Making the connection

Jo-Maré Duddy – Mobile Telecommunications Limited, a rare success in government’s SOE story, is making a new connection with Namibians by offering 49% of the company to the public in the biggest primary listing on the Namibian Stock Exchange (NSX) ever.

On 19 November 2021, it is anticipated, ordinary Namibians and institutional investors will own 367.5 million ordinary shares in the telecoms giant when it lists on the local bourse, boosting the total market capitalisation of the NSX by nearly N$6.4 billion and becoming the fourth biggest company on the Local Index. The remainder of MTC’s 750 million ordinary shares – or 51% of the company – will still be owned by government through Namibia Post and Telecom Holdings (NPTH).

MTC’s initial public offering (IPO), which opened on 20 September, offers ordinary shares at N$8.50 a shot. This means the company will debut on the NSX will a market capitalisation of total shares in issue of N$6.375 billion. At the close of the market on 20 September, FirstRand Namibia had a total market capitalisation of N$8.025 billion, followed by Namibia Breweries with N$7.045 billion and Capricorn Group with N$6.661 billion. The total market capitalisation of the Local Index at the end of day was N$28.666 billion.

MAN ON THE STREET

In terms of market capitalisation by free or public float - shares that can be publicly traded and are not restricted – NamBrew was leading the charge on the Local Index on 20 September with N$3.522 billion. With N$1.926 billion, FirstRand Namibia was second and Capricorn with N$1.74 billion third. MTC aims to raise nearly N$3.124 billion through its IPO, which closes on 1 November at 12:00.

According to MTC’s prospectus, 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. This interest is driven by the law requiring institutions like pension funds and insurers to invest at least 45% of their assets under management in Namibia.

However, that still 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. Preference will be given to individual investors when it comes to share allocation in the event of an IPO oversubscription, MTC undertook in its prospectus. The result of the IPO will be announced on 17 November.

The prospectus comments on share allocation in the event of oversubscription as follows: “The MTC board will at its sole discretion, consider the appropriate allocation in the following: PDN [previously disadvantaged] status; MTC staff; MTC customers; Namibian natural persons; Namibian corporates and institutions; and SADC [Southern African Development Community] and international investors.”

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.

INDUSTRY GIANT

MTC, which was established in 1994 in a joint venture between government through NPTH and two Swedish entities, enjoys a market share of 90%. At the end of its financial year last September, the company had nearly 2.6 million active subscribers.

MTC has demonstrated the ability to continuously deliver on positive growth prospects, the company says in its prospectus.

Its operational performance delivered compound annual growth of 33.5% in revenue and 9.5% in net profit from 2016 to 2020. Its average annual margin for earnings before interest, taxes, depreciation, and amortisation (EBITDA) since 2016 was 56%. Following the adoption of IFRS15 during the 2019 financial year, MTC recorded an EBITDA margin of 52% In 2019 and 2020.

Since 2016, MTC has had an annual average capital expenditure to revenue ratio of 21%, compared to the industry benchmark of 15%. This is due to its continued investment in geographical expansion, additional capacity, and its commitment to remain at the forefront of mobile technology, according to the prospectus.

The document continues: “Through its significant network investments, innovative products and services, MTC has retained its valuable customer base and delivered on strong and sustainable cash flow generation. MTC’s average operating cash flow ratio over the last 5 years came to 115%.”

The company’s dividend pay-out profile shows an average of 75% of net profit paid out between 2016 and 2020, amounting to N$2.734 billion. MTC’s annual average return on equity for the same period is 41%.

STATE COFFERS

According to the prospectus MTC’s primary objective with its listing is to unlock shareholder value and encourage private sector investment in the company, thereby ensuring broad-based economic empowerment.

However, as government remains majority shareholder in MTC post listing, the step also has fiscal objectives. The prospectus states that maximising the value of MTC shares after listing will generate proceeds for state coffers too.

In addition, the listing aims to increase confidence in government’s ongoing public enterprise restructuring programme.

The listing also has public enterprise-related objectives of “creating a new mind-set for MTC as a listed entity adhering to international best practices; and [the] injection of new commercial and market influences into government’s public enterprises”, according to the prospectus.

Government already has plans for the about N$3 billion MTC aims to raise through its IPO. According to the fiscal strategy of finance minister Iipumbu Shiimi’s budget, half of the money will help to fund government’s estimated deficit of more than N$28 billion in 2021/22. The rest “will be ring-fenced for productive activities and be utilised in a manner that reaps long-term benefits for the country”.

Commenting on the IPO, Simonis Storm (SS) said: “What these productive activities entails are not clear as yet; we expect more clarity on this in the mid-term budget review next month. We see this as a positive, given that tax and SACU [Southern African Customs Union] revenue is under significant pressure. The higher than expected sale proceeds should allow government to achieve slightly more than initially planned.”

‘CHEAP’

The prospectus forecasts a price-to-earnings (P/E) ratio of 10.31 for September 2021.

SS put it into perspective: “Simply put, the price-to-earnings ratio is the share price that an investor pays for the profits/earnings that he/she gets per share. Put differently, if MTC’s earnings remain constant, then a P/E ratio of 10.31x implies that an investor will get their initial investment in MTC shares back in just over 10 years.”

Comparing MTC with its South African peers, the share seems “relatively premium priced”, SS said. Groups like Vodacom and Telkom have an average P/E of 8.8x.

“Compared to other telecommunications companies listed on the Johannesburg Stock Exchange, MTC has a slightly lower P/E ratio, i.e. MTC is slightly cheaper,” the analysts explained.

IJG Securities agree. “MTC has one of the lowest price-to-earnings ratios and among higher ROEs [return on equity] in the industry, indicating that the IPO price is relatively cheap compared to the market prices of its peers.”

Cirrus Capital commented that MTC’s valuation of a P/E multiple of 8.25x (September 2020), a forecast dividend yield of 6.5% for September 2021 and a price-to-book (P/B) multiple of 3.0x “at first sight seems reasonable”.

RISKS

MTC does however face some noteworthy risks, IJG pointed out.

“Firstly, strict and unpredictable regulatory requirements may dampen MTC’s competitiveness or impact its financial position, particularly in the areas of infrastructure sharing and spectrum allocation,” IJG said.

MTC is regulated by the Communications Regulatory Authority of Namibia (CRAN) and will be regulated by the NSX too after listing.

“It is possible that MTC’s future competitive outlook may be impacted by legislation related to new business avenues or markets that MTC may venture into. MTC has internal controls to minimise any potential events of regulatory non-compliance,” according to the company’s prospectus.

Namibia’s ongoing recession, amplified by the Covid-19 pandemic, also poses a risk. “This has led to consumer spending and a shift to cheaper prepaid services,” IJG said.

The analysts cautioned that the increasing popularity of over-the-top services, such as WhatsApp, could negatively affect revenue from MTC’s SMS and voice services.

“Competition in the telecommunication space has increased over the past decade, and as a result, the industry has more or less reached saturation in terms of the number of customers, which will affect the runway for growth somewhat. Industry directives by the CRAN such as Virtual Network Operators and Mobile Number Portability will further intensify competition if they get implemented,” IJG said.

Institutional investors should take up the bulk of MTC’s share volume, which will be “a definite boost for the stock, at least in the short run, and typical for a successful IPO”, SS said.

However, the longer-term view, according to the analysts, is “a bit murky”.

“For starters, would like to know where tangible growth would originate – unfortunately we do not see it all the way through as per the prospectus e.g., Paratus Namibia remaining a strong competitor within the internet/fibre (ICT) space locally and the threat of other international competitors (MTN),” SS said.