Monday, March 26, 2018 07.59PM / Vetiva Capital Research
After series of discussions, MTN is cementing plans to list its Nigerian Business (“MTNN”), which is estimated to be worth about $6 billion, on the Nigerian Stock Exchange by H2’18. The company has obtained shareholder approval for the listing and is in the process of seeking regulatory approvals.
We believe listing of the largest telecommunications company in Nigeria on the domestic bourse is a game changer for the equity market and as such, assess preliminary details surrounding the issue.
Company Profile: Largest Telco in West Africa
MTN Nigeria (MTNN) is a subsidiary of MTN Group South Africa (Africa’s biggest mobile phone operator) and the largest contributor to the group earnings accounting for about 33% of its revenue (5-year average). According to the Nigerian Communications Commission (NCC), the telecommunications giant has a customer base of over 52 million subscribers, accounting for c.36% market share in the country.
MTNN began operations in 2001 after securing one of four GSM licenses offered by the Nigerian Government in a deal worth $285 million. Since then, the Telco giant has so far made significant investment in its mobile infrastructure, with total assets worth over ₦1 trillion as at FY’16, and has enjoyed a decent level of return over the years.
MTNN offers cellular network access to its subscribers within Nigeria, with airtime and subscription accounting for 64% of revenue as at FY’16 and roaming services (International roaming services, including data roaming, in-flight roaming, and WiFi roaming services) making up the second largest contributor to revenue at 12%.
Currently, MTNN is controlled by MTN International (Mauritius) Limited (MTNI) with 75.8% ownership. Also, 18.7% of its ordinary shares outstanding is held by Nigerian shareholders through special purpose vehicles. In addition, 2.8% is owned by Mobile Telephone Networks NIC B.V and 1.8% owned by Public Investment Corporation SOC Limited.
Upon completion of the planned IPO, MTNN will be the first subsidiary of the MTN Group to be publicly listed on a stock exchange, though we note that the Group has announced its intentions to also list 35% of its Ghanaian business on the Ghana Stock exchange by the end of 2018.
Financial Performance : FY’17 Result shows stronger momentum as Data revenue leaps
MTN Group recently released financial results for the year ended 31 December 2017 which showed an 11.6% y/y revenue growth in its Nigerian business to ₦885 billion (excluding the impact of currency volatility) – now contributing 27% of the Group’s Total revenue (FY’16: 32%). Voice revenue continues to account for majority of headline revenue (c.74%), with the segment growing 17% y/y. Performance of the Data segment was however much stronger with revenue up 87% y/y and the segment now contributing 12% to total revenue (FY’16: 7%). We note that the company’s total data user base grew 14% y/y, with its active data users reported at 14.1 million as at FY’17 (27% of MTNN’s total subscriber base).
Costs (operating expenses and cost of sales) over the year however rose at a faster pace than revenue – up 27% y/y – with the strongest rise recorded in network costs - up 65% y/y. Weighed by impact of the weaker naira on foreign currency denominated expenses, MTNN’s EBITDA margin contracted from 46.4% in FY’16 to 38.9% in FY’17. Overall, FY’17 EBITDA declined 7% y/y to ₦346 billion. Though MTN Group did not report FY’17 bottom line figure for its Nigerian subsidiary, we estimate a single digit y/y PAT decline in the period; noting the weak run rate already recorded as at H1’17 (PAT down 28% y/y as at H1’17). While MTN Nigeria has not paid dividends since 2015, MTN Group declared a total dividend of R7.00/share (c.$0.54/share) for FY’17.
A promise fulfilled; MTNN to raise capital via IPO in 2018
In 2015, MTNN was levied an unprecedented fine of ₦1.04 trillion (an equivalent $5.2 billion as at the date of fine) by the NCC for non-compliance with a deadline to disconnect all non-registered sim cards in the country – 5.2 million unregistered SIM cards billed at ₦200,000 per subscriber. Following series of negotiations between MTNN and the Federal Government of Nigeria, a final resolution was reached wherein the fine was reduced to ₦330 billion (to be paid off over seven installments). Part of the settlement included a plan for MTNN to list its shares on the Nigerian Stock Exchange as soon as it became commercially and legally feasible.
However, given weak investor sentiment in the equity market since 2015, (NSE broad index down 17% and 6% in 2015 and 2016 respectively), MTNN stalled the listing agreement in hopes of more “suitable market conditions”. Thus, given improving macroeconomic environment which has helped rejuvenate investor confidence in the Nigerian equity market, and spurred a 42% rise in the NSE All-Share Index in 2017, the Telco giant is in the market and ready to list its shares by H2’18.
IPO indicative details
MTNN currently has 402.6 million issued ordinary shares of ₦1.00 each (nominal value), 402.6 million preference shares at $0.005c each (nominal value), and 4.5 million class “B” ordinary shares. As part of the listing process, we understand that the company plans to reclassify its Class B shares to ordinary shares - to have a single class of shares.
Also, in a bid to improve liquidity and achieve a more “market friendly” price, MTNN plans a share split of 1 for 50 (taking its nominal value per ordinary share to ₦0.02 kobo from ₦1.00). With this, total outstanding ordinary shares are expected to rise to 20.3 billion shares.
That said, MTNN plans to offer and issue at least 3.5 billion shares through an Initial Public Offer (IPO) on the NSE. We understand that the telecoms giant also plans to pay off its existing preference shareholders (402.6 million in issue) by offering and issuing ordinary shares in exchange.
With a nominal value of $0.992 for each preference share (share capital: $0.005c plus share premium: $0.987c), we estimate a value of ₦144 billion for the total preference shares outstanding.
Using MTNN’s over-the-counter (OTC) market price of c.$13 (ytd average) for each linked unit of its ordinary and preference shares, a rough estimate puts the value of the ordinary shares at $12 (excluding the estimated $0.992 value per preference share) – this is equivalent to a post-split price of ₦86.40/share (using ₦360/$1 rate).
We highlight that given the impact of the fine earlier discussed, MTNN’s price in the OTC market has taken a dip – down from an average $26 as at Q4’15 to a year to date average of $13. We highlight that the eventual IPO price for the stock will be determined through book building.
Using our estimated OTC price, we expect an additional 1.7 billion ordinary shares to be issued in exchange for the preference shares. As such, we estimate a total of 5.2 billion new shares to be listed on NSE – taking total shares outstanding to 25.5 billion. Consequently, we estimate a market capitalization of ₦2.2 trillion for MTNN, with the company accounting for about 13% of the NSE’s Market Capitalization (post listing).
Listing portends benefits for NSE, MTN Nigeria
We believe the Group’s strong global brand recognition & reputation and strong financials present MTNN as a Blue Chip on the Nigerian Bourse and as such expect this to further support foreign interest in the Nigerian equity space. In the short to medium term, we expect listing discussions on other telecoms operators to remain on the table amidst persistent pressure from national regulators across Africa; Vodacom in 2017 listed 25% of its Tanzanian business on the Dar es Salaam Stock Exchange (in line with government imposed regulation for telecoms companies to list at least 25% of their shares locally), MTN Ghana agreed to list 35% of its shares in order to obtain a 15-year 4G license.
Meanwhile, on the company side, additional equity capital will help improve the firm’s financial flexibility, capital structure and could potentially also support a better relationship with its regulator (NCC). We believe this could also improve general “national goodwill” for the brand as a larger pool of Nigerians attain ownership of the company. Overall, we are optimistic about MTNN listing before the end of Q3’18. Details on the listing remain sparse, however, media sources have stated that a spokesperson for the company said MTNN will prioritize Nigerian retail & institutional investors to access the issue.
MTN Nigeria remains a growth story in the Nigerian economy, given the room for improvement in mobile penetration (at 72% as at FY’17) and internet usage across the rapidly growing population (internet penetration at 55% as at December 2017).
New era for Telecommunications sector
In our view, the listing of MTNN on the NSE would help deepen the market, improve wider sector diversity, encourage further listings by other telecoms companies, and eventually make the equity market a better representation of the wider economy. Currently, four major sectors (Banking, Consumer Goods, Industrials and Oil & Gas) account for 80% of the market capitalization of the NSE. Given the sheer size of MTNN, we expect the ICT sector to potentially displace the Oil & Gas (c.5% of NSE) as the fourth largest sector on the exchange – accounting for 12% of the NSE’s market cap (post listing) compared to a meagre 0.2% currently.
About the Author
This equity research was prepared by Ifedayo Olowoporoku of Vetiva Capital Management Limited. He can be reached vide firstname.lastname@example.org