Buy, Sell or Wait and See?

Alas! MTN Nigeria has listed its shares on the Nigerian Stock Exchange (NSE). The telco-giant received regulatory approval from SEC and NSE to list 20.3bn units of shares at price of N90 per share. The listing exercise added N1.8tn to the market capitalization

of the NSE, thereby making the company the 2nd largest entity on the Nigerian Bourse.

Buy/Sell/Hold: For us, the fundamental question that arises is; Is the listing price a good entry price to Buy (new investor), Sell or Hold (existing investors) the stock at the current listing price. To answer this, we adopted a relative valuation methodology using EV/EBITDA and P/E ratios using comparables in Emerging markets.

Our Evaluation: From our analysis, MTN Nigeria’s implied Enterprise Value based on a listing price of N90/s and market capitalisation prints at N2.0 tn. Furthermore, the company declared EBITDA of N150.4bn in 2019 (annualised; N601.7bn). Applying the annualised value, the listing implied forward EV/EBITDA prints at 3.4x.

Our analysis, however, excludes the possible impact of N55.0bn fine to be paid, as well as redemption of about N144.0bn preference shares. Furthermore, our forward P/E ratio for MTN Nigeria prints at 9.5x based on market capitalisation of N1.8tn and annualised net income of N193.8bn. Comparing MTN Nigeria’s implied forward multiples with its African peers, our analysis revealed that the stock is undervalued at the listing price of N90/s.

Comparison: Our African peer average which includes MTN Group, Vodacom, MTN Ghana, Safaricom, Sonatel, and TIM Participacoes forward EV/EBITDA prints at 5.6x, while forward P/E ratio prints at 12.4x. Consequently, relative to our selected African peers, MTN is priced at a discount considering forward EV/EBITDA of 3.4x against African peer average of 5.6x.

MTN’s Business and Opportunities: We view the growth potential of MTN Nigeria’s business as huge, considering mobile penetration rate of 86% (as at Q1 2019) which could help in driving voice (accounting for 74.9% of revenue as of Q1 2019) and data revenue (accounting for 16.6% of revenue as of Q1 2019). Nigeria’s population demographics evident in its youthful population also serves as an opportunity for growth in data revenue given the growing usage and acceptability of social media and internet surfing for communication.

Development of advanced technology such as the 5G technology as well as increasing coverage of 4G network should also support growth in data revenue in the medium to long term. On the macroeconomic side, we expect a recovery in consumer spending in the medium term to provide a further boost to data bundle consumption. This is premised on lower Average Revenue Per User (ARPU) for Nigeria compared to South Africa due to better living conditions (higher GDP per capital, higher minimum wage and lower unemployment level).

Lastly, approval of the payment service bank (PSB) license would help in driving Fintech revenue (accounting for 3% of revenue in Q1 2019). However, we see certain downsides to growth particularly from the highly regulated environment that it operates.

MTN Nigeria has had issues with regulatory agencies with a case against the Attorney General of the Federation still pending while N55bn is due to be paid in Q2 2019 to the NCC as the last tranche of the N330bn fine that was agreed in 2016 for non-disconnection of unregistered lines. The telecommunications sector which contributes c.12% to GDP and recorded a strong growth of 9.65% in FY 2018 still holds growth prospects given Nigeria’s impressive.

CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange

Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange

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