S.Africa's MTN Jumps on Upbeat Profit Outlook

By Reuters Posted 17 August 2006 @ 03:04 pm EET     Print     Reprint     E-Mail     Comments

JOHANNESBURG (Reuters) - Shares in MTN, Africa's biggest cell phone operator, jumped on Thursday after its first-half profit estimates exceeded market expectations, though some analysts warned profits might fall in the second half.

MTN shares climbed 5.1 percent to 57.70 rand by 1053 GMT, outpacing the Johannesburg Top-40 index of blue-chip stocks, which gained 2 percent.

The South Africa-based company said late on Wednesday it expected first-half adjusted headline earnings per share of 273 to 283 cents. MTN is changing its financial year and so did not give comparative figures, but analysts and fund managers said the figures were slightly ahead of expectations.

"It was about 3 to 5 percent ahead of what I had been expecting," said African Harvest portfolio manager Rajay Ambekar.

But analysts said while MTN might post brisk first-half growth, powered by its second-biggest market Nigeria, the launch of a risky new network in Iran and a pricey recent acquisition of Dubai-based Investcom might shrink profit in the second half.

"The Investcom transaction will be earnings dilutory, and the costs of the Iran launch, which looks to have been delayed slightly, won't bite until the second half," said Ambekar.

MTN has pursued an acquisition spree in recent years, culminating in the $5.5 billion purchase of Investcom, which gave it access to 10 new countries in Africa and the Middle East amid booming demand in some of the last untapped mobile markets.

But risk premiums attached to emerging market stocks -- particularly for telecoms companies which often pump millions of dollars in capital into volatile countries -- have swelled since MTN agreed its price for Investcom in May, and many analysts say the price tag now looks too high.

TOO MUCH RISK?

Some investors also say the company may have bitten off more than it can chew. The Investcom deal includes a new network in war-blighted Afghanistan, and MTN has separately bought a licence to run Iran's second mobile network at a time when that country is locked in a nuclear stand-off with the West.

Most investors expect more detail on the firm's hopes for Iran, where it is due to launch at the end of August, and on Investcom when MTN reports full results on August 30.

Shares in MTN, once an investor favourite outpacing local peers, have fallen 10 percent so far this year, lagging the Top-40, which has gained 18 percent.

Some analysts said the stock now looked fairly priced at almost 10 times this year's earnings, cheaper that its closest peer, Egypt's Orascom, which trades at 12 times 2006 profit, according to Reuters data.

But some noted first-half figures had been inflated by a strong first quarter, when MTN traditionally posts fatter profit margins as it eases off on chasing subscribers after the bumper Christmas season. Previously MTN's financial year rand from April to March.

MTN focuses on adjusted headline EPS, which strips out capital, non-trading and certain one-off items as well as the impact of a tax credit linked to its Nigerian business.