Julius Masaba

15^th November, 2021

By Julius Masaba

MTN, the biggest telecommunication company in Uganda, is set to place its stock and start trading on the Uganda stock market on 3rd December 2021. We have only 17 days to the listing date and less than a week to close the offer.

About 4,477,808,848 shares of the company are expected, priced at UGX200 which translates to US$0.06 per share at current exchange rates. The offer was announced in mid-October.

But first, let’ look at the key information in brief.

Company Information

Company:                                      MTN Uganda Limited

Market capitalisation:                 UGX4.5Tr

Market share estimated at:        48%

Subscriber base:                           >14m

Mobile Money agents:                120,000

National network coverage:       More than 80% (97%-2G, 90%-3G and 61%-4G)

Minimum investment:                 UGX100,000 (500 shares)

Price per share:                             UGX200 (US$0.06)

Stake:                                              20%

Number of offered shares:         4,477,808,848 ordinary shares.

Expected dividend payout:         60%

Future plans:                                 UGX1.111Tr on infrastructure expansion, 90% countrywide coverage

Products:                                        Voice (talk time), Data (internet), e-Commerce (MoMo Card),

                                                         Insurance (MTN Ayo), Loans (MoKash) and Remittances

Offer opens:                                  11^th Oct, 2021, 10am

Offer closes:                                  22^nd Nov, 2021, 4pm

Listing on USE:                             06^th Dec, 2021, 9:30am

MTN is partially owned by Charles Mbire (3.99%), a Ugandan businessman and MTN Group under MTN International (96.01%) before and (76.01%) after IPO.

The South African-originating company making up 48% of the telecom market in Uganda (Bharti’s Airtel comes second), brought in close to UGX2.0Tr in revenue in 2020 and looking to raise UGX895,561,769,600 by offering up a 20% stake.

MTN has been growing significantly in popularity in recent years, especially in Uganda (even East African region) beating rival Airtel, and warding off others like Vodafone, Africell, etc. MTN also leads in other countries like Ghana (listed), Nigerian, South Africa, etc.

Customer base of the company has grown from 28,000 in 1998 to more than 14 million currently, according to its prospectus. The company’s sales have been growing at an average 7% from UGX1.3Tr in 2016 through the years, to UGX1.9Tr in 2020.

Last year, MTN separated Mobile Money segment to be able to fall under regulation by the National Payment Systems Act & Regulations 2021 and National Payment Systems Act 2020. It created a fully owned subsidiary – MTN Mobile Money Company Limited, which is included in the IPO.

But the company’s plan to list has been looked at with a frown. Questions like ‘why now, why not 5 years ago’, etc. came up.

According to a section of financial analysts and investors, UGX200 per share is a lot to pay for a company that has been ‘arm twisted’ to go public, which is a good thing but marred by public criticism.

However, the truth has been told, that the company was ‘forced’ to list as a prerequisite for renewal of its national telecom operator (NTO) licence and to enable Ugandans partake of the company’s growth or profits.

See, government through Uganda Communications Commission (UCC) punishes MTN with a licence renewal fee of US$100Mn, forcing them to list. In turn, MTN uses this loophole or ‘opportunity’ to want to take back US$254Mn. It’s a ‘do me I do you’ kind of scenario!

The IPO maybe good but has some ‘BUTs’.

Why is it good?

Brand loyalty: Many Ugandans are in love with the Y’ello company. I recall in early 2000s, the company would invest heavily in outdoor live exhibitions and selling its products like the landline phones, etc.

At such customer activation and signup events, they would give out freebies like T-shirts, caps, etc., anyone who got such would walk with his head high around the village, anti awangudde MTN.

It is such marketing and PR activities that made the company to be known everywhere and so fast, that if you asked for a network line for a phone number, someone would read out ‘zero seven seven…’.

Higher profitability, less CAC: MTN has grown and reached a point where by each new subscriber increases the profitability of the network. It has a small customer acquisition cost (CAC).

As such, it may not need an investment in a new network to serve additional or new subscribers. However, it plans to increase its capital expenditure budget (for infrastructure) for long-term geographical coverage.

Strong past performance: The company has been on an upward trajectory, making huge turnovers year after year. In fact, it has been paying huge dividends consistently to its shareholders. The same basis for the planned 60% dividend payout post-IPO.

The company made UGX96Bn, UGX153Bn, UGX220Bn, UGX269Bn and UGX322Bn in profit after tax for 2016, 2017, 2018, 2019 and 2020; respectively. This strong performance has made the company attractive to investors and government.

Here are the ‘BUTs’.

It’s a bit risky too, for me as an investor.

Competition: MTN faces competition from over 30 registered telecom players, two of them NTOs (Airtel and Lycamobile) are on its neck. The biggest number are the small players in the market. Small competitors are not sleeping and will slowly by slowly eat into MTN’s market share.

Recall that when Lycamobile got a licence as NTO No. 3, it was also reminded by the government that at least 20% of their share capital should be availed to the public via local stock exchange. UTL will also do so alongside Airtel. Competition will be tight.

There is a saying that never underestimate the impact of a mosquito landing on a man’s testicles. However, it (MTN) enjoys an oligopolistic market environment where it leads the pack.

Distributors left out: Like a company would first prioritise internal staff who qualify for a job opportunity, I expected MTN to at least favour its players in the distribution chain or channels.

Surely for company’s wholesale distributors and Mobile Money agents, the company should have considered them as they are a key segment in the company’s third-party channel.

Some distributors have been with the company for more than two decades and some mobile money agents have been with the company since the segment was introduced. I don’t know how MTN views this whole thing but silently, an adversarial business relation is likely to arise.

No incentives to investment clubs/groups and SACCOs: Investment clubs/groups and SACCOs are key elements in mobilising savings from the population. These savings are them used for investment.

This drives up (personal and institutional) investments in society and leads to improved purchasing power parity among citizens. It should have been wise for MTN to devise a strategy to court such savings and investment vehicles in the community to purchase shares with a perk.

From the economics surrounding the IPO, notably there is no incentive for investment clubs/groups and SACCOs. From the numbers, it needs just a minimum of UGX3.5Bn to give a 5% incentive.

However, Capital Markets Authority (CMA) may refuse taking blame since it will say “we followed the ‘law'”. Those likely to be blamed would be the cynics, speculators, pseudo-analysts, and skeptics (like one lead retail broker top CEO called them).

System and infrastructural failures: These are technical issues in operations such as break down in internet speeds, fraud in Mobile Money transactions and impersonation in phone line ownership. Cyber-attacks are also common. Last year, some banks, MTN, Airtel and a payments aggregator (Pegasus) were faced with a cyber-attack.

Also take note of the third-party suppliers or service providers like mast operators. Recall that MTN sold some stake in the tower ownership with American Tower Corporation (ATC) some years back. This makes it vulnerable – a third-party technical fault can affect the whole MTN network or system.

Tough legal and regulatory environment: MTN Uganda and MTN Mobile Money Company Limited operate under licencing by Uganda Communications Commission (UCC) under the National Payments Systems (NPS) Act 2020 and National Payments Systems (NPS) Act & Regulations 2021; respectively.

And since public interest is involved together with licencing of other telecoms and planned listing, regulation will be tougher in the years to come.

State and other corporate governance shenanigans: Internet shut downs are common – in 2016 before election, abrupt raids on company offices with claims of espionage; even interference in its management – firing, deporting of CEOs and other executives and allowing them to return. Such affect operations and eventually share price.

Sporadic acts of terrorism, unrest e.g., during election campaigns and poll time can affect the share price tremendously.

The company has also been embroiled in some court cases involving top management, mostly around whistleblowing and staff defamation. Such things put the company on a shaky management operation.

Poor cash flow position: “Cash is King”, goes the saying. This will or is likely to affect trading on the bourse. Meaning that for a shareholder who wants to leave or exit the company and plans to sell his or her shares, the company may have no spot cash or enough funds to pay such an investor.

So, liquidity risk is a huge challenge for listed companies. This may also affect capital availability for investment. According to International Monetary Fund (IMF), African stock markets suffer from the problem of low liquidity. MTN as a listed player will not be spared.

Uncertain economic times: “IPOs are not really a nice thing. A lot of things affect an IPO, such as timing and pricing,” says Warren Buffet. In MTN’s case, it is timing – in these uncertain Covid-19 times, when people are trying to fill their purses and businesses trying to pick up.

What if a third wave hit? When an economy is recovering from a recession and listing of the company is to take place, it has a big impact on the share price.

Lack of financial forecasts: Forecasting is a bit complicated, like trying to look at the sky to see if it’s going to rain or not. However, in business planning, you can fairly forecast performance since you have some historic and current figures to work with.

For MTN, this can be assisted by strategic growth plan items as disclosed by management. Like a business plan, financial forecasts help you to look at the future, under the worst case and best case scenarios.

However, in a letter by the CMA to a one concerned Andrew Muhimbise, a prospective investor, it disclosed that there is no legal requirement for forecasts to be included in the prospectus of a listing company.

But MTN Ghana’s (a subsidiary of MTN Group) prospectus had them. So, could it be an issue of policy review? Probably, yes.

Personally, I look at MTN’s prospectus as a business plan tabled before me (investor) to peruse through and decide whether to invest or not, and as such (by business modus operandi), the financial projections were necessary.

Hint: Maybe CMA has work to do – review and amend the listing requirements to incorporate the aspect of financial projections. It can visit and review such requirements, regulations by other countries to see which way the cat jumps.

Below is an extract of my 5 year P&L projections for the company, with assumptions below it.

NB: This is based on the inputs I worked with, mostly from the prospectus.

Unconvincing value and share price: With an average earnings per share (EPS) of UGX12 in the last 3 years, the share price of UGX200 is too high. Meaning it will take between 12 and 20 years to recoup your invested capital on each share.

To make it worse, the prospectus puts the par value of 01 share at UGX1.0 even when the market has been given a price of UGX200. It raises a red flag!.

On the disputable share price (said to be overvalued), see the table extract from my work below. From my analysis under the discounted cash flow method (DCF), the share price should have been around UGX169.

NB: This is based on the inputs I worked with, mostly from the prospectus.

Shaky dividend policy: MTN’s dividend policy is good. With good free cash flow (FCF) positions for the last 5 years, the company has been able to pay dividends consistently between UGX100 and UGX300 billions. On that backdrop, it promises to pay 60% in dividends.

However, by the look of things, I have my personal exceptions. One of the conditions for the company to list was to first offer 20% of its stake to the public. Secondly, they are required to cover at least 90% of Uganda, geographically.

To cover such an area, you need a huge investment in infrastructure. Meaning there will be prioritization on expansion than emphasis on realising returns for shareholders. There is a loan commitment of UGX388Bn and another UGX1,111Bn also planned for inject expansion in the long run.

All that has an impact on the returns (net income), a negative impact on the expected dividend payout. Given the loan commitment, dividends are likely to undergo erosion as loans are being repaid. The 60% rate may not be attained.

Don’t forget that the dividend declaration will be in the discretion of the company board of directors before tabling it as a resolution. Read pages 32 and 226 of the prospectus.

The table below shows results from my valuation model.

NB: This is based on the inputs I worked with, mostly from the prospectus.

The past 5 years have been stable. From 2022 (first 5 years), it will be another  or new phase of growth. Stabilizing again might take 5 to 10 years (row 4) because it will be in stage two of growth (row 5).

Personally, I expect good dividends after that period. If you are a high risk tolerant person, just throw in some money so that even if you lose, it will not give you heart attack.

So, from those observations, what I can say is:

1. Buy and hold for 5 years, 10 years or forever (and learn);
2. Buy now and immediately sell in 2022 (when you see price dropping); or
3. Do nothing.

This article also appeared on Medium by the same author. Click here.

Disclaimer: This article and views here in are observations by the author about the MTN IPO. The analysis was done with reference to the prospectus, past literature review and commentary from several professional and non-professional (call them ‘pseudo-analysts’) in the investment, finance, and capital markets field. The author will not be liable for any financial loss incurred by any party as a result of basing on this article. Share prices may go up or down and you may lose whole or part of the, or benefit from your investment.

About the Writer

Julius Masaba is the Team Lead at Leanfoot Ventures, a private investment research and business consulting firm; a WordPress writer/blogger on startups, entrepreneurship, business, and finance. He’s also the Business Development Lead at Ablestate, https://www.theablestate.com/. He loves tech.