MTN shares slump on currency, political risk

2012-01-14 09:50

The twin perils of political and currency risk bedevil the future prospects of telecoms giant MTN.

After a decade of fair trade winds, stormy weather ahead was heralded this week not only by a sharp plunge of the telecommunication giant’s share price, but also by the downward rating by international merchant bank Goldman Sachs.

The bank took MTN stock off its pan-European buy list and cut its rating to neutral after weighing political, commercial and currency risks facing the telecoms company.

The share price has been sinking since the year began.

The initial decline was 8%, followed by a brief recovery.

Then the share tanked further by 2.2% this week on the news of the Goldman Sachs report – making for a 6.8% decline thus far.

There has also been an uptick in volumes of trading in the yellow share.

The bank weighed a composite set of factors across MTN’s footprint in Africa and the Middle East.

The company is feeling the political risk pressure in its Middle Eastern markets, particularly in Iran, Syria, Yemen, and Afghanistan.

Iran, where it has 32.2 million subscribers, is being squeezed by the US to drop its nuclear programme and the world’s most powerful country has called on countries to cut oil imports from Iran in a bid to reduce the flow of oil revenue to the Iranian government.

In some of its key markets the telecoms group faces looming competition, currency risk and political and social upheaval, making for a forecast of cloudy weather ahead.

“We think the stock’s performance may be capped by concerns over (rival) Etisalat’s attempts to increase market share in Nigeria, a macro-growth slowdown and currency devaluation in Nigeria, concerns over exposure to Iran and Syria, and the risk of increasing competition in smaller African countries,” Goldman Sachs said.

After initially resisting International Monetary Fund advice to devalue the naira, Nigerian central bank governor Sanusi Lamido Sanusi announced late last year a new dollar-naira mid-rate, saying the naira would trade within a range of N150– N160 to the US dollar.

The old range was N145 – N155 to the greenback. Business Day newspaper on Friday quoted Sanusi as saying he expected inflation to rise to about 14% to 15% by midyear.

MTN declined to comment on the Goldman Sachs report.

Adding insult to injury, the removal of the oil subsidy sent the price of a litre of petrol up overnight to about N150 (about R7.55), from around N65.

Nigerian consumers will have to make tough consumption choices between transport to get to work, bread and airtime.

In response to questions on its position in Nigeria, Iran, Syria and Yemen, the telecoms company was curt.

“The recent removal of petrol subsidies imposed by the Nigerian Government does not have a significant effect on MTN Nigeria costs as the company uses diesel to fuel base stations which was deregulated a while back.

MTN is not in a position to comment further on this,” said MTN spokesperson Rich Mkhondo.

They declined to comment on the Goldman Sachs rating.

But analysts have warned that MTN’s repatriated earnings will be put under pressure by the devaluation of the Nigerian currency.

This devaluation is worrying, considering that the group earns 40% of its cash earnings in Nigeria, where it has 40.2 million subscribers, the largest in any of its 22 markets where it operates.

“I am afraid MTN’s bottom line will be negatively affected because it repatriates its dividends to South Africa.

In rand terms, it will earn less naira as a result of the currency devaluation,” said Dawie Roodt, chief economist at Efficient Group.

Even though MTN has numerous hedging instruments in place to buffer the group against currency devaluations, the corporation does admit to some vulnerability in recent official documents on its website.

The company says: “Currency risk refers to potential losses caused by currency fluctuations in our operating countries.

Currency devaluation is outside MTN’s control and response strategies are limited to mitigating the impact of short-term devaluations.”

Analysts say that the trouble with the recent Nigerian devaluation is that a slew of further devaluations of this already “soft” and malleable currency are anticipated.

But Khulekani Dlamini, a portfolio manager at Afena Capital, believes it is too early to assess the effect of the political unrest and the currency devaluation.

So far for MTN, he says, it is “business as usual”.

“Careful monitoring of the situation throughout 2012 will enable MTN to discern trends,” he said.

The naira devaluation by the Central Bank of Nigeria (CBN) was prompted by a fall in revenue from oil exports, the government’s main source of revenue.

The Nigerian fiscus is heavily dependent on oil revenues. By weakening the currency, the CBN is attempting to boost crude oil exports by making the resource cheaper for foreign buyers.

However, this policy has come at the expense of ordinary Nigerians.

The government has cancelled fuel subsidies that kept fuel prices low.

They have responded by taking to the streets in a wave of protests that continued through the week.

The withdrawal of the fuel subsidies will dramatically increase the price of fuel, thereby shrinking Nigerian purses.

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