MTN’s growth focus shifts to Nigeria after Ethiopia, Syria exits

Analysts see strong potential in data and fintech, while cautioning on currency and regulatory risks.

Last week, the South African company said it won’t bid again for a telecoms licence in Ethiopia, despite the carrot of the right to offer financial services. It will also exit Syria where CEO Ralph Mupita says conditions have become “intolerable.”  The company is also looking at options of leaving Yemen and Afghanistan.

In 2020, Nigeria accounted for 29% of MTN’s subscriber base and around 30% of revenue and earnings. Analysts see bright prospects for growth. Chapel Hill Denham in Lagos raised its 12-month price target for MTN Nigeria by 33% to N238.72 ($0.58) on August 13.

The firm recommends MTN Nigeria as a ‘buy’ and says the stock is cheaper relative to earnings before interest, taxes, depreciation and amortisation (EBITDA) than rivals such as Vodacom and Safaricom.

• MTN Nigeria is trading on an enterprise value to EBITDA multiple of 3.4x, versus 6.2x and 10.8x for Vodacom and Safaricom respectively, Chapel Hill Denham (CHD) says.
• Growth prospects are underpinned by Nigeria’s demography, with a population median age of 18 years, CHD argues.
• The company’s Nigerian data revenue will overtake voice revenue in the medium term, says CHD. From 2021 to 2025, CHD predicts compound annual growth rates of 42.1% and 57.5% for MTN Nigeria’s data and fintech businesses, versus 11.1% for voice revenue.
• Over the medium term, MTN Nigeria’s fintech revenue will exceed the fee and commission income earned by Nigeria’s largest banks, CHD says.

Currency risk, regulation

The growth prospects comes with risks. Relying on Nigeria for a significant part of revenue and profit makes MTN “particularly vulnerable” to macroeconomic challenges facing the country, says Chiti Mbizule, principal telecoms analyst at Fitch Solutions in South Africa.

• The company has previously incurred fines in Nigeria after disputes over dividend repatriations and failure to disconnect unregistered subscribers.
• The operator’s focus on strengthening its internal controls and its decision to set up an international advisory board, including former South African president Thabo Mbeki, have likely been informed by regulatory challenges in Africa and Nigeria in particular, and the move will somehow go towards improving relationships with governments and regulators, Mbizule says.
• Still, “essentially the Nigerian market, while highly lucrative, will remain highly risky for MTN.”

Regulatory issues are the main challenges facing MTN Nigeria, says Ayobami Omole, African telecoms analyst at Tellimer in Lagos.

The company’s inability to secure a payment service bank license is the latest instance of “regulatory roadblock”, she says.

• Still, MTN Nigeria is able to work around that by using its “super-agent license” and partnering with financial institutions to get its fintech business moving, she says.
• Direct network costs in the first half increased by about 30% on the year, lifted by naira depreciation, Omole says. Site rollouts were accelerated, but site lease agreements are dollar-based.
• For the rest of the year, further currency depreciation remains “a big threat” to the company’s cost profile, she adds.
• Tellimer, which rates the shares as “buy”, raised its target price by 9% to 240 naira in August. “The biggest downside risks to our valuation are further naira devaluation and an outbreak of the Covid-19 delta variant,” Omole says.

Bottom Line

MTN’s fortunes have become more sensitive than ever to Nigeria’s currency and regulatory uncertainties.