November 10, 2021/CSL Research

Following the listing by introduction of 20.3bn units of its shares on the premium board of the Nigerian Stock Exchange (NSE) at N90 per share in May 2019, MTN Nigeria (MTNN) has announced plans to sell 14% of its shares held by the parent company (MTN Mauritius) to retail and institutional investors subject to appropriate market conditions. The Group, on Thursday, 4 November, announced intentions to proceed with a public offer for the sale of up to 575m shares in MTNN in November through a bookbuild to institutional investors and at a fixed price to retail investors. MTN International (Mauritius) currently owns 76.1% of MTN Nigeria, implying the initial volume offering of 575m shares represents 3.7% of its total interest. 

The telecommunications sector, which contributed c.12.2% to GDP and recorded a strong growth of 15.9% in FY 2020, still holds growth prospects given Nigeria’s large population (over 200 million) and expected annual growth (c.2.6%). Though the pandemic had adverse effects on many sectors, it was positive for the telecoms industry considering the need to operate virtually. Hence, we believe MTNN, given its market-leading presence and its superior brand name remains well-positioned to benefit from the growth in the sector. MTNN enjoys a strong network distribution and attractive spectrum holdings. Its network spans 36 states and covers 89% and 69% of the population for GSM and 4G services, respectively. 

Nigeria’s population demographics evident in its youthful population supports growth in data Revenue, considering the growing usage and acceptability of social media and internet surfing for communication. Also, the convenience and flexibility associated with Voice over Internet Protocol (VoIP) presents a strong investment case for Data Revenue to be the next growth phase. Development of advanced technology such as the 5G technology as well as increasing coverage of 4G network should also support growth in Data Revenue in the medium to long term. Though not likely in the near term, recovery in consumer spending should provide further boost to data bundle consumption. This is premised on lower Average Revenue per User (ARPU) for Nigeria compared with South Africa due to better living conditions (higher GDP per capita, higher minimum wage and lower unemployment level). 

The sale of more shares to the public improves liquidity. MTNN remains the market leader in the Nigerian telecommunications market. According to Nigerian Communications Commission (NCC), the firm has the largest market share by subscriber base, with 38.6% market share as of September 2021 while Globacom, Airtel, and 9mobile have 27.8%, 26.8% and 6.8% market share respectively. The telecom giant has proved relentless, leveraging  on  its large subscriber base and extensive network footprint in the country to drive business growth. We see a strong growth potential for MTNN considering mobile penetration rate of c.89% in Nigeria compared with 109% for Kenya and 167% for South Africa, which could drive voice (accounting for 60.8% of revenue as of 9M 2021) and data revenue (accounting for 30.4% of revenue as of 9M 2021). 

MTNN recently received approval in principle (AIP) for its PSB license application, a major step towards the final approval. Approval of the payment service bank (PSB) license will support Fintech revenue (accounting for 4.2% of revenue in 9M 2021). We believe obtaining a PSB license will enable the firm target between 40 to 60 million unbanked adult population in Nigeria. That said, while it is difficult to estimate the impact of the PSB license on MTNN’s Revenue, we forecast that with the PSB license, MTNN can increase the contribution of fintech to total Revenue to c.8.3% in the short to medium term compared with 4.2% currently. Notably, its super-agent service, MoMo, continues to expand, adding over 234,000 agents as of 9M 2021 (54,000 agents in Q1, 67,000 agents in Q2 2021 and 113,000 agents in Q3 2021) resulting in approximately 630,000 agents as of 9M 2021. With the help of these increased agents, transaction volume has more than tripled to 93.3m in 9M 2021.

At an EV/EBIDTA of 5.6x, MTNN is trading at par with its African peers. Within Africa, we believe MTNN deserves a premium valuation based on its dominant market position in Nigeria, alongside its strategic positioning to benefit from the growth prospects in  the entire African market. This is premised on the population demographics, rising urbanisation, increasing usage of the internet for communication, which will aid the  provision of digital and mobile financial services (MFS) services in the region. We have revised our estimates over our forecast years (2021-2025). We arrive at a target price of N232.9/s, hence we retain our BUY recommendation. Our revised target price implies an upside potential of 16.5% from the last closing price of N200.0/s (price as of 09 Nov). We arrived at our target price using Discounted Cash Flow (DCF) and Relative Valuation methods, assigning a weighting of 60:40.

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