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The one Top 40 stock you must leave alone right now

by , 29 July 2015

The South African telecoms sector hasn't fared so well in 2015.

Companies such as MTN, Vodacom and Telkom haven't lived up to investor's expectations so far.

These companies continue to face tough market conditions, job cuts and slow growth.

However, a couple weeks ago in my article "There's a trading war between two telecoms giants", I mentioned that the Vodacom-Neotel deal would be an excellent acquisition on Vodacom's part.

Vodacom is taking important steps to ensure it takes control and become the leader in the telecoms market.

MTN on the other hand, is struggling to find the same positive growth. So if looking to buy or stock up on MTN, this may not be the perfect time.

Let's see why…

This mobile giant faces big challenges ahead

Shares in mobile giant MTN fell 5% on Tuesday alone, as the company announced it expects a 10% to 15% drop in its first-half earnings.
This bad news is thanks to lower oil revenues slashing Nigeria's economic growth and negatively impacting its currency.

MTN's Nigerian unit also took a knock because of the nation-wide fuel shortage in May. The shortage had a dire impact on Nigeria as private generators that produce most of the electricity for 170 million people and businesses ran out of fuel.

Secondly, in the past month, labour strikes took its toll on MTN and the chopping and changing of its managers isn’t good for the company’s stability either.   

Yes, both issues have ended, but MTN needs to take a step back, reassess its current strategy to find different profitable opportunities to help account for the losses.  

Could this be MTN’s saving grace?

Ten years ago MTN entered into Iran and paid R5 billion for a mobile licence to operate there.

The interesting part is, MTN now receives over 10% of its revenue from Iran and has increased its subscriber base there to over 44 million.

Despite heavy economic sanctions on Iran, MTN continues profit from its mobile operations in the Middle Eastern country.

In MTN's 2014 annual results, its Iran operation increased its revenue by 14%. Not to mention, data revenue increased by 96% thanks to MTN’s newly rewarded licence for 3G and LTE services.

So MTN Iran is still performing well, in tough economic conditions.

Now the recent news that world powers and Iran agreed on a historic nuclear deal could be the perfect opportunity for MTN to boost its growth there even further.

You see, once the nuclear deal is set in stone, MTN will be able to access the R12 billion it has locked up behind sanctions in Iran.

With this kind of cash, MTN could use it to grow its Iranian operations or use the cash to fund its IT services offerings such as e-commerce, intranets and private networks, to improve revenue.

An example of this new strategy is MTN's investment in fleet management companies that track vehicles in real time and send information to the driver or reroute the person.

Is now the best time for investors to buy?

The 10% drop in MTN’s share price, since June, to around R200 might look like an attractive buy-price. But the current outlook for MTN looks bleak.

It has tough challenges ahead. Most notably, the potential Vodacom and Neotel deal that could place MTN, far behind its competitors in the near term.

However, we have MTN in both Stock of the Month and South African Investor portfolios.  And we're happy to keep this stock as a long-term play, for now.

The R12 billion, currently locked up, could help MTN fund and grow its IT offerings and consequently boost its revenue.  But until MTN announces a clear strategy on what it intends to use the funds for if they're repatriated, MTN will continue to slip behind its competitors.

So if you own MTN, the best thing to do right now is, hold it. But if you thinking of adding MTN to your portfolio, then rather wait for a better opportunity.

The one Top 40 stock you must leave alone right now
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