by Charles Sizemore | December 23, 2013 2:15 am
Editor’s note: This column is part of our Best Stocks for 2014 contest. Charles Sizemore’s pick for the contest is MTN Group (MTNOY).
Investors have pretty well forgotten about emerging markets over the past three years. The “BRIC” countries of Brazil, Russia, India and China no longer excite. Nor do more exotic non-BRIC locales such as South Africa. The iShares MSCI South Africa ETF (EZA) is down by roughly 15% since the beginning of 2011, while the S&P 500 has gained nearly 45%.
I’ve made no secret of the fact that I’m a major Africa bull. It’s the last major investment frontier, and the growth is very real. Per capita GDP has more than doubled in the past decade, and according to Deloitte, seven of the 10 fastest-growing countries in the world are in Africa.
One sign of the booming middle class is Africa’s surprisingly high cell phone penetration; by Ericsson’s estimates, the continent already has 780 million mobile subscribers.
Don’t underestimate the significance of this. Africa has harsh geography, which makes building infrastructure very difficult and very expensive. But mobile technology allows large parts of Africa to essentially leapfrog over legacy technology infrastructure — such as copper phone wires — and into the modern world.
This is showing up in some interesting places. For example, mobile phones are giving millions of working and middle-class consumers access to basic banking services for the first time. According to Deloitte, “a 10% increase in mobile phone penetration in a poor country is linked to an increase in GDP of 1.2% due to the ensuing economic activity that people engage in as a result of being ‘plugged in’ and connected.”
For a part of the world that has been more or less in isolation since the dawn of time, this is a game-changer.
By now you might have guessed that my recommendation is an African telecom stock. So with no further ado, here it is: South African telecom giant MTN Group (MTNOY).
MTN Group is headquartered in South Africa, but it has more than 200 million customers spanning 22 countries across Africa and the Middle East. Roughly a quarter of its subscribers are from Nigeria alone.
Although most Americans have never heard of MTNOY, its brand has cachet in large swaths of the developing world. MTN’s brand made the Brandz list of the Top 100 Most Valuable Global Brands in 2013, coming in at No. 79. It’s the first African company to make the list.
Looking at the fundamentals, there is a lot to like about MTN Group stock. Revenues and earnings are up by more than a third since 2008, a period in which growth has been hard to come by in most markets. MTNOY trades at a reasonable price/earnings ratio of 13 and pays a respectable, growing dividend currently yielding 4.5%. MTN Group grew its dividend by 10% in 2012 and is on pace to grow its 2013 dividend by 15%. In the past five years, it has grown its dividend by about 45%. (Though fair warning: Exchange rates can skew ADR payouts.)
The bullish case for MTN Group is straightforward:
What could go wrong?
Well, first I should state the obvious. MTN Group is based in Africa and does business in the world’s most dangerous hotspots. It’s a leading provider in Syria, for crying out loud. This is a company that is constantly exposed to macro risk.
But it’s also a company that has proven very capable of operating in those environments over its history. There could be short-term bumps, but overall, MTNOY should be able to navigate whatever unexpected surprises come its way. And its willingness to jump into markets that would give most executives heartburn gives it a first-mover advantage in the countries with the fastest potential growth rates.
Next is competition. While MTN Group has the biggest presence in Africa, it’s not the only player. Britain’s Vodafone (VOD), through its subsidiary Vodacom, is also very active in Africa and in fact has a larger market share in MTN’s home market, South Africa. But this is the beauty of operating in growing, non-saturated markets. Hundreds of millions of Africans have yet to buy mobile phones … let alone smartphones. A rising tide lifts all boats.
I suggest buying MTNOY stock with a plan to hold for 50%-100% gains in the next 18-24 months. And I expect enough of that to come this year to put me well on my way toward a strong Best Stocks for 2014 outing.
The rise of Africa is real. And MTN Group gives us direct access to the new middle-class African consumer.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management and the editor of Macro Trend Investor. As of this writing, he was long MTNOY in his Macro Trend Investor portfolio and personal accounts.
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