Everyone now wants the shares of MTN Nigeria. The demand for this stock is so strong that hardly will any discourse take place on radio, TV or social media without its name being mentioned. The positive sentiment is because its financial, demographic and economic factors point to a stock that fits into the investment objectives of bargain hunters, ethical and growth investors.
So, on Thursday May 16, 2019, MTN Nigeria recorded another “first” as it became the first telecommunications company to be listed on the Nigerian Stock Exchange (NSE). At the price of N90 per share, its listing on the NSE added another N1.83 trillion to the market capitalisation of equities. Without MTN, the NSE might have probably turned to a bond market because on May 15, 2019, the bonds market capitalisation closed at N10.82 trillion compared with the equity market capitalisation that closed the day at N10.37 trillion.
MTN Nigeria was set up in 2001 with a view to tapping the opportunities in the Nigerian telecommunications sector following a successful liberalisation program by the federal government which paved the way for private sector players to come in. The firm paid $285 million to secure one of the four available digital mobile licenses (DMLs) in order to operate the global system for mobile telecommunications popularly called GSM for an initial 15-year license. The license allowed it to operate a 900MHz and 1,800MHz second generation (2G) DML within the country.
Leveraging on the technical expertise of its parent company, MTN Group Limited which is based in South Africa, MTN Nigeria set the pace for others as it established itself as the market leader. It strengthened its base in 2007 when it launched a 3G service following the payment of $150 million. Its expansion program received the blessings of the regulators, the Nigerian Communications Commission (NCC), as it was the first telecoms firm to build 10,000 base stations in the country. In March 2019, MTN Nigeria controlled 37.52 percent of the GSM market, having 60.3 million mobile and data subscribers, while data subscribers alone amounted to 46.5 million, which is about the population of Kenya, East Africa’s biggest economy.
MTN Nigeria consistently delivered strong performance
Supported by Nigeria’s big market size, growth rate, high urbanisation at 3.4 percent, according to the data provided by the United Nations Development Program (UNDP), and with 56 percent of the population aged between 16 and 65 years, you would but agree that the future is very bright for the company.
MTN Nigeria has maintained a 12 percent year-on-year revenue growth from 2006 to 2018, and in the last financial year, total revenue by the company stood at N1.04 trillion, information extracted from a report prepared by RMB Nigeria Stockbrokers, entitled “ A ‘behemoth’ with upside, initiate at OW”, stated. Its revenue as at 2018 was about 15 percent of Nigeria’s annual budget. According to the RMB report, the growth in revenue was supported by new revenue streams in the data and digital space. Gross revenue is projected to reach N1.18 trillion in 2019; N1.30 trillion in 2020 and N1.43 trillion in 2021.
In 2013, out of the N794 billion gross revenue, voice services-airtime & subscription, interconnect and roaming, accounted for N646 billion, representing 81.3 percent of the gross revenue. Data generated N94 billion; SMS, N19 billion, other services earned N33 billion while handset and accessories generated N2 billion. Fast forward to 2018, gross revenue from voice services increased to N784 billion; data, N165 billion; SMS, N14 billion; digital, N41 billion; VAS, N31 billion; others, N5 billion while no income was generated from handset and accessories. All but digital are expected to rise in the coming years, according to RMB Nigeria Stockbrokers’ projections.
Earnings before interest, tax, depreciation and amortisation (EBTIDA), which is a measure of a company’s performance, IAS 17, rose by 27.2 percent from N356 billion in 2016 to N453 billion in 2018. This is projected to rise to N521 billion in 2019; N575 billion in 2020 and N630 billion in 2021.
Net interest income (NII), IAS 17, increased by 64 percent from N89 billion in 2016 to N146 billion in 2018. Based on RMB Nigeria Stockbrokers’ forecasts, NII will further increase to N211 billion in 2019; N274 billion in 2020, and N311 billion in 2021.
MTN Nigeria paid N123 as dividend per share(DPS) in 2017; N251 DPS in 2018 while in 2019, it is projected that the company will pay N8.8 dividend per share. The sharp drop in its dividend per share was as a result of increase in its shares in issue. Between 2016 and 2018, MTN Nigeria’s shares in issue were 407 million. The shares in issue were increased to 20.4 billion to allow more local individual and institutional investors benefit from the progress the company has made overtime in Nigeria.
How RMB Nigeria Stockbrokers arrived at N147 per share target price
The target price of MTN Nigeria is put at N147 per share with an overweight rating. But how did RMB Stockbrokers arrive at this figure? It was the outcome of a combination of different valuation models. The analysts at RMB Stockbrokers adopted the enterprise value (EV) to EBTIDA multiple; price to earnings ratio; price to sales ratio, discounted cash flow (DCF) methods; Ghana IPO transaction before the equity mean value (median) was arrived at. The EV is computed when a company’s market capitalisation is added to its preferred shares, minority interest, debt and latter subtracting its debt from the result.
Therefore, the EV/EBTIDA resulted in a mean valuation of N3.070 trillion with a low of N1.77 trillion and a high of N4.37 trillion. Price to earnings method gave a mean valuation of N2.705 trillion. Price to sales method resulted in a mean value of N2.66 trillion while the discounted cash flow (DCF) and Ghana IPO transactions valuation estimates were N4.20 trillion and N3.29 trillion respectively. The median equity value stood at N3.07 trillion.
The mid-point MTN equity value came to N3.002 trillion while that of enterprise value came to N3.58 trillion. Eventually, equity value price per share was N147 while enterprise value per share was N175. At the close of business on the Nigerian Stock Exchange on Monday May 27, 2019, MTN Nigeria shed 7.11 percent to close at N130.05 per share. Compared with the current market price, the target price of MTN Nigeria shows that the stock is presently trading at a discount.
Factors in favour of telecommunications sector in Nigeria
Telecommunications services, especially data services, have the potential to grow from its present state as a result of a number of favourable factors to the telecoms sector. On top of the list is the Nigeria’s low internet penetration. In 2018, data penetration was 57 percent. It is expected to increase to 59 percent in 2020 and later to 61 percent in 2020. Another factor is the underserved rural communities. A study carried out some few years back by Google which was prepared by Dalberg Global Development Advisors showed that 25 percent of Nigeria’s rural dwellers did not have access to cell coverage and might have to travel between 1 and 10 km to access telephone services. What’s more, smartphone affordability has greatly improved. The average price of new smartphone has declined by about 35 percent while there is increasing usage of fairly-used smartphones in the country.
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