What is the fair value of MTN Nigeria?

Three months ago in a piece titled “Like Microsoft, Like MTN?”, I predicted that “in 18 months or less MTN…will leapfrog Dangote Cement to become Nigeria’s largest listed Company.”

Well it looks like the article was right but a little less bullish than the markets, as it has come to pass some 15 months earlier than expected.

As of the close of trading on Friday August 30, MTN Nigeria (MTNN) had a market capitalisation of N2.87 trillion ($7.86 billion), while Dangote Cement was valued at N2.76 trillion ($7.56 billion).

MTNN has surged some 56 percent since its listing on the Nigerian Stock Exchange (NSE) in May, as bullish investors seek exposure to one of Nigeria’s still growing sector (Telecoms) with massive potential to pull millions into the digital world, while helping to solve problems like financial exclusion through mobile money.

This is even as investors overlook the still significant regulatory, security and other headwinds the company faces in the country.

So where does the stock which traded at N141 per share on Friday go from here, after piercing through the Dangote Cement valuation ceiling?

We believe valuation should be much higher with the round number resistance around N200 per share looking like the next natural target price for the stock to settle at (over the next 18 months) for a N4 trillion market capitalisation, equivalent to 3.3x estimated forward (2019) sales.

In that sense MTNN may be trading at significant discount to fair value, which is somewhat justified until the major cloud hanging over the company is resolved, chief of which is the claim by the Attorney General of the Federation, that MTN was owing $2 billion in back taxes, for which the AGF is demanding instant payment.

The case remains in court and until it is settled amicably, we expect significant headline risk which will bring some volatility to the stock in the medium term. More risks to the stock and other Telco’s would be a move to institute a tax on telephone recharge/airtime, which a fiscally challenged Federal Government may contemplate.

There is also the perennial attacks and picketing of MTNN by some activists in retaliation for perceived Xenophobia meted out to Nigerians living in South Africa, never mind that MTNN is 99 percent staffed and run by Nigerians including the board of Directors.

MTN Group should probably have sold a small part (say 30%) of its 100 percent ownership of MTNN to a wider set of Nigerian shareholders a long time ago, despite the narrow private placement it undertook in 2008.

This would have earned the firm more goodwill from vocal local investors, and helped to protect it from the excesses of overzealous regulators and accusations of being a foreign entity bilking Nigeria’s commonwealth.

Nevertheless MTNN is now listed and promises to undertake a proper IPO in coming months, which should help reduce some of the unnecessary/unhelpful assaults against the company.

When we compare MTNN against the Group valuation it even gets more interesting. MTN Group (the parent company of MTNN with operations in 21 countries) has a $12.57 billion market cap, meaning the Nigerian operations now command a valuation equivalent to 62.5 percent of the entire group valuation, even though it makes up roughly 36 percent of revenues.

Of course MTN Group is suffering from the classic conglomerate discount, an economic concept describing a situation when the stock market values a diversified group of businesses and assets at less than the sum of its parts.

With the Nigerian operations still growing fast, MTN Group may soon find itself in a similar situation as Naspers Ltd., Africa’s largest company, whose 31 percent stake in Chinese firm Tencent Holdings alone is worth over $122 billion, eclipsing Naspers’s own entire market cap of $100 billion.

MTNN grew revenues by 12.12 percent to N566 billion in the half year period (Jan – Jun 2019), keeping it on track to report Full year numbers above the N1 trillion mark for the second year running.

Operating profits came in at N190.4 billion compared to N136.5 billion in the earlier period, equivalent to a 39.49 percent increase.

Free Cash Flow (FCF), defined as EBITDA minus Capex came in at a healthy N199 billion for the period.

For a company growing so fast and throwing out such impressive FCF, MTNN’s valuation is still pretty cheap, with estimated Price to earnings (PE) ratio of 14. Regional peers such as Emirates Telecommunications Group or Etisalat of United Arab Emirates, trades at a P/E of 16.36, while mature names like Mexico’s America Movil trades at 14.19 times earnings.

If you value MTNN as a growth stock and model a P/E ratio close to the growth multiple (profit after tax grew by 35 percent to N98.9 billion in H1), or between 20 – 30 times earnings you get a valuation between N4 trillion and N6 trillion for estimated 2019 year end net income.

Whatever the case MTNN is a long term play over the next 10 years. Last week it launched its super- agent network service – MoMo Agent – which is expected to cater for the over 36million unbanked people in the country. It recently announced board members that include Ernest Ndukwe (that shepherded Nigeria’s telecoms revolution), Ifueko Okauru, and Andrew Alli.

It is a stock that even Warren Buffet may be tempted to buy at these levels!

Patrick Atuanya