JSE-listed cellular operator MTN expects revenue to be under pressure over the next few years as it runs out of expansion options, and its current markets head towards saturation point.
Analysts have indicated that MTN, Africa's largest cellular operator, must find new avenues to grow, as the markets it operates in cannot continue to indefinitely add subscribers at a rapid rate. Moreover, there are no large acquisition opportunities in the existing markets in which it operates, indicating that its heady growth days are over.
The cellular giant's revenue surged from R8.3 billion in 2001, when it was still M-Cell, to hit R119 billion in its most recent financial year to December.
However, yesterday it reported revenue of R56 billion in the half-year to June, a 2.2% decline from a year ago. Revenue will be under pressure in the short-term, says outgoing CEO Phuthuma Nhleko. However, he says MTN is targeting growth from its mobile money offerings, increased data use, as well as trimming costs.
MTN recently took its aggressive acquisition plans off the table, preferring to give back some of its cash flow to shareholders. However, despite saying there are no real prospects to buy out value-adding companies, it is keeping a lookout for opportunities that may arise.
The company is well-positioned to do a deal; in the six months to June, it reported a 164% jump in free cash flow, to R6.8 billion, it has cash on hand of R29 billion, and low debt. However, it is returning cash to shareholders in the form of a maiden dividend, an indication that it is not aggressively acquiring.
Trimming fat
MTN has a continuous cost focus, says Nhleko, and is pushing expenses down in a bid to push its earnings before interest, tax, depreciation and amortisation up to 45% from its current 43.3%.
Capital expenditure during the half-year dropped from R15.5 billion to R8.5 billion as the need to roll out infrastructure slowed. The lower amount was also partially due to the stronger rand, which resulted in lower actual rand-based expenditure. For the full year, MTN will spend R21.3 billion, down from its initial R23.6 billion expected investment.
However, because the company is pushing further into markets that are increasingly becoming saturated, average revenue per user is under pressure.
Another challenge MTN is facing is the stronger rand, which skews results from its international operations, dragging revenue down when reported in rands. MTN earns 70% of revenue from countries other than SA.
To combat the slower revenue growth, MTN will be focusing its energies on data growth, and increasing penetration of its data offerings, says Nhleko.
Other expansion opportunities could arise from the expected consolidation in Africa. Africa is characterised by a fragmented market, with many players that have a small market share. Nhleko explains MTN could benefit from cherry-picking several operations in the fragmented African market and consolidating these into one company.
No opportunities?
Chris Gilmour, Absa Investments analyst, says MTN's statement that it will not be on the hunt for acquisition opportunities as aggressively as it had been indicates the company does not anticipate many acquisitive growth prospects.
MTN has recently seen several failed bids. Its on-again off-again marriage with Bharti Airtel finally collapsed towards the end of last year, when talks were abandoned because of government interference in the R184 billion deal.
Subsequent talks with India-based Reliance Communications Group regarding a “potential business combination” came to nothing. More recently, a R24 billion merger opportunity with Egyptian telecoms operator Orascom failed.
Gilmour notes that much of the company's growth in recent years had come through acquisitions and expanding into countries that had low penetration rates. However, now that its markets are approaching maturity, growth will slow down in the next few years, he adds.
In SA, and other territories, Gilmour expects data to be a big push for MTN and other cellular companies. He queries whether, from an investor's perspective, MTN will be an exciting stock in the future.
Gilmour notes that MTN needs to find new growth avenues, but the markets in which it operates are saturated. “I'm wracking my brains to find new geographical growth markets for MTN. There is nothing with real critical mass.”
Frost & Sullivan ICT industry analyst Spiwe Chireka says much of MTN's growth in SA was thanks to the 2010 Soccer World Cup. “Without that boost, we may have seen earnings before interest, tax, depreciation and amortisation growth in SA continue in the lower digits.”
In addition, one of MTN's biggest historical growth areas, Nigeria, is “becoming tougher”, Chireka notes. “The price wars are catching up with the GSM operators and the proliferation of CDMA makes the market crowded.”
She expects the recently implemented subscriber registration legislation to have an effect on the growth of the Nigerian operation. “This will lead to lower subscriber growth,” Chireka predicts. “By the end of this year, we may even see Nigeria reporting a decline in subscriber numbers for the first time.”
Chireka says MTN's aggressive expansion over the past few years should continue to be a key element of the group's success. As its two main markets - Nigeria and SA - increasingly come under pressure, operations in other parts of the world will become more important, she notes.
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