October 13, 2021, The Money Engineer, Investment, Leave a comment.
https://themoneyengineers.com/2021/10/13/what-to-consider-before-buying-mtn-shares/
1. Introduction
MTN Uganda is selling 20 percent of its shares to the public. In this very long article I try to summarize the key disclosures in the prospectus with the aim of simplifying it and providing useful information to the reader to make an informed decision.
I have written an introductory article on investing in the stock market. The reader not familiar with shares should start there:
{ https://themoneyengineers.com/2021/06/26/investing-in-the-stock-market/}
I have assumed that the reader is an ordinary person of sound mind with no background in finance.
A prospective investor should seek to answer the following questions before buying any shares:
1. What are the details of the offer?
2. Do I know the company I am investing in?
3. What are the future prospects?
4. What products and services does the company offer?
5. Does the company have a social license to operate?
6. Is the company well managed?
7. How is the telecom market performing?
8. How is the policy and regulatory landscape?
9. What is the company’s dividend policy?
10. How has the company performed in the past?
11. Is the offer price fair?
12. What are the key risks?
13. Do I have the funds to invest?
14. Does this investment meet my investment objectives?
I will attempt to provide answers to these questions in the sections below:
The reader should familiarize themselves with the detailed prospectus which can be found here: { https://www.mtn.co.ug/investor/prospectus/}
The information shared in this article is based on the company’s issued prospectus and other publicly available information and does not amount to financial advice. (The full disclaimer can be found in section 17 of this document)
2. What are the details of the offer?
Background and Objectives of the Offer
MTN is selling 20 percent of its shares to the public to allow Ugandan investors, including MTN’s loyal customers, to own a stake in the Company and participate in its future growth.
In addition, the Offer and the Listing are being undertaken to comply with the provisions of the NTO (national telecommunications operator) Licence which requires MTN to sell a portion of its shares to the public.
This is a good move by the government to promote local ownership of these profitable foreign companies. Ugandans should take advantage of this opportunity and consider investing.
Particulars of the Offer
A total of 4,477,808,848 shares are being sold at a price of UGX 200 per share which represents 20% of the issued share capital of the Company.
The opening date is 11th October 2021 and the closing date of the offer is
22nd November 2021. Anyone interested in buying shares has to do so within this period. The shares will be listed on the Uganda Securities Exchange on 6th December 2021.
Minimum number of Offer Shares per Application
You can buy a minimum of 500 shares to participate in the IPO. Each share is being sold ugx 200. That means that the minimum investment is ugx 100,000. Applications for more shares must be in multiples of 500. There is no limit to how many shares you can buy.
Ugandan Retail Investors Priority and Oversubscription
Ugandan retail investors will be given first priority in allocation of shares. If too many people apply to buy shares the priority will be given to Ugandan retail investors especially those who have bought above ugx 5 million shillings.
Incentive shares
There is an incentive scheme to encourage Ugandans to participate. 5 Incentive Shares for every 100 Sale Shares shall be allocated to Uganda Retail Investors and East African Retail Investors. In addition eligible MTN Customers applying through the m-IPO Platform and paying through MTN Mobile Money will be given 5 Incentive Shares for every 100 Sale Shares allocated (in addition to the general Uganda Retail Investors incentive). This is actually a good opportunity for Ugandans to take ownership in a solid company at discounted prices.
How to apply for shares
The easiest way to buy the shares is to talk to your stock broker or access the USE Easy-Portal at https://scd.use.or.ug/ or dial *165*65#, or use the MyMTN App for MTN customers.
3. Do I know the company I am investing in?
The following key statistics can help to put the offer in perspective
• MTN is the number 1 player in the telecoms market
• MTN has 14.2 million subscribers
• MTN has 4.6m active data subscribers
• 8.5 million momo subscribers
• MTN Uganda operates in 134 districts (there are very private companies with such coverage in the country)
• 120,000 momo agents (this is a massive operation which ensures that mobile money is available throughout the country)
• 200 service stores
• 14 main distributors
Background and Nature of Business
MTN was incorporated as a private company limited by shares on 25 February 1998. At the time when mobile cellular service penetration in Uganda was at a low of 0.27%. Since then there has been tremendous growth of the telecommunications sector in Uganda with current penetration at 70% (seven lines for every ten individuals) as of 30 June 2020.
MTN is a leading mobile operator in Uganda. According to the UCC Market Report Q2 2021, the number of telephone subscriptions in Uganda stood at 28,986,019 as of 30 June 2021. The Company’s reporting data as of 31 December 2020 indicates that of these industry-wide subscriptions, 14.2 million are MTN customers, 4.6 million of which are 30-day active data subscribers. In the mobile money market, MTN has approximately 8.5 million active 30-day MTN Mobile Money subscribers.
In 2009, MTN pioneered mobile money business in Uganda and conducted that business alongside its telecommunications business until 2021 when, as a consequence of the enactment of the National Payment System Act (NPS) Act, MTN was required to transfer the mobile money business to a wholly owned subsidiary. Following the completion of the licensing and structuring process prescribed by the NPS Act, the mobile money business was transferred to and is currently conducted by the Mobile Money Company with effect from 19 June 2021. The mobile money business continues to be a significant contributor to MTN’s earnings.
MTN has a presence in all 134 districts of Uganda and has evolved from a telecommunications company providing value added services to a provider of an innovative range of products and services including voice, data, digital and mobile financial services delivered through a network of approximately 120,000 mobile money agents, 200 service stores and 14 main distributors.
MTN is a subsidiary of MTN Group. MTN Group is a leading emerging market mobile operator, with customers in 20 markets in Africa and the Middle East. As of 31 December 2020, MTN Group had over 273 million subscribers across its operating subsidiaries and joint ventures. MTN Group is one of the largest companies listed on the JSE in Johannesburg, South Africa with a market capitalization of ZAR113 billion (USD 7.8 billion) at the end of 2020.
4. What are the future prospects?
MTN’s strategy is centred around becoming a fully-fledged digital platform as a business. In the medium-term, MTN will work towards the implementation of its Ambition 2025 strategy, including strategically repositioning its financial technology and infrastructure assets and platforms (such as the recent separation of the Company’s financial technology platform into a new wholly owned subsidiary) from its core telecommunications business.
As illustrated Above, the execution of Ambition 2025 is embodied in four clear strategic priorities – building the largest and most valuable platforms, driving industry-leading connectivity operations, creating shared value and to accelerating portfolio transformation.
The strategic priorities will be underpinned by five vital enablers to assist in operationalizing the Ambition 2025 strategy –
• MTN Mobile Money and accompanying financial technology solutions,
• Ayoba with MTN (digital services),
• enterprise services,
• network as a service and
• Chenosis (a marketplace for application programming interface).
5. What products and services does the company offer?
MTN Uganda offers the following products and services
• Voice (Voice contributes 50.9% of revenues)
• Data (Data is growing and contributes 18% of revenues. There is potential for this to grow especially with work and study from home reality because of COVID)
• Mobile money (mobile money contributes 26.4% of revenues)
• Digital services
• Enterprise services
Uganda has a very young population which is growing very fast. It is predicted that Uganda will have a total population of 45.5 million people by 2023 and 51.1 million people by 2027.
This young dynamic generation will drive demand for voice, data and digital services in the future. For instance my six year old daughter has access to a tablet and a laptop and attends online school from home through the internet.
6. Does the company have a social license to operate?
In July 2007, MTN established the MTN Foundation as an incorporated trust for the purpose of focusing the Company’s corporate social investment initiatives that are aimed at contributing to the reduction of poverty and fostering sustainable development in Uganda. The main objective of the MTN Foundation is to improve the quality of life in communities across the country by supporting and implementing sustainable projects in four thematic areas: Youth Empowerment, Education, Health and Other National Priorities. The MTN Foundation is governed by a Board of Trustees made up of eminent members of society and senior MTN officers.
The MTN Foundation is funded annually by an endowment from MTN of 1% of MTN’s profit after tax and partners with credible public and private non-profit organizations to execute sustainable projects in each of the chosen focus areas.
MTN Uganda is part and parcel of the fabric of Ugandan society. Almost every trading center has some MTN booth. The local operator knows everyone in town. The almost constant marketing campaigns have become part of the daily conversation. MTN has sponsored many social events including the MTN marathon and several music shows. Plus it provides direct and indirect employment to thousands. It also contributes a lot to the country’s tax revenues. A phone number has now become part of a Ugandan’s identity.
MTN brought the dream of owning a phone to the common man at a time when phones were inaccessible. Of course there is the occasional glitch and rude customer agent, but, overall MTN has positively impacted the nation and in my opinion has a social license to operate.
7. Is the company well managed?
Ownership
The majority shareholder is MTN International which owns 96.014%. The ultimate owner is the MTN group. MTN international is the one that is selling the 20%. It appears a number of holding companies were set up in the process for tax advantages. There is a minority shareholder, Charles Mbire, who owns 3.986%. The prospectus discloses Mr. Charles Mbire’s business interests in Invesco and Nilecom which are both associated to some extent with MTN.
Management
The board is led by Mr. Charles Mbire who is a leading businessman, entrepreneur and industrialist in Uganda and has been the chairperson of
the Board since 2003. Mr. Charles Mbire, owns 892,230,775 Shares representing 3.986% interest in the issued share capital of MTN).
In addition to the Chief Executive Officer and the Chief Finance Officer, who are members of the Board, MTN is led by an experienced management team with a mix of local and international expertise.
Mr. Vanhelleputte is the Chief Executive Officer for MTN. Mr. Wim Vanhelleputte is a seasoned executive with over 20 years’ experience in the telecommunications sector across eight countries in Africa.
In my opinion, from the face of it, MTN seems to have a competent leadership team. This is further demonstrated by their leadership of the telecom market.
Employee Headcount
MTN has a diverse workforce of 1,020 personnel. 520 are permanent employees while 500 are contract / outsourced staff. This makes MTN one of the largest employers in the country.
8. How is the telecom market performing?
Telecommunications
Uganda’s telecommunications sector is one of the continent’s fastest growing markets by subscribers and operator activity. According to the UCC Market
Report Q2 2021, the Ugandan telecommunications market had a total of 28,986,019 subscribers as of 30 June 2021, with 616,785 new mobile subscribers being added for the quarter.
The National Budget Speech 2021-2022 reports that with regard to GOU’s digitisation agenda, internet access as of June 2021 stood at 52%, with 21 million people using the internet. Active mobile money subscriptions stood at 23 million served by 235,800 mobile money agents. High-speed optical fibre cable covers 3,900 kilometres. In addition, new industries have been established in the assembly of computers, mobile phones and accessories, and the development of knowledge-based information and communications technology solutions.
The National ICT Initiatives Support Programme established by the Ministry of ICT in 2017 has funded the local development of 115 applications, many of which are in use in the public and private sector.
According to Fitch Solutions’ Uganda Telecommunications Report Q1 2021, the Ugandan market is expected to grow at an average rate of 4.2% over the forecast period 2020-2029. Uganda’s telecommunications market penetration rate presents enormous organic growth opportunities for the operators in the market. The operators have also been credited with the growth in network connected devices. According to the UCC, this is as a result of mobile network operator-device importer partnerships.
Mobile Money
MTN Uganda conducts its mobile money business through a wholly owned subsidiary called MTN Mobile Money (U) Limited.
The UCC Market Report Q4 2020 reports that the number of mobile money transactions during Q4 2020 crossed the 1 billion transactions mark, the first-time that this milestone has been recorded and surpassing the previous quarterly record of 954 million transactions posted in Q3 2020. These transactions included agent assisted deposits, mobile money-bank transfers, mobile betting and merchant payments, among other transaction categories.
The UCC Market Report Q2 2021 indicates that as of 30 June 2021, the number of registered mobile money accounts stood at 31.3 million, with a national penetration of three mobile money accounts for every four Ugandans. However, the UCC noted in its UCC Market Report Q1 2021 that following a sector- wide clean-up of mobile money account registers, the number of active mobile money accounts in Uganda as of 31 March 2021 stood at 20,298,694. Accordingly, the number of registered mobile money accounts must always be measured as against active users. According to the UCC, Uganda generally holds a mobile money activity ratio of 66%, which is double the aggregate African average of 30% account activity.
As Fitch Solutions’ Uganda Telecommunications Report Q1 2021 confirms, MTN has solidified customer relationships by offering a wider range of mobile financial services, creating new revenue streams and improving customer loyalty in a market where it has seen subscriptions numbers come under pressure.
MTN continues to remain better placed than traditional banks to tap into Uganda’s underserved loans and savings market and in 2016, MTN was the first operator to offer loan and savings services in Uganda through MoKash. With its platform already in place, MTN can offer small loans cost-effectively, allowing customers to gradually build up a credit rating and gain greater confidence to participate in credit-based transactions.
9. How is the policy and regulatory landscape?
MTN Uganda operates under Uganda’s legal environment. It has a license from Uganda Communications Commission to operate a telecommunications business. The mobile money business is regulated by Bank of Uganda.
The government of Uganda is aiming for universal access to ICT for all Ugandans. The National Development Programme (NDP) III digital transformation programme aims to increase ICT penetration and use of ICT services for social and economic development.
The key expected results include:
• increasing ICT penetration;
• reducing cost of ICT devices and services;
• creating more direct jobs in the sector; and
• increasing ICT incubation; and increasing government services online.
Overview of NTO (National Telecommunications Operator) Licence
MTN holds an NTO license which is for a period of 12 years with effect from 1 July 2020. The NTO Licence will expire on 30 June 2032 and may be renewed at the UCC’s discretion. There is a risk here because the licence may not be renewed or maybe cancelled depending on government’s policy.
MTN paid an upfront licence fee of USD 100 million for the NTO Licence. The Company is also required to pay a levy of 2% of its gross annual revenues for the licence term as the Company’s contribution towards information and communication technology and rural communication development. The licensing costs are significant and seem to exert some pressure on the company.
10. What is the company’s dividend policy?
MTN’s current dividend policy provides that MTN will target a dividend pay-out ratio of at least 60% of annual profits after tax. The average payout ratio in the last 4 years was 57%.
11. How has the company performed in the past?
Profitability
The company is clearly profitable and reported after tax profits of ugx 322bn in 2020. This represent a net profit margin of about 17%. Sales have grown by about 9% in the last 5 years. The profits after tax have grown by about 35%. This is a good performance compared to how the economy is performing. Uganda’s GDP will grow at 3.3% for the financial year 2021-2022, which, while an increment from the 3% growth rate recorded for the financial year 2020-2021 is lower than the desired target of 6.8%.
Liquidity
The company has positive cash balances of ugx 137bn as at 30th June 2021 which is a good thing. This means it can meet its immediate obligations. The company has also generated net positive cashflows in the last five years except in 2020 where it seems to have over invested.
Financial Risk
The company has some debt on its books amounting to about 388bn as at 31st December 2020. The debt portfolio represents 14% of the total assets of the company which is relatively small compared to other highly leveraged businesses.
The finance costs were ugx 156bn in 2020 which represents 26% of the operating profits. This implies that the company is able to meet its loan obligations at least in the foreseeable future.
Shareholder return
The average dividend payout ratio in the last 4 years has been 57.23%. The stated dividend policy in the prospectus is 60%. At this level of payout the imputed dividend for 2020 would have been ugx 8.6 per share (for issued capital after IPO). This represents a dividend yield of 4%. To earn at least a benchmark return of 10% which is the typical treasury bill return the share price would need to increase by at least 6% to ugx 212. It’s difficult to predict how the share price will perform after IPO so the shareholder return can’t easily be projected.
The prospective investor will have to make a judgement call on the future prospects of the company and how the company might remain attractive to investors.
12. Is the offer price fair?
The shares are being offered at a share price of ugx 200 per share. We can evaluate if this price is fair by comparing it with the company’s estimated value per share. From the prospectus the company’s net equity as at December 2020 was ugx 726 billion. The total issued shares after IPO will be 22,389,044,239. This means that the value per share is about ugx 32.4. This means that the offer price is about 6 times the book value of the company.
The profit after tax in 2020 was ugx 322 billion. This means that the earnings per share is about ugx 14.38. The price earnings (p/e) ratio is about 13.9. The price earnings ratio of Safaricom is about 24.03. This means that although the MTN offer seems highly priced it’s still undervalued compared to its peer (Safaricom). The p/e ratio gives us an indication of how investors view the future prospects of a company. For example the p/e ratio of Apple is about 27.96.
Further dilution is expected when the 5,610,955,761 unissued shares are allotted. Overall the price seems relatively high but given the company’s future prospects it might be undervalued. I didn’t find sufficient information in the prospectus to value the company based on future cashflows.
The prospective investor needs to make a judgement call on whether the price is fair or not taking into account several factors. It’s just like buying land. It’s all about willing buyer, willing seller. Some people may view a piece of land as too expensive. Others will swoop in considering it a bargain offer. It’s all about perspective.
13. What are the key risks?
A number of risk factors are mentioned in the prospectus including but not limited to the following:
• The dividend payout is not guaranteed;
• Cyber security attacks;
• Mobile money fraud;
• The licenses may not be renewed;
• The company may be sued by different people;
• Changing technology may render the business unsustainable;
• Loss of key personnel;
• The share price may drop;
• The IPO may not attract enough people;
• Market competition from other players;
• Changes in regulatory and policy framework;
The prospective investor should carefully weigh these risks against their investment objectives before buying any shares.
14. Do I have the funds to invest?
The minimum investment requirement is ugx 100,000 though this is unlikely to make you rich! There is no upper limit. There is an incentive for retail investors if they invest at least ugx 5m. In case of oversubscription Ugandans who have invested at least ugx 5m will be given first priority plus all the incentive shares.
So a good target if you wish to invest is about ugx 5m. Of course any amount above ugx 100k is acceptable.
The funds you use should be risk capital. This means don’t put your children’s school fees in the IPO. You should be willing to lose all this money and to hang in there for at least 5 years plus.
I wouldn’t borrow to buy shares because the returns are not guaranteed yet the interest repayment is certain.
15. Does this investment meet my investment objectives?
Investing in shares should form a portion of your overall investment portfolio. You should aim to own a basket of shares in different companies not just MTN. This basket may include a bank, a beer company, a utility, etc. Owning a single stock is quite risky and is not well advised.
Stocks give you some growth opportunity although they come with some risk. The prospective investor should carefully evaluate their overall investment objectives and make sure any purchase decisions align appropriately. For instance if you want a steady return then you should not buy shares. You would rather put the money in a unit trust or treasury bill/bond and earn a steady interest income.
16. Conclusion
MTN is the number 1 player in the telecoms market with over 14 million subscribers. The company is profitable with revenue projected to grow at 10%. The company is part of the MTN group which has over 273 million subscribers across 20 markets in Africa and the Middle East. The parent company is listed in South Africa with a market capitalization of over $7.8 billion.
The company operates in a growing economy with a relatively young demographic which will continue to demand voice, data, mobile money and other digital services.
The offer price of ugx 200 seems a little bit high compared with the company’s book value. However an accurate valuation should be based on future prospects which are difficult to quantify. The price is however affordable as the minimum investment is ugx 100,000. An incentive has been put in place to encourage Ugandans to participate (5 incentive shares for every 100 shared allotted). So a good target for retail investors is a minimum of ugx 5m because you’ll be prioritized in case of oversubscription.
The imputed dividend yield of 4% seems low compared to other safer bets like a simple treasury bill. The prospective investor will need to earn at least 6% in capital gains to achieve a benchmark return of 10%.
The prospective investor has to make a bet on the company’s future prospects because this is what will really drive her returns in terms of capital gains.
Overall this offer is a possibly good opportunity for all Ugandans and East Africans to own a small portion of a large profitable company and I would encourage everyone to seriously consider it.
17. Disclaimer
The information shared in this article is based on the company’s issued prospectus and other publicly available information and does not amount to financial advice. These are my personal opinions and should not be relied on to make an investment decision. Investing in shares in risky and the share price might fluctuate. Anyone relying on this information to make a purchase decision does so at their own risk. The services of a professional financial advisor should be sought before buying shares in any company.
18. About the Author
The Money Engineer (aka John Ntende) is a finance professional with an engineering background. He has over 13 years practical experience in business strategy, finance, management, entrepreneurship and investment. He currently leads the corporate strategy team at the Electricity Regulatory Authority. John is passionate about helping people realize their true potential through personal development and financial literacy. John is also an avid entrepreneur and has invested in a cottage manufacturing facility which makes food condiments and fruit juices.
He publishes a daily online blog to teach and inspire other people to take charge of their money. In his free time, he grows fish in his backyard.
John is a published author having written two books on backyard fish farming and financial literacy. John is married with two daughters and currently lives and works in Uganda.
You can follow The Money Engineer online at https://themoneyengineers.com/
