We are optimistic about the potential value-add for MTNN, a company that we cover, and raise the stock's target price in this report from NGN240 to NGN299, reiterating our Buy recommendation.
Creating wallets on any network: A new twist
MTNN said in the announcement that its payment banking service is open to all Nigerians, regardless of which mobile provider they use. This is an unexpected twist.
We had previously expected mobile money services to be restricted to individuals based on their mobile provider, as with the prevailing model in Ghana and Kenya. Competition in Nigeria could therefore become extremely intense, with no restriction on the potential addressable market. Providers with superior service offerings, effective marketing and the best last-mile delivery will conquer the market.
The solid foundation of a super-agent license
A strong agent network is the key to the last of these – last-mile delivery – and hugely important for the success of any PSB.
MTNN took advantage of its super-agent license (which Airtel Nigeria has just acquired) to build up a strong network of agents. Although there is no agent exclusivity, ie an agent can serve multiple service providers, MTNN has more agents than any other mobile money operator or financial services provider, putting the company in an excellent position to hit the ground running with mobile money.
Valuing the mobile money opportunity
We have surveyed mobile money penetration (mobile money users as a percentage of the total subscriber base) across various African telcos (in whole and specific markets). Safaricom has the highest penetration (71%), given its dominance and the positive trend for mobile money in Kenya; Airtel Africa (owner of Airtel Nigeria) has the lowest in our sample, at 20%; while MTN Group (MTNN's parent) has a penetration of 24% overall. However, the rate is much higher in Ghana and Uganda, at 42% and 58%, respectively, due to MTN Ghana's first-mover advantage and the group's market leadership in mobile services in both countries.
For MTNN, we assume its potential mobile money customer base to be 30% of its c71mn total customer base. The company is likely to benefit from the network effect of the already existing agent network and the absence of restrictions on the addressable market. That being said, we remain cautious as developments unfold.
Based on our comps, average revenue per user (ARPU) ranges between US$1.3 and US$2.2 across African telcos, with Safaricom's M-Pesa again coming top of the rankings.
Price regulation and competition in Nigeria will hit MTNN's pricing as more focus will be placed on gaining market share. As such, we assume an ARPU of US$1.3, which is somewhat lower than the average for MTN Group.
Upgrade MTNN target price, reiterate Buy
These assumptions point to additional revenue of cNGN136.2bn and NGN54.5bn EBITDA at an assumed EBITDA margin of 40%, lower than Safaricom M-Pesa's incremental EBITDA of 47%. We attribute this to the tough competition in Nigeria and likely relatively strict regulatory oversight.
Our SOTP valuation for Safaricom employs an EV/EBITDA multiple of 22x for M-Pesa, an average of some listed developed market digital payment companies. We assume the same EV/EBITDA multiple for MTN's mobile money operations, arriving at an incremental market cap of cNGN1.2tn or a total value per share of NGN58.9 for MTNN, representing 20% upside on the current price and bringing our target price to NGN299 (previously, NGN240) and cumulative expected return to 27%.
Note: In Nigeria, a PSB licence is slightly different from a mobile money licence (although they have similarities), but we have used mobile money as a blanket term for money transfer services offered through a mobile device. The telco-led version is the default assumption when talking about mobile money in Africa (primarily because of M-Pesa's success). We highlight the differences here.