Nigeria: Chapel Hill Denham favours MTN, Lafarge, underweights Dangote Cement

MTN Nigeria’s growth prospects in data are not reflected in the market’s valuation of its shares, Tajudeen Ibrahim wrote in a research note on February 2.

Management at MTN predicts revenue growth of at least 20% over the medium term and earnings before interest, taxes, depreciation and amortisation (EBITDA) margin in the 53%-55% range. The company says CAPEX in the medium term will focus on 4G network and fibre infrastructure expansion, strategic partnerships and spectrum efficiencies. Chapel Hill Denham forecasts that data will account for 44.1% of revenue by 2025, implying a compound annual growth rate for data revenue of 36.1%.

The research says MTN will increase subscribers by 15% to 78.8m this year, driven by rural penetration and rising demand for data. Chapel Hill Denham predicts revenue growth of 28.7% this year, driven by voice (+9.2%), data (+44.1%), fintech (+186.5%), and digital (+76.4%).

• The firm raises its 12-month price target to 244.98 naira ($0.59) from 238.72 and reiterates its ‘buy’ recommendation.
• MTN Nigeria shares trade on estimated 2022 and 2023 EBITDA multiples of 3.8x and 3.1x. This adds to their attraction relative to emerging-market and African peers, which respectively trade on multiples of 7.1x and 5.9x for 2022, and 6.7x and 5.3x for 2023, the research says.
• The dividend yield provides further support, with the research predicting a 9.3% yield for 2022,  versus about 5% for the market.

The main risk, the research says, is the National Identity Number (NIN) registration. Telecom companies, including MTN, have said the linking of NIN with SIM cards has caused mobile subscriber losses.

• MTN management says 44 million subscriber NINs (64% of subscribers) have been submitted, meaning that 74% of its total revenue has been secured.
• The current deadline for NIN registration is March 31.

Lafarge, Dangote Cement

Investors should overweight Lafarge Africa and underweight Dangote Cement on valuation grounds, Chapel Hill Denham said in a separate note on February 2.

Dangote Cement shares currently offer about 9% upside to fair value, while Lafarge Africa has an upside of about 44%, says the note from analyst Mustapha Wahab. The firm has a target price of 38.95 naira for Lafarge Africa and 284.44 naira for Dangote Cement.

Lafarge may double earnings per share (EPS) in 2021, but the market has not yet priced in the strong performance, the research says. Chapel Hill Denham says Lafarge’s 2022 after-tax profit is likely to increase by 10%, supported by revenue growth and decelerating finance charges.

The case for Lafarge is strengthened by plans to exit the margin-dilutive Continental Blue Investment (CBI) business in Ghana, the research argues. In January, the company said it was planning to sell its 35% stake in CBI.

• The move is positive as management will now strictly focus on Nigeria, Chapel Hill Denham says.
• Focusing on the domestic market will start to be reflected in margins this year, it adds. “Lafarge’s management will be less distracted henceforth.”

Bottom line

Chapel Hill Denham sees MTN’s data growth prospects as a standout investment theme.