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