At the recent MTN capital day event, the group's chief finance officer said that MTN will be embarking on an asset-realisation programme in a bid to simplify its portfolio, focus on its pan-Africa strategy, and improve its capital allocation and returns. Among other changes*, the programme includes the proposed sale of 14% of MTN's holdings in MTN Nigeria (MTNN).
Investors in Nigeria have met the news with a mixture of optimism and skepticism. Earlier this week, we initiated coverage of MTNN with a Buy recommendation, highlighting the huge opportunity for telcos in Nigeria and MTNN's particular advantages. The sale will give local retail and institutional investors the opportunity to tap into this growth story. However, skeptics have questioned MTN Group's intentions, asking if the move represents a gradual exit from the Nigerian market due to a lack of confidence.
The non-dilutive offer will see MTN Group's holdings in MTN fall from c76% to c62%, which would still be a majority shareholding. The sale of the c2.8bn shares will be worth cNGN464bn (over US$1.1bn) at the current price and will likely take place in tranches. The Group has intended to sell part of its stake since the 2019 listing by introduction, but says market conditions have thus far not been favourable.
Should you buy? Absolutely
As discussed in-depth in our initiation report, MTN Nigeria is a very strong growth opportunity. Like its fellow Nigerian companies, it has faced macroeconomic and regulatory challenges, but the telco has shown resilience. MTNN remains a big and important part of the MTN Group, contributing c40% of its EBITDA.
Although the Group has recently faced challenges in repatriating its dividends from Nigeria, the enormous growth prospects for the Nigerian market outweigh this difficulty. In addition, investments in Nigeria fit neatly into the group's pan-Africa strategy.
In this light, the stake sale should be seen as a good opportunity for investors rather than a red flag. It also improves the liquidity of the stock on the Nigerian stock exchange, thereby driving fair-value realisation.
But risks remain
Despite the huge potential of the Nigerian market and MTNN’s ability to exploit that opportunity, there are a few risks to our Buy recommendation that investors should consider, most notably:
Regulatory risk is generally a major risk for businesses in Nigeria. The telecommunications industry is highly regulated and MTN has a history of being a victim of the Nigeria Communications Commission's (NCC) regulation a few times. With a super-agent license and the anticipated payment services bank (PSB) license, the company now falls under the jurisdiction of the central bank as well.
In the past, MTNN's earnings have been impacted by severe regulatory fines. Specifically, in 2015, MTN Nigeria was fined cNGN1tn (which was later renegotiated to NGN330bn) by the NCC for failure to disconnect non-registered SIM cards. This led to over a 100% decline in net income in 2015. There have also been other cases led by the Attorney General of the Federation and the Nigerian House of Representatives, although these were later withdrawn.
Recently, the NCC banned mobile network operators from selling new SIM cards because of a national database update process. The ban lasted for c5 months and MTNN lost over 5mn subscribers in the period.
Separately, MTNN has been prevented from launching a full mobile money service in Nigeria due to delays from the central bank. Overall, we rate regulatory risk as high for the operator and the telecommunications sector overall.
The tough macroeconomic terrain in Nigeria is a hindrance to the potential growth of the sector. In particular, the low purchasing power of Nigerians influences how fast average revenue per user can grow and how fast data penetration can increase.
Also, currency devaluations impact the cost of acquiring equipment for network development and expansion, exacerbated because MTN Nigeria’s deal with the tower company (IHS) is dollarised. We saw a slight decline in MTNN's EBITDA margin in 2020 following the c12% devaluation in the I&E window exchange rate.
We foresee limited risk in terms of technical capacity as MTN and its infrastructure partners – IHS – are adequately skilled. However other external challenges in Nigeria – such as the delays at Nigerian ports and the increasing security challenges across the country – are huge barriers to the speedy rollout, maintenance and expansion of infrastructure.
*The asset-realisation program will also involve the sale of a 12.5% stake in MTN Ghana, exiting the Middle East market and the sale of MTN's 75% stake in MTN Syria, and sales and leasebacks of c13,000 towers in South Africa.