On May 16, 2019, we saw the long-awaited listing of MTN Nigeria Plc (“the Company” or “MTNN”) on the Nigerian Stock Exchange (NSE). Although the market had expected an Initial Public Offering (IPO), the Company opted for a listing by introduction. This means that the company is not looking to issue new shares nor seeking to relinquish some of the existing shares of its majority shareholder (MTN International Limited) to raise equity capital in the immediate term, but existing shareholders are now provided with the opportunity to sell to the public. MTNN listed 20.4 billion shares at N90.0 per share, which translates to a market capitalisation of N1.8tn and implied price to earnings multiple of 9.5x using annualised Q1:2019 earnings, relative to the pricing multiples in Ghana (10.0x), Mauritius (30.3x), and South Africa (30.0x). This makes MTNN the second largest company listed on the Nigerian Stock Exchange (NSE) after Dangote Cement, accounting for 17.3% of total market capitalisation on the day of listing and 18.9% after three trading days.
Issues with the Listing
The illiquidity of MTNN shares on the exchange is a major concern as retail investors have not had the opportunity to make purchases. We believe this is partly connected to the cheap valuation of the company at the point of listing. Using annualised Q1:2019 EBITDA, the company’s EV/EBITDA at listing was 3.4x compared with 4.9x and 5.4x for African and emerging market peers. Hence, demand has considerably outpaced supply, as existing shareholders are unwilling to sell at the listing price. This is further buttressed by off-market trades of about 25.0 million shares at N125.00 per share, which was at a 38.9% premium to the listing price of N90.0 per share. Using the EV/EBITDA multiple for comparable countries would suggest significant room for price appreciation, showing that liquidity would remain tight in the immediate term. Our valuation of MTNN is currently being finalised with the report due for publication later this week.
MTNN’s Listing Price
In our discussion with management, we discovered that the N90.0 listing price was arrived at using the average trading price of linked units at the OTC market over 180 days. We also obtained information that MTNN’s shareholder loan of US$402m was converted to cumulative preference shares linked to ordinary shares in 2008. However, prior to the listing on NSE, the shares were delinked, and the ordinary shares were subdivided into 50 shares at 2kobo per share from N1.0 per share. There are plans to redeem the preference shares worth N144.7bn (US$402.0m).
*EV/EBITDA is based on closing price
Source: Afrinvest Research
Volatile, Uncertain, Complex and Ambiguous (V.A.C.U) Regulatory Environment
Since 2015, MTNN’s relationship with its primary regulator, the Nigerian Communications Commission, has been fractious. The company was fined N1.0tn (US$5.2bn) in 2015 for not disconnecting unregistered sim cards. This was later reduced to N333.0bn spread over four years, with the condition to list its shares publicly by 2019. The final tranche of N55.0bn is due this May according to Management and the listing of shares has been concluded.
In 2018, two incidents heightened risk in the regulatory environment which also stalled the scheduled-to-be-completed IPO. There was a CBN’s case relating to incomplete Certificate of Capital Importation (CCI) obtained for the repatriation of dividends; this was later settled before the end of 2018. The elephant in the room is now the case with the Attorney General’s office, which has fined the company US$2.0bn in relation to taxes on the importation of equipment and payments to suppliers. In our discussion with management, we got the feeling that the uncertainty attached to the fine is part of the reason for MTNN’s cheap valuation at listing and why the IPO is on hold. If the fine should crystallise, it would significantly affect earnings and in turn the valuation of the firm. Management also informed us that the MTN Group intends to sell down its stake to 65.0% from the current 80.0%, which should result in improved liquidity.
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