The Nigerian Telecommunications Sector Report: A Transformative Past, Resilient Future


Tuesday, July 07, 2020 / 10:35 AM / by Afrinvest Research / Header Image Credit: Afrinvest


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Executive Summary

In the decade between 2010 and 2019, the global telecommunications industry grew rapidly, powering the global digital economy, improving connectivity and driving globalisation. More recently, data from the Global System for Mobile Communications Association (GSMA) revealed that the industry GDP grew at a 5-year CAGR of 5.5% to $4.1tn in 2019. The industry accounted for 4.7% of global GDP relative to 4.2% recorded in 2015. The rapid explosion of the digital economy has led to even greater competition and shifting customer needs, with operators having to expand their service portfolios and sustaining capital expenditure for facility and network upgrades to boost capacity and meet demand.


Chart 1: Telecommunications Contribution to Global GDP
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Source: GSMA, Afrinvest Research

Since 2010, mobile operators globally have invested over $1.5tn to deploy mobile and fixed broadband networks. However, investment is slowing as CAPEX grew at a CAGR of 0.4% between 2017 and 2019 from -3.3% CAGR between 2014 and 2016. Relative to industry GDP, CAPEX has averaged 5.0% between 2014 and 2019. With the need to invest in 5G infrastructure which is critical to the digital economy in the future, operators would need to increase investment to unlock its transformative potentials. This is even more important as mobile operators have been exploring alternate sources of revenue lately given the need to monetise data as the falling share of voice revenue is leading to new revenue streams. Given this backdrop, some of the key trends that would shape the telecoms industry include the development and adoption of 5G network, rise of IoT, evolution of the content ecosystem and the transformative power of artificial intelligence (AI).


In Nigeria, growth has been explosive at a CAGR of 31.8% between 2000 and 2019, driven by reforms that liberalised the sector and attracted foreign and domestic investment. From a negligible 0.1% contribution to GDP in 1999, prior to the adoption of GSM, the sector's contribution to GDP has risen to 10.3% in 2019, with nominal GDP rising 200.0x from N26.3bn to N7.4tn. Interestingly, the sector has been the fastest growing at a normalized average (excluding 2000 - 2001) of 34.9% between 2000 and 2010 before moderating to an average growth of 4.6% from 2011 to 2019. The sector has also been one of the most resilient, with growth averaging 6.9% between 2017 and 2019 while also being one of the most important, with an outsized contribution to the economy's growth since the 2016 recession.


Chart 2: Percentage Contribution of Telecommunications Industry to GDP and Growth Rate at Constant Prices (1999 - 2019
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Source: NCC, NBS, Afrinvest Research

The telecoms industry has leveraged Nigeria's robust population, currently at over 200.0 million people, with total subscribers at 184.7m in 2019 from 2.3m in 2002, reflecting an 18-year CAGR of c.27.7%. Likewise, the penetration rate measured by teledensity (measures the number of telephone lines for every 100 individuals in an area) increased from 1.9% in 2002 to 96.8% in 2019, with usage of telecoms services predominantly mobile-based. The boom in the sector has also been driven by massive investment, which has supported the deployment of network infrastructure across Nigeria while intense competition has led to the affordability of services. The telecoms market is mainly oligopolistic, dominated by four players (MTNN, AIRTEL, GLOBACOM and 9MOBILE). As at 2019, MTNN is the market leader ranking highest with a share of 37.2% and 42.9% of the total voice and data subscribers while GLOBACOM trailed, accounting for 28.0% and 22.9% respectively. Similarly, Airtel Africa accounts for 27.2% and 27.4% of the total voice and data subscribers with 9MOBILE having the least at 7.4% and 6.4% respectively. The prospects of new entry into the industry remain limited given economies of scale and the high capacity for huge capital expenditure, research and advertising spend.


Despite the significant progress made in the industry, there is still space for strong growth in the future. Broadband penetration remains weak at 37.8% as at 2019 relative to peers such as South Africa and Egypt, suggesting that more investment is needed and there is significant earnings prospects. Currently, the ARPU of our coverage companies remains weak relative to levels in other peer countries such as South Africa and Egypt. We believe platforms of operators can be leveraged to catalyse change in other sectors, especially financial services, and deliver enhanced earnings performance. The major pressure point for the industry has been regulation, with NCC's heavy regulatory fines and policies to ensure fair competition restraining the growth of some major players. Similarly, regulation has restricted the expansion into other business lines with strong prospects such as financial services, unlike in markets like Kenya and South Africa. We believe the speed and flexibility of regulation would shape the trajectory of growth and investment in the sector.


Investment Thesis

The telecommunications sector in Nigeria remains the fastest growing, the most resilient and the largest contributor to the economy's growth. Despite this, the sector is not at its full power yet given weak broad-band penetration at 37.8% and the huge prospects for mobile money under the right regulatory framework. These opportunities drive our optimistic outlook for the sector despite weak macroeconomic conditions. Accordingly, we make a strong case for investing in MTNN and Airtel Africa, with market share of subscribers at 37.3% and 27.2% respectively. The two companies have also continued to invest in telecommunications infrastructure to boost capacity and deliver superior services to customers, with annual CAPEX at around N617.4bn and N580.7bn respectively over the past three years. With regulators loosening previously rigid rules and providing to telcos an even better opportunity to deliver financial services, we see another pathway for strong growth reminiscent of historical levels in the medium-term. The immediate worry is the unprecedented economic crunch brought by the COVID-19 pandemic worldwide, which could affect 2020 earnings. However, the industry is expected to remain resilient as the digital economy has boomed during the lockdown implemented to fight the pandemic. 


Our analysis shows that MTNN (10.6x) and Airtel Africa (4.0x) are undervalued with an average P/E multiple of 7.3x compared with BRICS markets such as Brazil (11.6x), Russia (13.3x), India (13.4x), China (48.5x) and South Africa (12.5x). Put together with our positive outlook for the sector over the medium-term, we believe the opportunity is attractive. Based on our valuation of MTNN and AIRTELAFRI, we arrived at a target price (TP) of N147.67 and N419.53 per share respectively, representing an upside potential of 28.4% and 40.4% relative to the market price of N115.00 and N298.90 per share as at 22-May-2020. Accordingly, we place a “BUY” rating on both MTNN and AIRTELAFRI.


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