One of the predominant issues in telco service stocks right now is the weak growth environment – penetration rates in most developed markets are quite high, and competition makes it difficult to sustain any sort of real edge. That's not nearly as much of a problem for Africa's MTN Group (Nasdaq:MTNOY), given the low penetration rates and per-capita incomes in much of its territory, but the company has its own set of challenges ranging from regulatory, political, and economic uncertainties to the potential deployment of capital towards M&A. Regulation Never Helps The LeaderWhether it's France Telecom (NYSE:FTE), China Mobile (NYSE:CHL), SK Telecom (NYSE:SKM), or even AT&T (NYSE:T), regulation is a fact of life in the telco services world, and it seldom ever makes life better for the market leader. To that end, increasing regulatory activity in the key markets of South Africa and Nigeria (about two-thirds of company EBITDA) are not going to help matters. Regulators in South Africa have come to the conclusion that, despite the presence of four service providers, there isn't enough competition in the country and that high prices are hurting the economy. Given all of the screw ups of the South African government that have harmed the economy, it's a somewhat humorous conclusion, but there will be nothing humorous about attempts to reduce the revenue or profits that MTN earns from its large South African subscriber base. So too in Nigeria, where despite the lifting of a promotional ban on MTN, the government has declared the company a “dominant operator” and therefore subject to a different set of rules and regulations. A tariff cut is all but certain, but the good news is that even a 50% cut would only impact earnings about 5% (and most analysts seem to have already factored this in to estimates). The good news is that regulatory pricing pressure is not insurmountable or unknown to MTN Group. MTN, and its rivals like France Telecom, Vodafone (NYSE:VOD), and Millicom, have long dealt with this pressure and MTN can take advantage of increased penetration of post-paid subscribers and more consumption of higher-value data and ancillary services, as well as migration to 3G service. Expansion Seems Probable, But Where And At What Cost?Although MTN Group already operates in 21 countries, management is looking to potentially grow that number. The question for investors is how they go about it, and what sort of returns on investment management is willing to accept. SEE: How To Pick The Best Telecom StocksMTN Group is one of 11 companies to bid on the two licenses coming available in Myanmar (Burma), and a decision will be announced on June 27th. Management doesn't sound optimistic, though, citing an expectation that the average bid will be at or above $1 billion. As a reminder, Vodafone and China Mobile abandoned a joint bid on the basis of seeing too little potential return in winning a license. From with management's commentary, it doesn't sound like they were willing to overpay, so a win here would be unexpected. Even as MTN is showing price/return discipline in Myanmar, the markets are buzzing with the fear that the company is going to pursue an acquisition in India. While the company has previously been tied to India's market leader Bharti in M&A speculation, this rumor has MTN Group going after the #3 player Reliance. Call me skeptical – India may have long-term growth potential on par with MTN's core African markets, but competition is fierce, regulation is extreme, and returns on investment look low. Unless management makes a very convincing case for why India's long-term growth outweighs low near-term returns, I have a hard time reconciling a prudent bid for a Myanmar license with an imprudent bid for Reliance. Assuming that MTN does neither, the most probable use of the capital on the balance sheet would be dividends or buybacks, as the company could definitely support leverage (it currently has net cash). Perhaps management would be willing to be creative on M&A, though, as I believe buying a few select operations from France Telecom or TeliaSonera could be both viable and worthwhile. The Bottom LineIt's an unfortunate reality that the turbulence of emerging market currency markets can alter the fair value of MTN by as much as 20% in just a few months. Consequently, the fair value as expressed in U.S. dollars can swing quite a bit. For more long-term oriented investors, though, I believe the prospects of high single-digit revenue growth and mid-teens free cash flow growth make MTN Group a name to consider as a long-term holding. Regulation and competition are certainly threats, but MTN Group remains one of the better (and very scarce) ways to play growth across Africa and the long-term potential remains worthwhile relative to the risks and inconveniences. Disclosure – As of this writing, the author owns shares of MTN Group.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. BlackBerry Ltd

    Blackberry – formerly known as Research in Motion (RIM) – is ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Android Operating System

    A mobile operating system developed by Google. The Android operating ...
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. Has increased data usage affected the telecommunications sector in developed countries?

    The big news in the telecommunications sector for developed nations is bigger, cheaper data. Global data traffic is expected ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!