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By Janice Kew

July 15 (Bloomberg) — Celtel Zambia Plc, the Zambian phone company that started trading last month, was rated “overweight” in new coverage at Morgan Stanley, which said it and MTN Group Ltd. are “top mobile picks in still-booming Africa.”

“Celtel Zambia is attractively valued,” analysts including Sean Gardiner wrote in a note to clients today. Celtel Zambia has a “dominant 84 percent market share” in the country, according to the note.

Mobile-phone use in sub-Saharan Africa will rise to 42 percent of the population by 2012 from 19 percent last year, Morgan Stanley said. Operators increasingly are targeting rural areas where payback periods are short and demand is high. New services such as mobile banking are also making owning a mobile phone “even more essential,” the analysts wrote.

Celtel Zambia, the southern African nation’s biggest mobile- phone company and a unit of Kuwait-based Zain, raised 665.6 billion kwacha ($205 million) in the country’s biggest initial public offering and attracted applications for more than twice the number of shares offered.

MTN, Africa’s largest wireless carrier, was upgraded to “overweight” from “equal-weight”, meaning investors’ funds should hold more of the stock than the weighting in benchmarks. MTN “is a great play on mobile growth in sub-Saharan Africa,” the analysts wrote.

MTN on July 9 agreed to extend exclusive merger talks with India’s Reliance Communications Ltd. for two weeks in a bid to reach an agreement. This could “help resolve the disputes over right of first refusal claims by Reliance Industries,” according to the note. Mukesh Ambani‘s Reliance Industries Ltd. in June said it may block any deal which doesn’t give it a first chance to buy a stake in Reliance Communications.

“Even if talks collapse, we do not think there is any positive expectation for a tie-up reflected in the current share price,” the analysts wrote.

Morgan Stanley also initiated coverage of Safaricom Ltd., east Africa’s biggest mobile-phone company, rating it “equal- weight.” The firm cut Orascom Telecom Holding SAE, the biggest mobile-phone company in the Middle East and North Africa, to “equal-weight” from “overweight.”

To contact the reporter on this story: Janice Kew in Johannesburg at