September 3, 2024/Cordros Report
In this report, we update our views on the Nigerian telecommunications sector. While we maintain a positive outlook on the sector over the medium term, we highlight that currency pressures and the impact of the highly inflationary environment on operations remain significant headwinds in the short term. Thus, we are neutral on the sector at this time. Acrossour coverage, we upgrade our rating on MTN Nigeria Communications Plc (MTNN; NGN218.80) to “BUY” reflecting the increase in our EBITDA margin estimate to 39.1%, resulting from lower cost pressures and improved FCF generation brought about by the renegotiation of IHS tower lease agreements. Meanwhile, we initiate coverage of Airtel Africa Plc with a “HOLD” rating and a one-year target price of NGN2,385.07, implying an 8.4% upside from the last closing price (NGN2,200.00). Our model suggests that the company will deliver EPS growth of 52.6% CAGR over our forecast horizon, highlighting a marked recovery from the slump in 2024FY. We estimate 2025E and 2026E DPS of USD0.02 and USD0.06, which correspond to dividend yields of 1.7% and 4.5%, respectively.
Data is the future
Data revenue has contributed quite significantly to the marked growth witnessed in the sector over the last few years. In fact, company financials in recent quarters now show the increasing impact of sustained increase in data usage as contribution from voice services are now being usurped by data. We believe this trend has come to stay. Firstly, we cite that demographic factors such as the sizeable population (of which c. 43.0% are young) and favourable urbanisation growth should drive steady demand for these services. Then, the evolution of technology consumption trends, particularly as seen in more developed markets, presents the added growth frontier. Precisely, we believe the consumption of new age services such as gaming, media streaming, the incorporation of Artificial Intelligence (AI) tools into everyday life, and the emergence of neo-futuristic advancements such as augmented and virtual reality, will be instructive for steady demand of telco services. We also believe the evolution of 5G services will play a significant role in accelerating the propagation of data services in the medium to long term.
Currency pressures to impede earnings in the interim
We posit that Nigeria’s listed mobile network operators will maintain another year of sturdy revenue growth, buoyed majorly by data consumption amid steady consumption of data services. We expect revenue for our coverage companies, MTNN and AIRTELAFRI, to grow by 24.0% y/y and 1.5% y/y, respectively. Over the medium term, we forecast a revenue CAGR of 15.1% for MTNN (2024E – 2028E) and 8.1% for AIRTELAFRI (2025E – 2029E). On earnings, we expect AIRTELAFRI to recover from the slump in 2024FY and forecast an EPS of USD0.04 with full recovery still impeded by substantial FX losses of USD722.09 million in 2025E (2024FY: USD1.07 billion). We expect AIRTELAFRI’s EPS to grow at a CAGR of 52.6% over 2025E – 2029E. Meanwhile, we expect MTNN to record another year of loss, with a loss per share of NGN17.78 (vs 2023FY loss per share of NGN6.73) before recovery kicks in 2025E as EPS turns positive (NGN21.09). From 2025E to 2028E, we expect EPS to grow at a CAGR of 26.2%.
We are NEUTRAL
Our investment case for the sector is hinged on (1) sustained growth in data services, (2) demographic and structural upsides and (3) mobile money prospects. This points to strong upsides for the sector in the medium term. However, we note that there still exist factors, particularly in the short term, that pose threats to the telcos’ performance. Such factors include currency pressures and the impact of the highly inflationary environment on energy costs. Thus, while we believe the sector remains on a positive path, issues abound, particularly in the short term; hence, our NEUTRAL stance.
