Uganda: Behind MTN Share Offer

Kampala, Uganda — Commenting on the move by Uganda's largest telecom company, MTN, to list on the country's stock exchange, Stephen Kaboyo, the managing director at Alpha Capital Partners, sees opportunity.

"In my own prediction, MTN stock will be a good buy, will definitely be oversubscribed, and depending on the share allocation approach, I expect huge presence of retail, pension funds and other institutional investors, as well regional investors," he said immediately MTN revealed the Initial Public Offer plan.

Kaboyo who heads a local firm focusing on sovereign asset management, foreign exchange trading and financial markets, is a veteran of Uganda's capital markets. He said he expects MTN's listing to deepen the capital market and by implication increase its visibility and attractiveness.

"It will help in building investor confidence in Uganda's equity market and by extension boost the market capitalisation of the stock exchange," he said.

There has certainly been no bearishness about MTN's listing, but the bullishness from Kaboyo and others, has also been tempered by providence from professionals.

Keith Kalyegira, the chief executive officer at the Capital Markets Authority cautions investors; whether institutional or individual, to endeavor to understand the salient features of the offer as spelt out in the IPO prospectus, by seeking professional advice from any of the licenses professional investment advisors or participating brokers before investing.

He said by listing, MTN will reap multiple benefits including public relations value that comes with a being quoted company and urged other Ugandan enterprises and family owned businesses with ambitious growth plans to consider market based financing to finance their growth or refinance the expensive debt they may have.

Multiple other sources have also said in as much as investors need to invest their money in the company, they need to do so with caution.

"There's certainly value in MTN Uganda but don't put all your savings in there. Don't look at it like a breakthrough of what you have been waiting for, no," one of the sources said.

MTN Uganda opened the Initial Public Offer of its ordinary shares on Oct.11 ahead of listing on the stock market.

With each share priced at Shs 200, MTN Uganda aims to raise approximately Shs 895.56 billion (US$250milllion) from the sale of 4.47 billion shares or 20% of its ordinary shares.

MTN Uganda CEO Wim Vanhelleputte says the telco plans to invest more than US$300million mainly towards expansion in the network to grow its business.

The listing move is designed to enable the local population and their counterparts in the East African Community have a chance to own part of the lucrative business. But as with all investments in shares, the element of risk is not absent.

The tough decision-making has placed many potential investors in almost the same spot as others faced when MTN first ventured into the Ugandan market in the late 1990s.

Charles Mbire, the company's current board chairperson, was among those that seized the opportunity. He is currently the only other shareholder in MTN Uganda with a 3.98% of the business equivalent to 892.2million shares worth Shs 178.4billion. Mbire acquired his shareholding at MTN Uganda's inception in 1998.

MTN Uganda, which is a subsidiary of South African-based firm, MTN Group, has been very successful over the years. And Mbire has prospered with MTN. The company's business prospectus for the IPO shows that in the year ending December 2021, Invesco Uganda; a company whose value is 70% held by Mbire, reached an agreement with MTN Uganda to cancel a recurring support services agreement at Shs11billion (US$3million).

Mbire says Ugandans investing in MTN have the opportunity to transact in the shares of the company and to realise the value of their investment because the capital markets on the whole will be strengthened with the USE benefitting from an increased market capitalisation and share liquidity.

Financial performance

MTN Uganda currently has 22.389 billion shares valued at about Shs4.48 trillion. It has consistently recorded growth in profits in the past five years, riding mainly on data and mobile money services. The company recorded Shs96.3 billion in 2016; Shs 152.6billion in 2017; and Shs 219.5billion in 2018 as profit after tax. The company also recorded Shs269.2billion in 2019 and Shs 321.6billion in 2020.

Despite the one-off termination payment to Invesco Uganda and another Shs50bilion (US$14million) one-off payment in transitional licence fees to the Uganda Communications Commission (UCC) which regulates the telcom market, MTN is still expects to record a modest 0.9% growth in profit after tax to Shs325 billion for the year ending December 2021.

MTN revenues have been on the upward trend. It recorded Shs1.30trillion in 2016; Shs1.43trillion in 2017; and Shs 1.55trillion in 2018.This later increased to Shs 1.71trillion in 2019 and Shs 1.88tillion in 2020.

But in the IPO prospectus, MTN Uganda also lists risks in its operations that could potentially see value of the shares upon listing decline and investors potentially losing all or part of their investment in the shares.

These among others include risks related to revenue. It says its revenue from the voice services is expected to decline, but the company expects this to be offset by growth in data services revenues.

There is risk around renewal of its operating licence, payment of substantial spectrum fees, failure or network interruptions, and competition from other traditional and non-traditional operators in the telecommunications sector.

"Although MTN is currently the leading wireless network operator in terms of subscriber market share across fixed telephony, mobile voice and data service types, the Company faces stiff competition from traditional and non-traditional operators in the sector," the company states in its prospectus.

"The company operates in an exceptionally competitive environment, particularly with respect to pricing, across its segments and this may adversely affect the Company's revenue and margins. Over the last five years, a number of new telecom providers have been licensed and with the roll-out of a new telecommunications licensing framework, the industry will be reshaped in the medium to long-term."

Moreover, the company says non-traditional players including social networking sites like Facebook (including Facebook Messenger), Instagram, WhatsApp, Telegram, Snapchat, Viber and TikTok, and modern enterprise communications applications such as Zoom, Microsoft Teams, Blue Jeans and Google Meet continue to enter the market, providing highly-nuanced and multidimensional competition, threatening its revenue streams like pre-paid mobile voice services and text messages.

MTN Uganda is also currently involved in 75 court cases though adds that none of the litigations involved in has the ability, individually and in totality to affect its business and assets to the extent of affecting the overall viability as a going concern.

Dividend policy

But the main draw for potential investors should possibly be MTN's current dividend policy.

"Investors will benefit from dividends (when declared by the company) and a capital gain per share depending on the performance of the Company over time and its trading activity," says Mbire.

MTN's current dividend policy provides that in the medium-term, the company will target a dividend pay-out ratio of at least 60% of annual profits after tax.

However, dividend pay-out ratio in any given year is subject to the Board discretion considering the Company's cash projections, business outlook, investment plans, capital markets conditions, solvency and liquidity, tax regulations and debt covenants.

The Board may also vary the dividend pay-out ratio in a year if the accumulated reserves can accommodate an extra payment above the set ratio subject to cash availability and compliance with debt covenants.

Furthermore, the MTN's policy is to consider declaring and paying dividends thrice a year: a first interim dividend after the half-year results, a second interim dividend after quarter-three financial results and a final dividend in quarter-one following the release of the year-end results.

Meanwhile, the dividends paid will be subject to withholding tax, which is borne by the shareholder, with the dividend payments to resident shareholders attracting a withholding tax of 10% of the gross amount, while dividend payments to non-resident shareholders ordinarily attracting withholding tax of 15% of the gross amount.

For non-resident shareholders, double taxation relief may apply where Uganda has double taxation arrangements with the country of residence of a particular non-resident shareholder, in which case the withholding tax rate would be 10%.

Behind decision to list

MTN Uganda now becomes the 10th domestic company to list its shares on USE which has suffered a lull in business. The last company to list, Cipla Quality Chemicals Ltd, did so in 2018.

MTN's listing is meant to enable the telco comply with the provisions of its renewed National Telecommunications Operator (NTO) License which requires that it lists on the Uganda Securities Exchange by June 30, 2022.

SBG Securities Uganda Limited, a subsidiary of Stanbic Bank Holdings has been appointed as the transaction advisor and the lead broker.

Upon completion, the listing will see MTN Group through its investment, MTN International domiciled in a tax haven state of Mauritius; reduce its shareholdings to 76%, equivalent to 17billion shares valued at Shs3.4trillion.

People familiar with the operations of the telco told The Independent that MTN Uganda's step to list on the USE is solely meant to 'make good' of its strained relations with the Ugandan government in which President Yoweri Museveni has always lashed out at the company for profit 'repatriation.'

MTN Uganda's journey started nearly three years ago as the telco sought for a new licence renewal after the expiry of its 20-year operating licence in October 2018.

The government had initially decided to charge MTN Uganda US$100million as a fee for the licence renewal before the industry regulator, Uganda Communications Commission (UCC) revised it lower to US$58milion saying the company had mentioned more planned investments worth more than US$200milllion.

However, President Museveni opposed UCC's decision on grounds that MTN Uganda has reaped "vast profits" in Uganda since 1998, when it started operating, "most of which have obviously been repatriated."

"The company's obligation to sow where it intends to reap for the next 10 years, as well as its ability to do so are and cannot be in doubt," Museveni said in a letter to the communications minister and the attorney general dated Nov. 19, 2019.

The back-and forth negotiation escalated to the point of deportation of three MTN Uganda expatriates - MTN CEO Wim Vanhelleputte, then-General Manager for sales and Distribution, Annie Tabura, and then Chief Marketing Officer, Olivier Prentout - in February 2019, with the Uganda government accusing the trio of alleged gross crime including threatening national security.

However, Vanhelleputte, was allowed to return three months later on the intervention of President Museveni.

"It is right that MTN Uganda was compelled to list as a pre-requisite for their recent licence renewal," one of the sources that spoke to Independent said. "If otherwise, they would keep 100% of their shares, it makes sense. MTN Uganda is a sound business, and boards don't like to deal with people who have invested Shs100, 000 and make so much noise on social media etc. No one wants to deal with that."

The sources said if it was 'forced listing, MTN Uganda would not list on USE because a public listed company is a headache to run.

But they are quick to point out that listing a company on stock market helps burnish the business's credentials in a sense that it helps to essentially gain more credibility among the public as the value of the company is well known.

MTN Uganda started operations in 1998 and has since recorded a surge in subscriber base to more than 15million. In 2009, the company pioneered mobile money business alongside its telecommunications business until 2021 when, as a consequence of the introduction of the National Payment Systems Act 2020, MTN was required to transfer the mobile money business to a wholly owned subsidiary, MTN Mobile Money Uganda Limited.

Following the completion of the licensing and structuring process prescribed by the National Payment Systems Act 2020, the mobile money business with effect from 19 June 2021 started operated by MTN Mobile Money Uganda Limited.

Currently, MTN has a presence in all 134 districts countrywide 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 more than 145 407 mobile money agents, service stores and 13 main distributors.

MTN converted to a public company limited by shares (under registration number P.498) by a resolution of the members, dated 14 November 2002, with the conversion process being formally completed on 17 December 2003.

MTN is a subsidiary of the MTN Group, which beneficially owns 96.015% of the issued shares in MTN through MTN International, an investment holding company incorporated in Mauritius.

MTN Group operates in 21 countries in Africa and the Middle East and has 277 million subscribers as at 30 June 2021.

Listed on the Johannesburg Stock Exchange, MTN Group has a market capitalisation of more than US$16.6 billion.

More investments ahead

Vanhelleputte says the telco plans to invest more than US$300million mainly towards expansion in the network to grow its business.

He said one of the major conditions for National Telecom Operator (NTO) Licence issuance is for MTN to achieve 90% geographic coverage within the first five years. Currently, the company stands at geographic coverage of 70%.

He said the company's opportunities for growth in the near future are mainly two: mobile money and other fintechs and mobile data.

"We still have a low penetration of data. We only have only 30% of our customers who use mobile data regularly and therefore need to invest more in our network, our capacity and spectrum so that the internet speeds are higher," he said.

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