Telecommunications Sector Update: Resilience through a COVID-led Recession


Thursday, July 08, 2021 / 09:35 AM / by Afrinvest Research / Header Image Credit: Afrinvest 


Executive Summary

In the Telecommunication Sector report 2020 ("A Transformative Past, Resilient Future"), we opined that the sector would remain resilient as the digital economy would boom during the lockdown. In line with our expectation, this sector powered the economy during the pandemic in 2020 as it grew the fastest by 15.9% y/y and accounted for 12.2% of the GDP. However, the sector is not at full power yet given weak broad-band penetration at 45.0% (although an improvement from previous year), and the huge prospects for mobile money under the right regulatory framework.


At a P/E ratio of 14.5x and an EV/EBITDA multiple of 5.8x, the Nigerian telecoms sector is relatively attractive compared with an average P/E and EV/EBITDA ratios of 23.3x and 7.7x (emerging) and 16.5x and 8.7x (frontier). We believe the sector is positioned for growth given the high population growth rate, low smartphone penetration, low data penetration and relatively unbanked population. Across the companies under our coverage, we have issued a "BUY" rating on MTNN and "SELL" rating on Airtel Africa Plc. Our rating for MTNN is based on the company's resilience in a challenging operating environment and how it is positioned to unlock opportunities in areas of financial inclusion and the rising demand for connectivity and digitalisation. For Airtel Africa, the company is positioned to take advantage of the demographic across 14 countries given its acquisition and renewal of spectrum licence, a $500.0m loan facility to invest in network and distribution infrastructure to enhance both mobile, connectivity and financial inclusion across countries of operation, and its 'win with' strategy. However, its "SELL" recommendation reflects that the stock is fully valued at the current market price of ₦667.70, hence it presents no headroom for potential capital appreciation.


Prior to 2014, the Nigerian economy attracted local and foreign investors due to the rise in oil prices and currency stability. However, in 2016, the country witnessed a significant fall in oil prices which led to government revenue shortfalls, high inflation, dollar shortages, external reserves depletion and ultimately, a recession. These stifled service capacity expansion plans of network operators, weakened labor market dynamics and reduced disposable income which affected corporate earnings. As a result, growth within the telecoms sector stalled.


Nonetheless, after Nigeria exited the recession in 2017, the telecoms sector contributed immensely to the economic recovery with the sector's contribution averaging 10.7% in the past three years and in FY:2020, the sector accounted for 12.2%. This growth was supported by the robust mobile uptake and rapid expansion of mobile internet services. Despite the dawn of COVID-19 which affected every sector of the economy and dragged the country into a recession in 2020, the sector recorded a significant growth of 15.9% as it played a key role of supporting continuity for most businesses, government agencies and societies.


The telecoms sector continues to leverage on Nigeria's robust population (of over 200.0m people) with the total subscriber base peaking at 204.5m in 2020, reflecting a 10.7% growth from 184.7m in 2019 (vs. 88.3m in 2010). Consequently, teledensity rose to 107.1% as of FY:2020, which was previously calculated by the NCC based on the 2006 census population estimate of 140.0m but revised in March 2019 to reflect a population estimate of 190.0m.


The structure of the Nigerian telecoms sector remains oligopolistic with four players controlling the entire market share with MTN Nigeria communications Plc's (MTNN) complete acquisition of Visafone. According to data released by the NCC, MTNN maintains leadership with 80.8m subscribers (39.5% market share as at FY:2020). Trailing, Airtel Africa Plc (Airtel) had 55.6m subscribers (27.2%), Globacom Nigeria had 54.8m subscribers (26.9%) while 9mobile (previously Etisalat) had 13.0m subscribers (6.4%).


In December 2020, the FGN in collaboration with the NCC suspended the sale and activation of new SIMs, and directed all operators to update SIM registration records with valid NINs with an initial deadline of 30th December, 2020. Due to logistical challenges, the FGN moved the deadline several times with the latest set for 30th June, 2021, and granted NIN enrollment licence to service providers to quicken the update process. As at April 16th, 2021, the FGN lifted the embargo on SIM registration to consumers with a valid NIN. The impact of the SIM activation suspension on telecom operators' revenue was minimal in Q4:2020 as number of subscribers fell 1.6% to 204.5m at FY:2020. However, subscriber growth was significantly impacted in Q1:2021 with the number of subscribers declining 5.9% to 192.4m. We believe the downtrend in subscriber growth will affect the top-line of telecom operators in Q1:2021. Nonetheless, in the near-term, we expect revenue to be supported by the progress of NIN enrollment which to date has c.54.0m people registered. Also, the resumption of sale of new SIMs will boost subscriber growth thus, propping up revenue.


For 2021, we expect industry revenue to grow by 11.5% to N3.2tn supported by growth in subscriber base, ARPU and mobile money (Airtel). OPEX is projected to increase by 11.8% due to the deployment and upgrade of network infrastructure. Also, we expect FX challenges to impact cost especially with the adoption of the NAFEX rate as the official rate. Despite this, PBT and PAT is expected to rise by 40.9% and 40.3% respectively.

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