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MTN Nigeria Communications Limited. Nigeria | Equities | Telecommunication | January 12, 2017 DLM RESEARCH

…Still dauntingly tall among peers

Equity Research | MTN Nigeria Communications Limited DLM RESEARCH

January 12, 2017 2 www.dunnlorenmerrifield.com

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In comparison to peers, MTN Nigeria Communications Limited outplays other

communication companies in Nigeria, as it presently controls about 40% of the

industry.

MTN Nigeria Communications Limited (MTNN) is well placed in the Nigeria

telecommunications space with total assets of N964.38billion (Book value- FY’14).

The company won a bid for a mobile phone licence to operate in Nigeria in 2001 at

a cost of $285 million. The decision to operate in Nigeria was a calculated one which we

believe was due to the limited wireless capacity in Nigeria at the time coupled with the fact

that the market was untested. This initially raised concern amongst various investors with

regards to the company’s strategy and return on investment. However, in its first year of

operation through December 2004, MTNN surprisingly accumulated 1.96 million

subscribers before rising to 41.6 million in 2014 and subsequently to 57 million subscribers

as at 2016.

In 2015, the group reported R147.06 billion in revenue out of which Z51.91 billion

(35.32%) emanated from the Nigeria operation. Between 2011 and 2014, the company

grossed a total of N3.13 trillion in revenues, and paid out N883.99billion representing

28.24% of revenue as cash dividend during the same period. Overall, the strong revenue

(the highest among the group’s subsidiaries) reflects the success story that supports the

strong business strategy of the company. Today, Nigeria accounts for the largest

proportion of the group’s profits. Despite regulatory headwinds, we do not expect the

company to cut down its operation in Nigeria in the medium to long term given that

MTNN is the group’s ‘’cash cow’’.

One of MTNN’s major strength is its wide network coverage. We recognise the fact

that the company has come under pressure in recent time due to lower mobile termination

rates, declining voice revenue, current internet data price crash and regulatory pressure.

This has weighed significantly on profits and margins even as competition has puts

pressure on its ability to grow subscriber base in maturing markets. Furthermore, voice

revenue continued to come under pressure as a result of the use of multiple SIM cards as

well as promotional price offer by other operators. The number of porting activities

showed MTNN’s loss of subscribers to other operators and we do not expect the

company to win back all subscribers consequent to the recent disconnection. Ih the last

two years, the company has lost market share at an average of 2%. However, MTNN is

responding explicitly, with reduction in the price of data bundle plans, and new

promotional offers in the form of recharge bonuses. MTNN is a key beneficiary of growth

in the Nigeria‘s telecom industry given its subscription ratess rate. MTNN’s footprint and

investment in growth areas such as mobile money transfer service is making the company

a preferred partner to many multinational businesses.

.

…Still dauntingly tall among peers

Alex Ibhade

[email protected]

Please read the Important Disclosures at the end of this report.

Fig. 2: Stock data

FYE December

Price Mov’t: YtD / 52wk N/A

Average daily vol./val. N/A

Shares Outstanding (mn) 407

Capitalization (N’mn) 632,612 ($2,067mn)

EPS, N- FY2014 513.51

DPS, N- FY2014 586.80

FCFPS, N- FY2014 741.08

Source: Bloomberg, NSE, DLM Research

Fig. 3: Key ratios

FY 2014 FY2013

EBIT margin 39.88% 42.77%

Net profit margin 25.34% 27.32%

Equity multiplier 5.60x 4.76x

Asset turnover 0.86x 0.83x

Source: Company report, NSE, DLM Research

Fig. 4: Valuations

FY2015E FY2016E FY2017F

Revenue/share 2,026x 1,984x 1,968x

EBITDA/share 1,178x 1,170x 1,171

EBIT/share 808.1x 813.5x 806.8x

Net debt/asset 19.24% 22.98% 20.61%

NAVPS 422.70x 433.74x 441.62x

ROE 111.79% 113.06% 108.14%

ROA 22.11% 20.38% 18.31%

Div. Yield 0.00% 0.00% 0.00%

Source: Company annual report, DLM Research

Price:

- Expected listing price range N800 – N1,600

- Recommendation: Neutral

* As at January Thursday 12, 2017

We initiate coverage on MTN Nigeria Communications

Limited (MTNN) given the company’s strong brand, earnings

stream, solid balance sheet and cash flow generation. Our

near term outlook on the company is premised on a number

of factors such as: investment in growth area, growth in

mobile money and machine-to-machine. Mobile money and

machine-to-machine are industry forces that are recording

strong growth.

The MTNN Mobile Money service which allows MTNN

customers to send and receive cash via their mobile device

has recorded 6.2 million accounts and presents the company

with enormous potential to grow income from transaction

fees

MTN Nigeria Communications Limited.




Outlook.......... what does the future hold. In this section we present,

three likely scenarios which the revenue and earnings profile for MTN Nigeria

may chart, given the outlook for the Nigerian telecom industry and, in relation

to the domestic economy.

Scenario 1: Base case assumptions project a conservative growth rate.

Our base case is derived from a number of factors such as decreasing voice

revenues, hostile competition, migration to other networks and decrease in

number of subscribers.

Scenario 2: Assumes that data income grows at historical CAGR of

19.14% over the next five years with possible increase in the price of data.

Based on this assumption, revenue would increase to about N811.71billion by

2016, N833.33billion by 2017, N873.10billion by 2018 and N888.76billion by

2019. As at November 1, 2016, the industry average for data tariff floor for

major operators such as MTN, Etisalat and Airtel was N0.53k/MB. A review

of the old rate showed that Etisalat offered (N0.94k/MB), Airtel (N0.52k/MB),

MTN (N0.45k/MB) and Globacom (N0.21k/MB). As a result of the price

variation, NCC came up with an average data tariff of N0.53k/MB for

dominant operators. However, an interim price floor of 0.90k/MB was

introduced by NCC. This was later suspended with an expectation to continue

with effect from December 1, 2016. The proposed tariff seeks to increase the

industry average data tariff from N0.53k/MB to N0.90k/MB.

The implementation of the new rate is pending on the finalisation of the

study on the determination of cost based pricing for retail broadband and

data services in Nigeria. With increasing use of internet, we expect an

additional data usage on the network going forward. On the back of this growth

assumption, there’s a robust revenue upside potential for MTN Nigeria from

the medium to long term. However, despite the growth potential, MTN Nigeria

would still need to focus on cost management, albeit in the short to medium

term until a meaningful top line growth is achieved for a healthy bottom line.

By 2017 and beyond however, our forecasts imply that operating cash flow will

be healthy to accommodate dividend growth, but cost reduction would still be

necessary. However, if voice revenue continues to decrease at this rate beyond

2018 and data floor price decreases further or even remain at the current level

as opposed to the proposed data price increase, then revenue would no longer

be sufficient to boost operating and net profits. We would therefore see a

reduction in dividend pay-out albeit at a significantly reduced level, and likely

temporarily, until a sustainable growth is attained.

Scenario 3: Assumes that the company focuses on pursuing revenues in

other growth areas in line with management drive.

“ As at November 1,

2016, the industry average for data tariff

floor for major operators such as MTN, Etisalat

and Airtel was N0.53k/MB.

’’




Likely scenarios MTN Nigeria valuation or share price may chart.

Fig. 5: MTN Nigeria valuation range

We considered the main valuation criteria used in the

telecommunications industry. However, DCF is our principal method to

assess the value of MTNN as we believe the DCF model is the most

appropriate model to value companies in the telecom sector. The two key

factors which we considered will affect valuation are revenue growth and cash

flow. Typically, the telecommunications industry is considered to be slightly less

risky, hence, we used beta coefficient of 0.84, though higher than that of the

group. We used a WACC of 16.97% and cost of equity of 18.96%–and believe

a dividend yield above 10% would be appropriate to provide an adequate return

to investors. Our valuation model suggests that N800 - N1,600/share looks a

likely listing range for MTNN Nigeria, suggesting a dividend yield above 30%.

This would make dividend yield base investment on the stock attractive. The

dividend model assumes 56% average dividend pay-out of operating profit. For

EV/EBITDA model, past performance of EBITDA is positive but volatile,

and we do not expect it to grow significantly in the near term. Hence, we

forecast a maintainable normalized EBITDA of N471.40billion with

EV/EBITDA multiple of 1.93x. Our adopted EV/EBITDA multiple is lower

than those of our selected African market peers, as we applied a discount to

reflect market risks. The EV/EBITDA method suggests the shares could trade

at N1,272/share. The DCF valuation model and sensitivity analysis suggests a

price range of N804 – N1,653/share. Overall, our valuation prices places

MTNN shares on a forecast P/E of 2.72x range bound which does looks

attractive in our view and could be a very profitable long-term buy. MTN

has invested heavily in its set up and is dependent on the investments in

assets for future returns. Therefore, with higher asset base, its

depreciation and amortization is relatively higher.

Value per share: EV/EBITDA Method: N1,272/share

Value per share: DCF Sensitivity analysis: N804 – N1,653/share

Value per share: Price/Book Model: N850.10/share

Adopted EV/EBITDA multiple: 1.93x

Maintainable normalized EBITDA N471.40billion billion

Enterprise value - N1.02trillion

“ Overall, our

valuation prices place MTNN shares on a

forecast P/E of 2.72x range bound which does looks attractive in our

view and could be a very profitable long-term buy.

’’

Adopted price to book value: 1.9x

Value per share: DCF model: N1,474/share




Book value per share and per share earnings suggests that valuations are

viable. One of the major reasons why we believe the company might be worth

much more than its book value due to its earning power being mainly derived

from " tangible assets evident on the balance sheet. MTNN’s tangible assets

(property and equipment) add up to 53.28% of total assets and N1,262 fixed

asset per share. Asset quality remains strong with no accumulated loss over

time. The strong asset quality indicates the ability of the company's assets to

generate future profits and cash flows. MTNN’s net asset value per share is

currently N422.70/ per share. Between 2011 and 2014, the company’s book

value per share decreased by 2.37% (CAGR), with an average annualized

decline by 1.28%. If the company maintains this pace over the next four to five

years, its book value per share could decline further to the neighbourhood of

N393. MTN Group currently trades at 1.89x to its book value, which is close to

the low end of its historic range. The group’s p/b value is lower than peers and

South Africa Mobile Telecommunications subsector. In the past five years, the

shares have a low p/b value of 1.433x, which may signal that the company is

undervalued or the market expects a reduction in their future profits. With the

Nigeria operation contributing substantially to the group’s overall performance,

we expect MTNN share to be priced more than 2x the group’s p/B value.

Pricing the company’s share in the neighbourhood of 2x book value suggests

that the share is priced for a solid, long-term return. Nevertheless, we however

remained conscious and adopted a conservative 1.9x price to book value. That

said, we are of the view that the book value of the company (target P/B ratio)

will better reflect market and/or listing value.

Price to book valuation FY'11 FY'12 FY'13 FY'14

Net asset 184,915 168,537 201,901 172,064

BVPS 454.27 414.04 496.00 422.70

Year-on-year growth

-8.86% 19.80% -14.78%

Normalized maintainable net asset

182,760

Forecast price to book value 1.90x

Equity value 347,244.91

Price per share 853.10

Fig. 6: Group price to book value (x)

Source: Bloomberg, ychart, DLM Research

1.7

1.75

1.8

1.85

1.9

1.95

2

2.05

2.1

2.15

26-Aug-16 5-Sep-16 15-Sep-16 25-Sep-16 5-Oct-16 15-Oct-16 25-Oct-16 4-Nov-16

“ Pricing the

company’s share in the neighbourhood of 2x

book value suggests that the share is priced for a solid, long-term return.

’’




Dividend yield and dividend growth will be the main focus for investors.

The company has historically paid dividend greater than net income as

depreciation and amortization are very substantial. While the main determinant

of dividend growth in the medium to long term is earnings / free cash flow,

investors will be attracted to MTNN’s track record of paying dividend. While

our dividend forecast is based on the assumption that the current dividend

trend will be maintained, we see dividend yield ticking above inflation.

Dividend paid has increased from N220.79billion in 2011 to N238.86billion in

2014, representing a CAGR of 2.66%. The dividend paid in 2014 represents

45.48% and 72.62% of cash flow from operations and operating profit

respectively. Though, there are rooms for growth, but for FY’16, dividend

payout is forecast to moderate as a result of capex programme and regulatory

fine of N330billion unless management are able to cut some costs or capex.

Companies typically keep their pay-out ratios fairly low, such that when they

experience slowdown in cash flow and profit, they will be able to keep and

grow dividend. While a significant proportion of the company’s annual dividend

is accrued to the group due to its shareholdings status, in our view, the huge

dividend pay out to the group signals profit repatriation. Overall, we think that

balance sheet is strong enough to support future growth.

Fig. 7: Dividend operating profit (%)


Costs and dividends eat up bigger slice of MTNN’s earnings. MTNN has

historically spent more of its earnings on costs of operation and dividend to

shareholders. Despite slow growth, operating costs has historically outpaced

EBITDA, while annual dividend exceeded net income except for FY’11 and

FY’13 financial year. Cash outflow for the two line items averaged 85.37% of

revenues over the past four years. While we reckon the fact that dividend-

paying stocks is among the best-performing asset classes, the high costs

underscores the intense pressure on corporate earnings. With the addition of

interest charges and income tax, MTNN seem to be paying out more than it

earns except for FY’11 and FY’13 where it posted positive net balance.

62.18%

75.36%

54.46%

72.62%

FY'11 FY'12 FY'13 FY'14




Fig. 8: Revenues and cash out flow – 2011-2014 (N’bn)


With the negative net cash balance in FY12 and FY14, three scenarios

maybe playing out in our view. Annual headline revenues may be higher than

reported, while costs may be lower than reported. The third scenario is that

MTN Nigeria may be drawing from accumulated retained earnings and or profit

from sales of assets. However, with the exclusion of non-cash items such as

depreciation and amortization, net cash balance remained at a comfortable

position, which although, does not reflects on retained earnings. Erecting

network of cellular masts and towers is a costly undertaking; this has resulted in

a steady capital expenditure as a percentage of operating cash flow. However,

with the sales of 9,151 towers in 2014, we expect to see a substantial reduction

in the company’s overall cost structure going forward as the cost of tower

maintenance continues to eat into profits. Overall, reduction in overall cost

structure will provide the company an opportunity to mitigate some business

risks.

Fig. 9: Net cash balance (N’bn)


750.51

772.07 761.66

854.64

757.98 753.58

793.61

824.81

FY'11 FY'12 FY'13 FY'14

Total cash out flow Revenues

7.47

-18.49

31.96

-29.83

FY'11 FY'12 FY'13 FY'14

“ However, with the

exclusion of non-cash items such as

depreciation and amortization, net cash balance remained at a comfortable position,

which although, does not reflects on retained

earnings.

’’




Retained Earnings FY'11 FY'12 FY'13 FY'14

Share capital 646.51 646.51 646.51 646.51

Share premium 64,498.50 64,498.50 64,498.50 64,498.50

Retained Earnings 119,770 103,392 135,851 106,017

Increase/Decrease in retained earnings (16,378) 32,459 (29,834)

Annual revenues utilization FY'11 FY'12 FY'13 FY'14

Total costs 402,879 435,804 454,160 495,876

Net interest expenses 17,841 14,033 28,608 38,324 Income tax 108,998 82,749 94,024 81,579

Dividends 220,789 239,480 184,863 238,861

Total cash out flow 750,507 772,066 761,656 854,640 Headline revenues 757,978 753,578 793,614 824,807 Net cash balance 7,471 (18,488) 31,958 (29,833)

Annual inflow and out flow FY'11 FY'12 FY'13 FY'14

Total costs 402,879 435,804 454,160 495,876

Less Dep & Amortization 111,836 119,790 141,187 150,418

Total costs 291,043 316,014 312,973 345,458

Interest received 13,314 34,039 13,673 22,575

Interest Paid 32,879 46,526 42,336 48,391

Net interest Paid 19,565 12,486 28,662 25,815 Tax paid 60,833 103,487 87,412 66,744 dividends 220,789 239,480 184,863 238,861

Total cash out flow 592,230 671,467 613,911 676,878

Headline revenues 757,978 753,578 793,614 824,807 Net cash balance 165,748 82,111 179,703 147,929

Total costs (Excl Dep & Amort) to headline revenues 38.40% 41.94% 39.44% 41.88% Total cash out flow to headline revenues 78.13% 89.10% 77.36% 82.07%

MTN has a positive free cash flow but not strong enough to support

substantial increase in dividend payout when adjusted for interest

payment. Cash Flow from Operation was mostly strong except for a decline

in FY’12 and FY’14 due largely to higher operating costs. While EBITDA level

is strong, EBITDA is only a proxy, particularly when dealing with capital

intensive companies like MTN. Hence, we relied more on free cash flow to the

firm. The reason we need FCF instead of EBITDA and operating cash flow is

the capex adjustment. Nevertheless, we think that balance sheet strength is

sufficient to support current dividend trend out to 2019E and even beyond.

Though, the company is expected to have a greater amount of free cash flow in

the near term as its expenditure on the major initiative winds down.

Fig. 10: Free Cash Flow

(FCF) FY'11 FY'12 FY'13 FY'14

Tax rate 30.7% 26.0% 27.7% 24.8%

EBITDA 466,935 437,564 490,640 479,349

EBIT 355,099 317,774 339,453 328,931

Tax on EBIT (108,998) (82,749) (94,024) (81,579)

Capital expenditures (126,556) (228,134) (229,814) (139,362)

Depreciation & Amort. 111,836 119,790 151,187 150,418

Unlevered free cash flow 231,380 126,681 166,802 258,408

\

“ Cash Flow from

Operation was mostly strong except for a

decline in FY’12 and FY’14 due largely to higher operating costs..

’’




Cash flow adjusted for interest FY'11 FY'12 FY'13 FY'14

EBITDA 466,935 437,564 490,640 479,349

Capex 126,556 228,134 229,814 139,362

Net interest expense 17,841 14,033 28,608 38,324

Cash flow adjusted for interest 322,538 195,397 232,218 301,663

Fig. 11: Cash flow margin ratio (%)


We do not see signs of stabilisation in the pricing environment in Nigeria

that will drive a recovery in revenue growth in FY’16. Revenue growth

slowed in FY’14 and FY’15 and our forecasts anticipate revenue decline at 0.8%

in FY’16 before gradually recovering in the years ahead. We also expect post

2019E earnings CAGR of 1.78%. With the general economic slowdown and

industry headwinds remaining a drag on overall profitability, in the medium

term, we are of the view that MTNN’s investment in capacity and growth areas

will contribute significantly to the bottom line as data segment and e-commerce

will act as key catalysts. With increasing use of data for file sharing, video app

downloads, and web browsing, MTNN is focusing on broadband investment

even as it has invested $94 million in renewing its 2G licences and acquired

Visafone, to boost broadband services and revenue from the segment which

has been relatively low. That said, the strong outlook of broadband and

expanding geographical footprint will sustain revenue and profitability.

MTNN continues to maintain a significant level of investment to extend

high speed network and mobile data coverage. Given that MTN is a

capital intensive company, it spends substantial amount on a regular

basis to buy/upgrade/replace assets or equipment. It spent R47.73 billion

in last five year (2011-2015) on acquiring and renewing spectrum. While the

company maintains an average capex/revenue ratio of 23.21%, capex represent

a significant reduction in cash flow. Since capex as a percentage of revenue stay

low, we think the company will continue to spend a lot on acquisitions to

maintain its market leadership even as it is planning to double capital spending

in Nigeria in the 2016 fiscal year to $730 million. MTN Nigeria has already

indicated desire for business expansion; hence, we can expect moderate capital

commitment going ahead.

66.47%

60.52%

62.07%

63.68%

FY'11 FY'12 FY'13 FY'14

“ Revenue growth

slowed in FY’14 and FY’15 and our forecasts anticipate revenue decline

at 0.8% in FY’16 before gradually

recovering in the years ahead...

’’




Fig. 12: Capex/revenue ratio (%)


The capital expenditures to depreciation ratio indicate the growth phase

of the company. Between 2011 and 2014, MTNN’s capital expenditures to

depreciation ratio averaged 1.52 which is relatively strong in our view. The high

ratio shows that MTNN has been investing in long-term assets on expectation

of future growth. However, 2014 saw a decline to 1.01 which in our view

reflects slowdown in capex and may affect its future ability to compete

successfully with other operators. This is particularly true as revenues of

companies with high capital expenditures to depreciation ratios grow more

quickly than those with low capital expenditures to depreciation ratios.

Fig. 13: Capex/Depreciation ratio (%)


The Nigerian Communication Commission fine has led to a material

cash outflow, but MTN has the option to alter its dividend policy to

reduce leverage and manage its credit profile to ensure its ability to

service debt. The company uses more payables which are not matched by

receivables and inventories combined. Net debt/EBITDA has already come

down from a high of 0.47x in FY13 to 0.39x in FY14. As the company further

increases its borrowings to fund growth, the ratio may see an increase in FY16.

As at FY’14, MTN Nigeria had gross debt and cash & cash equivalent of

N393.19billion and N207.69billion respectively, implying a net debt figure of

N185.51billion. 71.72% of the gross debt was in naira, and the balance 28.28%

in USD. Given the decision to borrow $1.30billion to pay the regulatory fine

16.70%

30.27% 28.96%

16.90%

FY'11 FY'12 FY'13 FY'14

1.22

2.08

1.79

1.01

FY'11 FY'12 FY'13 FY'14

“ Between 2011 and

2014, MTNN’s capital expenditures to

depreciation ratio averaged 1.52 which is relatively strong in our

view..

’’




and fund capex needs, we estimate that the company’s net debt would increase

by over 40%, with significant exposure to exchange rate risk.

Capitalization FY'11 FY'12 FY'13 FY'14

Total debt 262,626 233,011 376,924 393,192

Net debt 156,086 197,255 232,052 185,505

Senior debt – – – –

Preferred stock 239,420 239,420 239,420 239,420

Total capitalization 502,046 472,431 616,344 632,612

Leverage FY'11 FY'12 FY'13 FY'14

Net debt / total capitalization 31.09% 41.75% 37.65% 29.32%

Total debt / EBITDA 0.56x 0.53x 0.77x 0.82x

Net debt / EBITDA 0.33x 0.45x 0.47x 0.39x

Net debt + preferred / EBITDA 0.85x 1.00x 0.96x 0.89x

Coverage FY'11 FY'12 FY'13 FY'14

EBITDA / cash interest expense 26.2x 31.2x 17.2x 12.5x

EBITDA / total interest expense 12.6x 8.8x 10.7x 7.2x

(EBITDA – capex) / cash interest expense 19.1x 14.9x 9.1x 8.9x

(EBITDA – capex) / total interest expense 9.2x 4.2x 5.7x 5.1x

DSCR 10.4x 6.5x 7.5x 6.5x

Investors enjoyed a more than double digit annual return on investment.

Return on equity is one of the best measures of profitability for MTNN. It

shows hows much profit the company generates with the investment made by

shareholders. In the face of price competition and increased regulatory

pressure, MTNN continued to improve its performance with return on equity

averaging 117.97% in the past three years. In addition, the annual profit

margins reflects MTNN’s fundamental strength. The strong ROAE shows that

management is growing the company's value at an acceptable rate. However,

the high ROE doesn’t compensate for unhealthy level of debt – particularly

given the long-term debt-to-equity ratio of 191.60%.

Fig.14: Returns on equity, asset and capital 2011-2014(%)


75.85% 76.07%

50.49% 53.90%

125.05% 117.06%

111.79%

27.47% 27.90% 25.15% 22.11%

FY'11 FY'12 FY'13 FY'14

ROCE ROAE ROAA

“ In the face of price

competition and increased regulatory pressure, MTNN

continued to improve its performance with return

on equity averaging 117.97% in the past

three years. ’’




Fig. 15: Profitability margins 2011-2014(%)


Current ratio increased steadily to 1.13 in 2014 as there was a growth in

borrowing which caused an increase on total current liabilities and a

rapid increase on the current ratio in 2014. The ratios have consistently

remained under 1.00 before 2014 which generally highlighted the company ‘s

negative working capital and probably suggests some liquidity crisis. However,

given the low inventory in the telecommunication industry, the low current

ratio of the company can be accepted. This in our view reflects that the majority

of the company’s assets can be categorized as non-current assets like property,

plant and equipment (PP&E) and intangible.

Fig. 16: Liquidity ratios 2011-2014 (x)


Fig. 17: Working capital 2011-2014 (N’bn)


61.60% 58.06%

61.82% 58.12%

46.85% 42.17% 42.77%

39.88%

30.11% 29.33% 27.32% 25.34%

FY'11 FY'12 FY'13 FY'14

EBITDA margin EBIT margin Net Profit Margin

0.91

0.43

0.85

1.13

0.92

0.44

0.85

1.13

FY'11 FY'12 FY'13 FY'14

Quick ratio Current ratio

-28.36

-203.98

-42.06

47.66

FY'11 FY'12 FY'13 FY'14




The Company




The company

MTN Nigeria Communications Limited MTNN, is a leading provider of

telecoms services to both the consumer- and the business sector in

Nigeria. The company was founded in 2001 after it secured one of the four

available licenses to operate digital Global System for Mobile

Telecommunications (GSM) with a licence fee of US$285 million for an initial

15 year period, allowing MTNN to provide and operate a 900 and 1800 MHz

second-generation digital mobile service. MTNN commenced commercial

operations in Nigeria with three cities, Lagos, Abuja and PortHarcourt.

In the absence of sufficient transmission capacity in Nigeria, MTN

embarked on the construction of a microwave transmission backbone at

a cost of US$120 million. The company offers an extensive range of services

including: cellular network access and ICT solutions. It also provides internet

services, such as video calling through its 3G network, data services mobile

internet, and mobile WiFi services. In addition, it offers international roaming

services, including data roaming, in-flight roaming, and WiFi roaming services.

It provides voice SMS, fashion and lifestyle tips, mobile TV, bulk SMS service,

mobile newspaper, conference call. Beside being the first GSM network to

make a call in Nigeria, MTNN was also the first to launch its service across

major Nigerian cities, and currently has the most expansive network coverag

across overall 3,340 cities, towns and villages in all the 36 states including the

Federal Capital Territory. In 2013, MTNN became the first telecom operator to

build a 10,000 base transceiver stations (BTS) in Nigeria. Since inception

MTNN has led the growth in the Nigeria telecom market to become the biggest

mobile operator in Nigeria with millions of subscribers joining its network. AS

at FY’15, MTNN’s subscribers’ base totalled 61.25 million subscribers before

decline to 58.4 million in the first half of 2016. The company’s subsidiary is XS

Broadband Limited, which provide broadband fixed wirless access.

MTNN’s main focus is to keep its current subscribers while also looking

to tap the growth opportunities in broaband and ICT space – both in the

consumer and business segment with the view to maximising avverge

revenue per user. Hence, this strategy has aided the achievement of its set

objectives of developing a telecommunication in emerging markets and

realizing a good return on investment (ROI).

“ MTNN commenced

commercial operations in Nigeria with three cities,

Lagos, Abuja and PortHarcourt.

’’




The shareholding structure showed that MTNN is 75.81% owned by

MTN international (Mauritius) Limited which itself operates as a

subsidiary of MTN Group Ltd; 18.7% held by Nigerian shareholders through

special purpose vehicles; 2.78% owned by Mobile Telephone Networks NIC

B.V and 2.71% owned by Shanduka Telecommunication (Mauritius) Limited.

The current shareholding structure would give MTN the clout to alienate

minority shareholders. MTN Nigeria’s issued share capital comprises

402,590,263 Ordinary Shares, 4,500,000 ‘B’ Ordinary Shares which was issued

to MTN international (Mauritius) Limited. Each Ordinary Share is linked to one

Preference Share (402,590,263 Preference Shares) thereby constituting

402,590,263 Linked Units. From the above, we estimate the outstanding shares

to be 407,063,044. That said, there is possibility for further capital raising, as the

company is looking to raise c.$1 billion from the planned listing of its Nigerian

unit.

Fig. 18: Shareholding structure (%)

Source: Company website, DLM Research

MTN Nigeria takes step towards listing on the Nigerian Stock

Exchange. The optimistic expectations from the market showed great

appetite for Telecoms. While we believe the listing will have a positive impact

on the market, giving the anticipated substantial boost to the market

capitalization, we think that the listing is part of government strategy to allow

Nigerians to hold its shares amongst others. The listing will also have positive

impacts on the company among which are; 1) creates a market valuation for the

business and enables MTN the opportunity to raise capital to fund future

growth. 2) Creates a public profile and improves the ability to attract high

profile board members. 3) Improve investor & customer confidence and

corporate governance structure. However, this positivity must be balanced

against the disadvantages among which are accountability, strong regulatory

scrutiny, higher professional fees and the need for transparency.

75.81%

18.70%

2.78% 2.71%

MTN Int'l Ltd Nig shareholders NIC B.V Shanduka Telcos

“ That said, there is

possibility for further fund raising, as the

company is looking to raise c.$1 billion from

the planned listing of its Nigerian.

’’




The listing is part of MTNN’s negotiation strategy with Nigerian

Communication Commission (NCC). While MTNN has begun initiating

procedures for the listing, it is uncertain at this time the numbers of shares to

be put on the stock exchange from the outstanding shares for public investors.

Post listing, we believe there will be more financial disclosures giving more

clarity on its business operations. That said, there are chances the listing will be

delayed for a number of reasons with market timing a major factor to be

considered. in addition, though the bulk of the share is held by its subsidiary,

we anticipate a scenario of limited float and the shares being tightly held by a

few investors.

Post listing we are of the view that the company may carefully consider

issue of capital management and would most likely buy back shares in

line with the group’s capital management strategy. Though, buying back

shares could push the company’s EPS and RoE higher than the company-wide

earnings. This will effectively reduce the company’s shares in existence. One of

the major reasons for this will be to fuel dividend growth. If the company

maintain the current dividend pay-out each year, and the number of total shares

is decreased, shareholder will be receiving a larger dividend each year– with the

group maintaining significant advantage over other investors due to its

shareholding status. The success of this if considered, will depend largely on

The Nigerian Stock Exchange regulation on listing

MTNN to raise funds through Initial Public Offer for multiple payments.

The company is targeting about $1billion to settle the regulatory fine of N330

billion which has not been fully settled. The second which is very vital is the

company’s quest to invest in capex. Though the company has not announced

any guidance on the planned IPO, we believe MTN may offer a small portion

of its stake in the business as minority shareholders will be unwilling to sell

down their holdings or exit. With the current shareholding’s structure, we do

not envisage a scenario for hostile takeover by any single investors or

divestment by majority owners aimed at dispersing its stock among high net-

worth Nigerians. On the other hand, with ownership dilution protection in

mind, we anticipate a scenario where treasury stock will be created to keep a

controlling interest within the treasury with the view to ward off hostile

takeovers by any single investors.

“ The company is

targeting about $1billion to settle the

regulatory fine of N330 billion which has not been fully

settled ’’




SWOT Analysis

Strength and Opportunities

1. Good access to funding

2. Strong market position

3. The MTN brand enjoys a high level of consumer awareness and

attraction as a result of strong advertising and sponsorship activities

4. Information on competitor's activities

5. Growing mobile and internet market

6. Low mobile penetration rates in some markets

Weakness &Threat Weakness &Threat 1. Increasing cost of operation

2. Intense price competition in the market

3. Corporate governance, regulatory and political uncertainties

4. General slowdown in economic activities which may affect earnings

growth.

5. The uprising insecurity on network facility.

6. Too many expansions can lead to loss of focus

7. Mobile number portability may impact growth




Revenue remains strong despite industry headwinds. MTN Nigeria

revenue recorded a CAGR growth of 2.86% to N824.81billion in 2014 from

N757.98billion in 2011. The company’s wider network coverage and brand

loyalty has been a major driver. With industry active voice subscriptions of

149.19 million at the end of June 2016, MTN has the highest mobile

penetration rate accounting for 39.15% (58.40 million subscribers) of the total.

This has enable the company to post strong financial numbers over the years

except for FY’12 which was negatively affected by the SIM registration

process. Current growth is mainly a result of the increase in smartphone

penetration and the introduction of new value added products. Though, MTN

is experiencing a challenging period mainly due to regulatory fine, aggressive

price competition driven by bonuses on recharge, freebies and other

promotional activities. This in addition to the use of multiple sim cards as well

as pressure on consumer spending may impact on the company’s revenue

growth rate going forward. Dangote cement is the only listed company with

clear chances of meeting MTN’s revenue trend in the near future due to i’s Pan

African drive. That said, while we do not see signs of stabilisation in the pricing

environment in Nigeria that will drive revenue growth in FY’16, we are of the

view that revenue from broadband will proved some respite going forward

Fig. 19: Revenues (N’bn)

Source: Company report, DLM Research

MTN Nigeria is the major contributor to the group’s revevue. Results

released thus far showed that reveneue from Nigeria operations has been

relatively strong, accounting for the highest contribution on the group’s revenue

year in year out compared to other subsidiaries. For example, the FY’15

revenue from Nigeria represents 35.32% of the group’s total revenue, and

~1.22% of Nigeria’s GDP at constant basic prices. This explain why the

group’s capex in Nigeria is high.

757.98 753.58

793.61

824.81

2011 2012 2013 2014

“ MTN Nigeria

revenue recorded a CAGR growth of

2.86% to N824.81billion in

2014 from N757.98billion in

2011 ’’




Fig. 20: MTNN revenues contribution to the group 2011-2015 (%)


Fig. 21: MTNN vs. other major subsidiaries revenues contribution to the group 2011-2015 (%)


Fig. 22: MTN Nigeria revenue /GDP ratio at constant and basic prices (%)

Source: Company report, NBS, DLM Research

28.62% 28.64%

35.08% 36.75% 35.32%

FY'11 FY'12 FY'13 FY'14 FY'15

28.62% 28.64%

35.08%

36.75% 35.32%

31.67% 30.60%

29.49%

26.49% 27.23%

28.36% 27.99%

21.23% 21.23% 21.32%

FY'11 FY'12 FY'13 FY'14 FY'15

MTN-Nig South Africa Large OpCo cluster

1.30% 1.24% 1.24% 1.21% 1.22%

2.03%

1.83%

0.98% 0.92% 0.90%

FY'11 FY'12 FY'13 FY'14 FY'15

Constant Basic Prices Current Basic Prices

Fig.23: Group revenue by country (Rm)

FY'11 FY'12 FY'13 FY'14 FY'15

South Africa 38,597 42,285 39,707 38,922 40,038

Nigeria 34,879 38,697 48,159 53,995 51,942

Ghana 5,941 6,862 8,269 7,149 7,903

Cameroon

3,812 5,204 6,194 5,806

Ivory Coast

4,124 5,480 6,418 6,424

Iran 11,050

Uganda

3,296 4,467 5,289 5,148

Syria 6,463 5,391 3,229 3,449 2,605

Sudan

2,158 2,496 2,701 3,472




The majority (68.42%) of MTN’s revenue comes from selling mobile

voice (airtime) and subscription, a decrease of 9.02% from 77.44% in

2011. With some markets almost at maturity, the relative share of voice and

messaging revenue is likely to decline, but demand for communication services

is still strong. The popularity of over-the-top services such as Skype, Facebook,

WhatsApp, Messenger, Viber, WeChat, 2go, BBM, Netflix among others for

internet calls, means that subscribers are gradually moving away from voice

centric to data centric as it offers a cheaper means of communication. This is

even through as these platforms are gradually eroding revenue that GSM

operators are making from short message service (SMS).

Revenue from airtime & subscription recorded a decline of 3.87% from

N587.01billion in 2011 to N564.30billion in 2014, which in our view is a direct

reflection of loss of market share, and reduction in voice termination rates.

Mobile subscription in Nigeria is mainly prepaid by topping up airtime in

advance of usage with an insignificant monthly payment via fixed term

contracts. As competition persists, MTN is responding with various

promotions, new tariff plans and bundled offerings. The termination rates for

voice services provided by new entrants and small operators in Nigeria

irrespective of the originating network was set at ₦6.40 from April 1, 2013;

₦5.20 from April 1, 2014; and ₦3.90 from April 1, 2015. The termination rates

for voice services provided by other operators irrespective of the originating

network were set at ₦4.90 from April 1, 2013; ₦4.40 from April 1, 2014; and

₦3.90 from April 1, 2015.

Fig. 24: Revenue from airtime & subscription (million)


587.01

530.32

569.17 564.3

2011 2012 2013 2014

“ Revenue from

airtime & subscription recorded a decline of

3.87% from N587.01billion in

2011 to N564.30billion in

2014, which in our view is a direct reflection of loss of market share, and reduction in voice

termination rates.

’’




Fig. 25: Airtime & subscription contribution to revenue (%)


Data revenue is growing and is expected to hit the N150 billion mark by

the end of 2016 as data usage increases. This is part of the company’s

strategy to boost the declining average revenues per user (ARPU).following the

acquisition of Visafone with focus on enhancing data and internet services.

MTN strategy is to tap into the growth opportunities in the e-commerce field,

expand its product offering outside of traditional voice, increase presence in the

digital space by leveraging technologies and taking advantage of low levels of

internet penetration in a bid to generate a substantial amount of income from

the sector. With increasing use of data for over-the-top services, video and app

download; we see e-commerce and data income as a good long-term bet for

MTN’s endeavours to diversify revenue to cushion the effect of low ARPU in

Nigeria.

Fig. 26: Income contribution

Airtime & Subscription 587,011 530,316 569,168 564,301

Data 37,889 80,788 93,566 105,572

SMS 22,474 31,313 19,338 15,823

Interconnect & Roaming 91,705 92,334 77,173 86,846

Handset & Accessories 1,701 2,439 1,705 223

Others 17,199 26,388 32,664 52,041

Total 757,979 763,578 793,614 824,806

Fig. 27: Data contribution to revenue (%)


77.44%

70.37%

71.72%

68.42%

FY'11 FY'12 FY'13 FY'14

5.00%

10.72%

11.79% 12.80%

FY'11 FY'12 FY'13 FY'14

“ With increasing use

of data for over-the-top services, video and app

download; we see e-commerce and data

income as a good long-term bet for MTN’s

endeavours to diversify revenue to cushion the effect of low ARPU in

Nigeria

’’




Fig. 28: Data revenue projection (N’bn)


The average revenue per user provides an idea of how well the company

can monetize its user base in Nigeria. The competitiveness over-the-top

services can clearly be seen in MTNN’s ARPU numbers – which have been

declining over the years as the advent of these platform– which provide

cheaper, alternatives to the premium pricing of texting and calling, than mobile

networks. Overall, MTNN’s ARPU declined from $60 in 2002 to $5.09 in June

2016. In naira term, the company’s ARPU declined from N1,177 in the first

quarter of 2014 to N963.42 in 2015 before rising to N1,086. On the group side,

MTN Cyprus dominated MTN Nigeria and MTN South Africa by a wide

margin. While MTN South Africa ARPU declined by 19.98% y/y from $9.31 in

1Q14 to $7.45 in 1Q’15; in the 1Q14, ARPU for MTN Nigeria was 3.4x lower

than that of MTN Cyprus in dollar term $7.21 vs.$24.91. But this narrowed to

3.29x in 1Q’16 following the little growth noted in MTN Nigeria’s ARPU. For

2015, MTN Nigeria saw a bigger percentage increase in ARPU than other

subsidiaries.

The low ARPU of MTN Nigeria appears to be affecting the ultimate profits of

the company compared with other subsidiaries. While we considered the naira

devaluation as a major factor affecting MTN Nigeria’s ARPU, we are of the

view that the low ARPU means that majority of MTN Nigeria’s users are low-

end subscribers, whose tendency to spend on mobile value added solutions is

low; thereby depressing the effective rate of revenue realisation per minute for

the operators. In our view, maximizing ARPU from the existing customer base

is key to sustaining the current revenue momentum.

135.13

162.16

194.59

233.51

FY'15E FY'16F FY'17F FY'18

“ Overall, MTNN’s

ARPU declined from $60 in 2002 to $5.09 in June 2016. In naira

term, the company’s ARPU declined from N1,177 in the first quarter of 2014 to N963.42 in 2015

before rising to N1,086.

’’




Fig. 29: MTN Nigeria ARPU ($)


Fig. 30: MTN Nigeria ARPU (Naira)


Fig. 31: MTN Nigeria ARPU Trend ($)


Fig. 32: MTNN ARPU vs. other subsidiaries ($)


7.21

6.92 6.91

6.47

5.68

5.25

4.99 4.87

5.4

5.09

1Q14 1Q15 1Q16 2Q16

1,177.82

1,124.34 1,123.29 1,118.11 1,102.59

1,046.45

994.44

963.42

1,078.00 1,086

1Q14 1Q15 1Q16 2Q16

60

57

51

2002 2003 2004

7.21 6.92 6.91 6.47 5.68 5.25 4.99 4.87 5.4

9.31 8.86

8.34 8.21 7.45 7.46 7.22 6.4 3.32

24.91

27.35 25.39

21.99

19.35 19.37 19.8 18.38 17.78

11.46 11.21 12.06 10.54

9.14 9.02 9.48 9.0 8.0

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Nigeria SA Cyprus Congo.B




Fig. 33: MTN Nigeria vs. other subsidiaries ARPU growth trend analysis (Rebased)


Fig. 34: ARPU (US.dollar) Country 1Q15 2Q15 3Q15 4Q15 1Q16

South Africa 7.45 7.46 7.22 6.40 5.32

Uganda 2.79 2.34 2.13 2.29 2.49

Rwanda 2.27 2.25 2.21 1.95 2.01

Zambia 4.23 3.83 3.65 2.84 2.45

South Sudan 8.26 8.33 7.75 4.71 2.06

Botswana (joint venture) 6.27 6.35 6.28 5.60 5.45

Swaziland (joint venture) 8.06 7.81 7.97 7.08 5.60

WECA

Nigeria 5.68 5.25 4.99 4.87 5.40

Ghana 3.57 3.15 3.29 3.09 3.13

Cameroon 3.83 3.43 3.68 3.60 3.37

Ivory Coast 5.07 4.70 4.59 4.69 4.55

Benin 6.05 5.78 6.09 5.80 5.94

Conakry 2.69 2.34 2.01 2.15 1.70

Congo B 9.14 9.02 9.48 9.00 8.22

Liberia 5.07 4.70 3.96 4.31 3.73

Bissau 3.79 4.16 3.58 3.15 3.24

MENA

Iran (joint venture) 4.01 4.03 3.91 3.61 3.71

Syria 3.31 3.04 2.95 3.91 2.09

Sudan 2.47 2.59 2.62 2.61 2.83

Yemen 4.51 3.66 4.06 4.10 4.10

Afghanistan 2.76 2.89 2.86 2.59 1.92

Cyprus 19.35 19.37 19.80 18.38 17.78

MTN Nigeria acquires Visafone, to boost broadband services. With

increasing importance of data, and other new revenue areas, MTN is investing

in newer revenue areas such as data to deliver future growth opportunities. This

underscores the acquisition of Visafone which offers a number of services

including voice, high speed data (3G), internet and other value added services.

Hence, the acquisition of Visafone points to the company’s strategy to build up

its mobile data capabilities. The technologies will remain important aspects of

MTN strength in the medium to long term and allow it compete favourably

among peers.

33.00

43.00

53.00

63.00

73.00

83.00

93.00

103.00

113.00

1Q14 1Q15 1Q16

Nigeria SA Cyprus Congo.B




The acquisition gives MTN edge over other mobile operators as the first major

operator to introduce 4G voice telephony which would improve e-commerce

sector, banking; insurance and financial services, software and IT enabled

services and widens the revenue base of the company. We think that MTN will

integrate the operation of Visafone into its GSM operation, and run it as voice

over its 4G Long Term Evolution (LTE) technology network as against the

initial plans to run Visafone as a Code Division Multiple Access. The new

800MHz frequency band will enable MTN to compete effectively with

Globacom which has 700 MHz spectrum.

MTN Nigeria account for the highest subscribers in the group’s total

subscribers. Despite the growing competition in the industry, MTNN

recorded 22.6 million net additional subscribers in the last 5years (2010-2015)

following regulatory approval of select promotional offerings from October

2014. As at December 2015, MTNN recorded 61.3 million subscribers,

representing 58.40% growth between 2010 and 2015, and accounted for

26.37% of the group’s total subscribers. In 2015 alone, MTN Nigeria recorded

a 2.34% growth by ramping up 1.4 million customers in a year that saw its

parent company also increasing customer base by 9.1million to 232.5 million

subscribers, representing 4.07% growth y-o-y.

Fig. 35: MTNN subscribers’ vs. Group subscribers 2010-2015 (million)


Fig. 36: MTNN subscribers’ contribution to group’s total subscribers’ (%)


38.7 41.6 47.4 56.8 59.9 61.3

141.6

164.5

189.3 207.8

223.4 232.5

FY'10 FY'11 FY'12 FY'13 FY'14 FY'15

MTN Nig MTN Group

27.33%

25.29% 25.04%

27.33%

26.81%

26.37%

FY'10 FY'11 FY'12 FY'13 FY'14 FY'15

“ Despite the growing

competition in the industry, MTNN

recorded 22.6 million net additional

subscribers in the last 5years (2010-2015) following regulatory approval of select

promotional offerings from October 2014

’’




Fig. 37: MTN Nigeria subscribers’ vs. other major subsidiaries FY 2015 (million)


MTN’s market share is beginning to wane as more subscribers switches

to other operators. Though it reported a 2.3% increase in subscribers to 61.25

million in FY’15, its market share declined to 41.04%. According to data from

the Nigerian Communications Commission (NCC), Globacom recorded 68% of

all additional GSM lines in Nigeria between June 2015 – June 2016. Specifically,

a total of 7,477,977 new lines were activated between period, with Globacom

adding 5,063,895 new susbcribers, while Airtel added 2,414,082 new customers.

On the other hand, MTN and Etisalat experienced a reduction of 4,403,344 and

382,336 subscribers respectively. Hence, MTN’s market declined to 39.15% by

the end of June, 2016. In spite of the reduction, however MTN’s average size of

transaction is almost twice that of peers. While we see this as a drag on MTN’s

overall performance, we think that the malaise stemmed from heightened

regulatory pressure, which led to the disconnection of 6.7 million subscribers in

compliance with the subscriber registration process. While MTN has intensified

effort to complete the registration process with the disconnected subscribers,

there are chances that some of the subscriibers have migrated to other service

providers. A major strategy the company have deploy to increase its subscriber

base is to offer competitive pricing plans and promotions offer.

Fig.38: Industry subscribers- June 2016 (million)

Source: Company report NCC, DLM Research

61.3

30.6

46.1

57.1

37.4

Nig SA IRAN Large OPCO Cluster Small OPCO Cluster

58.4

36.32 31.98

22.47

MTN GLO Airtel Etisalat

“ Though it reported a

2.3% increase in subscribers to 61.25 million in FY’15, its

market share declined to 41.04%.

’’




Fig. 39: Market share –June 2016 (million)

Source: Company report NCC, DLM Research

The mobile number portability process has had its heaviest negative

impact on MTNN. The porting service launched in April 2013 allows

telecoms subscribers the freedom to move their telephone numbers to any

network of their preference while retaining their phone lines. Since its

introduction, MTNN has lost the most subscribers as its share of outgoing

porting activity remains high. This in our view reflects changes in subscribers

network preference for a number of reasons among which are network

quality, tarriff and promotional tarriff offer by competitors. For example, in its

first year of introduction (May 2013- December 2014), MTNN recorded

96,496 representing 44.13% of the 218,653 outging porting activities. On the

other hand, the company’s incoming porting remained relatively low at 16,434,

representing 7.04% of the total. Further more, in 2015, while the industry

recorded outgoing porting activitis of 219,599, MTNN’s share of the industry

stood at 125,515, representing 57%. MTNN’s incoming porting for 2015

remained low at 10,936, representing 5.15% of the total. In the first half of

2016, there were a total of 112,875 incoming porters, of which MTN recorded

the smallest share of the incoming porting accounted for 4,231 or 3.75%. On

the other hand, there were a total of 113,329 outgoing porters in the half of

2016, MTN recorded the largest of 57,933 and accounted for 51.12% of the

total outgoing porting activity for the period.

Fig. 40: MTNN porting activities Jan –June 2016

Source: NCC, DLM Research

42.88%

21.34% 20.18%

15.60%

39.15%

24.35% 21.44%

15.06%


2015 2016

450 542 361 547 990 1,341

-8,430

-10,562 -12,044

-8,115

-10,189

-8,593

Jan-16 Feb Mar Apr May Jun-16

Port-in Port-out

“ The mobile number

portability process has had its heaviest negative

impact on MTNN

’’




Fig. 41: MTNN porting activities 2015


Higher operating cost holding back operating profits. MTN has been

unable to increase operating profits by as much as 2% CAGR since 2011

as operating costs continues to exert pressure on operating profits and

margins. Operating overhead in Nigeria appears high with very wide cost

structure which comprises of NCC levies, site maintenance cost, leased capacity

cost, diesel cost, high valued equipment maintenance contracts, and community

relation costs. The upsurge in these costs has given way to decline in operating

profit. MTN’s operating expenses rose from N402.88 billion in 2011 to

N495.88billion. On the other hand, operating profit declined from N355.01

billion in 2011 to N328.93 billion in 2014. Despite the increase in general cost

level, we believe MTN needs to be cost efficient to address this negative trend

going forward. The major drivers of costs are depreciation, and direct network

operation costs. While tower maintenance is one of the biggest costs, MTN sold

9,151 of its Nigerian cell towers to infrastructure company IHS in order to drive

down its operating costs as the towers were expensive to maintain. Some of the

underlined challenges were; inaccessible roads to some of the tower, high

security costs and weak power supply. The lack of stable power supply in

Nigeria has meant MTNN run up high operating costs that affect its profit level.

For instance, in 2014, MTN Nigeria spent c.N30.5billion on the purchase of

diesel. The company’s high power bill accounts for over 50% of its operating

costs.

Fig. 42: Operating cost and cost to revenue ratio 2011-2014 (Billion, %)


1,186 1,478 1,559 994 657 536 951 737 599 1,068 735 436

(6,571) (6,951) (7,439) (8,161) (9,558)

(11,918)

(19,214)

(11,218) (12,259)

(10,073) (11,414) (10,739)

Jan-15 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec-15

Port-in Port-out

50.00%

52.00%

54.00%

56.00%

58.00%

60.00%

62.00%

350.00

400.00

450.00

500.00

550.00

600.00

2011 2012 2013 2014

Operating costs Cost to revenue

“ MTN’s operating

expenses rose from N402.88 billion in

2011 to N495.88billion. On

the other hand, operating profit declined from N355.01 billion in 2011 to N328.93 billion in 2014.

’’




Fig.43: Operating profit , OP. cost/profit ratios and OP. margins (Billion, %)


MTN Nigeria accounts for almost half of the group's EBITDA, and a

greater proportion of its free cash flow. In naira terms, the company’s

EBITDA grew by a CAGR of 0.88% from N466.94billion in 2011 to

N479.35billion in 2014. On the other hand, EBITDA margin declined by 3.49pp

from 61.60% in 2011 to 58.12% in 2014. In rand, MTN Nigeria EBITDA grew

by a CAGR of 13.70% from R21.51billion in 2011 to R31.62billion in 2014

whereas the group recorded a growth of 10.16%. Overall, the group earned the

highest EBITDA of R73.19billion in 2014 with Nigeria operations contributing

43.20% to the group’s EBITDA. In 2015, while MTN Nigeria posted EBITDA

of R27.50billion, MTN South Africa’s EBITDA stood at R13.37billion. MTN

Syria offered the lowest EBITDA of R460 million in the MTN Group.

Fig.44: EBITDA and margins in naira (Billion, %)


Fig. 45: MTN Nigeria EBITDA margins vs. group and south Africa ( %)

0%

20%

40%

60%

80%

100%

120%

140%

160%

300

310

320

330

340

350

360

2011 2012 2013 2014

Operating profit Operating cost/ profit Operating margin

56.00%

58.00%

60.00%

62.00%

64.00%

400

450

500

FY'11 FY'12 FY'13 FY'14

EBITDA EBITDA margin

44.92% 38.96%

43.80% 49.81%

40.20%

61.68% 58.26% 60.71% 58.56%

52.95%

35.21% 34.13% 33.81% 32.14% 33.39%

FY'11 FY'12 FY'13 FY'14 FY'15

Group EBITDA margins Nigeria Op EBITDA Margins South Africa Op EBITDA Margins


“ In 2015, while

MTN Nigeria posted EBITDA of

R27.50billion, MTN South Africa’s

EBITDA stood at R13.37billion.

’’




Fig. 46: Group EBITDA by country (Rm)

FY'11 FY'12 FY'13 FY'14 FY'15

South Africa 13,591 14,433 13,425 12,509 13,370

Nigeria 21,514 22,544 29,235 31,620 27,504

Large opco cluster 14,656 9,547 11,442 11,439 10,944

Ghana 4,129 2,537 3,123 2,674 3,197

Cameroon 1,454 1,750 2,550 2,651 2,101

Ivory Coast 1,395 1,662 2,813 2,475 2,195

Uganda 856 1,762 1,603 2,074 1,775

Syria 1,690 1,238 561 651 460

Sudan 435 598 792 914 1,216

Small opco cluster 4,299 5,632 6,732 8,083 7,525

Group EBITDA contribution (%)

FY'11 FY'12 FY'13 FY'14 FY'15

South Africa 24.82% 27.42% 22.45% 17.09% 22.61%

Nigeria 39.29% 42.83% 48.90% 43.20% 46.52%

Large opco cluster 26.77% 18.14% 19.14% 15.63% 18.51%

Ghana 7.54% 4.82% 5.22% 3.65% 5.41%

Cameroon 7.54% 4.82% 5.22% 3.65% 5.41%

Ivory Coast 2.55% 3.16% 4.70% 3.38% 3.71%

Uganda 1.56% 3.35% 2.68% 2.83% 3.00%

Syria 12.43% 8.58% 4.18% 5.20% 3.44%

Sudan 3.20% 4.14% 5.90% 7.31% 9.09%

Small opco cluster 7.85% 10.70% 11.26% 11.04% 12.73%

Group EBITDA margins by country (%)

FY'11 FY'12 FY'13 FY'14 FY'15

South Africa 35.21% 34.13% 33.81% 32.14% 33.39%

Nigeria 61.68% 58.26% 60.71% 58.56% 52.95%

Large opco cluster

37.23% 39.26% 36.66% 34.90%

Ghana 69.50% 36.97% 37.77% 37.40% 40.45%

Cameroon 45.91% 49.00% 42.80% 36.19%

Ivory Coast 40.30% 51.33% 38.56% 34.17%

Uganda 53.46% 35.89% 39.21% 34.48%

Syria 26.15% 22.96% 17.37% 18.88% 17.66%

Sudan 27.71% 31.73% 33.84% 35.02%

Small opco cluster 17.23% 35.76% 33.99% 36.11% 32.31%

MTN withdrew its lawsuit against Nigeria’s National Communications

Commission, over a N780 billion fine for failing to disconnect 5.1 million

unregistered lines. We believe the lawsuit was initiated as a way to strategically

drag NCC into negotiation with possible fine reduction. Consequently, the fine

was later reduced to N330billion of which MTN made a goodwill payment of

N50billion. In addition, in June 2016, the first scheduled payment of N30 billion

(US$124 million) was made with the balance of N280billion spread in six

tranches. The agreement to reduce the fine from the initial amount was reached

after MTN threatened to pull out of Nigeria and expand to more African nations

to make up for any revenue shortfall. While MTN has made a provision of N120

billion ($600 million) towards settling the regulatory fine, we believe FY’16 will be

impacted by naira devaluation and the regulatory fine. Given the significant

contribution from MTN Nigeria to the group, we do not think the withdrawal

would have been initiated. While MTN has disconnected 4.5 million subscribers

in the first quarter of 2016, we think that NCC effectively fined MTN N73, 333

for each of the disconnected lines. It has equally lost an average of N6.30billion

“ We believe the

lawsuit was initiated as a way to strategically

drag NCC into negotiation with possible

fine reduction.

’’




in month (N18.83bn in the first quarter) using $4.5 average revenue per

subscriber in a month. MTN Nigeria has always been fine for a number of

offences. For example, in 2014, NCC imposed quality of service fine of

N185million on the company which was duly paid. The fine underlines some of

the wider risks associated with emerging markets.

Fig. 47: MTN Nigeria regulatory fines 2012 - 2015 ( N’bn)


H1’16 performance negatively impacted by regulatory pressure. For H1

2016, MTN Nigeria’s revenue declined by 4.80% to N389.35billion from

N408.99billion in the prior year. Revenue growth for the period was impacted

by a number of factors such as; 1) disconnection of the final batch of

subscribers in compliance with the subscriber registration process. 2) The

suspension of regulatory services until May 2016 when the operation attained

the necessary approvals to introduce market-related pricing plans and

promotions. 3) The introduction of regulatory restrictions on “out-of-bundle”

data tariffs which impacted MTN Nigeria’s data revenue growth. 4) Multiple

SIM usage. Digital revenue gained contributed 51.7% to data revenue

supported by growth in music and other lifestyle content services. EBITDA

margin declined by 7.5 pp to 49.8%, impacted by the transfer of the second

tranche of passive infrastructure into the TowerCo as well as US dollar-

denominated expenses associated with the TowerCo and build-to-suit sites.

This was supported by 13.8% increase in marketing costs relating to the

subscriber registration process.

Fig. 48: MTN Nigeria interim revenues 2013 - 2016 ( N’bn)


0.360 0.131 0.185

330

2012 2013 2014 2015

383.06 413.61 408.99 389.35

410.56 411.20 398.45

2013 2014 2015 2016

H1 H2

“ For the half year

2016, MTN Nigeria’s revenue declined by

4.80% to N389.35billion from N408.99billion in the

prior year.

’’




The outright payment of the NCC fine would have significantly impacted

the company’s short and mid-term financial position given the size of the

fine. This reflects the risk of a significant cash outflow which would increase

the company’s leverage and credit metrics. With the fine 48.13% more than

shareholder’s fund, and 100.3% of operating profit based on FY’14, the

outright cash payment implies that MTN Nigeria would have be thrown into

negative shareholders fund, with possible erosion of operating profit which

would have threatened their continued operation in Nigeria. The many options

for the company were; sale of assets, borrowing from financial institution or

issue new debt instrument/equity to boost working capital and or make

adjustments to CAPEX and dividend plans. Beside the financial loss, we are of

the view that the fine has impacted on business operation negatively, both in

South Africa and Nigeria. For example, in South Africa, the shares of MTN

group declined by 30.78% from October 2015 to date as investors and traders

were reluctant to trade on the company’s shares with some degree of panic

among shareholders. In addition, Moody's rating agency changed the outlook

on MTN Group's credit ratings from stable to negative to reflect the potential

for deterioration in the group's credit metrics and liquidity profile.

While the company has the capability to absorb more debt to pay the fine, we

believe that additional debt will increase its debt profile and reduce the

company's financial flexibility to take on other investment opportunities in

Nigeria.

Fig. 49: MTN –Fine to revenue, SHF, EBIT and EBITDA ( %)


Fig. 50: MTN –Group share price movement post fine announcement ( ZAr)

Source: Bloomberg, DLM Research

40.87%

191.79%

100.33%

68.84%

Fine /revenue Fine/SHF Fine/EBIT Fine/EBITDA

0

5,000

10,000

15,000

20,000

25,000

7-Sep-15 7-Nov-15 7-Jan-16 7-Mar-16 7-May-16 7-Jul-16

“. With the fine

48.13% more than shareholder’s fund, and 100.3% of operating

profit based on FY’14, the outright cash

payment implies that MTN Nigeria would have be thrown into negative shareholders

fund.

’’




MTN group to issue dollar denominated bond to pay regulatory fine. The

decision to raise fund came after the company reported H1’16 loss pressured by

Nigeria operation regulatory fine. Since 2010, the group have issued a number

of bonds to fund business expansion. For example, in 2010, the group issued a

R1.25billion which matures in 2017. In 2014, the group also issued another

$750million note which matures in 2024. While the new bond when issued will

increase the group’s leverage profile and ratios, we think that it’s a right decision

for the company given that MTN Nigeria credit limit with Nigerian banks is

already high therefore limiting its borrowing capacity from Nigerian banks due

largely to CBN’s regulation that Nigerian banks cannot lend more than 20% of

their capital to one single company (single obligor limits). For example, in

2013, the company secured a 7-year loan worth $3 billion -N470 billion (which

consists of $1.8 billion in additional facilities and $ 1.2 billion in restructuring of

existing local facility loan) from a consortium of local and international financial

institutions to upgrade its network, which include; Zenith Bank Plc N55 billion;

FCMB N15 billion; Guaranty Trust Bank Plc N40 billion; United Bank for

Africa, N25 billion and Fidelity Bank N26.2 billion. Others local financiers are

Access Bank Plc with N35 billion; Diamond Bank Plc N5 billion; Citibank N5

billion; Ecobank, N15 billion; First Bank of Nigeria Limited N40 billion, FSDH

N3billion; Keystone Bank N5 billion; Mainstreet Bank N5 billion, Rand

Merchant Bank N3 billion; Stanbic IBTC, N15 billion; Standard Chartered N7

billion; and Union Bank of Nigeria N20 billion, totalling N329.25 billion.

Hence, MTN will have to look outside Nigeria possibly South Africa for

borrowings for business expansion.

MTN is the biggest advertisement spender in the sector. Advertisement

is a major force to reckon with in the telecom industry. In the sector, a

successful marketing campaign can lead to increase sales, better name

recognition and a wider customer base. Hence, MTN Nigeria continuously

engage in aggressive marketing strategy ranging from traditional print media to

social network marketing, large scale TV and print advertising. In the past five

years, MTN has spent a substantial budget of its adspend on publicising its

products. For example, with the quest for a bigger share of the market and

outdo other competitors, MTN spent c.N4.7billion on advertising in 2015 and

was closely followed by Airtel which spent N4.10billion. Though, 2015 MTN’s

advert spends represents a decline when compared with the period 2011 when

advertising spend was N6.38billion. The company also frequently uses

celebrities who endorse the services as brand ambassadors.

“ The decision to raise

fund came after the company reported

H1’16 loss pressured by Nigeria operation

regulatory fine. The bond issuing is to enable the company raise fund

to offset the N330billion Nigerian fine, and address capex

needs ’’




Fig.51: MTN Nigeria advert spends vs. peers ( N’bn)

Source: Mediafacts, DLM Research

Increase in financial charges weakens pre and post- tax profits. It is

noteworthy to state that pre-tax and post-tax profit positions of the company

are strong but we note a declining trend. While a moderate improvement was

noted in 2011, the weak performance hinged on financial charges which

accelerated by 21.28% (2011-2014) as the firm’s gross loans rose to

₦393.20billion. As a result, pre-tax profit decline by a CAGR of 4.84% to

₦290.61billion, (FY11: ₦337.26bn). On the other hand, profit after tax

declined to ₦209.03billion from ₦228.26billion in 2011. While management

stated that unfavourable exchange rate movements resulted in net foreign

exchange losses of f R712 million incurred on US dollar borrowings and trade

payables in 2015, however, for FY’16, we expect lower numbers following the

tough operating environment and the regulatory fine levied against the

company during the year. We are optimistic MTN will post a strong bottom

line in the medium to long term with EPS coming stronger on the back of

stronger cash flow from data and e-commerce. In addition, we expect the

company to engage with customers to reconnect disconnected lines, and

focus on high value customers.

Fig. 52: MTN Nigeria PBT and PAT 2011 - 2014 ( N’bn)


4.70

4.10

3.70 3.70

MTN Airtel GLO Etisalat

195

200

205

210

215

220

225

230

235

260

270

280

290

300

310

320

330

340

350

FY'11 FY'12 FY'13 FY'14

PBT PAT

“ We are optimistic

MTN will post a strong bottom line in the

medium to long term with EPS coming

stronger on the back of stronger cash flow from data and e-commerce

’’




Maintaining focus on profitable growth has led to strong profit

margins. The strong profit margins indicate how successful management has

been in generating income from operating the business. Over the last five

years, MTN Nigeria has consistently had operating margins that is above 40%

except for 2014 where it posted operating profit margin of 39.88%. In our

view, trends in operating margins for the most part are directly tied to

management decisions. This highlights the management’s ability to manage

expenses without hindering sales growth. The highest operating margin

(46.85%) was recorded in FY’11 on the back of growth in revenue and

managements’ focus on cost efficiency. In addition, profit after tax margin

remains fairly stable between 2011 –2012 but saw a notable decline in FY’11

and FY’14.

Fig.53: MTN Nigeria profitability margins 2011 - 2014 (%)


The difference between EBIT and EBITDA margin is a reflection of the

capital intensive nature of the company. We note the huge difference

between EBIT margin and EBITDA margin is at an average of 17%. This is

expected from a capital intensive firm as they operate an Asset heavy model –

because of the heavy investments in property plant and equipment that leads to

high depreciation and amortization. The difference between EBIT margin and

EBITDA margin tells a whole lot about the amount of depreciation and

amortization in the Income Statement.

61.60% 58.06%

61.82%

58.12%

46.85%

42.17% 42.77% 39.88%

44.49%

40.31% 39.17%

35.23%

30.11% 29.33% 27.32%

25.34%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

55.00%

60.00%

65.00%

FY'11 FY'12 FY'13 FY'14

EBITDA margin EBIT margin PBT margin PAT margin

“ Over the last five

years, MTN Nigeria has consistently had

operating margins that is above 40% except for 2014 where it posted

operating profit of 39.88%.

’’




Fig.54: EBIT vs EBITDA margins ( %)


Fig.55: EBIT vs EBITDA margins difference ( %)


Healthy balance sheet position, despite increasing borrowings. A

review of the firm’s balance sheet showed that total assets rose by a CAGR of

5.09% to ₦964.38billion, (2011: ₦830.97bn). It is worthy to state that the

increase in assets was predominantly driven by investment in fixed asset

deployed to network sites. We see this increasing further in the medium to

long term as the company continue to explore investments opportunities in

Nigeria. The book value of fixed asset is N513.85bllion based on FY’14

results, which is 23.48% more than FY’14 debt level. Monetizing some of

MTN’s asset particularly fixed assets will help to unlock huge cash which can

be put forward to reduce the debt level. While the industry was widely

considered as an infrastructure business where owning asset is crucial for

services delivery; however, this is gradually changing as the operators in the

industry are realizing the important of asset optimization. This follows

MTN’s towers divestment in September 2014.

34.00%

39.00%

44.00%

49.00%

54.00%

59.00%

64.00%

FY'11 FY'12 FY'13 FY'14

EBITDA margin EBIT margin

14.00%

15.00%

16.00%

17.00%

18.00%

19.00%

20.00%

FY'11 FY'12 FY'13 FY'14

“ Monetizing some of

MTN’s asset particularly fixed assets will help to unlock huge cash which can be put forward to reduce the debt level

’’




Fig.56: MTN Nigeria Assets and shareholders’ fund 2011 - 2014 (N’bn)


Fig. 57: MTN Nigeria Fixed assets vs. debt 2011 - 2014 (N’bn)


Current assets increased by 62.69% in FY’14 recovering from the sharp

decline in FY’12. This resulted from the reduction in cash and cash

equivalents which decreased by 66.44%. This is largely due to the fact that, in

2012, MTN Nigeria invested $1.3 billion in network expansion. In addition,

the amount of inventory in 2012 decreased by 7.92% when compared with

that of 2011 while the amount declined further in 2013 and 2014. Besides the

cash and inventory, after a big decrease by 70.59% in 2012, MTN’s current

investments climbed by 24.10% in 2014. In general, non-current assets were

steadier over the last 4 years except for a decline in 2014 which came as a

results of sales of 9,151 towers which invariably boosted cash position.

As a result of the changes in both current assets and non-current assets, the

total assets of MTN increased by N133.41billion over last 4 years.

830.97 779.29

961.31 964.38

FY'11 FY'12 FY'13 FY'14

435.65

552.53

637.39

513.85

262.63 233.01

376.92 393.19

FY'11 FY'12 FY'13 FY'14

Fixed asset Debt




Fig.58: Current vs Non-current assets 2011 - 2014 (N’bn)


Total Liabilities increased in line with assets. The current liabilities of

MTN Nigeria dropped by 20.07% in 2013 compared to 2012 level, and

declined by 0.81% in the past four years. This trend reflected a recovery of

company’s bad financial condition in last four years. The drops in current

liabilities resulted largely from reduction on current borrowings and other

current assets. In contrast, the non-current liabilities decreased by 12.02% and

6.84% in 212 and 2014, yet it increased by 15.66% between 2011 and 2014,

reaching N438.24 billion in 2014. The overall increase is in accordance with

the growth in non-current interest-bearing loans –as non-current borrowing

over weighted the decrease of current borrowings. Hence, the financial

liabilities increased significantly the total liability, thus influenced company’s

financial position. In general, total liability increased by N146.26 billion

because of the influence of non-current liability. The total liabilities were

highest in 2014 following the 4.33% growth in noncurrent liabilities.

Fig.59: Current vs Non-current liabilities 2011 - 2014 (N’bn)


496.5

621.69

714.38

562.64

334.47

157.59

246.93

401.74

FY'11 FY'12 FY'13 FY'14

Current assets Non current assets

362.83 361.57

289

354.08

283.23 249.18

470.42 438.24

FY'11 FY'12 FY'13 FY'14

Current Liabilities Non current liabilities

“ The drops in current

liabilities resulted largely from reduction on current

borrowings and other current assets

’’




After years of strong growth, shareholders’ fund figures have been

lower than expected particularly given the current level of gross debt.

The obvious truth is that MTN have used spare capital to fund expansion. In

generally, the total equity of MTN Nigeria decreased almost each year except

for 2013 where it recorded a growth of 19.18%, but on average, MTN

Nigeria’s shareholder’s fund decreased by 1.28% between 2011-2014 as the

company has negative net cash balance (retained earnings in 2012 and 2014).

The growth in 2013 resulted from increase in retained earnings attributable to

ordinary shareholders and minority interest. To connect with the movement

in income statement, improvement in net profit directly explained the positive

fluctuation in retained earnings. The retained earnings determined the trend

of total equity.

Fig.60: Shareholders equity 2011 - 2014 (N’bn)


Investment in infrastructure to enhance the quality and capacity of the

company’s network. MTN is clearly investing a huge amount into future

growth, and we think the payoff will be massive going forward. However,

given the industry headwinds, it is uncertain whether the company will

continue to spend a lot on acquisitions and other activities with its free cash

flow. The company stated that its investment profile in Nigeria has risen by

~23% to $16 billion, representing almost half of the total assets in the

nation’s telecoms industry, which currently stands over c.$35 billion. Between

2001 and 2010, MTNN invested N887.577 billion in fixed assets. Theses

investment in infrastructure has enabled the company to build the largest

network facility in Nigeria. For FY’15, capex declined by 40.4% to R4.99

billion, impacted by the tower transaction as well as increased use of build-to-

suit towers with the rollout of capex below budget. More so, in 2015, MTNN

renewed its operating spectrum in the 900MHz and 1,800MHz frequency

bands. It also paid N18.96billion for the 2.6 GHz to boost its mobile

broadband and LTE 4G services in Nigeria.

184.92

168.54

201.9

172.06

FY'11 FY'12 FY'13 FY'14

“ To connect with the

movement in income statement, improvement in

net profit directly explained the positive fluctuation in retained

earnings

’’




MTN Nigeria has also invested US$94 million to renew its 2G licenses,

concluded the acquisition of Visafone Communications. It bought VGC

Communications Limited (VGCCL) at $70 million (N9.3 billion). These

investments, combined with the acquisition of a 4G/LTE licence and digital

TV spectrum, highlight MTN’s long term commitment to improving the

quality of broadband services. For 2016, MTN planned to spend $716 million

(N141.05bn) to upgrade its Nigeria’s network. The huge investments

support the company’s drive to maintain leadership position in the Nigeria

telecom industry. That said, while management highlighted that improving

quality and data speeds remains a priority, we are of the view that the rush to

compete favourably will push capex higher going forward, even as profits are

falling.

Capex (R’mllion) 2011 2012 2013 2014 2015

Nigeria 6,331 13,733 14,298 8,375 4,993

South Africa 4,105 6,495 5,835 5,676 10,948

Large OPCO cluster 4,790 5,066 5,805 5,863 7,319

Small OPCO cluster 2,333 2,823 3,809 3,888 4,368

Total 17,717 28,827 30,164 25,242 29,199

Fig. 61: Capex/revenue ratio 2011 - 2014 (%)


Fig. 62: shares of MTN Nigeria capex in group 2011 - 2014 (%)


18.15%

35.49%

29.69%

15.51%

9.61%

FY'11 FY'12 FY'13 FY'14 FY'15

35.73%

47.64% 47.40%

33.18%

17.10%

FY'11 FY'12 FY'13 FY'14 FY'15

“ The company stated

that its investment profile in Nigeria has

risen by ~23% to $16 billion, representing

almost half of the total assets in the nation’s

telecoms industry, which currently stands over

c.$35 billion.

’’




In our view, the company’s rising debt-equity ratio is also a key

concern. The growing financial leveraging is largely on account of the high

costs of infrastructure. Since telecommunication is a capital intensive sector,

the need for financing is bound to rise, given the massive outlay required to

acquire network infrastructure. In FY11, the company’s total debt stood at

N262.63billion but rose to ₦393.19billion in 2014 – comprising short and

long term unsecured borrowings with the carrying amount (28.28%)

denominated in US dollar and (71.72%) denominated in naira. While the

foreign loan portfolio is LIBOR linked variable interest plus some margins,

this exposes the company to interest and exchange rate risks. With debt

already at N393.19 billion, further borrowing could take the company’s debts

above N500billion and total liabilities to more than N1trillion, which will be

more than the book value of asset, therefore putting the company’s future

cash flow and profitability under pressure and possibly impairing its ability to

compete effectively in Nigeria. For FY’16, we are of the view that MTN

Nigeria’s debt profile will accelerate further after the acquisition of Visafone,

though, there was no information on the cost and financing of the deal.

Fig. 63: Borrowings 2011 - 2014 (N’bn)


Debt-to-assets ratio grew from 31.60% in 2011 to 40.77% in 2014. The four

year trend line is less encouraging but MTNN appears to be only moderately

leveraged. (The company had a larger debt-to-asset ratio in 2014, with an average

ratio of 35.37%. This means that for every N1 of assets there is N0.40 of debt,

which is not excessive by any means and, highlights that MTNN can increase its

financial gearing by a considerable amount before the balance sheet takes on too

much debt. This also means the company is making acquisitions and increasing

debt in an attempt to improve returns to shareholders.

262.63 233.01

376.92 393.19

FY'11 FY'12 FY'13 FY'14

Debt Summary (N’m) 2011 2012 2013 2014

Senior debt – – – –

Subordinated debt 262,626.3 233,010.8 376,924.0 393,192.0

Total debt 262,626.3 233,010.8 376,924.0 393,192.0

Cash 106,540.5 35,755.8 144,872.0 207,687.0

Net debt 156,086 197,255 232,052 185,505

“ In FY11, the

company’s total debt stood at

N262.63billion but

rose to ₦393.19billion in 2014 – comprising short and long term

unsecured borrowings with the carrying

amount (28.28%) denominated in US

dollar and (71.72%) denominated in naira.

’’




Fig. 64: Debt to asset ratios 2011 - 2014 (%)


With a net debt of N185.51billion on shareholder’s fund of N172.06billion,

net debt-to-equity ratio steadily increased from 0.84x in 2011 to 1.08x in

2014, and the average D/E ratio from 2011 to 2014 was 1.06x. The rising debt

level reflects the risk of a significant cash outflow and pressure on MTN's credit

metrics. A further increase in borrowings could increase the company's D/E ratio

to 1.5x in 2016. Though, just looking at debt-to-equity ratio doesn't paint the

whole picture. A better way is by looking at the company's interest cost as a

percentage of operating income. While the ratio appears high, a few things need to

be taken into account. First, the company will see its balance sheet expand after

investing in the 2.6 GHz wireless spectrum, and Visafone acquisition which are

asset to the company.

Fig. 65: Debt to equity ratios 2011 - 2014 (x)


Interest coverage ratio is strong but fluctuated significantly. While investors

may be worried about the company’s new debt profile, it’s worthy to note that the

company is only using 11.65% of its operating income on interest payments. The

gross interest coverage ratio which is just 4.96x EBIT further justify the

company’s capacity to pay interest on loans. The interest coverage ratio hit a low

of 4.96x in 2014 and a high 9.55x in 2014. Overall, while the company's interest

expense doesn't look worrisome, the healthy interest cover further justifies the

company's desire for dollar denominated financing with low interest rate. In our

view, if the company cannot pay its interest income from its operating income, it's

unlikely it will be able to expand or pay dividend.

31.60% 29.90%

39.21% 40.77%

FY'11 FY'12 FY'13 FY'14

0.84

1.17 1.15 1.08

FY'11 FY'12 FY'13 FY'14

“ The rising debt level

reflects the risk of a significant cash outflow

and pressure on MTN's credit metrics..

’’




Fig. 66: Interest coverage ratios 2011 - 2014 (x)


Interest expense FY'11 FY'12 FY'13 FY'14

Senior interest expense

– – –

Subordinated interest expense 32,001.60 46,480.4 42,234.6 47,860.4

Others 2,150.60 2,496.4 2,995.6 2,649.5

Total charges 34,152.2 48,977 45,230 50,510

Net Cash interest expense 17,841 14,033 28,608 38,324

Coverage FY'11 FY'12 FY'13 FY'14

EBITDA / cash interest expense 26.2x 31.2x 17.2x 12.5x

EBITDA / total interest expense 12.6x 8.8x 10.7x 7.2x

(EBITDA – capex) / cash interest expense 19.1x 14.9x 9.1x 8.9x

(EBITDA – capex) / total interest expense 9.2x 4.2x 5.7x 5.1x

DSCR 10.4x 6.5x 7.5x 6.5x

The low debt-to- EBITDA level suggests MTN Nigeria has a higher

repayment debt capacity. A key metric to gauge companies’ repaying capacity is

net debt-to-EBITDA. The main target of this ratio is to examine the cash

available with the company to pay back its debts, and not how much income that

is being earned. The metric tells us how many years it will take the company to

repay the debt if using the cash it generates from its core operations. The

company’s debt repayment capacity is under 1x the EBITDA. The debt-to-

EBITDA ratio hit a low of 0.53x in 2012 and a high 0.82x in 2014, with average

ratio of 0.67x for the four years period. The lower ratios indicate the company

have a low amount of financial debt relative to EBITDA.

Fig.67: Debt to EBIT and EBITDA ratios 2011 - 2014 (x)


9.55

6.38

7.39

4.96

FY'11 FY'12 FY'13 FY'14

0.52 0.53

0.59

0.52

0.40 0.39 0.41

0.36

FY'11 FY'12 FY'13 FY'14

Net debt/EBIT Net debt/EBITDA

“ The debt-to-

EBITDA ratio hit a low of 0.53x in 2012 and a high 0.82x in

2014, with average ratio of 0.67x for the four

years period.

’’




Debt to cash flow from operating activity is strong. This implies that the

company has greater financial flexibility to invest in future growth

opportunities. Cash flow-to-debt ratio rose from 2.72x in 2011 to 3.005x in

2014. This figure is likely to see a decrease in 2016 following the anticipated

growth in the company’s debt. While this seems like a negative development, it is

worth noting that the company took some debt in 2015 to finance investment in

its networks, which should increase the quality of services. Most of these debts

will not come due until 2019 and beyond, which provides room for the company

to accumulate enough cash to pay off its debt.

Fig. 68: Cash flow from operation 2011 - 2014 (N’bn)


Fig. 69: Cash flow to debt ratios 2011 - 2014 (x)


503.79

456.10

492.61

525.23

FY'11 FY'12 FY'13 FY'14

2.72 2.71 2.44

3.05

FY'11 FY'12 FY'13 FY'14

Leverage statistics FY'11 FY'12 FY'13 FY'14

Net debt / total capitalization 31.09% 41.75% 37.65% 29.32%

Total debt / EBITDA 0.56x 0.53x 0.77x 0.82x

Net debt / EBITDA 0.33x 0.45x 0.47x 0.39x

Net debt + preferred / EBITDA 0.85x 1.00x 0.96x 0.89x

Capitalization FY'11 FY'12 FY'13 FY'14

Total debt 262,626 233,011 376,924 393,192

Net debt 156,086 197,255 232,052 185,505

Preferred stock 239,420 239,420 239,420 239,420

Total capitalization 502,046 472,431 616,344 632,612




Fig. 70: Cash flow margin ratio 2011 - 2014 (x)


Fig. 71: Operating cash flow ratio 2011 - 2014 (x)


Fixed assets investment leads to higher operating leverage. MTNN operating

leverage is very volatile as it ranges from 18.11x to -0.79x. It is expected that

MTNN Operating leverage will be high as the company has made significant

investments in Property, plant and equipment as well as intangible assets. These

long term assets account for more than 60% of the company’s total assets. In

Financial leverage, the usage of debt primarily increases the financial risk as they

need to payoff interest. The greater the debt, the higher the financial leverage. The

company’s financial leverage has been unstable hovering between 0.30x – 1.16x.

Total leverage which measures the sensitivity of net Income to changes in revenues

also remained unstable moving between 5.48x and -0.91x. This implies that for

every 1% change in Sales, the Net Profit moves by -0.91%.

Operating leverage FY'12 FY'13 FY'14

Turnover growth -0.58% 5.31% 3.93%

Growth in EBIT -10.51% 6.82% -3.10%

Growth in PAT -3.18% -1.89% -3.59%

Operating leverage 18.11 1.28 -0.79

Financial leverage 0.30 -0.28 1.16

Total Leverage 5.48 -0.36 -0.91

0.66

0.61

0.62

0.64

FY'11 FY'12 FY'13 FY'14

1.39 1.26

1.70

1.48

FY'11 FY'12 FY'13 FY'14

“ Total leverage which

measures the sensitivity of net Income to changes

in revenues also remained unstable

moving between 5.48x and -0.91x.

’’




Fig. 72: Operating, financial and total leverage 2011 - 2014 (x)


MTN’s track record of paying dividends will be of immense benefit to

prospective investors with preference for dividend paying companies.

MTN has paid dividends every year since 2004. The consistent dividend

payments indicate that the company is profit-making. Long term investors

prefer dividend paying companies because it is a measure of how they are

making profits while growing the business. In 2014, MTN paid a total dividend

of N238.86billion representing 45.48% and 72.62% of cash flow from

operations and operating profit respectively. Though, there are rooms for

growth, but for FY’16, the ability to maintain the dividend payout trend is slim

as a result of capex programme and regulatory fine of N330billion unless

management are able to cut some costs or capex which is unlikely in our view.

The main determinant of dividend growth in future will be earnings / free cash

flow growth which we think will be low given the impact of regulatory fine,

reduction in airtime & subscription revenue and price war in Nigeria.

Fig. 73: Dividend2011 - 2014 (N’bn)


-5.00

0.00

5.00

10.00

15.00

20.00

FY'12 FY'13 FY'14

Operating leverage Financial leverage

Total Leverage

220,789 239,480

184,863

238,861

FY'11 FY'12 FY'13 FY'14

“ In 2014, MTN

paid a total dividend of N238.86billion

representing 45.48% and 72.62% of cash

flow from operations and operating profit

respectively.

’’




Fig. 74: Cash dividend/cash flow from operation and operating profit 2011 - 2014 (%)


Free cash flows to equity to grow 0.17%. Revenue is clearly contributing to

FCFE despite sporadic growth but MTN is clearly also investing a huge amount

into future growth, and we think the payoff of will be massive going forward.

CapEx seems to be all over the place right now, which in our view will bode

well for the company in the medium to long term. Though, it uncertain whether

the company will continue to spend a lot on acquisitions and other activities

with its free cash flow.

Fig. 75:Capex/revenues 2011 - 2014 (%)


Fig. 76: Capex/revenues projection 2015 - 2019 (%)


43.83%

52.51%

37.53% 45.48%

62.18%

75.36%

54.46%

72.62%

FY'11 FY'12 FY'13 FY'14

Div/Cash from operation Div/Operating profit

15.43%

28.75% 27.18%

15.44%

FY'11 FY'12 FY'13 FY'14

26.72%

20.54% 21.99%

18.91%

16.19%

FY'15E FY'16F FY'17F FY'18F FY'19F




Financial Projections




Financial projections. The current pricing pressure in Nigeria implies

that MTN Nigeria is exhausting its capacity to grow earning but

focusing on other growth areas. Going forward, we expect the company to

try to turn around the negative trend in subscribers’ numbers. Nevertheless,

there are significant upside potential in broadband, e-ecommerce and other

growth areas which the company is looking to explore. Hence, we expect

revenue to grow at a CAGR of 1.78% to N900.96billion by FY19. The H1’16

results showed that ARPU is increasing. This shows that the company has

successfully focused on deriving higher revenue from other business unit

particularly e-commerce and broadband which continue show prospect for

growth. Going forward we expect that customer acquisitions will continue, but

the company possesses a significant opportunity to maximise ARPUs by

offering promotional deals in growth areas. Airtime and subscription continues

to decline in both revenue and active users and it is clear that this trend will

continue in the near term particularly in maturing markets as competition

intensified and we believe that the company will try to differentiate itself by

launching new services and increasing marketing expenditure if necessary.

Hence, sequel to securing a digital broadcast licence for N34billionn in 2015,

the company has commenced the pilot of its digital television broadcasting

service in Jos, Plateau State. Plans to accelerate EBITDA have gained

momentum, as it uses discounted tariffs and promo to grow market share.

Hence, we project EBITDA growth of 1.98% CAGR to N515.35 billion.

Fig. 77: Revenue projection 2015 - 2019 (N’bn)


Fig. 78: EBITDA and margin projection 2015 - 2019 (N’bn, %)


807.49 801.03

825.06

858.06

900.96

FY'15E FY'16E FY'17F FY'18F FY'19F

58.40%

58.60%

58.80%

59.00%

59.20%

59.40%

59.60%

59.80%

60.00%

60.20%

450

460

470

480

490

500

510

520

FY'15E FY'16E FY'17F FY'18F FY'19F

EBITDA EBITDA Margin

“ Going forward we

expect that customer acquisitions will continue, but the

company possesses a significant opportunity to maximise ARPUs by offering promotional deals in growth areas

’’




MTN’s Valuation Range




MTN’s Valuation Range. MTN Group is valued at c.$15billion, but with

MTN Nigeria contributing ~35.32% of the group’s revenue, one would expect

the company’s worth to be 40% of the group – but this is necessarily not the

case given the impact of annual capex. The annual capital expenditures tell a lot

about the operating and growth philosophy of the company. Given its

expansion drive, we expect MTN to have capital expenditures that is greater

than the average depreciation expense. While the current investment shows

that the company is building capacity and although capital expenditures would

be considered in forecasting future cash flows, as the cash flows will reflect a

growth profile. Being the first major mobile telecom that will be listing on the

domestic bourse, there are chances the stock will attract some premium for a

number of reasons among which are strong demand and limited float.

Valuation. Whilst we considered the main valuation criteria used in the

telecommunications industry, we employed DCF as our principal method in

assessing the value of MTNN. In our view, the DCF model is the most

appropriate model to value companies in the telecom sector. The two key

factors which we considered will affect valuation are revenue growth and cash

flow. We used a WACC of 16.97% and cost of equity of 18.96%–and think a

dividend yield above 10% would be appropriate to provide an adequate return

to investors. Our valuation model suggests that N800 - N1,600/share looks a

likely listing range for MTNN Nigeria, suggesting a dividend yield above 30%.

This would make dividend yield base investment on the stock attractive. The

dividend model assumes average dividend pay-out of 56% of operating profit.

For EV/EBITDA model, past performance of EBITDA is positive but

volatile, and we do not expect it to grow significantly in the near term. Hence,

we forecast a maintainable normalized EBITDA of N471.40billion with

EV/EBITDA multiple of 1.93x. Our adopted EV/EBITDA multiple is lower

than those of our selected African markets peers, as we applied a discount to

reflect market risks. The EV/EBITDA method suggests the shares could trade

at N1,272/share. The DCF valuation model and sensitivity analysis suggests a

price range of N804 – N1,653/share. With N422.70 BVPS and N513.51 EPS,

valuations seem viable.

Fig.96: Valuation metrics

Capital structure (Equity) 30.44%

Capital structure (Debt) 69.56%

Forecast period 5year

Beta 0.84

Long term growth rate 3.00%

Risk free rate 13.50%

Risk premium 6.50%

Tax rate 30%

Cost of equity 18.96%

WACC 16.97%

Outstanding shares (Million) 407.06

“ MTN Group is

valued at c.$15billion, but with MTN Nigeria contributing ~35.32% of the group’s revenue, one would expect the

company’s worth to be 40% of the group, but

this is necessarily not the case given the impact of

annual capex

’’




Fig.80: Betas and Leverage

Unlevered beta

Adopted beta 0.84

Tax rate 30%

Debt/equity ratio 1.08x

Unlevered Beta 0.48

Levered beta

Unlevered beta 0.48

Tax rate 30%

Debt/equity ratio 1.08x

Levered Beta 0.84

Fig.81: DCF Valuation

FY’15E FY’16F FY’17F FY’18F FY’19F

EBIT(₦’mn) 331,150 328,421 338,356 339,019 347,771

Operating FCF (₦’mn) 75,758 97,631 171,199 105,521 124,435

Present Value of Op FCF 64,767 71,356 106,972 60,964 61,461

EV(₦’mn) 917,413

Equity Value (₦’mn) 600,321

Price/Share ₦1,474.80

Fig.82: Sensitivity analysis of enterprise value to changes in EV/EBITDA multiple and

WACC (₦’billion)

Fig.83: Sensitivity analysis of enterprise value to changes in growth rate and WACC

(₦’billion)

Terminal perpetual growth rates

3.0% 3.5% 4.0% 4.50% 5.0%

Discount 15.00% 905,482 931,259 959,380 990,179 1,024,058

Discount 15.50% 868,558 891,865 917,199 944,837 975,106

Discount 16.00% 834,471 855,617 878,525 903,425 930,589

Discount 18.00% 720,823 735,578 751,386 768,366 786,651

WACC 16.97% 775,260 792,921 811,943 832,490 854,754

Fig.84: Sensitivity analysis of equity value to changes in EV/EBITDA multiple and WACC

(₦’billion)

EV/EBITDA multiples

3x 4x 5x 6x 7x

Discount 15% 499,984 672,887 845,791 1,018,695 1,191,599

Discount 15.50% 484,109 653,302 822,496 991,690 1,160,883

Discount 16.00% 468,611 634,190 799,768 965,347 1,130,925

Discount 18.00% 410,184 562,199 714,213 866,227 1,018,241

WACC 16.97% 439,565 598,387 757,209 916,031 1,074,853

Fig.85: Sensitivity analysis of equity value to changes in growth rate and WACC (₦’billion)

EV/EBITDA multiples

3x 4x 5x 6x 7x

Discount 15.00% 893,176 1,066,079 1,238,983 1,411,887 1,584,791

Discount 15.50% 877,301 1,046,494 1,215,688 1,384,882 1,554,075

Discount 16.00% 861,803 1,027,382 1,192,960 1,358,539 1,524,117

Discount 18.00% 803,376 955,391 1,107,405 1,259,419 1,411,433

WACC 16.97% 832,757 991,579 1,150,401 1,309,223 1,468,045


3.0% 3.5% 4.0% 4.50% 5.0%

Discount 15% 512,290 538,067 566,188 596,987 630,866

Discount 15.50% 475,366 498,673 524,007 551,645 581,914

Discount 16.00% 441,279 462,425 485,333 510,233 537,397

Discount 18.00% 327,631 342,386 358,194 375,174 393,459

WACC 16.97% 382,068 399,729 418,751 439,298 461,562




Fig.86: Sensitivity analysis of target price to changes in EV/EBITDA multiple and WACC

EV/EBITDA multiples

3x 4x 5x 6x 7x

Discount 15.00% 1,228.28 1,653.04 2,077.81 2,502.57 2,927.33

Discount 15.50% 1,189.28 1,604.93 2,020.58 2,436.22 2,851.87

Discount 16.00% 1,151.21 1,557.98 1,964.74 2,371.51 2,778.28

Discount 18.00% 1,007.68 1,381.12 1,754.56 2,128.01 2,501.45

WACC 16.97% 1,079.85 1,470.02 1,860.19 2,250.36 2,640.53

Fig.87: Sensitivity analysis of target price to changes in perpetual growth and WACC


3.0% 3.5% 4.0% 4.50% 5.0%

Discount 15.00% 1,258.51 1,321.84 1,390.92 1,466.58 1,549.81

Discount 15.50% 1,167.80 1,225.06 1,287.30 1,355.19 1,429.55

Discount 16.00% 1,084.06 1,136.01 1,192.29 1,253.46 1,320.19

Discount 18.00% 804.87 841.12 879.95 921.67 966.59

WACC 16.97% 938.60 981.99 1,028.72 1,079.20 1,133.89

Fig.88: Sensitivity analysis of implied terminal EBITDA multiples to changes in growth

rate and WACC (x)


3.0% 3.5% 4.0% 4.50% 5.0%

Discount 15.00% 3.07 3.22 3.38 3.56 3.76

Discount 15.50% 2.95 3.09 3.24 3.40 3.58

Discount 16.00% 2.83 2.96 3.10 3.25 3.42

Discount 18.00% 2.46 2.55 2.66 2.77 2.89

WACC 16.97% 2.64 2.75 2.87 3.00 3.14

Fig.89: Residual Valuation Method

2015E 2016E 2017E 2018E TV

N N N N N

Equity 434 442 440 437 503

Net income per share 469.03 456.78 472.96 474.11 489.16

Equity charge per share 81.67 83.16 82.88 82.30 94.80

Residual income 387.35 373.62 390.08 391.81 394.36

Total residual cash flow 387.35 373.62 390.08 391.81 4,404.63

PV of total cash flow 331.26 273.26 243.99 226.63 2,178.84

PV of total cash flow 3,253.98

Fig.90: EV/EBITDA Method

Actual FY'11 FY'12 FY'13 FY'14

Forecast FY'15E FY'16F FY'17F FY'18F

EBITDA 466,935 437,564 490,640 479,349

476,417 476,611 495,034 501,107

Low 437,564

Low 476,417

High 490,640

High 501,107

Average 468,622

Average 487,292

Maintainable normalized EBITDA 471,394

EV/EBITDA Multiple

1.93

EV

911,262

Equity Value (Market cap)

518,070

Outstanding shares

407.06

Price per share 1,272




Overview: Of the Nigerian Telecommunication Industry




Overview of the Nigerian telecommunication industry. The Nigerian

telecom industry has seen a remarkable growth story and has significantly

contributed to the growth of the domestic economy in the past 10 years.

With customers demand growing year in and year out, competition has

shifted in such a way that few could have predicted. The FDI in Nigeria

between 2001 and 2011 was c.$45bn, and Telecoms accounted for ~35% of

the total. The sector’s cumulative investment is valued at $34 billion (N6.7

trillion), an increase from $32 billion (N63.6 trillion) since 2013. Investment

for the industry is projected to reach $42 billion (N8.5 trillion) by 2017. In

2015 the growth rate in the telecommunications sector was higher than for

the economy as whole. As a result, the proportion of total annual GDP

accounted for by telecommunications increased. .In real terms, the sector

contributed N1,645,82 billion to GDP in the final quarter of 2015, or 8.88%.

The year on year growth rate recorded in the fourth quarter of 2015 was

3.49%, though lower than the growth rate of 18.76% recorded quarter-on-

quarter. Despite the growth noted thus far, expanding coverage to rural areas

is a complex issue. Geographic terrain and vast distances, lack of electricity

and road access, and continued security threats are all challenges to

investment in rural coverage.

Fig. 91: –Telecom sector contribution to GDP y-o-y 2010 and 2015 ( %)

Source: NBS, NCC, DLM Research

Fig. 92: –Telecom sector contribution to GDP y-o-y 2010 and 2015 ( %)

Source: NBS, NCC, DLM Research

9.03%

8.68% 8.64%

8.57%

8.46% 8.50%

2010 2011 2012 2013 2014 2015

8.27%

9.25%

7.57%

8.76% 8.38%

9.46%

7.71%

8.88% 8.83%

9.80%

Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16

“ In real terms, the

sector contributed N1,645,82 billion to

GDP in the final quarter of 2015, or 8.88%. The year on

year growth rate recorded in the fourth quarter of

2015 was 3.49%, though lower than the

growth rate of 18.76% recorded quarter-on-

quarter. ’’




Periods GDP at CBP (N’m) telecoms contribution Contributions to GDP (%)

Q1'14 15,438,679.50 1,276,130.97 8.27%

Q2'14 16,084,622.31 1,487,620.52 9.25%

Q3'14 17,479,127.58 1,323,814.27 7.57%

Q4'14 18,150,356.45 1,590,309.70 8.76%

Q1'15 16,050,601.38 1,344,489.25 8.38%

Q2'15 16,463,341.91 1,556,927.44 9.46%

Q3'15 17,976,234.59 1,385,850.02 7.71% Q4'15 18,533,752.07 1,645,822.30 8.88%

Q1'16 15,992,773.94 1,411,743.39 8.83%

Q2'16 16,124,151.89 1,580,140.43 9.80%

The sector has also played a significant role in the socio-economic

development of the country by connecting the masses. While we see

some growth potentials in some markets, we think that the industry will

continue to evolve in the medium to long term but the current recessionary

pressure coupled with costs overhang will dampen short term growth

potential. Growth of the sector is followed by massive job creation. Despite

the fierce competition and slowing revenues as a result of declining ARPU,

operators are well placed to see growth in the near to medium term. In some

markets, we think mobile market is approaching saturation and a shift from

traditional voice and SMS services to data with the view to drive future

growth, particularly in 4G long-term evolution (LTE) services, which are

expected to expand to regional markets. Although the lack of available

spectrum, and a new mobile termination rate may eat into revenues, but

surging data demands, and value-added data bundles should see operators

maintain profitability and expand customer base. The Nigerian

Communications Commission is responsible for much of the country’s

telecommunications sector; it oversees and formulates policy regulation for

the operators.

The key game changer in the sector is attributed to several factors

among which are, the telecom sector reform which led to the partial and

fully liberalization of the sector in 1992 and 1999 respectively, which opened

up the sector to private participation and the resulting competition by private

operators. The launch of wireless services was an important landmark and

one of the most important drivers of overall industry growth. In addition,

other factors such as Nigeria’s population, economic growth, drive for market

share and low tariffs, have played a notable role in the industry’s growth. With

the view to increase market share, operators are continually lowering the

prices of their products and tariffs. That said, Subscribers’ retention and

network upgrades are strategic priorities for the operators. Since liberalization,

the price of mobile phone sim card has dropped significantly from c.N20,000

(USD$145) in 2001 to less than N200 for basic prepaid. Waiting lists for

telephone lines have disappeared, while telephone tariffs for local, national

and international calls declined from N50/minute to c.N10/minute, with calls

in Nigeria being ranked among the lowest in Africa. Hence, the Nigeria’s

teledensity which measures the percentage of population with access to

“ The launch of

wireless services was an important landmark and one of the most important drivers of

overall industry growth.

’’




telephony services increased by 46.35% within four years. The teledensity

which stood at 73.12% as at the end of June 2012 rose to 107.10% by the end

of June, 2016. The growth in teledensity showed that access to telephone

services is getting deeper in Nigeria. The operators are exploring new

opportunities in broadband market as they look to meet a new wave of

customer demands, diversify revenue streams, and margins.

Fig.93: –Nigeria Tele density 2012-2016 (%)

Source: NCC, Index mundi, DLM Research

The total number of connected lines has increased steadily. According

to NCC, as of February 2014 the nation had a total installed capacity of

247.7m lines. Despite some markets nearing maturity, between December

2010 and July 2016 the number of connected lines increased by 114.91

million, or 103.04%. The higher connected lines suggest that subscribers are

having three to four telephone lines even as some of the lines are not active in

most of the time. Out of the 226.43 million connected lines in July 2016, only

150.26 million representing 66.36% are active. The 150.26 million represents

the total active mobile subscriptions on all mobile networks operating in the

country, including the Global System for Mobile Communications (GSM),

Code Division Multiple Access (CDMA) and fixed wired/wireless operators.

While market penetration is already high, we do not expect to see a much

larger expansion in active line growth from operators except for migration

driven. Most of the increases in the number of active lines are attributable to

additional GSM lines. The growth between December 2010 and July 2016 is

68.51 million representing 84.38%, considerably higher than the growth in the

sector active lines.

70

75

80

85

90

95

100

105

110

Jun'16Dec '15Jun '15Dec '14Jun '14Dec '13Jun '13Dec '12Jun '12

“ The 150.26 million

represents the total active mobile subscriptions on

all mobile networks operating in the country,

including the Global System for Mobile Communications

(GSM), Code Division Multiple Access

(CDMA) and fixed wired/wireless

operators..

’’




Fig.94: Connected, active and unused lines2010-2016 (million)

Source: NCC,DLM Research

While the Global System for Mobile Communications (GSM) showed

an increasing contribution to total active lines, on the other hand,

Division Multiple Access and Fixed wired/wireless displayed a decreasing

trend which in our view reflects changes in communication trend. For

example, Global System for Mobile Communications (GSM) accounted for

98.45% of the total active lines in December 2015 followed by Core Division

Multiple Access (CDMA) with 1.42% of the total, whist fixed wired and

wireless make up 0.12% respectively. Given the ease of communication which

the GSM provided, we think the dominance of GSM users over others will

continue going forward.

Fig. 95: Total active lines vs. GSM and % of GSM on total active lines (million, %)


Fig. 96: Operators contribution to total active lines (%)


111.52 124.8

151.71 169.67

188.89 210

226.43

88 95.88 113.2

127.61 139.14

151.02 150.26

23 29 39 42 50

59 76

2010 2011 2012 2013 2014 2015 July'16

Connected lines Active lines Unused lines

88.00%

90.00%

92.00%

94.00%

96.00%

98.00%

100.00%

102.00%

0

20

40

60

80

100

120

140

160

July'16201520142013201220112010

Mobile (GSM) active lines sector Active lines

99.63% 98.45% 98.30% 97.83% 97.02% 94.45% 91.90%

0.25% 1.42% 1.57% 1.88% 2.60%

4.80% 6.91%

0.11% 0.12% 0.13% 0.28% 0.37% 0.75% 1.19%

July'16201520142013201220112010

GSM CDMA Fixed Wired/Wireless

“ Given the ease of

communication which the GSM provided, we think the dominance of GSM users over others

will continue going forward.

’’




Mobile Subscribers (GSM) has seen a steady growth. While the Nigeria

mobile market has high rates of penetration; with over 130m sim cards in

circulation, the fixed-line market is lagging. We are of the view that uptake of

smart devices and the low-cost smart phones are a key driver of this

development. The smartphone penetration rate is still growing strongly and

adoption is higher in the developed markets. In 2015, the GSM subscribers

recorded a y-on-y growth of 8.71% or 11.91 million to 148.68 million

subscribers. Between 2010 and 2015, SGM operators in Nigeria recorded an

additional 67.48 million subscribers, representing a growth of 83.11%

(CAGR: 12.86%). This is due largely to the fact that GSM is the most popular

subscription type in Nigeria, and only a small fraction of subscriptions are for

fixed lines. July, 2016 marked a clear turning point as total GSM subscribers

rose to 149.71 million. With the growth nearing no end, Nigeria is expected to

lead the global growth in mobile GSM subscribers follow by South Africa.

The growth in mobile GSM subscribers is driven by users’ preference for

using their device for a variety of activities that are normally performed on

laptops or desktops.

Fig. 97: GSM subscribers in Nigeria (million)


Fig. 98: CDMA and Fixed wired/wireless subscribers in Nigeria (million)


149.7 148.68 136.77

124.84

109.83

90.56 81.19

July'16201520142013201220112010

0.37

2.15 2.19 2.41 2.95

4.60

6.10

0.16 0.19 0.18 0.36 0.42 0.72

1.05

July'16201520142013201220112010

CDMA Fixed Wired/Wireless

“ Between 2010 and

2015, SGM operators in Nigeria recorded an

additional 67.48 million subscribers,

representing a growth of 83.11% (CAGR:

12.86%)..

’’




Investment in the sector remained an upward trend even as network

quality is a key point of differentiation among operators. Investment in

mobile infrastructure is the key factor for the strong growth seen in the sector

which has allowed mobile operators to expand their market coverage. Despite

the fierce competition, network quality remains a key differentiator among

operators. Hence, operators have been investing in faster network capabilities,

while also diversifying their service portfolios to growth areas. For example,

in the last 10 years, capex has trended upwards significantly with spectrum

costs being the main drivers The sector’s investment is valued at $34 billion

(N6.7 trillion). In 2012, MTN spent $1.5bn on capacity building, followed by

a similar amount in 2013, and it plans to spend $3bn on additional upgrades

through to 2016. Globacom has invested heavily in the same direction.

In 2013 and 2014 Glo signed a $500 million deal with Chinese equipment

vendor, to upgrade its infrastructure nationwide for efficient service delivery.

It also signed another $750 million agreement with Huawei Technologies to

expand the capacity of its network. Airtel also made infrastructure

investments worth more than $1.7bn between 2010 and 2014. Between 2007

and 2014 Etisalat invested c.$1bn into its Nigerian operations. With the view

to maintain market share and protect average revenue per user, operators are

now investing in 4GLTE services to achieve long-term plan for network

quality and coverage which in our view signalled that network upgrades will

continue going forward.

The mobile market comprises of four GSM operators but dominated by

three major GSM operators. The top three operators – MTN, Glo and

Airtel have been present since the early growth years and now account for

84.94% of the market. As at 31, December 2015, MTN Nigeria was the

largest player by market share due largely to it wider market coverage. MTN

has the largest market share of all the GSM operators with 41.04% (61.25

million subscribers). Globacom is a distant second with 22.10% (32.99 million

subscribers), followed by Airtel who have 22.02% market shares with 32.86

million subscribers, while Etisalat holds 14.85market share with 22.16 million

subscribers.

Fig. 99: GSM subscribers by operators December 2015 (million)


61.25

32.99 32.86

22.16


“ Investment in mobile

infrastructure is the key factor for the strong

growth seen in the sector which has allowed mobile operators to

expand their market coverage..

’’




Fig. 100: Operators by market share December 2015 (%)


At the end of the second quarter of 2016, the number of subscribers with

MTN and Airtel were 4.65% and 2.68% lower respectively compared to the

subscribers recorded in December 2015. On the other hand, Glo and Etisalat

increased their subscribers’ base by 10.09% and 1.40% respectively in the

same period. As a result Glo and Etisalat market share rose to 24.35% and

15.06% respectively, whilst MTN and Airtel saw a decrease in their share, to

39.15% and 21.44% respectively.

Fig. 101: GSM subscribers by operators June 2016 (million)


Fig. 102: Operators by market share December 2015 (%)


41.04%

22.10% 22.02%

14.85%


58.4

36.32 31.98

22.47


39.15%

24.35% 21.44%

15.06%





In the medium to long term, we expect to see a fundamental shift in

the industry from a voice dominated environment to a data dominated

environment and this may impact on the viability of most operators.

While growth in mobile usage has been remarkably strong in recent years,

fixed broadband penetration remains very low - presenting opportunity for

investment. Broadband/internet connections is expected to grow significantly

in the near to medium term as Nigerian grows more reliant on mobile devices

with the increasing youthful population embracing mobility. The growth in

internet usage is expected to be driven by traffic on social media, content-rich

apps download, music and video accessed from a new range of cheaper

smartphones. With c.150 million mobile subscribers, the majority of the

internet users in Nigeria are limited to narrow band internet at 2G/3G speed.

Despite the growth in internet usage noted thus far, Nigeria still lags behind

most of the world in terms of high-speed broadband connectivity. With the

view to boost broadband quality, coverage and internet penetration, operators

are investing on 4G LTE mobile broadband services. For example, MTN

Nigeria acquired Visafone to utilise Visafone NCC band allocation for 4G

LTE services. At the end of June 2016, internet users on Nigeria’s

telecommunications networks declined to 92.28million from 92.36 million

subscribers in May 2016, of which 92.18 million were on GSM networks. This

means that of all the active GSM lines, ~62% had an internet subscription.

On the other hand, the ratio of internet to mobile subscriptions amongst

CDMA providers is low relative to GSM subscribers.

Fig. 103: Internet subscribers in Nigeria (million)


92.28 97.2

75.75

65.67

55.18 46.56

38.26 31.04

23.96

9.96 7.95 4.96 1.75

June'16*Sep'15*20142013201220112010200920082007200620052004

“ While growth in

mobile usage has been remarkab

ly strong in recent years, fixed broadband

penetration remains very low - presenting opportunity for investment...

’’




Fig. 104: Internet subscribers in Nigeria percentage on population (%)


Fig. 105: Internet users by operators (million)


MTN remains the market leader in internet subscription despite losing

subscribers month-on-month. At the end of June 2016 MTN Nigeria had

32.97million internet subscribers – which was almost 100% more than Airtel’s

17.33 million subscribers. Glo was second with 26.23 million and Etisalat

fourth with 15.28 million subscribers. The current level showed that MTN

has ~36% market share, followed by Glo with 28.57% market share. The

entry of ntel and Smile underscores the potential for growth in the mobile

broadband space. The entrance by ntel comes at a time when operators are

struggling with slowing revenues and looking to revenue from data to

improve income. This in our view suggests there could be significant return

on investment if operators develop the necessary infrastructure to support

growing data use. The three operators that currently offers 4G network are

Ntel, Smile and Mtn-Visafone.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

June'16*Sep'15*20142013201220112010200920082007200620052004

92.18

0.10

GSM CDMA

“ At the end of June

2016 MTN Nigeria had 32.97million

internet subscribers – which was almost 100%

more than Airtel’s 17.33 million subscribers..

’’




Fig. 106: GSM internet subscription by operators (million)


Fig. 107: GSM internet subscription by market share (%)


Internet data price crash in Nigeria signalled another wave of

competition in data offering and pressure on revenue from data services.

We attribute the crash in data price to the removal of data floor price by the

Nigerian communications Commission on October 13, 2015, giving internet

service providers the freedom to drop their data prices as low as they can go.

One month after the floor price removal, in November 2015, MTN lost 1

million subscribers (40.8 million), Glo gained 3 million (24.9 million), Airtel lost

close to 1 million subscribers (16.8 million), and Etisalat lost close to half a

million (15.2 million). Glo got a better part of the market as it revised data plans

and introduced a ridiculously cheap Campus Booster data plans and other

packages. April 2016 figures showed that, MTN lost almost 10 million internet

subscribers (32.4 million), while Glo gained almost 5 million (26.3 million).

Airtel’s internet subscriber base fell from 17.7 million in September 2015 to

15.3 million in April 2016, while Etisalat’s internet subscriber base rose to 17.2

million from 15.6 million. In our view, MTN’s revision of data plans in May

2016 is a direct reaction to the decline in its internet subscription numbers.

32.97

26.23

17.33 15.28


36%

29%

19% 17%





Domestic calls recorded by the industry between 2010 and 2014 showed

no consistent trends pattern. In 2010, local outgoing calls stood at 26.48

billion minutes while the local incoming calls stood at 29.10 billion minutes,

yielding a total of 55.58billion minutes calls made across the four major

networks in Nigeria in 2010. Year 2012 recorded the highest time spent on

domestic calls with local outgoing calls of 59.12billion minutes and incoming

calls of 60.56billion minutes yielding a total of 119.67billion minutes. As at

December 2014, the total outgoing traffic for mobile GSM operators came to

32.22billlion minutes while total incoming climbed to 32.63 billion minutes.

MTN reported the highest outgoing and incoming traffic of 10.07 billion

minutes and 15.69 billion minutes respectively. On the other hand, the total

outgoing and incoming traffic for the Mobile CDMA operators & Fixed

telephone operators for the same period came in at 2.18 billion minutes and

1.82 billion minutes respectively. MTN Fixed reported the highest outgoing

traffic of 1.39 billion minutes and the highest incoming traffic of 1.48 billion

minutes. As at December, 2014, the total outgoing mobile to international

traffic was 1.64 billion minutes while total incoming mobile to international

traffic was 2.77billion minutes. International calls recorded classified by

outgoing and incoming calls were lower largely because tariffs was higher and

therefore costly in call charges. The ratio of outgoing to incoming calls

averaged at 1:6. MTN reported the highest outgoing traffic of 891million

minutes and the highest incoming traffic of 1.94 billion minutes. The total

number of mobile roaming minutes outgoing and incoming for the Mobile

GSM operators was 66.08 million, while the total number of SMS sent as at

December 2014 was 2.28 billion and total number of received SMS reported

was 2.58 billion.

Fig. 108: Local and national telephone traffic for mobile operators 2010-2014 (Minutes-billion)


55.58

40.51

119.68

28.76

64.85

2010 2011 2012 2013 2014

“ As at December

2014, the total outgoing traffic for mobile GSM

operators came to 32.22billlion minutes while total incoming

climbed to 32.63 billion minutes. MTN reported the highest outgoing and

incoming traffic of 10.07 billion minutes

and 15.69 billion minutes respectively.

’’




Fig. 109: Local incoming and outgoing traffic for mobile operators 2010-2014 (Minutes-billion)


Fig. 110: International telephone traffic for mobile operators 2010-2014 (Minutes-billion)


Local & National Telephone Traffic Cdma (2014)

MULTILINKS 3,094,233.64 9,844,549.00

GLOBACOM 11,853,221 1,022,315

MTN 1,392,000,000 1,476,000,000

VISAFONE 694,480,160 292,063,696

21st CENTURY 80,428,775 40,924,155

ipNX 146,406

TOTAL 2,182,002,795.64 1,819,854,715.00

Total Number Of Roaming Minutes Gsm (2014)

MTN 33,865,155.00 14,426,965.00 48,292,120.00

GLO 3,274,557.00 2,775,263.00 6,049,820.00

AIRTEL 377,992.00 4,399,274.00 4,777,266.00

EMTS 4,420,271.32 2,537,516.39 6,957,787.71

TOTAL 41,937,975.32 24,139,018.39 66,076,993.71

29.1

21.18

60.56

13.2

32.63 26.48

19.33

59.12

15.56

32.22

2010 2011 2012 2013 2014

Local Incoming calls traffic local outgoing calls traffic

2.89

2.25 2.46 2.46

2.77

1.76

1.25 1.49

1.8 1.64

2010 2011 2012 2013 2014

Int'l Incoming calls traffic Int'l outgoing calls traffic

Local & National Telephone Traffic Gsm (2014)

MTN 10,074,000,000.00 15,699,000,000.00

GLO 7,608,256,463.01 5,065,958,826.28

AIRTEL 7,042,598,992.00 6,932,463,561.00

EMTS 7,491,416,855.82 4,934,434,445.78

TOTAL 32,216,272,310.83 32,631,856,833.06




Porting activities is gaining momentum in Nigeria particularly in terms

of usage among subscribers in search of better quality. The porting

service launched in April 2013 allows telecoms subscribers the freedom to

move their telephone numbers to any network they prefer while retaining

their phone lines. The introduction and increasing usage of the service has

prompted operators to invest on their network with the view to retain existing

subscribers as well as making their network attractive to potential telephone

users as subscribers’ retention is key in the sector. In our view, the ability to

retain subscribers after porting to a new telecom service provider is one of

the most important advantages of MNP. However, tying down of subscriber

to the new network they ported to for a longer period and their inability to

move out of such network is one of the identified major bottlenecks. 2015

was an active year for porting activities in Nigeria as outgoing activity

increased by 50.41% from 145,998 to 219,599 between 2014 and 2015. This

increase was driven mainly by MTN who lost 125,515 porters in 2015

compared to 67,039 in 2014, an increase of 87.23%. Airtel also lost more

porters in 2015 with 41,527 in 2015 compared to 25,883 in 2014, an increase

of 60.44%. Total incoming porting activities increased by 42.88% from

148,652 to 212,399. This was driven to a large extent by Etisalat, who gained

137,466 incoming porters in 2015.

Fig. 111: Cumulative Ported Numbers (May 2013‐ Dec 2014)


Cumulative ported numbers (May 2013‐Ddec 2014) MTN GLO AIRTEL EMTS Total

Cumulative Port‐In 16,434 38,156 85,918 92,946 233,454

Cumulative Port‐Out 96,496 42,091 51,902 28,164 218,653

Net porting (80,062) (3,935) 34,016 64,782 14,801

Overall, in 2015, Etisalat was the only net beneficiary of porting activities,

recording a net gain of 116,810porters. The other three networks lost more

from outgoing than they gained from incoming porting activities. MTN lost

the most subscribers through porting activities, the net loss on the network

remained significant month on month since April 2015 through December.

16,434

38,156

85,918 92,946

(96,496)

(42,091) (51,902)

(28,164)

MTN GLO AIRTEL EMTS

Cumulative Port‐In Cumulative Port‐Out

“ 2015 was an active

year for porting activities in Nigeria as outgoing activity increased by

50.41% from 145,998 to 219,599 between

2014 and 2015. This increase was driven

mainly by MTN who lost 125,515 porters in

2015 compared to 67,039 in 2014, an increase of 87.23%.

’’




Hence, Glo lost the least at 15,637, while Airtel recorded a net gain of 6,206

as a result of a net gain in third quarter of the year. In the first half of 2016,

there were a total of 112,875 incoming porters, which is a decrease compared

to 114,844 recorded in the prior year. Etisalat recorded the most incoming

activity of 60,485, and accounted for 53.59% of activity while MTN recorded

the smallest share of incoming porting accounted for 4,231 or 3.75%. On the

other hand, there were a total of 113,329 outgoing porters in the first half of

2016, a decrease of 6.44% relative to the 121,129 outgoing porters recorded

in the prior year. MTN recorded the largest outgoing activity of 57,933 and

accounted for 51.12% of total outgoing porting activity for the period.

Fig. 112: Porting activities Jan-16 Feb Mar Apr May Jun-16 `Total % share

Incoming

Airtel 5,280 5,752 8,177 6,859 6,829 5,527 38,424 34.04%

Etisalat 6,329 7,411 11,136 11,466 11,765 12,378 60,485 53.59%

Globacom 2589 1,828 1,446 1,468 846 1,558 9,735 8.62%

MTN 450 542 361 547 990 1341 4,231 3.75%

Total 14,648 15,533 21,120 20,340 20,430 20,804 112,875

Outgoing

Airtel 4,396 2,095 3,494 4,235 3,846 5,111 23,177 20.45%

Etisalat 976 1,671 2,153 2622 2,662 2,369 12,453 10.99%

Globacom 1,065 2,517 3,570 3,644 4,269 4,701 19,766 17.44%

MTN 8,430 10,562 12,044 8,115 10,189 8,593 57,933 51.12%

Total 14,867 16,845 21,261 18,616 20,966 20,774 113,329

Net porting activities

Airtel 884 3,657 4,683 2,624 2,983 416

Etisalat 5,353 5,740 8,983 8,844 9,103 10,009

Globacom 1,524 (689) (2,124) (2,176) (3,423) (3,143)

MTN (7,980) (10,020) (11,683) (7,568) (9,199) (7,252)

Total (219) (1,312) (141) 1,724 (536) 30

Porting activities

Dec-14 Jan-15 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec-15 Total

Incoming

Airtel 1,799 2,342 2,758 2,289 2,933 4,161 6,290 6,613 5,596 5,347 3,074 3,445 2,885 47,733

Etisalat 7,638 7,820 9,187 10,111 9,875 12,252 13,382 14,125 11,875 12,898 11,211 12,346 12,384 137,466

Globacom 621 1,146 1,532 1,435 1,717 1,065 850 850 1,413 1,505 979 1,735 2,037 16,264

MTN 1,110 1,186 1,478 1,559 994 657 536 951 737 599 1,068 735 436 10,936

Total 11,168 12,494 14,955 15,394 15,519 18,135 21,058 22,539 19,621 20,349 16,332 18,261 17,742 212,399

Outgoing

Airtel 2,686 3,330 3,655 3,197 3,381 3,316 3,768 4,047 3,362 3,635 3,562 3,086 3,188 41,527

Etisalat 920 1,749 1,625 1,431 1,777 1,984 2,177 2,161 2,077 1,264 1,241 1,431 1,739 20,656

Globacom 2,260 2,680 2,570 2,651 2,038 3,253 3,290 3,290 2,795 3,212 1,703 2,327 2,092 31,901

MTN 4,673 6,571 6,951 7,439 8,161 9,558 11,918 19,214 11,218 12,259 10,073 11,414 10,739 125,515

Total 10,539 14,330 14,801 14,718 15,357 18,111 21,153 28,712 19,452 20,370 16,579 18,258 17,758 219,599

Net porting activities

Airtel (887) (988) (897) (908) (448) 845 2,522 2,566 2,234 1,712 (488) 359 (303)

Etisalat 6,718 6,071 7,562 8,680 8,098 10,268 11,205 11,964 9,798 11,634 9,970 10,915 10,645

Globacom (1,639) (1,534) (1,038) (1,216) (321) (2,188) (2,440) (2,440) (1,382) (1,707) (724) (592) (55)

MTN (3,563) (5,385) (5,473) (5,880) (7,167) (8,901) (11,382) (18,263) (10,481) (11,660) (9,005) (10,679) (10,303)

Total 629 (1,836) 154 676 162 24 (95) (6,173) 169 (21) (247) 3 (16)




Average revenue per user has seen a significant decline as competition

heightened price pressure, resulting in faster declines. The monthly

average revenue per user in the telecom sector declined from its 2003 level of

~$48 to $6. The monthly Average Revenue Per User (ARPU) in Nigeria’s

telecoms market is estimated at N1,830, given the current foreign exchange

rate at N305. Using the ARPU of $6.00 and a subscriber base of 149.7million,

Nigeria’s mobile telephone users now pay c.N273.96billion monthly in

accessing telecom service, especially calls making. The growth is largely due to

the increase in the number of registered phone users as well as the

devaluation of the naira. While significant of new devices sold in Nigeria are

multi-SIMs, low-value customers have the highest share of the SIMs and seek

highly discounted call rates. As competition intensified, a further decline in

Mobile termination rates implies decline in interconnect revenue if usage

remains flat. As mobile and smart device utilization and connectivity

continues to expand, this will ultimately shape and define the Nigerian

telecoms space going forward.

Fig. 113: Average revenue per user 2010-2015($)


7 7 6 6 6 6

17 16

15 15 15 14.5

2010 2011 2012 2013 2014 2015

ARPU, by connection ARPU, by subscriber (US$)




Fig. 114: Statement of Profit or Loss, N’mn

FY2014 FY2015E FY2016E FY2017F

Turnover 824,807 807,486 801,026 825,057

Change %

-2.10% -0.80% 3.00%

Cost of Sales (178,571) (173,610) (176,226) (177,387)

Change %

-2.78% 1.51% 0.66%

Gross Profit 646,236 633,877 624,800 647,670

Change %

-1.91% -1.43% 3.66%

SG&A (317,305) (302,807) (296,380) (309,396)

Change %

-4.57% -2.12% 4.39%

Core operating Profit 328,931 331,069 328,421 338,273

Change %

0.65% -0.80% 3.00%

EBITDA 479,349 476,417 476,611 495,034

Change %

-0.61% 0.04% 3.87%

Other Operating Income 328,931 331,150 328,421 338,356

EBIT

0.67% -0.82% 3.03%

Change % 290,607 272,745 265,626 275,036

Profit Before Taxation

-6.15% -2.61% 3.54%

Change % 824,807 807,486 801,026 825,057

Income tax expenses (81,579) (81,823) (79,688) (82,511)

Profit After Taxation 209,028 190,921 185,938 192,525

Change % -8.66% -2.61% 3.54% Source: Company’s annual reports, DLM Research

Fig. 117: DuPont Analysis

FY2014 FY2015E FY2016E FY2017F

Total assets turnover 0.86x 0.79x 0.73x 0.75x

Net income margin 25.34% 23.64% 23.21% 23.33%

Equity multiplier 5.60x 5.82x 6.12x 6.11x

ROE 122.04% 108.69% 103.69% 106.91%

Fig. 116: Profitability & return

FY2014 FY2015E FY2016E FY2017F

Gross profit margin 78.35% 78.50% 78.00% 78.50%

Operating profit margin 39.88% 41.01% 41.00% 41.01%

Net profit margin 25.34% 23.64% 23.21% 23.33%

ROCE 53.90% 50.74% 48.02% 53.02%

ROE 111.79% 109.53% 104.36% 107.28%

ROA 22.11% 20.07% 17.71% 17.25%

Source: Company’s annual reports, DLM Research

Fig. 118: Efficiency ratios

FY2014 FY2015E FY2016E FY2017F

Fixed assets turnover 1.61x 1.28x 1.17x 1.18x

Current assets turnover 2.05x 2.32x 2.20x 2.41x

Total assets turnover 0.86x 0.79x 0.73x 0.75x

Inventory turnover 42.40x 40.0x 35.0x 38.0x

Receivables turnover 14.24x 14.60x 14.04x 14.04x

Payables turnover 1.42x 1.33x 1.33x 1.33x

Days inventory outstanding 3.97 4.5 5.0 5.0

Days collection outstanding 25.64 25 26 26

Days payable outstanding 257 275 275 275

Operating cycle (days) 0.00 0.00 0.00 0.00


Fig. 119: Liquidity ratios

FY2014 FY2015E FY2016E FY2017F

Working capital (N’mn) 47,659 (27,231) (52,176) (114,445)

Current ratio 1.13 0.93 0.87 0.75

Quick ratio 0.00 0.00 0.00 0.00

Cash ratio 0.59 0.52 0.50 0.47


Fig. 120: Long-term solvency & stability ratios

FY2014 FY2015E FY2016E FY2017F

Gearing 0.00% 0.00% 0.00% 0.00%

Equity multiplier 5.60x 5.82x 6.12x 6.11x

Total debt-to-equity 2.29x 2.44x 2.42x 2.43x

Total debt-to-assets 41% 42% 40% 40%

Proprietary 17.84% 17.17% 16.34% 16.37%

Interest coverage 4.96 3.93 3.62 3.70

Cash coverage 0.00x 0.00x 0.00x 0.00x


Fig. 121: Shareholders’ investment ratios

FY2014 FY2015E FY2016E FY2017F

EPS, N 513.51 469.03 456.78 472.96

DPS, N 586.60 454.14 454.14 454.14

Pay-out 114.27% 96.83% 99.42% 96.02%

FCFPS, N 0.00 0.00 0.00 0.00


Fig.115: Statement of Financial Position (N,m)

FY2014 FY2015E FY2016E FY2017F

Non-current assets:

Fixed Assets 513,848 631,465 686,465 701,465

Other non-current assets 48,793 48,449 49,664 51,154

Total noncurrent assets 562,641 679,914 736,129 752,619

Current assets:

Inventories 1,943 2,140 2,414 2,430

Trade Debtors 57,937 55,307 57,059 58,771

Prepayment

- - -

Bank and Cash Balances 207,687 193,797 208,267 214,515

Other current assets 134,169 96,898 96,123 66,005

Total current assets 401,736 348,143 363,863 341,721

Total Assets 964,377 1,028,057 1,099,992 1,094,339

Current Liabilities:

Overdraft - - - -

Trade payable 126,153 130,802 132,773 133,648

Short term loan 63,519 75,000 75,000 75,000

Other current liabilities 164,405 169,572 208,267 247,517

354,077 375,374 416,040 456,165

Non-current Liabilities

Long term loans 329,673 355,000 360,000 360,000

Other noncurrent Liabilities 108,563 121,123 144,185 99,007

438,236 476,123 504,185 459,007

Total Liabilities 792,313 851,497 920,224 915,172 Shareholders’ equity 172,064 176,560 179,768 179,167 Source: Company’s annual reports, DLM Research




Equity research methodology employed in this report

Views documented in this equity research report stem from conclusions reached through the use of multiple valuation methodologies,

industry-wide knowledge, company specific information and our near to medium term expectations of industry and company performance,

as well as market outlook. Our forecasts are based on a combination of top down and bottom up analysis, alongside historical trends in

industry and company financials. Where appropriate, we factored in available forecasts and business direction provided by company

management. This equity research report qualifies as an initiation research report on the company whose stock has been analysed, hence

the level and depth of details documented herein. Further updates on this company, or its stock, or both, will be communicated to

investors via brief research notes or earnings-flash emails, as occasion demands.

Our recommendation is slightly biased towards value investing. Therefore, our investment rank gauge—a customized scale we use to judge

how well a firm under coverage has performed—is determined using major value parameters as well as relevant ratios and multiples

computed with figures from the company’s most recent financials. The investment rank or grade given to a company is an alphabet which

falls in the set {A+, A, B, C+, C, D, E, F}, where

• Grade A+ means the company has done excellently well on all fronts that form the basis of our consideration, and has a strongly

positive performance outlook.

• Grade A means the company’s performance is of high quality, but can be made better. Outlook for the company is positive.

• Grade B means the company performed marginally above average, at least relative to its peers, but faltered on some fronts. Outlook is

weakly positive.

• Grade C+ means the company’s performance is exactly average; outlook is neither positive nor negative.

• Grades C and D indicate that dwindling performance is the company’s fate at the current time. Outlook for the company is mildly

negative.

• Grades E and F mean the company is headed for towards jeopardy, which might impair its ability to continue as a going concern.

Outlook for the company in this case is alarmingly negative.

The variables used to arrive at the company’s investment rank cover a wide range of measures which characterize liquidity, operational

efficiency, profitability, profitability margins, growth, economic profitability, gearing, relative valuation ratios, capital structure and

management performance. Our investment recommendation is underpinned by the upside or downside potential of a stock under

coverage. This potential is estimated by comparing the stock’s current market price to its price target and fair value, on a percentage

increase or decrease basis as summarized below:

In our analysis, we distinguish between fair value and price target. Fair value is our opinion of the actual fundamental worth of a stock,

irrespective of what the market thinks of the stock or what investors are willing to pay for it. Value investors purchase stocks way below

their fair values, while income investors might purchase stocks at their fair values at the very maximum.

Price target, on the other hand, is the estimated price we opine the stock will trade in the near to medium term. It is the price that, if

realized, could result in the best investment returns, given prevailing market conditions. It gives an idea of the price other investors might

be willing to pay for a stock regardless of its actual worth. We employ fair value, price target or both to determine a stock’s upside or

downside potential.

A BUY recommendation directly means what it says; purchase the stock according to your wallet and appetite for risk. A SELL

recommendation prompts investors to exit their positions in the stock, as the analyst believes the stock is not worth investors’ time and

capital commitment. A HOLD recommendation generally tells investors to do nothing; if you have not bought the stock, do not buy it and

if you have bought it, do not sell it.

Deviation from current price Recommendation

>30% STRONG BUY

10% to <30% BUY

-10% to < 10% HOLD

<-10% SELL

Source: Company Financials, DLM Research




IMPORTANT DISCLOSURES.

This research report has been prepared by the analyst(s), whose name(s) appear on the front page of this document, to provide background

information about the issues which are the subject matter of this report. It is given for informational purposes only.

Each analyst hereby certifies that with respect to the issues discussed herein, all the views expressed in this document are his or her own

and reflect his or her personal views about any and all of such matters. These views are not necessarily held or shared by Dunn Loren

Merrifield Limited or any of its affiliate companies (“DL Merrifield”). The analyst(s) views herein are expressed in good faith and every

effort has been made to use reliable comprehensive information but no representation is made as to its accuracy or completeness. The

opinions and information contained in this report are subject to change and neither the analysts nor DL Merrifield is under any obligation

to notify you or make public any announcement with respect to such change.

This report is produced independently of DL Merrifield and the recommendations (if any), forecasts, opinions, estimates, expectations and

views contained herein are entirely those of the analysts. While all reasonable care has been taken to ensure that the facts stated herein are

accurate and that the recommendations, forecasts, opinions, estimates, expectations and views contained herein are fair and reasonable,

none of the analysts, DL Merrifield nor any of its directors, officers or employees has verified the contents hereof and accordingly, none of

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hereof.

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Facts and views presented in this report have not been reviewed and may not reflect information known to professionals on other DL

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The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances or objectives. Neither the

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