Nigeria initiated 5G trials as far back as 2019. MTN Nigeria (MTNN) ran the trial, and it was declared successful. However, the full 5G rollout has faced delays due to the pandemic and regulatory bottlenecks. Nevertheless, the Nigerian senate has recently approved the deployment of 5G, and the Nigeria Communications Commission (NCC) has conducted an auction for two licenses for 100MHz spectrum in the 3.5GhZ band (5G compatible spectrum). The commercial rollout is expected to commence at most one year from now.
MTNN, Airtel Nigeria and Mafab Communications were the only three participants in the auction. As the other two local operators did not meet the NCC’s bidding requirement. Airtel Nigeria was priced out of the 5G race, leaving the country's leading mobile network operator (MNO), MTNN, and recently incorporated Mafab Communication.
The auction eventually closed at US$273mn (NGN112.9bn) despite initial kickback against the base price set at US$197.4mn. The telecom operators had initially asked that the base price be reduced because of the large future capex outlay needed to get 5G up and running.
Also, MTNN said that the spectrum was 136% higher than the estimated market value. However, our comp analysis shows that the Nigerian 5G spectrum is cheaper than the peer average for the mid-band auctioned (population adjusted).
A key reason for this is that smartphone, internet penetration and average income is lower in Nigeria compared with the other countries highlighted below, limiting the earnings potential from 5G.
Good development for MTN Nigeria
The new license will give MTN Nigeria a competitive edge over the MNOs that do not have a 5G spectrum, enabling MTNN to provide retail and enterprise clients with faster internet.
However, as mentioned above, Mafab Communications is a recently incorporated business and details surrounding their service offerings are unclear. As such, we do not expect them to bring a major competitive threat to MTNN, with just a stand-alone 5G offering. Media reports reveal the owner to be a Nigerian businessman, Mushbahu Bashir, who has strong ties to businesses across Islamic banking, shipments and mining.
5G is expensive and there is no indication of strong demand
Investors should remain cautious. As much as this is a good development for MTNN and will move Nigeria towards faster internet, it is important to remember that the 5G rollout is a long game. As we have previously highlighted, 5G rollout is expensive and there is no indication that demand for the new technology will be strong enough to justify that expense in the next few years.
For most telcos across Sub Sahara Africa, the priority remains deepening smartphone penetration and recouping investment on the 4G network, but acquiring the 5G spectrum license is essential to prepare for the next stage of technological advancement.
Key stats on MTNN users and network coverage
The winners are expected to pay the balance of US$75.6mn (winning amount less the intention-to-bid deposit – which was the reserve price) by 25 February 2022. MTNN had a buoyant cash position of NGN207bn as at 9M-2021 and recently raised NGN89bn through the series II of its bond programme. However, our projections show that our initial dividend payment assumption (80% payout) for 2021 might be impacted by the lower FCFF following the licence fee payment.
We maintain our positive outlook on MTN Nigeria and reiterate our Buy recommendation on the stock as we await clarity from the company’s management.