For a stock with 90% return, MTN is unbelievably cheap

The excitement among investors about the listing of MTN Nigeria could easily pass for the best since the 2007 stock market boom.

If you look in the right places, you can understand why investors are falling over one another to get a slice of MTN Nigeria ahead of  Thursday’s listing by introduction.

MTN Group on Wednesday said the listing price for its Nigerian business has been set by existing shareholders at N90 per share.

Given that the telco said it would list 20.4 billion shares on the Nigerian bourse, a N90 per share price values the telecoms company at 1.84 trillion naira ($6 billion).

The company’s valuation works out to an enterprise value that is 5 times of Earnings Before Interest Tax, Depreciation and Amortisation (EBITDA) and 9 times of earnings. That compares to the frontier peer average of 11 times EBITDA and 20 times earnings.

For a stock with a market-beating ROE and ROA of 90% and 17% respectively, surely the stock should command a premium.

These factors suggest the stock is undervalued at N90 per share. When BusinessDay adjusted the company’s valuation to reflect that of its frontier market peers, MTNN should be pricing around N150 per share, which implies that the stock will be trading at a discount of over 60 percent.

Add the telco’s medium-term dividend pay-out target of 80% and the stock makes an even more compelling investment case for investors who know they are buying at a bargain.

The excitement in the market ahead of the listing is almost certain to ensure that existing shareholders make a return of 10 percent on the first trading day.

“MTN is certainly a good stock to buy when you look at its market leadership, strong competitive advantage and future earnings power,” Uche Nwaleke, a retail investor told BusinessDay.

“The problem however is if I am able to get a tiny slice of the pie given that the listing is dependent on existing shareholders selling some stake.

“That’s a difficult proposition for shareholders who know the value of the stock,” Nwaleke added.

Through its method of listing, MTN Nigeria is not raising new capital rather existing shares of the company are being admitted into the exchange.

This implies that new investors can only trade shares of MTN if existing shareholders are willing to sell their holdings. This poses some liquidity constraints on the stock and is bound to drive prices upwards. However, the company has indicated plans to carry out a full public offer in the future, pending favourable market conditions.

“We expect the completion of the listing by introduction to provide a much-needed boost to investor confidence in the local bourse and encourage other telecommunications companies to list on the Nigerian Stock Exchange,” analysts at Meristem said in a note to clients, Wednesday.

MTN holds a fact-behind-the-figures meeting 8am today, to provide details on the company’s financials.

LOLADE AKINMURELE