Analysts say MTN's warning of a steep earnings drop is no reason for investors to panic, but it could result in some volatility from the stock in the short-term.
This as MTN warned the market that basic headline earnings per share (HEPS) for the last financial year will likely drop by at least 20%.
"I think this is expected and will not change investors' perceptions of MTN. So while it is an alarm bell, everyone heard the earlier sirens wailing," according to Ovum senior analyst Richard Hurst.
The key factor in the earnings slump is continued troubles for the telecoms operator's Nigerian business.
"The negative earnings performance has been impacted by a number of factors with the operational underperformance in Nigeria, resulting from the subscriber disconnections and the withholding of regulatory services, being a key contributor to this," MTN says in a statement.
The predicted HEPS drop, of at least 307c for the financial year, excludes a fine of $3.9 billion (R60 billion) hanging over the telco's head in Nigeria. This is something the company is aware could cause more instability going forward.
"Given the ongoing discussions taking place with the Nigerian authorities, there remains some uncertainty as to the final quantum of the Nigerian fine, should an out of court settlement be reached," MTN says.
MTN and the Nigerian Communications Commission (NCC) have until 18 March to settle the issue out of court. The original $5.2 billion penalty was first issued in October last year because MTN failed to disconnect 5.1 million unregistered SIM cards on its Nigerian network by an NCC deadline. The NCC later dropped the fine by 25%; however, even the reduced fine is still almost 40 times larger than the next biggest global telecoms fine - a $100 million fine imposed on American telco AT&T.
Nigeria key for MTN
"The key challenge for MTN is that the Nigerian market represents a big chunk of the group revenues (36% as at the FY14 results) and is the flagship operation of the group. This implies the impact the massive fine will have on cash flows will have a negative effect on the overall group earnings," says Hurst.
MTN last month confirmed its Nigerian business was likely to report profit of around 190 billion naira ($955 million) for the 2015 financial year. This is less than a quarter of the hefty fine imposed by the NCC.
"I believe MTN can certainly bounce back in Nigeria but it will take a few years for the 'profit hit' on that particular operation's financials to work itself out. There could be some holding back by MTN on new investment in that country for a while, but such a decision would have a negative impact on operations to the extent that network performance is adversely impacted," according to BMI-TechKnowledge director Brian Neilson.
MTN has around 62.5 million subscribers in Nigeria, the telco's biggest market. Overall, the MTN group has 233 million subscribers across 22 countries in Africa and the Middle East ? 29.1 million of which are in SA.
MTN's full year revenue for 2014 in Nigeria was close to R54 billion, while the entire MTN group's profit after tax for the 2014 financial year of R37.7 billion still falls short of the pending fine.
Don't panic
Africa Analysis MD Dobek Pater says there is, however, no need for shareholders to panic as he believes MTN will recover in the medium- to long-term, even if the short-term may be more volatile.
"Apart from the immediate problems, like the fine in Nigeria, MTN is beginning to face a maturing and more competitive mobile industry across most of its markets and needs to begin diversifying its services and developing new business models for the future," he says.
Neilson says whether shareholders will panic depends on how much pain was already expected.
"I suspect most institutional shareholders have already factored in this expectation (of the likelihood of there being a greater than 20% decline in earnings), when trading in MTN shares. However, we can expect ongoing volatility in the share price until the exact amount of the fine is settled on."
Pater says the future impact on MTN's financial performance will also depend on the quantum and payment terms of the fine.
"If the quantum is high and payment terms unfavourable (eg, pay the total amount within one month), it will probably knock MTN considerably, as it will impact on the entire group and may require MTN to see additional interim funding. If the quantum is more 'reasonable' (eg, around $1 billion) and payment terms more favourable (eg, payable over two quarters), MTN should be able to sustain it," he explains.
Leaning on other operations
Analysts agree MTN operations across Africa and the Middle East continue to offer value, and will likely be able to offset the Nigerian woes.
"MTN's other operations are most certainly self-sustaining and are not dependent on the Nigerian operation. An example is that each operation will have its own revenues and, of course, capex based on these revenues as well as separate debt obligations," according to Hurst.
"MTN Group has more than 20 other operations around the world, which provides an adequate buffer to its financial stability. The ending of sanctions in Iran means MTN can hopefully repatriate some earnings in future, which would also help," says Neilson.
"In SA, MTN remains the second largest player, which is not going to change anytime soon. The company will continue to exploit this enviable position in the market and remain profitable, notwithstanding the recent temporary network glitch," he adds.
Hurst believes that as the share price drops, a buying opportunity may emerge. "However, investor moves will be dependent on information and clarity surrounding the fine."
The company's share price has taken strain since the Nigerian fine was announced last year. The most recent trading statement - announced after the market close yesterday - has resulted in volatility, with the stock plummeting over 15% this morning. MTN's stock was worth R129.80 a share in early trade, after trading as high as R190 per share last October. MTN shares have fallen almost 35% in the past 12 months.
MTN says it will issue a follow-up trading statement as soon as it has "a reasonable degree of certainty as to the likely range within which the company's HEPS is expected to decrease". The full results for the year ended 31 December will be released on 3 March.
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