Iran's tumbling rial to squeeze MTN's profit

JOHANNESBURG Tue Oct 16, 2012 9:59am EDT

JOHANNESBURG Oct 16 (Reuters) - A plunge in Iran's currency could slice 5 percent or more off MTN Group's full-year earnings, the latest setback for the South African mobile operator over its money-spinning business in the Middle Eastern country.

MTN, Africa's largest wireless operator, made a big - and so far profitable - bet on Iran in 2005, taking a 49 percent stake in Irancell which now contributes about 9 percent to its earnings.

However, the tumbling rial, along with an ongoing $4.2 billion lawsuit over MTN's Iran licence, highlight the political risks of doing business with a country increasingly under pressure from Western sanctions over its nuclear programme.

Sanctions have slashed Iran's oil export earnings and triggered a rush by its citizens to exchange their savings for foreign currency, dragging the rial down. While the official rate is 12,600 rials per U.S. dollar, the price on the open market hit a record 37,500 rials earlier this month.

"As I understand it, the authorities are trying to stabilise the rial at around 25,000 to the dollar. Let us assume it went to the 25,000 point as a first step. That would cut MTN's Iranian earnings stream roughly in half," said Richard Barker, a Credit Suisse analyst in Johannesburg. "That is going to knock roughly 5 percent off their earnings."

MTN finance director Nazir Patel said in August the rial's slide could have a big impact on second-half earnings, expected in March.

Spokesman Paul Norman said on Tuesday the company was not in a position to comment further.

MTN has been unable to move money out of Iran for months due to the widening U.S. sanctions, and has said it was in talks with the Unites States about repatriating funds.

Because the currency cannot be brought home, the impact of the rial's slide is likely to be an accounting writedown.

"Some people might view that as a matter of concern, but until you actually have to sell assets at that lower rate, it is not really impacting on the cash flow. So in the short term, I do not see it as a problem," said Thato Mashigo, an equity analyst with Cadiz Asset Management.

BIG DIVIDENDS

Irancell was MTN's third-biggest profit source in 2011, generating 4.7 billion rand ($545 million) in earnings before interest, tax, depreciation and amortisation (EBITDA).

Revenue from Iran was also around 9 percent of the group total, or 11 billion rand. Those numbers were based on an average exchange rate of 10,614 rials to the dollar.

The company's hefty dividend is unlikely to suffer, however, as MTN generates enough cash from its other businesses to ride out its inability to bring home money from Iran.

It is more likely to spend its cash in Iran on capital expenditure there, and pay dividends out of earnings from its other 20 operations in Africa and the Middle East, said Byron Lotter, a portfolio manager at Vestact Asset Management.

"We are still buying. We think the Iran situation is factored into the share price and operations elsewhere are looking good," he said, adding that Vestact has allocated 10 percent of its portfolio to MTN.

MTN has bigger operations in South Africa and Nigeria, but Iran has seen the fastest growth in subscribers and revenue.

The company's dividend yield of 4.75 percent is one of the highest on Johannesburg's benchmark Top-40 index.

MTN's troubles in Iran are not limited to the local currency. It is facing a $4.2 billion U.S. lawsuit filed by Turkish rival Turkcell for alleged bribery when acquiring the Irancell licence in 2005.

It has denied any wrongdoing and said the case lacks legal merit. An elite South African police unit is also investigating the allegations.

MTN shares fell earlier this month on concerns about the rial, although they have since recovered. Shares of the company are up about 10 percent this year, slightly underperforming a 14 percent rise in the Top-40 index.

With MTN's exposure to markets such as Iran and Syria, it is not for investors without a decent amount of risk appetite, said one analyst, who declined to be identified.

($1 = 8.6998 rand) (Additional reporting by David Dolan; Editing by David Dolan and Mark Potter)