African cell service provider MTN Group (OTCPK:MTNOY) has continued to struggle, but the primary sources of the struggles continue to be largely beyond the company’s direct control. Although the company’s financial performance since my last update has been decent, the ADRs have fallen by another third, hurt by further erosion in the value of the rand (around 16%), worries about the company’s dollar-denominated debt, and ongoing struggles in the South African market.

While MTN Group’s ADRs do look undervalued, the same can be said for other emerging market telcos like Turkcell (TKC) where investor concerns have more to do with macro and currency risks than company-specific execution. Although I believe the strategic priorities outlined by the company are sound, the lack of a near-term dividend, and the ongoing operational challenges in certain markets remain meaningful issues.

Strategic Priorities That Make Sense

MTN Group shareholders have known for some time that the company would be getting a new CEO, as outgoing CEO Rob Shuter had previously announced (in March of 2020) his intention to depart in March of 2021 on the expiration of his four-year contract.

“Good riddance” is an unfairly harsh assessment of his tenure, but the local shares are down about half since his hiring, and he largely failed in his primary missions – shore up the company’s competitive position in South Africa against Vodafone’s (VOD) Vodacom (OTCPK:VDMCY) (where Shuter previously worked) and clean up the company’s relationship with the Nigerian government, where the company has run into all manner of regulatory issues (not all fair or the company’s fault, in my opinion).

Shuter will be replaced by CFO Ralph Mupita, who has been with the company for some time now. While Shuter was under contract until March of 2021, Mupita will assume the CEO role on September 1 of this year.

It remains to be seen if Mupita will launch any meaningful new programs or initiatives, but I expect he will largely stick with the current strategic priorities approved by the board. The company is currently working to execute on a large asset realization program – largely a process of selling assets like towers and non-controlling, non-strategic investment positions in order to raise capital – and I see no reason for this program to end prematurely. The somewhat more significant strategic priority also underway is the shift toward a pan-Africa focus. Management has indicated that they intend to sell out of their Middle Eastern operations and have already reported that they are in “advanced stages” of selling its Syrian business to its minority partner. After that deal is complete, the company will work on selling out of Afghanistan and Yemen. None of these operations are particularly financially material, contributing less than 3% of the company’s first half EBITDA.

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Iran is a different story. Iran contributes closer to 10% of overall revenue, but obviously, there have been significant issues here tied to the global sanctions imposed on Iran. While Iran is largely considered a “Middle Eastern” country, management recently reiterated that it has no plans to exit this business.

Core Challenges Remain

Maybe the best thing that can be said about MTN’s performance over the last year or so is that no major new problems have cropped up in Nigeria. The business has continued to grow the sub count, and while COVID-19 has impacted the business, data, and digital services continue to offer good revenue growth opportunities for a business that generates over 40% of the company’s EBITDA. While the ability to repatriate cash is a significant issue and could lead to no dividend for 2020, there at least seems to be regulatory peace here now.

I’m not all that concerned about the operations in Nigeria or Ghana right now, as both businesses continue to grow, generate good EBITDA margins, and offer attractive scope for future growth. While Ghana’s government recently named MTN Ghana a “significant market power” and imposed some business restrictions relating to interconnection and pricing, MTN is appealing this through judicial channels and it won’t be a crippling blow. South Africa remains an issue, though. While South Africa’s economy is struggling in its own right, MTN Group hasn’t managed to meaningfully improve its performance vis a vis Vodacom and service quality issues continue to leave it more as a price-taker in the market. Improving service quality would be an expensive endeavor, but it’s one I believe the new CEO should seriously consider, as while it may be possible to market and price around the service quality limitations, the company’s ongoing lagging performance in its home market needs to be addressed more strongly than the steps are taken so far (which have centered more around marketing and creating new pricing/service bundles).

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The Outlook

MTN’s announcement that it was suspending its interim dividend, and may not pay a dividend at all in 2020, was a disappointing development, but not entirely surprising. While the business has been operating relatively well in terms of local currency results, the company’s exposure to dollar-denominated debt has become more problematic in the wake of weaker African currencies (most especially the Nigerian naira). Likewise, the challenges in repatriating cash from Nigeria and Iran (among other countries) create even more unwelcome challenges.

MTN has pulled back on capex spending this year; management claims it is largely in response to COVID-19-driven changes in demand, but it also could be to preserve hard currency during a challenging time. Whatever the reason, MTN will need to spend on equipment to support the growth in higher-value services that drive the business model, so this is at best a brief respite.

My expectations for MTN Group have been conservative and remain so, even though revenue and FCF in 2019 exceeded my expectations (EBITDA was a little light) and 2020 has gotten off to a decent start. I’m looking for long-term revenue growth in the mid-single-digits (around 6%), with modestly better FCF growth. I believe that Nigeria and Ghana can remain strong contributors to overall performance, but I likewise believe more TLC is needed in the South African operations, and that TLC will likely have to include real capex spending growth.

Longer term, there are definitely attractive potential drivers here. In addition to above-average population growth, MTN’s core markets can offer meaningful growth in data consumption, as well as digital services (including mobile banking). There are also opportunities still in place to expand into additional African markets. What’s needed, though, is strong execution and a demonstrated ability to “get its house in order” with respect to its currency exposures and its competitive position in South Africa.

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The Bottom Line

MTN Group does look undervalued, maybe even meaningfully so, but it also looked undervalued back at the start of the year. With the economies of South Africa, Nigeria, and Iran under serious pressure, there’s a limit to how positive you can feel about the stock, though I suppose a “how much worse can it get?” argument may be valid (even though the market tends to answer that question with “it can get much worse”). I believe management can navigate its way through this currency-induced liquidity squeeze, but macro risks will always be present here and I’d like to see/hear more about a strategy for rejuvenating the South African business before getting more overtly bullish.

Disclosure: I am/we are long TKC, MTNOY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.