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MTNN, Airtel stocks still show upside potential despite regulatory headwinds

Nigeria’s telecoms operators have continued to demonstrate resilience despite the regulatory headwinds. As expected, the Federal Government’s know your customer (KYC) directive to link National Identification Numbers (NINs) to subscriber data, alongside earlier restriction on new SIM registrations led to a significant decline in telcos subscribers.

The major mobile network operators (MNOs) are MTN Nigeria Communications Plc, Globacom Limited, Airtel Africa Plc, and 9mobile. Only MTNN and Airtel Africa are listed on the Nigerian Exchange Limited (NGX).

MTNN Plc which as at August 9 exchanges at N168.1 per share and Airtel Africa Plc (N650 per share) are two telecommunications companies listed on the Nigerian Exchange Limited (NGX). MTN Nigeria Communications Plc (MTNN) is a subsidiary of MTN Group South Africa, a top player in the telecommunications sector in Africa (biggest mobile phone operator in the region) and the Middle East.

As the industry leader, MTNN has over 75 million GSM subscribers on its network. MTN International (Mauritius) Limited holds 76.08percent stake in MTNN while Others account for 23.92percent. Airtel Africa Plc is Nigeria’s second largest provider of telecommunications and mobile money services, with a presence in 14 countries in Africa, primarily in East Africa and Central and West Africa. For both telecoms operators, data services continue to drive their topline growth.

Shares trading information on the NGX

As at Monday August 9, investors in shares of MTNN Plc have seen the stock value depreciate this year by 1.1percent while those that are holding Airtel Africa Plc shares have lost 23.7percent of its year-open value.

Airtel Africa had reached a 52-week high of N930 and corresponding week low of N380, while MTNN had reached a 52-week high of N183 and a corresponding week low of N117.8. On the Nigerian Exchange Limited (NGX), MTNN shares outstanding are 20.354billion units while Airtel Africa shares outstanding are 3.758billion units. Shares outstanding are all the shares of a company that can be bought and sold by the public, as well as all the restricted shares that require special permission before being transacted.

Analysts’ outlook for the sector and the operators

“We expect the data drive to linger for the rest of 2021, given the observed shift away from traditional voice communication. This view is also buttressed by the fact that, per Nigerian Communications Commission (NCC) data, only 75percent of mobile subscribers are internet users, indicating a potential internet gap of about 40 million users”, according to CardinalStone analysts in their outlook for the sector where they noted that telecom sector is resilient than most sectors.

“Nigeria’s favourable demographics, rapidly growing population and low mobile penetration suggest legroom for an increase in subscriber base. This, coupled with the recent spike in data demand is expected to keep growth in the sector positive amidst regulatory uncertainties”, CardinalStone said. The analysts supported their “Buy” rating for MTN N with their target price (TP) of N213.24.

Lagos-based Meristem research analysts are positive in their outlook for the telecommunications sector. As a result, they want investors to BUY the shares of MTNN and Airtel Africa Plc. Meristem target price (TP) for Airtel is N748.89 while their target price (TP) for MTNN is N191.45.

“While we envisage a sluggish growth in subscriber base due to new regulatory requirements, we anticipate steady growth in data revenue (to be driven by the increased 4G capacity expansion and smartphone penetration) and fintech revenue (driven by the increase in services and agent networks).”

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“We also expect these to be complemented by increased cost efficiency and a rebound in traditional revenue sources, such as voice and SMS”, Meristem analysts noted in their outlook titled “a Wobbly Upturn…Traversing Uncertain Paths”.

“We expect consumer induced factors such as increased smartphone penetration, data usage per customer and ultimately data traffic to enhance value. Players in the sector have remained committed to their CAPEX, keeping 4G network expansion at the heart of their priorities”, Meristem research analysts noted.

“Despite the continued growth trajectory of the telecommunications sector, recent limitations such as the incessant regulatory issues have partly stifled the sector’s potentials. GDP figures for Q1:2021 reflected the inability of players in the sector to add new subscribers during the first quarter of the year. Thus, the growth of the sector in the first quarter of the year came in slower than previous quarters”, the analysts said.

Vetiva research analysts believe that the telecoms sector remains resilient despite regulatory bottleneck.

“While Nigerian telecommunication companies are expected to record another impressive top-line growth in 2021, we note that persisting inflationary pressures will continue to raise operating costs, and consequently truncate potential upsides in profitability margins”, Vetiva said in its second-half (H2) 2021 Outlook titled “No country for old policies”. Their target price (TP) for MTNN is N228.38 with a “Buy” rating.

“While voice income growth has been slowing in recent years due to stiff price competition and cheaper substitutes such as Over-the-Top (OTT) calls, data income, on the other hand, continues to wax stronger, underpinned by increasing data demands from mobile subscribers.

“As the Nigerian economy continues to open up to more digital services and smartphone penetration maintains its uptrend, we see data revenue recording further gains in the coming quarters. That said, we expect to see more capex disbursements in the second half, as telecom operators continually upgrade their infrastructure to meet rising data needs in the country.

“As per voice, we expect growth to continually decelerate due to slowing voice usage and intense price competition among players; however, we expect voice growth to remain positive in the short to mid-term, as improving mobile penetration in rural parts of the country continues to cushion voice income. Driven by our expectation of slowing growth, we see voice dominance losing more ground in the coming quarters”, Vetiva analysts further said.

“Nigeria’s telecommunications sector was dealt a big blow in fourth-quarter (Q4) last year when the Nigerian Communications Commission (NCC) issued a directive to all telco operators to suspend the registration of new SIM cards, as well as the reactivation of lost SIM cards. As a result, the country’s GSM’s subscriber base showed a consistent monthly decline from 204 million subscribers in December 2020 to 192 million subscribers in March 2021.

“Despite this regulatory constraint, the telecommunications sector grew 8percent y/y in Q1’21, although slower than the growth recorded in Q1’20 (10percent). The sector’s growth in Q1’21 was largely driven by increased mobile-data demand from active subscribers, as remote working continued to scale up across the services industry. With NCC’s suspension of SIM registration now lifted, we foresee Nigeria’s GSM subscriber base rising in the second half, translating to further expansions in the telecommunications sector”.

“Nigeria’s economic growth is expected to move slowly in H2 2021, driven by strong policy support and recovering external demand, even as the government shifts its focus to minimizing systemic risks in the financial sector”, said Capital Bancorp Plc analysts while reviewing the first-half (H1) and stating their outlook for H2 2021.

MTN Nigeria unaudited results for the half-year (H1) ended June 30

Last month, MTN Nigeria Communications Plc (MTN Nigeria) announced its unaudited results for the half-year ended 30 June 2021.

Salient Features: Mobile subscribers declined by 7.6 million to 68.9 million, impacted by the regulatory restrictions on new SIM sales and activations. Active data users declined by approximately 52,000 to 32.5 million. Service revenue was up by 24.1percent to N790.3 billion. Earnings before interest, tax, depreciation, and amortisation (EBITDA) grew by 27.6percent to N417.2 billion, while EBITDA margin improved by 1.4 percentage points (pp) to 52.7percent. Capital expenditure was up by 39.1percent to N186.4 billion (up 50.6percent to N114.5 billion excluding right of use [RoU] assets). Dividend per share of N4.55 kobo went up by 30percent. Unless otherwise stated, financial information is year-on-year (YoY) that is H1 2021 versus H1 2020).

MTNN operational review

Service revenue grew by 24.1percent YoY, driven by the sustained growth in data and also partly due to the lower base in comparative 2020 voice revenue that resulted from lockdowns during that period.

Voice revenue grew by 13.1percent, benefitting from an 11.8percent increase in traffic and MTNN customer value management (CVM) initiatives. The impact on MTNN voice revenue from the industry-wide suspension of new SIM registration was partly offset by higher usage in MTNN active SIM base as well as migration to a higher quality of experience.

Data revenue continued the positive momentum from H2 2020, rising by 48.3percent. This was driven by increased usage from the existing base, supported by the acceleration in MTNN 4G rollout and enhanced network capacity following the acquisition and activation of additional 800MHz spectrum in Q1. Data traffic rose by 83percent YoY, while smartphone penetration was up by 5.8pp to 49.3percent. MTNN 4G network now covers 65.1percent of the population, up from 60.1percent in December 2020.

MTN Nigeria CEO speaks

Commenting on the results, MTN Nigeria CEO Karl Toriola said: “In the first half of 2021, we made good progress strengthening the resilience of the business, managing the impact of the COVID-19 pandemic and enhancing support to our people, customers and other stakeholders. We extended our commitment to the Coalition Against Covid-19 (CACOVID) with an additional N3 billion contribution over a two-year period, half of which has already been paid. This is in support of efforts to promote the health and security of Nigerians, as we navigate our way through the pandemic; and in line with our Y’ello Hope initiatives through which we provided support to our broad base of stakeholders to the value of approximately N25 billion in 2020”.

“Our progress towards achieving greater business resilience is reflected in the upgrade by Global Credit Ratings (GCR) of our national scale long-term issuer rating to AAA and affirmation of our national scale short-term rating of A1+ with a stable outlook. This puts MTN Nigeria on the highest possible GCR scale for short-term and long-term ratings, providing a solid platform for growth”.

Airtel Africa financial highlights

Airtel Africa Plc’s financial review for the quarter ended June 30, 2021 shows a strong financial and operational performance, with further improvement in revenue growth trends. In the first-quarter (Q1) reported revenue grew by 30.7percent to $1.112billion, with constant currency growth of 33.1percent. Revenue growth partially benefitted from a weakened quarter in the prior year during the peak of Covid-19 restrictions across the region. Strong revenue growth was recorded across all regions: Nigeria up 38.2percent, East Africa up 32.8percent and Francophone Africa up 24.9percent; and across key services, with revenues for voice up 26percent, data up 37.4percent and mobile money up 53.7percent. Underlying EBITDA grew by 42.4percent to $534million in reported currency, while constant currency growth was 46.2percent. Underlying EBITDA margin was 48 percent, an increase of 396 basis points (increase of 428 basis points in constant currency) led by both revenue growth and improved operational efficiencies.

Operating profit was $352million, up 67.6percentin reported currency and 73.9percent in constant currency. Profit after tax more than doubled to $142million, up 148.7percent, largely due to the higher operating profits along with stable net finance costs which more than offset the increase in tax charges due to increased profits. Basic Earnings per share (EPS) was 3.3 cents, an increase of 200percent, as a result of higher profit and stable finance costs and foreign exchange.

EPS before exceptional items was 3.2 cents. Operating free cash flow (underlying EBITDA less capex) was $428million, up 38.7percent. Customer base grew by 8.4percent to 120.8 million, with increased penetration across mobile data (customer base up 14.8percent) and mobile money services (customer base up 24.6percent). The slowdown in customer base growth was due to new SIM registration regulations in Nigeria; excluding Nigeria the customer base grew by 15.9percent.

Airtel Africa CEO speaks

According to Raghunath Mandava, chief executive officer, Airtel Africa Plc, “In these challenging times our business model has so far proven resilient, but we continue to monitor the situation closely for the potential impact on local economies and consumers.”

“Our total customer base has returned to growth with acceleration in our East Africa and Francophone regions and despite continuing negative net additions in Nigeria. With the easing of these restrictions in late April we have since been able to gradually increase locations for activations in line with regulatory compliance across Nigeria, and we have begun adding new customers.

“Our continued focus on modernisation and rollout of our network along with simplifying our products and improving our distribution, have all helped us to make handsome gains on our ARPUs across voice, data and mobile money. Our robust operating model and solid execution should enable us to continue our profitable growth. We continue to see huge potential across voice, data and mobile money due to the low penetration levels in Africa, as we continue to partner the nations in bridging the digital divide and enhancing financial inclusion. We remain committed to continue to efficiently and effectively deliver services that help to improve the lives, communities and economies we serve|”.

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