Two years after listing by introduction the local bourse, Mobile Telecommunication Network (MTN) Nigeria share has gained more than 111%, closed at N190 per share on the Nigerian Exchange on Friday. The telecom stock has seen a stronger rally, rising above N208 per share.
MTN Nigeria Plc came to the stock market by way of introduction at N90 just two years ago and has not really hit the iceberg – perhaps a closely held stock with less volatility. However, South Africa based MTN Group has hinted about the plan to sell down 14% of its equity in its Nigeria operations.
That is not the news. Now, some investors and other stakeholders are asking why would a majority shareholder in the leading telecom giants that has 39% of the market share reduce stake.
Industry’s data shows that MTN Nigeria is a market leader with 39% of the market share credited to its superior performance among competing brands. In the stock market, it also ranks positive as a mover and shaker of daily trading movement.
MTN Group said the decision about its equity sales is part of its efforts to deepen its structure of ownership in Nigeria and have a broader retail shareholder base.
But equity analysts are reading between the lines.
Currently, MTN Group controls more than 76% of the equity in its Nigeria operations with 20.355 billion shares outstanding valued at about N3.9 trillion in the local bourse. The stock has gained more than 111% since it was listed in 2019.
The leading telecom services operator’s return on equity printed at 127% in the financial year 2020 from 111% in 2019 while earnings per share jumped to N10.08 from N9.99. MTN Nigeria dividend payment increased to N9.40 in 2020 from N6.92 in 2019.
A deeper look into its financials shows that in the last five years, MTN Nigeria Plc has revved up revenue performance at an average annual growth rate of 11.15%, rising from about N794 billion to N1.346 trillion.
With the Central Bank of Nigeria recent approval-in-principle of Payment Service Banking (PSB) licence, MTN Nigeria would be able to accept deposits and facilitate payments – across both local and foreign counterparties within Africa through its designated platforms, WSTC analysts hinted.
In the Nigerian market, MTN Nigeria has a 68 million subscribers base. WSTC securities analysts dubbed it a fast-growing and high potential company.
Why should you care?
Equity analysts have projected a better dividend payment for the financial year 2021 for Mobile Telephone Networks (MTN) Nigeria Plc shareholders amidst a plan to issue a public offer. However, they linked the decision to sell down to poor stock market valuation. MTN said the public offer would commence in November 2021.
The move is positive, given that it leaves more units of shares to be actively traded by retail investors, analysts at WSTC Securities hinted in a report, expect to see improved liquidity in the stock, as well as better price discovery.
Among other things, price discovery appears to be what MTN Group seeks with the selling down plan which could start any moment from now. MTN Nigeria Plc is the second-largest listed company was valued at N3.87 trillion on Friday in the stock market; coming rightly after Dangote Cement N4.76 trillion market capitalisation.
On November 10, Nigeria’s second-biggest listed company was up almost 5% to N208.30 after it obtained approval- in principle for a mobile money licence that had been pending for more than two years.
Due to profit-taking, the telecom company share price slowdown and then settled at N190 on Friday. Two years ago, MTN Nigeria comes to market at N90 per share, which means it has doubled up its stock market valuation.
But Cordros Capital thinks in a new equity report on the company that MTN group plan to sell down 14% of its stake to Nigeria may not be unconnected with feeling that the stock market hasn’t priced the Telco shares correctly.
With an estimated upside of less than 20%, Cordros Capital analysts keep MTN Nigeria stock out of buying order lists. In the stock market, after initial rallies, the most capitalised telecom operator on the Nigerian bourse has seen investors dumping the stock.
Following the sell-down announcement, and the subsequent heavy trading on the stock while the market awaits the implementation, analysts have remained positive about Telco’s earnings potential.
In its latest estimate, analysts at Cordros Capital Limited maintain their hold rating on the ticker, though the company’s estimates were largely upgraded.
“We estimate a profit after tax of N300.15 billion, up 46.3% year on year in 2021, translating to an earnings per share estimate of N14.7 compare with N10.08 in 2020”, analysts stated in the equity report.
Based on the expectation of better earnings per share in the year, analysts also expect the Telco’s giant to increase dividend payment to shareholders by 48.3% to N8.75 from N5.90 paid last year.
Cordros analysts said the net impact of their changes is an increase in the firm’s target price to N226.48 from N202.21 previously estimated, implying a potential upside of 19.2%.
Explaining their positions, analysts at Cordros Capital said shares of MTNN have gained increased attention from investors over the past two weeks following the announcement that the CBN has granted Approval in Principle (AIP) for license application regarding its proposed MOMO Payment Service Bank.
In addition, the company disclosed that the group company (MTN International) would embark on a public offer for the sale of up to 575 million shares via a book-building process to institutional investors and a fixed price to retail investors.
Analysts said the confluence of both events has elicited strong buying interest in the stock as the share price hit N200.00 on 9 November – the first time since the stock was listed by Introduction in May 2019.
Since 5 November, they noted that when both announcements were made, MTNN shares have gained 8.2% after closing at N190.00 (17 November 2021).
Beyond these idiosyncratic events, analysts at Cordros Capital said they still hold a long-term positive outlook on MTNN given its market leadership position, attractive industry dynamics and relatively less cyclicality.
“With a subscriber base of 68 million as of September 2021, the Company is well positioned to exploit the prospects and growth opportunities in the digital payments space”.
Based on analysts’ assessment of the likely impacts of the developments above, Cordros Capital believes the stock’s re-rating is justified. Mobile Money is the next growth frontier for the Telco industry, the equity report stated.
Cordros Capital analysts said they understand that the recent approval from the apex bank will enable MTNN to put in place the necessary infrastructure to offer banking services such as acceptance of deposits, remittances, payment processing and mobile wallets.
However, it is instructive to note that the approval in principle implies a six-month waiting period after which final approval will be given, provided all regulatory requirements are met.
As things stand, it is difficult to reliably estimate the potential contribution of the PSB subsidiary to revenue, EBITDA and Free Cash Flow, according to Cordros Capital analysts note.
MTN Nigeria Plc fintech business -an abridged version of the PSB subsidiary – contributed 4.2% to revenue as of 9M-2021, analysts highlighted.
Cordros Capital hinted that regulatory data from Kenya, Tanzania and Ghana suggest that the market leader in the voice market is also the market leader in the mobile money space.
This is because the size of the subscriber base provides leverage for dominance, it added.
Accordingly, this suggests that MTNN will likely dominate the mobile money space ahead of the final approval to launch, analysts stated.
MTNN is the voice leader with a 38.6% market share as of September 2021, according to NCC data.  With Airtel’s mobile money business contributing 11.4% to revenue (as of H1-21), analysts said they see scope for increased contribution from MTNN’s fintech business from the current level of 4.2%.
What’s in Store on the Offer for Sale?
Based on the company’s publication, the MTN Group (parent entity) will sell 575 million shares via a book-building process to institutional investors and a fixed price to retail investors.
For Cordros Capital analysts, asides from the fact that the parent company intends to divest to realise gains from its investment, they think the action could have been induced by perceptions that the stock is not fairly valued.
“We find justification for this on the basis that MTNN currently trades at an enterprise value to earnings before interest tax, depreciation and amortization (EV/EBITDA) and price to earnings (P/E) multiples of 4.6x and 9.7x, compared to Airtel Africa with 5.0x and 16.4x, respectively”.
Accordingly, analysts said the need for a new price discovery via a book-building process seems justified.
“We think the price at the end of the book-building process will likely be at a 5% premium or discount to the 60-day volume-weighted average price of N175.86 as of 5 November being the date of the announcement”.
In the third quarter, MTN Nigeria grew service revenue by 22.9% year on year, and by 23.6% on a 9-months basis.  This increase was attributed to a broad-based expansion across voice, up 7.4% year on year and actually accounted for 57.6% of revenue.
Also, the data segment expanded by 57.2% year on year, accounting for 33.2% of revenue while value-added services jumped +62.6%, accounting for 4.5% of revenue in the period.
“We expect continued growth in voice revenue in line with the recovery in economic activities, particularly in the informal sector”, analysts at Cordros capital said.
They also expect the momentum in data revenue to be sustained by its enhanced network capacity and favourable country demographics amid rising smartphone penetration.
Cordros Capital estimates that service revenue will grow to N1.62 trillion, representing a  20.4% year on year increase in 2021, supported by growth in voice (+9.8%), data (+47.2%) and value-added services (+27.4%).
Analysts said the company’s revenue growth will sustain expansion in margins despite elevated operating expenses amidst double whamming of a high inflation rate and naira devaluation in Nigeria.
Despite the significant increase in network operating costs that jumped by 31.5% year on year, according to the MTN Nigeria financials, 22.9% growth in topline and sub-inflationary growth of 6.6% in operating expenses pushed EBITDA higher.
MTN Nigeria EBITDA surged by 27.2% year on year to N217.29 billion in Q3-2021. This pushed the EBITDA margin upward by 179 basis points to 52.4% in Q3-2021 and by 158 basis points to 52.6% on a 9-month basis.
“We expect operating expenses to remain elevated in Q4-2021 given the pass-through impact of the Naira devaluation on BTS lease cost, increased rollout of 4G sites, and advertisement related expenses”, Cordros Capital stated.
Notwithstanding, analysts are expecting revenue growth to limit the overall impact on margins. For the financial year 2021, analysts at Cordros Capital projected that the company EBITDA will grow by 24.8% to N855.72 billion, with an accompanying EBITDA margin of 52.8%, representing +186 basis points year on year jump.
In September, MTNN paid N72 billion to renew its operating spectrum and services licences in Nigeria for another 10 years. It paid N374.6 million for the unified access service licence, which underpins its data network and telecom coverage in Africa’s biggest economy.
“These licences, which expired on 31 August 2021, have now been renewed for a further ten-year period, starting 1 September 2021,” the telecoms firm said in a statement.
The Nigerian Communications Commission (NCC) has notified the company of the renewal of the 900MHz and 1800MHz bands, subject to licence conditions, the telecoms firm said.
It plans to invest N600 billion over the next three years to expand broadband access in Africa’s most populous country and is boosting its 4G coverage to provide home broadband as part of a rural connectivity programme.
Analysts at WSTC Securities said they have a very strong outlook for MTN Nigeria, given the strong fundamentals of the industry it operates in, and company-specific factors.
The growth expectations for MTNN are high because of its status as the market leader in the telecommunications industry, analysts stated. WSTC Securities analysts without mincing words said in the equity report that despite the strong fundamentals of the company, there are risks.
Downside risks:
Over the past few years, MTN Nigeria has had its fair share of battles with the regulators. Largely, the telecom company has broken rules and regulations demand from the host economy.
In 2015, the Group was fined about N1 trillion but revised to N330 billion by the Nigerian Communications Commission (NCC) over failure to disconnect non-registered SIM cards.
Also, in 2018, the Central Bank of Nigeria asked MTN Nigeria to refund the sum of $8.13 billion that was illegally repatriated. The dispute was later resolved after the company paid $53 million.
In addition, analysts hinted that the Attorney General of the Federation initiated a case against the Company over unpaid taxes. The case was later withdrawn. More recently, in December 2020, the NCC suspended mobile network operators from selling new SIM cards due to a national database update.
The effects of churn and the regulatory restrictions led to a loss of 5 million subscribers (-7%) between December 2020 and March 2021. The ban was lifted in April 2021.  Analysts at WSTC Securities said the most gripping bottleneck is exchange rate volatility – which may have a negative impact on costs and dividend repatriation.