Nigeria Telecommunications Update: Now for Digital Transformation

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Monday, July 27, 2020 / 11:04 AM / FBNQuest Research / Header Image Credit: FBNQuest 


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Telecoms to take front role in Nigeria's economic diversification

Now more than ever, we believe that the Nigerian telecommunications sector is set to take a leading role in the government's effort to diversify the economy. On the back of significant investments by the mobile networks, the sector's contribution to GDP has risen steadily from c.7.7% in 2012 to c.10.9% in Q1 2020. It is now larger than that of the oil sector (9.5% Q1 2020 oil GDP). With respect to broadband, studies conducted by the International Telecommunications Union (ITU) indicate that a 10% increase in broadband penetration is likely to translate to increases of 2.0% and 1.8% in GDP for low-income and middle income countries.

Broadband target ambitious but achievable

The targets (of 90% broadband coverage at speeds of 10Mbps-25Mbps) stated in the national broadband plan 2020 is ambitious and audacious. Notwithstanding, we believe they are achievable. The plan's success will depend on the right mix of policy implementation, private sector-led infrastructure investment, and government incentives. Specifically, impediments to right-of-way access and cost must be removed.

Solid performance by operators in Q1; positive read-across for Q2

In contrast to other sectors that were hit hard by the economic outcomes of the COVID-19 pandemic, the sector was one of the few that recorded growth in Q1. Its essential role in easing the lockdown through the provision of digital tools for home working and social distancing resulted in a surge in demand for telecom services during the quarter. In Q1, MTN Nigeria (MTNN) and Airtel Nigeria (not covered) both delivered strong revenue growth of 17% y/y and 27% y/y respectively, mainly driven by stellar growth in data revenue - which were up by more than 50% for both firms. We believe that the solid performance carried on into Q2 on the back of strong data demand during the lockdown. With solid revenue growth of 17% y/y (data 40% y/y), Airtel's Q1 2021 (end-June 2020) results which were recently published provide positive read-across for the broad sector.

Potential downside risk to earnings from fx-linked costs

Due to fx liquidity pressures, we expect a rise in fx-linked costs to exert downward pressure on the earnings of telecom operators. Recently, MTNN disclosed that the NAFEX rate of c.N385/US$ will now be applied to dollar-linked tower costs (vs. CBN's official rate of N360 previously). The rate was only recently reviewed to N360/US$ in April (from N307 previously). However, we believe that the revenue growth from the surge in data traffic will more than offset the rise in costs. Regardless, our estimates are conservative. For MTNN, we forecast 2020 revenue and PBT growth of 13% y/y and 6% y/y respectively. Regards,


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