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MTN, one of the top holdings in the SPI Equity portfolio, has shed 11.4 percent from its 2012 high of 143.93 and is down to R127.55.
This comes on the back of negative sentiment arising from a lawsuit filed in the US by Turkcell, the initial lead member and 70 percent shareholder of the Irancell consortium which won the second GSM licence in 2004. Turkcell was later replaced by MTN after disagreements over shareholding and foreign ownership control of the consortium. Turkcell is now seeking $4.2-billion in damages, claiming MTN bribed officials, arranged meetings between SA and Iranian government leaders, and promised Iran weapons and UN votes in exchange for the licence and a place in the consortium.
Sanlam Private Investments cannot air legal opinions on the claims nor the jurisdiction of US courts over business disputes in foreign domains, but we anticipate a protracted process before the case is resolved.
Iran is one of few mature mobile markets in MTN’s portfolio with 103 percent penetration, fourth behind Cyprus, South Africa and Botswana. We expect data to be the key growth driver.
MTN owns 49 percent of MTN Irancell, which accounts for 8.4 percent or R13.94 of our discounted cash flow valuation of R166 per share.
If we place a zero value on the Iranian business, we value MTN at R152 per share. Should the US court process follow the path hoped for by Turkcell, and should MTN pay the full extent of the claim, exit Iran and realise no value for the business, we estimate this to be worth about R17.50 per share, bringing down our DCF valuation to R134.50.
In our view, therefore, the risks and concerns surrounding Iran are fully priced in.
Our investment case for the rest of MTN remains unchanged. It operates in countries that provide diversity and exposure to high-growth emerging economies. Penetration levels are low, and there is scope for significant growth. MTN has strong cash flows to meet capex requirements and pay stable dividends with scope to increase the payout ratio as the business matures. After the sell-off, MTN now trades on an attractive forward dividend yield of 7.9 percent.
However, we also note that 25 percent of MTN shares are held by American shareholders and consider them to be likely sellers, putting pressure on the share price in the short to medium term. We believe this presents an opportunity for new investors to build exposure.
Farai Mapfinya is an equity analyst at Sanlam Private Investments (SPI).