Business Day MTN Nigeria pre–IPO Report:
SUMMARY
The proposed listing of MTN Nigeria shares on the Nigerian Stock Exchange (NSE) is set to lift the market capitalisation of the bourse by about 20 percent.
According to our valuation MTN Nigeria is forecast to have a market capitalisation ranging from $8.56 billion to $10.88 billion.
BRIU, used various valuation methodologies including the discounted cash flow valuation (DCF) and relative valuation to estimate the Value of MTN Nigeria. This is the first major pre-IPO valuation attempted by a research firm using publicly available data.
BRIU used peer telecommunication companies from various emerging markets in order to obtain a multiple for MTN Nigeria.
Comparing telecommunication companies in various emerging market including Vodacom in South Africa, Safaricom in Kenya, Bharti Airtel in India, PLDT Inc., in the Philippines and Total Access Management in Thailand, BRIU obtained an industry average using price to cash flow (P/CF) of 9.9x, price to sales (P/S) of 2.9x, price to earnings of 47.6x, price to book (P/B) of 5.2x, and EV/EBITDA of 9x.
Our findings reveal a market capitalisation ranging between N1.4trn and N7.2trn. We arrived at an average value of N3.2trn (equivalent US$8.9bn).
MTN Nigeria has around 402 million shares in issue, the same amount in preference shares.
As part of the IPO it would split one share into 50 units, to create 20 billion shares.
Going by this estimate, BRIU arrived at a share price of N159.42 per share (market cap/shares outstanding).
Also, using the free cash flow to firm valuation methodology, we arrive at a value of N3.9trn, or US$10.9bn ($1/N360). Going by the number of shares estimate of 20 billion, the shares are estimated to price at N195.90.
The MTN group has made good progress on the IPO processes in Nigeria, and they aim to conclude it during 2018.
MTN Nigeria is the largest subsidiary of MTN Group which is a multinational telecommunications group that offers cellular network access to over 223 million subscribers in 22 countries in emerging markets.
As at the reporting date in 2017, MTNN had a total of 52.3 million subscribers. MTN Nigeria is the second largest contributor to MTN Group revenue of about 27.2 per cent closely behind South Africa which contributes 32.2 per cent.
MTN Nigeria is expected to achieve double digits growth in the coming years hinged on data and the IPO is set to be highly successful with major demand from Pension Funds, global fund managers, domestic investment firms and institutional investors looking for exposure to the last of its kind pure play emerging markets Telecommunications firm with a dominant position in a large country by population (200 million) and GDP($400 bn).
BusinessDay will update the valuation report as more IPO information is released by MTN Nigeria.
BACKGROUND
The Information and Communications sector of which the telecommunications industry falls, contributed 10 per cent to the total nominal GDP in the fourth quarter (Q1) of 2017 with an annual contribution of 10.03 per cent.
The Nigerian telecommunication industry is the largest segment of the information and communication sector. It can currently be regarded as a self-aware industry which adapts to the stark realities of business. The sector started operation in 2001 after the deregulation of the industry by ex-president Olusegun Obasanjo led administration.The sector had evolved over the years and has contributed immensely to sustained growth and thecommunication needs of Nigerians.
The leading players in the Nigerian telecom space are MTN, a South Africa-based multinational company with a present market share of 36.6 per cent. Closely following MTN in the fight for increased market dominance is Globalcom, an indigenous multinationalfirm with a market share of 26.2 per cent.
More so, Airtel, an Indian telecom firm has a present market share of 26.2 per cent and 9mobile trails behind with a market share of 11 per cent[1].
GSM remains the most dominant technology type for accessing the internet for subscribers.
Data released by the National Bureau of Statistics in Q4 2017 reveals that active GSM internet subscriptions stood at about 98.4 million, representing a 5.82 per cent increase relative to the previous quarter. GSM internet subscriptions recorded an increasing trend throughout the year 2017 as it grew by 7.1 per centas at year end 2017 compared to 2016 figures.
A delineation according to the major player in the space shows that, MTN retained the highest share of all GSM active internet subscribers as at Q4 2017, capturing 36.6 per cent of the total subscriptions. This was followed by Glo with 27.4 per cent subscription, Airtel with 24.3 per cent subscriptions and 9mobile (EMTS) with 11.5 per cent subscriptions.
Key Products
MTN Nigeria is one of the major players in the Nigeria telecommunication space. The telecom giant’s key product includes:
- Voice data (incoming and outgoing calls)
- Data services (internet service, mobile internet mobile Wi-Fi services);
- and digital(Enabling people to make financial transactions using their cell phones, and bringing them entertainment and online shopping through investments in mobile platforms, apps and online ventures business)
In the FY’17, data revenue grew by a robust 86.6 per cent.
Contribution of the telecommunication industry to the Nigerian Economy
MTN GROUP
Operating Model/Strategy
MTN Group is well positioned to capture growth as Africa and the Middle East are forecasted to be among the world’s key growth regions in the long and medium term.The benefit from this development by MTN is massive as they continue to leverage on the favourable demographic growth of Nigeria which is estimated to become the third most populous country in the world by 2050 and low data penetration in these region. MTN Group has defined clear initiatives (which serve as performance indicators to sustain growth in the long term. Its strategy which is explained below is succinctly captured with the acronym “BRIGHT”.
- Best customer experience
In 2022, MTN Group hopes to reduce monthly customer churn, achieve the best brand in the market and lead the market in NPS. This it hopes to do by revamping the customer experience and refresh the brand. Last year, MTN Group deployed the services of Nokia’s Cognitive Analytics for Customer Insights and Nokia Service Quality Manager which provides a complete view of customer satisfaction, device, network performance and revenue. This would enable MTN Nigeria speed the identification of service issues like data session quality, poor voice calls and also maximise the benefits of Nokia’s software which includes: data science and automation.
- Returns and efficiency focus
Improve ROIC, EBITDA, increase the yield on average free cash flow. This it hopes to achieve by focusing majorly on cash flows, ensure return-based capital allocations and leverage on its scale
- Ignite commercial performance
MTN plans on growing subscribers, market share, ensure stable voice revenues and grow enterprise and wholesale revenue through implementation of segmented propositions and go-to market plans, enhance, launch its wholesale business unit, grow enterprise products and channel.
- Growth through data and digital
Achieve 200 million data subscribers, achieve 100 million digital subscriptions, including 60 million for MTN Mobile Money. This it would achieve implementing dual-data strategy and scale up its mobile financial services.
- Hearts and minds
Improve employee engagement, enhance reputation
and ensure effective and compliance practices.
- Technology excellence
Increase population coverage, improve network quality.
MTN NIGERIA
MTN Nigeria is the largest subsidiary of MTN Group which is a multinational telecommunications group that offers cellular network access to over 223 million subscribers in 22 countries in the emerging markets. As at the reporting date in 2017, MTNN had a total of 52.3 million subscribers. MTN Nigeria is the second largest contributor to MTN Group revenue of about 27.2 % closely behind South Africa which contributes 32.2%. In 2017, MTN Group’s top-line growth was driven by a healthy growth in data revenue. There was a robust increase in data revenue of about 34.2%which was driven majorly by the robust 86.6% growth in Nigeria’s data revenue. Data revenue in Nigeria was driven by strong network quality which encouraged high data usage and customised data offerings. A 14.2% Growth in Digital revenue was majorly supported by Mobile financial services like MTN Mobile Money and rich-media services which were pulled down by a reduction in digital revenue in MTN by 3.5 per cent.
The MTN Nigeria is expected to achieve double digits growth Nigeria’s borrowings are highly denominated in dollar of about 51% of total borrowings.
Financial Outlook
In 2017, MTNN recorded an EBITDA Margin of 39%
Security issues
Nigeria telecom industry have been threatened by the following security issues which has taken a different dimension ranging from case of cybercrime(fraudulent and inappropriate use of the internet infrastructure such as cyber-fraud, cyber-intrusion, cyber-bullying, spam, privacy violation and online defamation) cracking, copyright infringement, identity theft. These security issues can adversely affect the nation’s security and its critical ICT infrastructure
Mobile penetration
Globally, despite a slowdown in the number of people purchasing as a result of saturation in the developed economy, mobile subscribers as at 2017 was put at 5 billion.[1] In Nigeria, the n mobile penetration rate was 49 per cent in 2017 and it’s projected to hit 55 per cent by year 2025.
In the same vein, smart phone penetration rate in Sub-Saharan Africa (SSA) is estimated at 34 per cent (about 230 million people). This is expected to grow by 34 percentage points to 68 per cent by year 2025, buoyed by proliferation of cheap smartphones, increasing population coverage of 3G and 4G networks, rising appetite for social media and so on.
In 2016, smartphone market weakened by 8% year on year due to persistent fall in Gross Domestic Product(GDP) as a result of falling oil prices which plunged the economy into recession.By 2017, smartphone market experienced 6 per cent growth per annum as the market is slowly moving out of recession.
The feature Smartphone market also grew by 15 per cent annually thereby offsetting the smartphone decline in 2016. With the upward increase in the growth rate of smartphone market, if all things been equal one can easily predicted positive growth in the market,
the market is still open to opportunities[2].
Regulatory issues
The telecommunication industry has over the years faced serious regulatory issues which include: multiple regulations and multiple taxation which is characterized by unfair taxes and levies billed by tax authorities on the telecom industry and delays in securing approval for site for new base stations.
BROADBAND POLICY
- Define the open access framework and secure ROW Waiver with states
- Enable expedited ROW permit for the rapid rollout of base stations
- Declare critical National infrastructure
- License new operator as required
Valuation
Using PEER multiples, BRIU arrived at a value of N3.2trn, equivalently US$8.9bn. We made use of comparable companies in emerging markets which are Vodacom in South Africa, Safaricom in Kenya, Bharti Airtel in India, PLDT Inc. in the Philippines and Total Access Management in Thailand. We arrived at an industry average of 9.9 using price to cash flow (P/CF) multiples, 2.9 using price to sales (P/S) multiples, 47.6 using price to earnings multiple, 5.2 using price to book multiples and 9 using EV/EBITDA multiples.
Our findings reveal a range between N1.4trn and N7.2trn. We arrived at an average value of N3.2trn (equivalent US$8.9bn).
MTN Nigeria has around 402 million shares in issue, the same amount in preference shares, which it sold at $0.99 in 2007.As part of the IPO it would split one share into 50 units, to create 20 billion shares, which would be listed on the bourse and set the IPO price via book building. Going by this estimate, BRIU arrived at a share price of N159.42 per share.
Major Findings
ARPU majorly describes the amount of revenue generated from a subscriber. From their FY’17, we saw that MTNN generated 27% of the Group total revenue to a tune of N1.1 trillion, with its 61 million subscribers (which is 24% of the Group’s total subscribers), we arrived at average revenue per user of MTNN: N1483.52 (or $4.24 equivalent) compared to N1100.02 (or $3.52 equivalent) in 2016.
Currently, MTN Group has a market capitalization of R234.121 billion (N6898.70 billion). Based on MTN Group market capitalization, MTNN can be valued between N1660.1 billion to N1877.2 billion, a $4.6 billion to $5.2 billion.
Due to the fact that there are no listed telecommunications firms in the country, we decided to compare MTN with similar firms in emerging markets. We looked at Vodacom in South Africa which is the largest teleco with a subscriber base of 66 million subscribers, Safaricom is the largest teleco in Kenya and Kenya has averaged annual GDP at about 5%, Bharti Airtel is the teleco with the largest market share in India and India has similar demographics as Nigeria with rapid economic growth of 7%, TAC is Thailand’s biggest Teleco and Thailand is a similar emerging market. Due to the fact that telcos are hugely debt financed because of its capital intensive nature, we focused majorly on EV/EBITDA, P/S, P/B, P/CF etc. We made use of the CAPM to estimate our cost of equity because CAPM is more preferred to the dividend model as it establishes a relationship with risk and return and it also considers systematic risk (market/general risk)
MTNN is presently fairly leveraged, with a current level of 46% and as such they still have the capacity to borrow or issue bonds. This can be seen with the recent decision of MTN Group to raise a N400 billion ($1.1 billion equivalent) in the Nigerian capital market as it seeks to move from dollar-denominated debts to local currency debt and fund expansions in local markets. Although, this issuance could lead to increase in the riskiness of the firm as investors reacted to this showing by a slight 0.6% reduction in MTN’s shares.
Brief Overview of Comparable Companies
Vodacom Group Limited: Vodacom is a South Africa base telecommunication company, whose parent company is Uk based Vodafone, is the largest company trading in Africa with current market capitalization of $21 billion, 66.8million subscribers, their earnings before tax depreciation and amortization(EBITDA) margin EBITDA margin is 38.40 per cent. Vodacom is the dominant telecom company in South Africa, the company’s service includes: message, converge services, broadband and data connectivity.
Safricom Plc: Safaricom is one of the major players in Kenya telecommunication industry withs market capitalization of $11 billion, 28 million subscribers and her earnings before interest tax depreciation and amortization) margin is 48.70%.The company offers incorporated telecommunication services, which includes mobile, fixed voice (National and international roaming services), SMS, data, internet (internet solution for enterprise and hosted services such as: cloud hosting, domains and security service), M-PESA. They make available financial services and enterprise solutions to business and public sector, Safaricom plc is not limited to voice and data service, they provide mobile handset with: mobile broadband modems, routers, tablets and notebook. The company provides platform for Bill payments and dividend payment.
Total Access Communication: Total Access Communication is one of the major players in Thailand telecom industry with market capitalization of $3.7 billion, number of subscribers amounting to 24.3 million and her earnings before interest tax depreciation and amortization (EBITDA) margin 38.90 per cent. Total access communication major in wireless telecommunications services and the sale of handset accessories, there services are broke down into two segments: mobile telephone services and sale of handset including starter kits. Total access communication offer variety of customer services which includes data wireless fidelity (Wi-Fi), electronic service, post-paid self-services numbers, online tracking and bill payment channels, while her personal service comprise post-paid (as main packages, add-on packages, , international calling and international roaming) prepaid, such as packages, happy subscriber identification modules (SIMs) and Happy Tourist SIM, as well as smartphones and tablets. The Company’s products for business include voice package, mobile marketing, data and Internet connectivity, information and communication technology (ICT) and mobile solutions and service
Bharti Airtel: Bharti Airtel is the leading telecom company in India with its operation in !7 countries across Asia and Africa. Bharti Airtel have a market capitalization of $24 billion, outstanding share of 3.9 billion, number of subscribers amount 282 million, earning before tax depreciation and amortization (EBITDA) margin 38.6 per cent. Her service includes: 2G, 3G and 4G wireless services, high-speed home broadband, DTH and enterprise services for both national and international long distance.
PLDT.Inc: Pldt.inc is a major player in Philippine telecom industry with a market capitalization of $5.7 billion and earnings before interest tax depreciation amortization (EBITDA) margin 44 per cent. PLDT services comprise wireless, fixed line and others. Its wireless segment provides cellular and wireless broadband. The company also provide digital service and mobile financial service, its range of services is not limited to the above listed service they also focused on wireless voice communications and wireless data communications.
TOP 5 LARGEST COMPANIES BY MARKET CAPITALIZATION
Sequel to the BRIU analysis, MTN Nigeria market capitalization is estimated at N3.5 trillion at N177.66 per share (this is a point estimate from our forecast range of prices: N159.42 to N195.9). We used a point estimate). This will make it rank as the second most capitalized firm in the Nigerian Stock Exchange (NSE), just below Dangote Cement Plc. (DANGCEM) which currently lead as the most valued firm in Nigeria based on market cap of N4.15trn.
MTN estimated market cap is set to displace Guaranty Trust Bank (GTBank), valued at N1.30trn as at 14th May, 2018. Consequently, Zenith Bank Plc. (ZENITHBANK) will drop out of the list of the top five most capitalized firms in the bourse.
| CALCULATION OF WACC | ||
| Risk free rate | 12.75% | |
| Equity risk premium | 11.42% | |
| Beta | 0.80 | |
| Cost of Equity | 21.89% | |
| Cost of Debt | 10.54% | |
| Tax rate | 32.00% | |
| WACC | 15.14% | |
MTN NIGERIA: CALCULATION OF WACC
| CALCULATION OF WACC | ||
| Risk free rate | 12.75% | |
| Equity risk premium | 11.42% | |
| Beta | 0.80 | |
| Cost of Equity | 21.89% | |
| Cost of Debt | 10.54% | |
| Tax rate | 32.00% | |
| WACC | 15.14% | |
MTN NIGERIA: VALUATION USING MULTIPLES
| VALUATION USING MULTIPLES | |||
| MULTIPLE | SECTOR AVERAGE | 2017 VALUE (NGN MILLION) | ESTIMATED VALUE (NGN MILLION) |
| PRICE-TO-CASHFLOW | 9.858 | 171,384 | 1,689,503.87 |
| PRICE-TO-SALE | 2.928 | 886,083 | 2,594,451.17 |
| PRICE-TO-EARNINGS | 47.592 | 30,296 | 1,441,825.69 |
| PRICE-TO-BOOK | 5.162 | 1,386,778 | 7,158,549.91 |
| EV-TO-EBITDA | 9 | 345,549 | 3,057,223.46 |
| AVERAGE VALUE (NGN MILLION) | 3,188,310.82 | ||
| VALUE (USD MILLION) | 8,856.42 | ||
MTN NIGERIA: DCF VALUATION
| YEAR | 2018 | 2019 | 2020 | 2021 | 2022 |
| 1 | 2 | 3 | 4 | 5 | |
| GROWTH RATE | 10% | 12% | 14% | 14% | 16% |
| REVENUE (NGN MILLION) | 974,691.36 | 1,091,654.32 | 1,244,485.92 | 1,418,713.95 | 1,645,708.18 |
| EBITDA (NGN MILLION) | 137,737.25 | 154,265.72 | 175,862.92 | 200,483.73 | 232,561.12 |
| CAPEX (NGN MILLION) | 27,547.45 | 30,853.14 | 35,172.58 | 40,096.75 | 46,512.22 |
| FREE CASH FLOW (NGN MILLION) | 110,189.80 | 123,412.57 | 140,690.33 | 160,386.98 | 186,048.90 |
| TERMINAL CASHFLOW (NGN MILLION) | 6,989,543.42 | ||||
| NET CASHFLOW (NGN MILLION) | 110,189.80 | 123,412.57 | 140,690.33 | 160,386.98 | 7,175,592.32 |
| DISCOUNT FACTOR@15.1% | 0.87 | 0.75 | 0.66 | 0.57 | 0.49 |
| PV | 95,699.93 | 93,089.31 | 92,166.88 | 91,253.59 | 3,545,755.72 |
| NPV (NGN MILLION) | 3,917,965.43 | ||||
| NPV (USD MILLION) | 10,883.24 |
MTN NIGERIA: KEY VALUATION ASSUMPTIONS/NOTES
| S/No | ASSUMPTION | REMARK | |
| 1 | We used the multiples of Vodacom, Safaricom, Total Access Communication, Bharti Airtel and TLJM.JK as proxy for MTN Nigeria | ||
| 2 | We assumed that earnings, book value, Cashflow and sales are priced fairly by the market. Hence we used Price to earnings, Price to Book, Price to Cashflow, Price to sales ratio to value MTN Nigeria | ||
| 3 | We obtained data from sources including Reuters, Bloomberg, and the MTN Group Company Financials | ||
| 5 | Values were converted from Rand to Naira using the prevailing exchange rate for the relevant years | ||
| 6 | MTN Nigeria earnings were calculated relative to the earnings margin of the MTN Group | ||
| 7 | MTN Nigeria Revenue was obtained from the notes to the account | ||
| 8 | Value for MTN Nigeria assets was calculated relative to the assets-revenue relationship of MTN Group | ||
| 10 | FCFF was taken as EBITDA-CAPEX as provided by the guidance in the MTN Group financial statement | ||
| 11 | We used the Capital Asset Pricing Method to obtain the cost of equity of MTN Nigeria | ||
| 12 | Market risk premium was obtained from Aswath Damodaran country specific risk document | ||
| 13 | We only considered interest bearing debts in the calculation of the total debt of MTN Nigeria | ||
| 14 | Corporate Tax Rate | 32.00% | Marginal Corporate Tax Rate Plus Education Tax Rate |
| 15 | Other exchange rate translations from rand to naira was taken as presented in the group financial statement | ||
| 17 | Capex from 2018/EBITDA will average 25% of EBITDA | 20.00% | |
| 18 | Terminal Growth Rate | 12.00% | |
| 19 | Risk Free Rate | 12.75% | Yield on 5-year FGN Bond |