Challenges ahead on ICT highway

Jo-Maré Duddy – Always on the look-out for a solid home for at least 45% of their assets under management, Namibian institutional investors will likely find the blue-chip status of Mobile Telecommunications Limited irresistible. Post-listing on the Namibian Stock Exchange (NSX), the question however is how MTC will materially increase its earnings to drive shareholder value.

MTC’s initial public offering (IPO) closes on 1 November at 12:00. It offers 49% of the company to the public at N$8.50 per share in the biggest primary listing on the NSX ever. MTC aims to raise nearly N$3.124 billion through its IPO. With government’s 51% share valued at nearly N$3.3 billion, the current state-owned enterprise (SOE) is expected to list on 19 November with a total market capitalisation of around N$6.4 billion, becoming the fourth biggest company on the Local Index.

In an-depth analysis, Cirrus Capital says it believes MTC’s IPO will be successful.

“The lack of local assets increases the appeal and demand for MTC from an institutional (local, regulated) perspective. MTC is a well-run, blue-chip Namibian company, with tailor-made products for Namibians. Furthermore, it is completely unleveraged. Additionally, MTC is arguably the strongest non-financial brand in Namibia with a massive reach and diverse customer base,” Cirrus says.

DEMAND

Selected Namibian institutional investors provided pre-commitments to subscribe for a minimum of 282.9 million shares – or about 77% of the IPO – at the listing price of N$8.50 per share ahead of the IPO.

That leaves just short of a quarter of the IPO – or 84.6 million shares valued at N$719 million – up for grabs to the man in the street. Although available at only N$8.50 a share, individuals will have to subscribe for at least 200 shares, an investment of N$1 700. After that, shares are available in multiples of 100.

From a retail perspective, Cirrus does expect demand. “However, given the dire make up of individual and corporate balance sheets, the quantum remains uncertain,” the analysts add.

They elaborate: “The most recent Namibian IPO, SBN Holdings (SNO), attracted N$244.1 million in retail demand, which made up 33.8% of the total listing. We do not believe retail investors will make up 33.8% (N$1.08 billion) of the MTC listing.

“A total of 5 047 investors subscribed for the minimum amount of N$2 225 when SNO listed, however this only accounted for 4.6% of the total retail contribution. However, one could argue that MTC’s marketing and brand are stronger than SNO’s, particularly given MTC’s market share and reach, and the listing has been long anticipated.”

MTC budgeted N$15.4 million in “broad-based marketing” in order to promote the listing countrywide. Cirrus’ comment: “Even though MTC tried to make the listing affordable with individuals needing a minimum of N$1 700, the economic situation in Namibia will most likely hamper the retail demand.”

CASH COW

MTC will be the first SOE to list. Although a “large step forward” for government, Cirrus adds: “While this is a positive step from government, it is to a large extent driven by necessity given the government’s large funding requirements in fiscal year 2021 and in fiscal year 2022.”

Half of the proceeds from the listing - a planned N$1.5 billion - will go towards this year’s N$30-billion net funding requirement, which alternatively would likely have required raising additional debt, Cirrus points out.

Government has run deficits for most of the last 15 years. It embarked on fiscal consolidation in 2015, seeking to flat line expenditure and allow revenue to catch up.

“In an effort to boost revenue, government in late 2019 turned to SOEs and requested them to declare special dividends, to which the few successful ones obliged (including NamPower and MTC),” Cirrus says.

However, the fiscal consolidation effort was derailed with the Covid-19 pandemic and subsequent economic collapse, seeing domestic and external revenue falling dramatically. This, in combination with an unsustainable public debt trajectory, has expedited government’s need to look for alternative sources of funding – such as decreasing its stake in some SOEs,” the analysts add.

Government will still be cash hungry for the foreseeable future and will favour pay-outs from its SOEs such as MTC, Cirrus believes.

“This is likely a large factor in the attractive pay-out ratio [at least 70%] indicated in the Prospectus. However, this raises concern around the alignment of interests for the various shareholders. Government, as the majority shareholder, will likely favour dividends over the medium term to fund its deficits. While this may appear attractive to some, the focus on pay-outs as the overarching ‘consideration’ raises the question as to availability of funds for long-term investment, particularly where it is CAPEX [capital expenditure] heavy,” they elaborate.

Although MTC has no debt, the impact of increased expenditure or investment - funded through retained earnings or debt - on dividends would be deterrent, especially where this does not result in at least an identical improvement in revenue, Cirrus says.

“While this may favour the majority shareholder, it may not always be what other shareholders consider to be in their best interests.”

MARKET

For MTC shareholder value to increase, revenue will need to increase significantly, Cirrus says.

“We do not believe this to be likely given its dominance (market share bigger than 90%) and its maturity (68.8% of revenue is generated from voice products and services).

“While there is scope for growth in the fibre market, we believe Paratus has the first-mover advantage over MTC and Telecom Namibia. Furthermore, with potential impact (for MTC) of enforced infrastructure sharing and mobile number porting, our base case foresees pressure on revenue growth and margins.”

The largest portion of MTC’s business is voice services. According to Cirrus, MTC lost 5.8% of market share from 2015 to 2020, a downward trend the analysts believe will continue given the increased competition stemming from infrastructure sharing and eventual number porting.

“The competition (risk) will be in the form of other mobile players and MTC needing to pay a market determined rate for its fibre infrastructure,” Cirrus says.

Given the saturated market, the analysts believe it is unlikely that MTC will increase its number of voice subscribers, which currently are about 2.5 million.

A promising avenue for MTC growth is the migration of about 1 million 2G users to 3G or 4G.

“While this could create significantly more revenue should all of the clients migrate to faster connections with suitable devices, we do not believe MTC will be able to migrate all of these clients.

“We believe many of the current 2G clients are located in remote parts of the country, whereas 4G coverage is still concentrated in the urban centres. Furthermore, these clients will likely be older and/or low income, thus will not see as significant an increase in their cellular service spend,” Cirrus says.

FIBRE

A further focus of Namibian ICT companies is fibre rollout.

At the end of May this year, MTC’s fibre subscribers totalled 1 712. These subscribers generated around N$2.3 million in monthly revenue. In comparison, at the end of Aug 2021, Paratus had 3 103 subscribers which generated about N$4 million in monthly revenue, Cirrus says.

Paratus Namibia Holdings is also listed on the Local Index of the NSX.

Cirrus says Paratus’ long installation lag time could aid MTC slightly, along with the latter’s strong brand in Namibia. Furthermore, MTC’s FTTH product (SpectraHome) is cheaper which could also help grow market share.

“However, due to Paratus generally being the first mover in locations, we believe MTC will ultimately struggle to take away market share from Paratus, particularly given the additional cost and red tape of changing service providers,” according to Cirrus.

MOBILE MONEY

A cornerstone of MTC’s strategy is to enter the mobile money space, Cirrus says. This makes sense given the drive of fintech on the African continent.

“MTC’s potential in this space lies in its reach and population coverage. Management stated that it targets 40% of its users for this new platform and that it could contribute 15% - 20% of total revenue within the next five years. However, given that more than two thirds of Namibians are banked, Cirrus isn’t convinced this will be such a substantial catalyst for shareholder value.

The analysts compare MTC’s plan with Kenya’s M-Pesa, Africa’s most iconic mobile money service.

M-Pesa was launched in Kenya in 2007 when only 14% of the country’s population held bank accounts. This improved to 34.4% in 2016, less than half the level in Namibia at the time.

“The success of M-Pesa as a mobile money initiative lies in the incredibly large unbanked population in Kenya, which is not the case in Namibia that has a largely banked population and boasts a mature, complex financial system,” Cirrus says.

It elaborates: “Our concern with the potential for (new) e-money services in Namibia lie with the total market size, market availability and the resultant revenue potential.

“To be profitable, we believe the quantity of transactions will need to be high. The commercial banks have the advantage that their platforms are a value add for clients (and therefore does not need to be profitable on its own) and are well established.

“However, given MTC’s stagnant (and large) revenue, the contribution and profitability of this would need to be hefty to move the needle for shareholders, and even if so, would likely (at best) take several years to be introduced and see sufficient adoption.”

With MTC’s IPO being the largest in Namibia’s history, Cirrus questions where demand will stem from after listing.

“The size of the listing would probably mean that the ticker will be net offered post listing. We believe that if there is not significant offshore demand, MTC will trade down in the months after listing given that most buyers’ demand will have been filled during the IPO process,” Cirrus says.