While we await the introduction of Airtel’s shares on the Nigerian Stock Exchange (NSE) market through an Initial Public Offering (IPO), concerns have been raised to whether or not we could compare the valuation of Airtel to that of MTN Nigeria (MTNN) upon listing.
Recently, Airtel Africa, a unit of India’s Bharti Airtel Ltd, last week set a price range of N363-N454 per share for its IPO on the NSE where it aims to issue 501 million to 716 million new shares and selling about 500 million shares on the London stock exchange (LSE) market with 10 percent over-allotment option.
The proposed listing of Airtel is said to imply a TTM EV/EBITDA multiple of 6.3x – 6.8x, implying that for every N1 EBITDA made investors are willing to pay between N6.3 to N6.8 own the shares.
MTNN, on the other hand, works out an enterprise value that is 5 times of EBITDA and 9 times of earnings.
MTNN shares according to BusinessDay analysis when adjusted to reflect that of its frontier market peers revealed MTNN should be pricing around N150 percent which implied that the stock upon listing was trading at a discount of over 60 percent.
The big question is whether MTNN is a better comparison with Airtel in terms of valuation.
“MTNN Nigeria is still in a stock in price discovery mode, so you can’t trust the current pricing of MTN Nigeria as a fair price for the stock,” Ayorinde Akinloye, equity research analyst at CSL Stockbrokers explained.
According to Akinloye, the best option is to compare Airtel with African peers like Vodacom and Safaricom. MTNN is not included because the company has a poor ROE and just recovered from a price battering of the past years.
While Vodacom and Safari according to analysis currently trades at a TTM EV/EBITDA of 7.8x and 8.6x respectively, “Airtel valuation of 6.3x-6.8x implies possible upside for the stock after listing,” Ayorinde stated.
While the valuation may appear Airtel, as being undervalued, Ayorinde explains that there is a need to consider critically some important factors which may rule out this fact.
As at the close of trading on Friday, Airtel Africa upon listing on the London stock exchange market, Airtel share price slumped steeply by 16 percent on its first day of trading, hence joining the list of worst debuting stocks in Europe.
Airtel stocks which were valued at 80 pence dipped to 67 pence as at the close of trading on Friday on the LSE.
The performance of the stock was largely tied to the reaction of investors towards a portion of the company’s share been issued to investors which is believed to be a large discount from previous offerings.
Prior before now, Airtel had claimed it planned to raise $750 million, despite highly leveraged with a debt-equity ratio of 2.0x and an outstanding debt obligation of about $3 billion.
This means that its debt obligation when shares are fully subscribed to will drop to about $2.25 billion while debt to equity to about 1.7x.
“This is still very high and doesn’t make a difference, now leverage stocks in the market generally trade at a discount to peers because of the leverage risk and impact on ROE,” Ayorinde explained.
“Airtel ROE is currently about 18.5% and I estimate a drop to 16.3 percent from my analysis due to higher Equity and lower impact on the finance cost,” he added.
Amongst peers like Safaricom with Return on Equity (ROE) OF 46.6 percent and EV/EBITDA of 8.6x, Vodacom (20.8%, 7.8x), Airtel with an ROE of 18.5 percent suggests to be traded at a price lower than that of Safaricom and Vodacom.
Also, compared to MTN Nigeria with a ROE of 65.4 percent higher than ROE of MTN group at 6.8 percent, this suggests MTN N should be priced at a premium to Airtel but currently trades at 6.2x EV/EBITDA which is discount to that of Airtel stated earlier.
This, therefore, raises the question if MTN is undervalued or Airtel is overvalued.
“Comparing Airtel and MTN Nigeria isn’t a good comparison given that Airtel has a more diversified earnings base operating across Africa than MTNN, although with similar revenue base,” Gbolahan Ologunro, research analyst at CSL stockbrokers told BusinessDay.
This he said on the base that a company with more operations across Africa has more prospects to grow earnings at a faster pace than the other, given that investors are more interested in this.
“Going by Airtel’s historical performance and the fact that their balance sheet is highly leveraged which investor’s will price into future earnings, I think Airtel is overpriced,” Ologunro told BusinessDay.
On the back of a highly leveraged balance sheet, a major metric such as ROE and EPS which measures return to a shareholder will be affected.