171.80/share (ZAR166.90/share previously; driven by our upward EPS revision), implying potential upside of 7%. MTN’s recent share-price outperformance, both in absolute and relative terms, was in our view mostly a result of investors electing to go defensive in SA.
“Also MTN’s share-price performance during the past three months has been driven by the market buying into MTN’s renewed commitment of returning excess cash to shareholders (it has marginally increased its dividend payout policy to 72% from 70% previously). On a relative basis, we continue to favour MTN over Vodacom (HOLD, TP ZAR104.50/share, current price ZAR110.66/share),” it states.
In terms of growth prospects, it states:
- Nigeria: We expect robust industry growth to persist over the medium-term, despite challenges around SIM penetration and the expected implementation of number portability. The key questions in Nigeria with reference to MTN is how much more aggressive is the competition likely to become, and what are the implications for the pricing of mobile services, both voice and data? Although GSM continues to be the growth driver, the recent newsflow around CDMA consolidation, the formation of a new mobile broadband player and the launch of an LTE network could lead to a first-to-market advantage and the revival of the fortunes of the CDMA market.
- South Africa: MTN, on a relative basis, outperformed Vodacom from a revenue growth perspective in 1H12, partly due to the base effect but more importantly due to better execution against the onslaught of aggressive pricing from Cell C (not listed) as the third mobile network operator. For now, we model for MTN’s FY12 EBITDA margin to marginally expand over FY11, but for revenue growth in 2H12 to slow compared with the 1H12 growth rate. According to management, the key driver of data growth is mobile handsets (rather than other types of connected devices, such as data dongles).
- Medium-term estimates: We only expect the benefits of key initiatives, such as best practices and shared services, over the medium-term. In the meantime, we expect other initiatives, such as tower sharing (with reference to Ghana and Uganda), to only contribute meaningfully to the bottom line from FY13E onwards. However, we have started to incorporate our valuations of such tower-sharing joint ventures in our SoTP valuation of MTN, and they are already adding up to ZAR2 per MTN share.
- FY12E: We have revised our FY12 EPS estimate upwards 0.5%, driven mainly by our 3% upward revision of revenue (to ZAR136.2bn) and the marginal earnings enhancement from the share buy-back. Our revised EPS estimate of ZAR12.26 (previously ZAR12.20) implies YoY growth of 14.6%.