MTN Group: Connecting Africa - [Business Breakdowns, EP.109]

28:59For MTN, its strongest market is Ghana, but then Uganda, Cameroon, Coutivore, are some of their other strong markets. Nigeria, they have a number of fintech services, but only recently actually received regulatory approval to start rolling out their own mobile money system. So, the regulatory realities as well as the telco competitive realities of a given market, will often dictate some element of its competitive structure. So, in the case of Kenya, for example, AirTel provides a strong but distant number to Empesa and a strong but distant number to MTN in Uganda, whereas in the case of a Senegal, there's actually a Silicon Valley backed startups that wound up successfully competing against our wrong, which was a dominant telco there.

29:47So it really is highly localized in terms of what the competitive dynamic looks like from market to market. We've talked about the business varying levels of specificity. Is there kind of an architect behind the strategic moves needed to successfully scale this Fintech business and what's driving the capital allocation decisions that MTN number makes? So, two different people, although they definitely are in close dialogue based on my impression and the limited amount of time that I'm unable to spend with them. But on the capital allocation side, you have the now -not -so recent, fairly recent CEO, Ralph Mepeda, who has dramatically simplified the structure of MTN.

30:32He's had a significant asset disposal policy or genuine focus on ROE as a important target for the company to be hitting at a group level as well as at a country level and a willingness to exit markets, even if it means sacrificing revenue or size, simply because those markets are just not a strategic hit for the company going forward. Ralph is a really disciplined guy who is focused on bringing global best practices to the company in a way that I've found very impressive. And I've always found to be very open -minded to learning about opportunities, threats, different practices elsewhere, both in his markets and outside of his markets.

31:12But the discipline that he and his C -suite have on capital allocation has been genuinely strong and certainly strong relative to the legacy of M -T -N that I think you could fairly call somewhat more focused on empire building. But on the fintech side of things, that's been historically a makes bag, but recently, as MTN has been focused on what it calls its structural separation of its fintech business from the telco, it's had the architect of its success in Ghana, which is definitely its most successful home on the money market, run by the gentleman who supervised that success, the man by the name of Serine Diel.

31:48And he went from running Ghana to running the entire MTN FinTech ecosystem. And after this structural separation is done, there will be effectively an entirely different business unit. They separate FinTech pop -co that he will be sitting on top of and able to make the necessary changes, which in some cases may be fairly dramatic, to continue winning and evolving the service. I mean, let's be clear. MTN has had an incredible history of providing world class service. Really throughout the life of the company, it was winning global awards for service quality as far back as the early mid -90s when it first started.

32:27But the necessary skills to offer an app -based FinTech ecosystem or mobile money ecosystem are just dramatically different than the network engineers and studied gradual capital discipline policy that a more traditional telco needs to thrive, especially in a growing market. And on top of that, there's going to be a regulatory impetus to make sure that there is independence and verifiability between MTA and Fintech and MTA and telco. So it is going to be, I think, interesting to see what Serine's comments wind up being at this year's Capital Market's day, but I can say with confidence that historically, I've found him to be ambitious in scale and scope, extremely focused on best practices being implemented across various markets and really trying to break away from a more studied telco pace of change because frankly he recognizes that transitioning from a feature phone or USS to e -based mobile money offering to something that's app based and much more software and user experience intensive is going to require pretty dramatic cultural change versus what legacy mtn might be more familiar with.

33:44I guess the idea of a structural separation is not something that I'm particularly familiar with at least in the vernacular of how we think about markets domestically. Can you kind of speak more to that decision and what that means for how they think about the future of their company? So I wouldn't want to speculate too much. The conversation around this started roughly at the same time that AirTel money announced transaction with TPG's Africa -focused fund. But the explicit stated intention of that AirTel money business being spun out in a timely manner after the TPG investment. Based on current indications, that spin -up process is likely to happen in the next, I would say, 12 to 24 months.

34:30I think it's safe to assume that, given that AirTel Africa is listed in London that they're very open to the idea of a listing in London or the United States. And that created a fair bit of pressure for MTN to also start highlighting and clarifying the role of its Fintech within the broader group. At the same time, they were clearly anticipating some level of future regulatory scrutiny in terms of making sure that MTN Fintech could be, for example, regulated like a bank if they needed to go in that direction over time. So the concept of a structural separation is really not so unfamiliar in the sense that you already understand conglomerates and Nobody would find it bewildering for say Geico to place a large bulk order for seized candy Within the context of Berkshire Hathaway to use sort of an American a comparison But the particular Impetus for the structural separation goes beyond just localization of authority and pushing authority down to chain.

35:31You also have this desire to create a separate organizational culture and focus in addition to that regulatory separability and the desire to really highlight the value of creating inside of MTN FinTech. If I try to contextualize the size and scale of this business maybe from a total payment volume perspective or GMV or whatever is the right way to think about it, daily how do you kind of think about the size and scale of what we're talking about here? Empty and Fintech business is amazingly large in our opinion, considering the level of general attention that it perceives in the wider world. This is a business that had 22 million active users to the end of 2017 and at the end of 2022 was at 69 million users.

36:18In terms of transaction value, this is a business that did 220 billion USD worth of total transaction value year over year and back in 2017 that was at roughly 55 billion USD transaction volume similarly large. I mean in ways that we just find really amazing 2 billion of total transaction volume back in 2017 and in the most recent period They were doing 2 .9 billion average transaction volume per quarter. So call it roughly 12 billion on an annualized basis and growing very quickly off of that base. If it were not for the fact that there is a large significant levy on mobile money transactions at Ghana, again, an empty and strongest market, as well as significant currency headwinds in Ghana in 2022, we think that in absolute terms, Fintech revenue and transaction value would have been up really strikingly year -over -year.

37:13But if you just exclude Ghana for a second, this was a business that was up roughly 30 % year -over -year in 2022, which, last we forget, was a very difficult year for emerging markets in general, an African in particular. And we would just point out that through 2021, Ghana was radically larger than any other MTA market and still was actually growing comparably fast. And if you take a look at the most recent regulatory data that we've been able to find, Ghana appears to be back on its prior growth trajectory. So this is a business that's growing extremely quickly at scale and actually still has a very long way to go in most of MTNs markets.

37:54Although we by no means want to suggest that it's a Fed of Complete that MTN will wind up having comparable success elsewhere. We're just optimistic on the point. On the topic of Levy's regulation, governance, typically Africa is perceived by Western investors to be more challenging, geography to invest in, Nigeria being a country with particular difficulties around getting cash out. Can you just provide a little bit of insight in how you think about investing in these assets and how those topics impact MTN? Emerging markets are difficult in a variety of different ways. And Africa, as a general operating environment, has a wide range of challenges.

38:41And I certainly would not want to understate those. But at the same time, I would make a few observations. First of all, these are businesses that have really managed to thrive under a very difficult decade for most emerging markets, particularly in Africa. MTN's Nigeria business has really become the leading light of the company, even during an extremely difficult period for Nigeria. And frankly, some very choppy regulatory waters for MTN and Nigeria back in the mid -2010s. I think mitigating a lot of the optical challenges of these markets are remembering that these are extremely important local participants in the economy.

39:21MTN is usually the largest taxpayer in pretty much any of its markets. And if it's not the largest, it's among the top five or 10. It's also had a pretty active campaign of localization where a substantial piece of, say, MTN Nigeria is listed locally on the Nigerian stock exchange, such that for the Nigerian government to act against MTN Nigeria, they not only would have to cut off service and communication capabilities for tens of millions of Nigerians that rely on MTN for communication services, But they also would be hitting up their largest taxpayer and one of the largest listed companies in their market and correspondingly hurting their large local asset managers.

40:07So the alignment is actually become quite strong. And if you just sort of want to look at some proof in the pudding, this past quarter was a really good example of challenging times in Nigeria, a very volatile election, but also So during a period where the government did a large -scale banknote conversion, and again, during the context of a Ukrainian conflict that has been putting inflationary pressure on a large number of markets. Despite that, data subscribers in M .K. Nigeria groove the midteens. This is just fresh data from earlier than the day as of when we're recording this, and voice subscriptions were up high single digits.

40:46So while I by no means want to suggest that these are businesses that will not struggle to some extent when times are difficult in these markets and with the difficulty of these markets, they're not new to this and they really found ways to generate acceptable returns or even very attractive returns even during difficult circumstances. The other point that I would make though is I would make the observation that Western investors have the ability to look through various forms of political risk, whether it be Chinese state or netter prizes and variable interest entities, or something like say Mercado Libre, which is by all accounts an incredibly impressive company.

41:26But where 40 % of their crown jewel FinTech asset Mercado Pago is probably represented by Argentina, which candidly, all of the difficulties in Nigeria are very significant, but I'm not certain that they're radically different than that of Argentina. And yet, Mercado Libre is celebrated probably right. So finds its home as a percentage portion of investors portfolios and commands a very rich valuation. My point is not that that's necessarily inappropriate. But simply that in the context of diversified portfolio, it would be, in our opinion, inappropriate to treat these as uniquely risky jurisdictions, as opposed to jurisdictions that require thoughtful risk management to balance out against what we see as a manifestly clear commercial opportunities.

42:09I guess I'd note that Mercado Libre's US -listed company, MTN Group, is not. Is there anything that kind of plays into the decision for these businesses to list locally versus access to the global capital markets by listing in London or the US? So I think in general, what we're seeing is that there's been a lot of substantial real, re -rate opportunity for companies that are willing to explore, realisting in the United States. And we can't really say for certain to what extent that's going to be a sustained trend or something that's only going to happen for some period of time. But for a large company like MTN, they've historically viewed themselves as proudly South African.

42:52And historically that was a good home or good jurisdiction for them, at least in their study judgment. Over time, I think that as the RAND has become a more challenging currency to transact in, and the Joe Berg exchange has really seen a lot of departure of foreign market participants, it's made it more difficult to get premium valuations or lower costs of equity capital by listing on the Joe Berg exchange. We think it would make a ton of sense for M -T -N to explore re -listing in the United States or in London or at least exploring in ADR. But we recognize that these are often extremely culturally sensitive conversations because of course They're probably very proud to have this impressive company listed locally that being said Again if the goal is to lower cost of equity capital and generate strong returns The fact pattern seems pretty clear in terms of further relative valuation opportunity is in terms of the local listings though So those are in some sense tactical.

43:51We're very confident that listing MTN Nigeria in Nigeria is not the optimal way to get a premium valuation for MTN Nigeria, but it's a very good way to make sure that local participants have a meaningful commercial stake in the development of that asset. And so while we fully can see that it's a suboptimal structure, it has the side effect of doing a great job of alignable stakeholders in a clean way. So it seems fairly obvious that the demographics are in their favor. There are structural advantages in the footprint that the MTN Group's business has today and the distribution advantage to get its mobile money product into the hands of its consumers.

44:35The trajectory of the business seems very healthy, but if they were to see their competitive advantages. Where do you think there are kind of risks in the story beyond the complexity? And how could the business not reach its full potential? Africa is a challenging operating environment, and so I never want to pretend that any of this is easy or guaranteed, and by the way, I'm very confident that Ralph and Serene would very much agree as well as all of their peers. I've never found the MTA and team to be anything other than humble and very serious about the balance of risk and opportunity in their market.

45:11But if we go away from just sort of general market risk considerations, there's a few things that immediately come to mind. One is just execution. This is a very large complex organization, as you say. But a side effect of that is if they get distracted, they could potentially lose focus on things. I'm not especially worried on that. They seem extremely focused, but particularly when comes to things like their fintech offering, the cultural change involved in having a mobile money business that is no longer operating like a telco or telco adjacent and now operating like a digital services business that's in some instances literally competing against venture backed companies is a real cultural change and they seem to have done an admirable job so far and I'm very optimistic they will continue to do so but it's by no means given.

46:00On top of that, it's possible that you could wind up seeing a substantial competitive entrance in one of their major markets. But again, we'll just sort of make the observation that if there's an environment where people are excited to put billions of dollars into create a competing network to say MTN Nigeria, wouldn't that also suggest that it's a market in which through some real enthusiasm for MTN Nigeria as an asset and as an operating environment. So I would never want to say that the competitive dynamic of mobile is over, but at the same time, I don't think it's really fair to say that you're going to wind up having dramatic arpeggio compression in the same environment where there's a significant amount of enthusiasm for the long -term opportunity within the African mobile context.

46:51Another point that I would make on that is that MTN has been pretty aggressive about active luring prices. At this point, they have done a really good job of bringing the cost of data in Nigeria, for example, their largest and most important data market, the price of a gigabyte well below a dollar. And we think that's likely to continue going down. If you look at the example of geo in India, that has historically been an important threshold for making these kinds of digital services affordable to a wider range of people and continue to expand the pie. So again, while it's not impossible that someone could come in, I think it would be difficult to do it in such where it really does a grievous damage to MTN.

47:34And, relatedly, when you start talking about a company with 20 different markets roughly, coming into one market does not mean that you have the regulatory permissions, commercial, relationship, et cetera, to threaten MTN in its other markets. It certainly will increase your organizational capacity to try to compete, but you're not necessarily actually able to compete. So there's definitely a balance of threats, but even things like the macroeconomic circumstances, look if the dollar continues to be strong for forever relative to emerging market currencies, then you absolutely could have an environment where inflation and dollar supremacy effectively mean that business doesn't grow in real terms from the perspective of a dollar -denominated investor.

48:21We don't really know how to have super strong opinions about that. I mean, this is something that people far smarter than me have really spilled a lot of ink trying to opine on and people seem to generally not get it right. It does seem to be headable in some broad macro sense for people that are intrigued by this fundamental opportunity, but are concerned about the challenges of a perpetually strong dollar on the business. And by the way, a strong dollar was easily the single largest headwind to a number of lines of business with MTAN. So we don't want to say it's not an issue, just that it is, we think something that can probably hedge and also probably not something that's likely to be a permanent feature of the global economy, but that again above our pay grade.

49:02The pandemic created a lot of volatility in the economics for tons of businesses. And before that, the global financial crisis was another economic shock to the system. I'd be curious from a macro perspective and a micro perspective, how African telcos performed through these periods of economic uncertainty. And also kind of in the midst of all that, the iPhone came on to the market and certainly disrupted the US phone market. How is it relevant in the context of the African smartphone market? Yeah, this is something that I like to use as a bit of a thought experiment because there's this idea that Yens are just impossibly volatile in a way that makes them borderline on a festival or that these are tremendously fragile businesses.

49:51And while, again, no business is perfect and we don't want to pretend that there's never going to be a cloudy day for these businesses, there are a lot more resilient, particularly really the telcos than people want to give credit. These are businesses that have survived through some challenging times of the last decade. And I've actually managed to grow subscribers quite strongly during that period, although admittedly with often declining arpoos before the data story really started to kick in. But the big point that I would guess would make is these are businesses that have been growing really strongly through COVID.

50:19That's maybe not so surprising, just in the sense that COVID really encouraged the adoption of a lot of communications, methodologies that were previously less central to people's day -to -day lives. But even now, now that COVID restrictions have really completely fallen out in every African country, these are businesses that are doing quite well in aggregate, particularly in terms of subscriber growth, during what should objectively be the second or third worst macro period that they've experienced over the past 30 years. And we think that analogies is pretty well with the reality that the iPhone and broad smartphone adoption in general really started to inflect very positively in the West during the midst of the GFC.

51:02So While it's not a promise that it's gonna be a perfect one -for -one analog It seems as if when it comes to communications technology and equipment once the product market fit is there the prices at a workable level The inflections can be really quite traumatic and sustain themselves even during difficult macroeconomic I can buy them. Thinking about a story like this, we've been kind of preconditioned to expect Fintech and Payment Oriented Companies beyond the card networks to be unprofitable as they scale. How do you kind of frame, I guess, A, what's the profitability of this business look like today, but also into the future?

51:42How do you frame the upside of what this could look like five, 10, 15 years from now? Now, this is one of the funny things. MTN's FinTech business, and same as with all of the other major African FinTech businesses among the telcos, they're all profitable. They're all actually quite strongly profitable. MTN is just special because, again, by some measures, it's the largest at this point, and it's certainly the largest at scale operating in multiple economies. But if you just use the numbers management is guiding towards in terms of this separation, It looks like all in fully loaded EBITDA margins may be something like 35 % and with very minimal capex needs, management is focusing people on EBITDA margins seemingly because that's what a lot of telco analysts are precondition to focus on and I can certainly understand that intellectually, but this is a very different me investment profile.

52:36Management is talking about sub 5 % of revenue being required in terms of capex reinvestment and we suspect it's going to be substantially below that. So what that winds up working out to, even with a really fully loaded tax structure and no optimization whatsoever, this is a business that could have net margins roughly twice what the rest of MTN's business has today. And as the incrementality continues to go up and particularly with advanced services, with incrementality is quite high, that could actually trend substantially higher from here. But just to not put too far to the point, we think that just based on management's disclosure, the idea of saying that empty and fintech is today a business doing more than $200 million of net profitability, fully loaded for tax is certainly in line with management's guidance.

53:22We think that there's a non -trivial amount of upside from there. In terms of what this could look like in the future, as you say, people are preconditioned on fintech to expect a lack of profitability, so the level of profitability here may be surprising. I wouldn't blame people a little bit or so, but the people also preconditioned to assume that bad things are going to happen in Africa and they will, to some extent. But if we can dream the dream for a second, if we were to just use the current mobile money profitability generated per user and Ghana and apply that across M10's entire African subscriber base, you do it again on our math and assuming diminimous incrementality, even though we think that's who's likely to be pretty substantial incrementality, you'd increase earnings power by roughly 70 to 80 percent today and that's assuming no incremental subscriber growth and no substantial growth of advanced services.

54:13As we've attempted to lay out today, we're pretty optimistic that both of those are likely to happen. The demographic growth seems inevitable. It's possible that MTN really fails to harness that. So I wouldn't want to give you a specific subscriber number, but you can get a sense of when the stock of 18 -year -olds in these countries are growing mid -single digits or higher every single year just by dint of demographics, you can see how there's going to be a lot of digitally fluent young people who are really excited to get their hands on their first smartphone as soon as it's affordable to them and really actively engage in the digital economy.

54:48So the idea that you're going to see a diminimus increase of advanced services and diminimus increase in the numbers and strawberries, we think is clearly not correct, but Ghana is far enough ahead of MTNs of the markets, just framing the profitability per user in their best market. We think it's a good starting place for thinking about the impact on this thing, especially in the context of a business that we think could plausibly grow for many decades just on the basis of additional population growth. And in a mastercard or visa kind of way, if it gets fully established, could be have a toll taking like feature on the economy, especially as long as it continues to add incremental value into its ecosystem, which Serine talks about a lot, and certainly the teams seems to be very focused on that as well.

55:33And as his customary or concluding question for these conversations, this is an extremely dynamic, interesting business that you've had the privilege of studying and experiencing. What are lessons you take away from your studies of this business as an investor, and the lessons that can be applied to other businesses in the emerging markets that can be borrowed from the MTN story. Privileges is a good word to use because it's been really fun and really exciting to be looking up this business for the past several years. I'd looked it before back in the mid 2010s in a very different context and just really digging in deeply and spending a lot of time on the ground, on visiting various markets, talk with local practitioners, and extremely energizing and eye opening in terms of just how rapidly things are changing on the ground at many of these markets.

56:26In terms of lessons for investors, I would start by saying that US markets are amazing and they're considered the best in the world for a reason. But the rest of the world really does have a fair number of opportunities that are worth studying. African demographics alone demand that investors start to have a view, because it will be a huge driver on everything from consumer demand, the popular culture, to commodities for effective the rest of our investing lives realistically. Relatedly, there's a narrative that innovation is really the preserve of the US, but emerging markets have had the ability to leapfrog and pioneer in a large number of areas, including things like mobile money.

57:02We think that story has really just begun, and you're seeing variations on that everywhere from, you know, certainly China, which has been incredibly rapid in finding ways of filling various low -end niches to Africa, to Southeast Asia, various parts of Latin America. And so whether you are a US -focused investor that's looking to learn lessons from elsewhere or you're more focused on emerging markets, I think that's beginning to be a dated stereotype to assume that the only thing that emerging market economies have to offer commodities and state -owned enterprises and other very sleepy organizations, there's definitely still plenty of that.

57:37But the world's increasingly changing and a lot of these markets are increasingly tilted towards information technology information services Finally on the operator side. It's a really good question I thought about it a lot since I did know that it was coming I would just say that operators that are willing to thoughtfully build on their income and see advantages innovate and incorporate global best practices They can radically change their local economies the digital revolution is in its early innings globally hopefully that, if nothing else, that's clear from this conversation today. And it's creating a digital class of sophisticated young people in emerging economies around the globe.

58:12We focus on Africa today, but you can tell similar stories of enthusiastic TikTok users and home -trained programmers and a hundred other markets. These people represent a new kind of consumer class and they're a huge, barely -touch talent pool that's born digital and mobile first. We've watched companies that take these populations for granted, have their franchises is totally dismantled. Meanwhile, those that are willing to adopt and innovate on global best practices have been able to spin up multi -billion dollar businesses, shocking quickly. And so while the US is one of the, if not the economic center of the world, by pretty much any measure, looking where the changes are happening fastest, we're not certain that it's only in Silicon Valley and other parts of the US economy that those kinds of important global changes sit.

59:02Increasingly, we suspect that you're going to have a lot of things to learn from these leapfrogging digital first businesses that are serving these consumers. So very exciting to watch and hopefully something that at least opens some operator's eyes to broadening their horizons. Or if they are a emerging market based, recognizing that where they are is not just a backwater. It's actually a source of really exciting opportunity into the future. This is a fascinating story in a market that not a lot of investors in our audience are typically familiar with. So we thank you for helping to educate us and we look forward to learning more about this business.

59:38Thanks, Zach. Really appreciate it. To find more episodes of breakdowns ranging from Costco to Visa to Moderna or to sign up for our weekly summary, check out join colossus .com. That's J -O -I -N -C -O -L -O -S -S -U -S dot com.