TUE, 21 JUNE, 2022-theGBJournal| Since the beginning of 2020, Nigerian-listed telecom stocks have outperformed the overall market, with Airtel Africa (AIRTELAFRI) gaining 483.8% and MTN Nigeria (MTNN) gaining 110.5% versus 92.9% for the NGX All-Share Index (Chart 1).
They have also led their Sub-Saharan African (SSA) peers during this period in terms of US dollar-equivalent price returns (Chart 2). This leads to an obvious question for investors. Does the rally still have legs?
In Coronation Research analysts view, the recent telco rally has been driven in part by strong earnings, both actual and expected.
‘’Earnings proved to be resilient amidst the shock of the COVID-19 pandemic as telecom companies enjoyed strong subscriber growth and increased smartphone and data penetration in Nigeria when consumers shifted to remote-working. Investors viewed telecom stocks as good defensive stocks amidst fears that market conditions could deteriorate. Importantly, however, earnings have not driven all of the telco stocks’ performance,’’ Coronation Research added.
Amidst Nigeria’s FX liquidity issues, foreign investors took advantage of the dual-listed nature and fungibility of Airtel Africa. Currently, the Lagos listing is trading at a 155.7% premium to the London listing (Chart 3). In addition, investors have flocked to the equities market, and telco stocks in particular, to generate alpha amidst unattractive yields in the Naira fixed-income market.
Since the end of 2019, MTN Nigeria’s dividend yield has been 1.6 percentage points (ppts) higher on average than the yield on the 1-year Naira T-bill (Chart 4), and we see little risk to its dividend payouts going forwards. Finally, positive developments around the telco mobile money licenses have seen investors support the stocks in recent months.
To that end, we offer an additional reason to believe that the telco rally still has legs. Simply, we expect the carriers to post solid operating and financial results for the remaining quarters of the year and for several years to come. True, subscriber growth has been declining, though not irreversibly, but this is already evident to investors. Although the regulatory ban on new SIM registrations led to poor subscriber results in the first nine months of 2021, the impact on revenue was heavily mitigated by significantly increased usage from the existing subscriber base.
Moreover, according to the Nigerian Communications Commission’s (NCC) figures, the downward trend in subscriber growth hit an inflexion point in Q4 21. As a result, we believe market expectations over the medium term are now achievable. Meanwhile, data remains one of the key growth drivers and smartphones continue to gain popularity, which is likely to help bolster Average Revenue Per User (ARPU). We expect solid results from both major telcos but prefer MTN Nigeria as an investment for its strong market leadership, attractive valuation, and what we believe to be considerable upside potential to consensus earnings estimates.-with Coronation Research
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