Tuesday, December 07,
2021 / 08:50 AM / by Coronation Research / Header Image
Credit: Simply Business
Nigeria's telecom companies received a boost in November when it was announced that they had received approval-in-principal to receive Payment Service Bank (PSB) licenses. Stock prices flew. For those with an envious eye on Safaricom in Kenya, this was their moment. However, Nigeria in 2021 is a very different place to Kenya in 2007 when Safaricom launched its M-Pesa product. Technology has taken root in Nigeria's payments business and competition abounds.
Last week, the exchange rate at the Investors and Exporters Window (I&E Window) appreciated by 0.08% to close at N414.73/US$1. The Central Bank of Nigeria has continued to intervene in the FX markets and, quite likely as a result of this, there was a small decline in its foreign exchange (FX) reserves to US$41.19bn, a fall of 0.22% on the week and the fifth consecutive weekly decline. The level of FX reserves remains high in historical terms and therefore the position of the CBN looks strong. As liquidity rises in the the official FX markets it seems possible that stability will be maintained in the I&E and NAFEX rates towards the end of the year
Last week, activity in the Federal Government of Nigeria (FGN) bond secondary market was mixed as market participants remained on the sidelines. As a result, the average benchmark yield for bonds was flat at 11.42%. However, on benchmark notes, the yields of the 3-year (- 1bp to 9.34%), 7-year (-12bps to 11.86%) and the 10-year (-18bps to 12.11% ) bonds tightened. We reiterate our expectation that a future rise in bond yields is unlikely to be sharp as the monetary authorities appear content with recent economic and monetary outcomes during 2021: a return to economic growth; falling inflation (albeit falling slowly); a high level of foreign exchange reserves; successful financing in the international capital markets (Eurobonds).
Trading in the Treasury Bill (T-Bill) secondary market closed bullish. The average benchmark yield for T-bills fell by 49bps to 4.36%, with the yield on a 356-day T-bill closing at 5.64%. Elsewhere, the average yield for OMO bills fell slightly by 3bps to 5.48%, with the yield on a 305-day OMO bill declining by 1bp to 6.32%. The CBN sold N37bn worth of bills to investors at an OMO auction, maintaining stop rates across the three tenors. The market continues to be liquid.
Last week, the price of Brent fell by 3.91%, its sixth consecutive weekly decline since the week ended 29 October 2021, to settle at US$69.88/bbl. Nevertheless, Brent is still up 34.90% year-to-date and has traded at an average of US$70.59/bbl, 63.33% higher than the average of US$43.22/bbl in 2020. Oil prices continue to decline as concerns over the economic impact of the Omicron variant of the Covid-19 virus continue to weigh heavily on demand prospects. The Organization of the Petroleum Exporting Countries and its allies, OPEC+, maintained plans to add 400,000 barrels per day (bpd) of supply in January 2022. However, the cartel has agreed to meet again before the next scheduled meeting on 4 January 2022, if necessary, leaving room for possible policy changes if demand suffers from measures to contain the Omicron variant. Elsewhere, optimism on the possibility of reviving the 2015 Iran nuclear deal appears to be dwindling as talks between Iran and world powers appear to have reached an impasse - which bodes well for oil prices in the interim. Nonetheless, we maintain that the price of Brent oil is likely to remain well above the US$60.00/bbl mark over the rest of the year and on into the early part of next year. Historically, levels above US$60.00/bbl have been associated with periods of strong public finances in Nigeria, hence our focus on this metric
The NGX All-Share Index declined by 2.63% last week - the largest weekly loss since the week ended 21 May 2021 - to close at 43,308.29 points. Consequently, the year-to-date return plunged to 4.71%. MTN Nigeria -12.11%, Honeywell Flour Mills -11.62%, Oando - 8.73% and Seplat -6.47% dropped points last week, while Nigerian Breweries +0.97%, Cadbury Nigeria +0.54% and Airtel Africa +0.53% closed positive. Across the sector indices, the NGX Oil & Gas -4.55% index declined the most, followed by the NGX 30 -3.25%, NGX Pension -2.70%, NGX Banking -2.29% and NGX Consumer Goods -0.59% indices. Conversely, the NGX Insurance index posted a gain of +2.97%.
Tech Returns for Telecom Companies?
A few weeks ago, Nigeria's top 2 telecom companies were given approval-in-principle to act as Payment Service Banks (PSB), the first stage in gaining such a license. The market reacted quickly, with the price of Airtel Africa, for example, rising 21.8% from N780/s to N950/s during November. Nigeria has telecom penetration of close to 90.0%, so the idea of telecom companies acting as PSBs creates the prospect of significant new sources of revenue. The obvious comparison is with Safaricom in Kenya, which has handled payments for many years.
Indeed, over the past 10 years, Safaricom shares have performed like a tech stock. In US dollar equivalent terms, its share price has delivered a compound annual growth rate (CAGR) of 26.5%, beating the Nasdaq Composite Index with a CAGR of 19.2%, though less than, for example, Amazon with a CAGR of 33.2%. So, are there lessons to be learned from Safaricom's experience for Nigerian telecom companies?
Our answer is that there are some lessons, but one cannot read across directly from Safaricom to Nigerian telecom companies. The reason is that when Safaricom began to make transfers on behalf of customers with its product M-Pesa, there was almost no competition in that space. M-Pesa was launched in 2007. Even some Kenyan banks had issues making money transfers from one part of the country to another at that time, so Safaricom could provide services they were unable to in some product areas. One point that was noticed during M-Pesa's launch was that mobile customers were already using their telephone credits to make transfers with one another - telephone credit was already a proxy for cash.
The world in 2021 is very different to 2007. Nigerian bank customers have many online and mobile banking products at their disposal, from online and mobile banking offered by legacy banks to internet-only banks like Kuda. In the payment services space, there are already giants like Flutterwave. In mobile money, there are significant players such as Opay and PalmPay. In some cases, the business model aims to gain the maximum number of mobile customers, with short-term profitability not the objective. In other words, a company with a new PSB in 2022 will be entering a crowded arena.
This is not to say that a PSB license is not enormously valuable to Nigerian telecoms companies, and there is likely to be a slice of extra revenue for them. It will be very difficult to replicate Safaricom, however.
Model Equity Portfolio
Last week the Model Equity Portfolio fell by 2.41% compared with a fall in the NGX Exchange All-Share Index (NGX-ASI) of 2.63%, therefore outperforming it by 23 basis points. Year to date it has gained 8.71% against a gain in the NGX-ASI of 4.71%, outperforming it by 400bps.
For the second time this year we felt like passengers as the prices of telecom stocks moved, only this time it was a fall in MTN Nigeria that caused us to take a 197bps loss in notional performance. Elsewhere the losses were more predictable, notably the 31bps loss from the sum of our notional positions in banks where, as we have already noted, the Q3 and 9M results appeared lacklustre. Out notional position in Seplat cost us 21bps last week.
We continued to make notional purchases in Custodian Investment during the week and will continue to do so this week, liquidity permitting. We have taken the sum of our positions in banks to a neutral position and will take it to an underweight position over the coming weeks. We continue to search for strong ideas to take us into 2022.
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