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Cordros Capital weighs MTN planned double action

The shares of MTNN have gained increased attention from investors over the past two weeks following the announcement that the CBN has granted Approval in Principle (AIP) for license application regarding its proposed MOMO Payment Service Bank. In addition, the company disclosed that the group company (MTN International) would embark on a public offer for the sale of up to 575 million shares via a book-building process to institutional investors and a fixed price to retail investors.

The confluence of both events has elicited strong buying interest in the stock as the share price hit NGN200.00 on 9 November – the first time since the stock was listed by Introduction in May 2019. Since 5 November, when both announcements were made, MTNN shares have gained 8.2% after closing at NGN190.00 (17 November 2021). Beyond these idiosyncratic events, we still hold a long-term positive outlook on MTNN given its market leadership position, attractive industry dynamics and relatively less cyclicality. Based on our assessment of the likely impacts of the developments above, we believe the stock’s re-rating is justified.

Mobile Money is the next growth frontier for the telco industry: We understand that the recent approval from the apex bank will enable MTNN to put in place the necessary infrastructure to offer banking services such as acceptance of deposits, remittances, payment processing and mobile wallets. However, it is instructive to note that the AIP implies a six-month waiting period after which final approval will be given, provided all regulatory requirements are met. As things stand, it is difficult to reliably estimate the potential contribution of the PSB subsidiary to revenue, EBITDA and Free Cash Flow (FCF).

Nonetheless, we highlight that its fintech business (an abridged version of the PSB subsidiary) contributed 4.2% to revenue as of 9M-21. Regulatory data from Kenya, Tanzania and Ghana suggest that the market leader in the voice market is also the market leader in the mobile money space. This is because the size of the subscriber base provides leverage for dominance.  Accordingly, we believe this suggests that MTNN will likely dominate the mobile money space ahead of the final approval to launch (MTNN is the voice leader with a 38.6% market share as of September 2021, according to NCC data). With Airtel’s mobile money business contributing 11.4% to revenue (as of H1-21), we see scope for increased contribution from MTNN’s fintech business from the current level of 4.2%.

What’s in Store on the Offer for Sale: Based on the company’s publication, the MTN Group (parent entity) will sell 575 million shares via a book-building process to institutional investors and a fixed price to retail investors. For us, asides from the fact that the parent company intends to divest to realise gains from its investment, we think the action could have been induced by perceptions that the stock is not fairly valued. We find justification for this on the basis that MTNN currently trades at an EV/EBITDA and P/E multiples of 4.6x and 9.7x, compared to Airtel Africa with 5.0x and 16.4x, respectively. Accordingly, the need for a new price discovery via a book-building process seems justified. We think the price at the end of the book building process (date of exercise yet to be announced) will likely be at a 5% premium or discount to the 60-day volume-weighted average price of NGN175.86 as of 5 November (date of announcement).

Recovery in Informal Sector, Data Consumption to Support Service Revenue: Service revenue grew by 22.9% y/y in Q3-21 (9M-21: +23.6% y/y), due to the broad-based expansion across voice (+7.4% y/y; 57.6% of revenue), data (+57.2%y/y; 33.2% of revenue), and value-added services (+62.6% y/y; 4.5% of revenue). We expect continued growth in voice revenue in line with the recovery in economic activities, particularly in the informal sector. Similarly, we expect the momentum in data revenue to be sustained by its enhanced network capacity and favourable country demographics amid rising smartphone penetration. Overall, we estimate service revenue will grow to NGN1.62 trillion (+20.4% y/y) in 2021E, supported by growth in voice (+9.8% y/y), data (+47.2% y/y) and value-added services (+27.4% y/y).

Revenue Growth to Sustain Expansion in Margins Despite Elevated OPEX: Despite the significant increase in network operating costs (+31.5% y/y), the strong topline growth (+22.9% y/y) and sub-inflationary growth in OPEX (+6.6% y/y) pushed EBITDA higher by 27.2% y/y to NGN217.29 billion in Q3-21. Similarly, EBITDA margin expanded by 179bps to 52.4% in Q3-21 (9M-21: +158bps to 52.6%). We expect operating expenses to remain elevated in Q4-21 given the pass-through impact of the Naira devaluation on BTS lease cost, increased rollout of 4G sites, and advertisement related expenses. Notwithstanding, we expect revenue growth to limit the overall impact on margins. For 2021E, we estimate EBITDA growth of 24.8% y/y to NGN855.72 billion, with an accompanying EBITDA margin of 52.8% (+186 bps y/y).

Valuation: Following the revisions to our model, we estimate a PBT of NGN300.15 billion (+46.3% y/y) in 2021E, translating to an EPS estimate of NGN14.75/share (2020FY; NGN10.08). On our 2021E EPS, we estimate a final DPS of N8.75/share, representing an increase of 48.3% from NGN5.90 paid in 2020FY and a dividend yield of 4.6% based on the price of NGN190.00/share (17 November). The net impact of our changes is an increase in our target price to NGN226.48 (previously; NGN202.21/share), implying a potential upside of 19.2%. Consequently, we retain our “HOLD” rating on the stock. On our estimates, MTNN trades at a 2021E P/E of 12.9x and EV/EBITDA of 5.3x compared to EM peers average of 18.8x and 5.7x, respectively.