Afrinvest: Telecoms sector resilient amidst economic crunch

Global operators invest $1.5trn in 10 years

The Nigerian telecommunications sector has been projected to remain strong despite the economic crunch occasioned by the coronavirus pandemic. According to investment analysts at Afrinvest, while there is an immediate worry over other sectors due to the impacts of the pandemic, the telecoms sector is expected to remain resilient as the digital economy has boomed during the lockdown implemented to fight the virus. Afrinvest in its telecommunications industry report noted that the industry has remained the fastest-growing, the most resilient, and the largest contributor to the country’s economic growth. Mobile subscriptions, especially for data, have been on a steady increase over the years but became astronomic in the last three months of the pandemic. According to data from the Nigerian Communications Commission (NCC), data subscriptions in the country stood at 141.2 million as of May this year.

The researchers at Afrinvest, however, said that despite this, the sector is not at its full potential yet given weak broadband penetration and the huge prospects for mobile money under the right regulatory framework. “These opportunities drive our optimistic outlook for the sector despite weak macroeconomic conditions,” it said. While making investment recommendations on the two telecom companies quoted on the Nigerian Stock Exchange, Afrinvest in the report stated: “Accordingly, we make a strong case for investing in MTN Nigeria and Airtel Africa, with a market share of subscribers at 37.3 per cent and 27.2 per cent respectively.

“The two companies have also continued to invest in telecommunications infrastructure to boost capacity and deliver superior services to customers, with annual CAPEX at around N617.4 billion and N580.7 billion respectively over the past three years.

“With regulators loosening previously rigid rules and providing to telcos an even better opportunity to deliver financial services, we see another pathway for strong growth reminiscent of historical levels in the mediumterm.” Despite the challenge, Afrinvest noted that the growth of the telecoms in Nigeria had been explosive at a CAGR of 31.8 per cent between 2000 and 2019, driven by reforms that liberalised the sector and attracted foreign and domestic investment. It said: “From a negligible 0.1 per cent contribution to GDP in 1999, before the adoption of GSM, the sector’s contribution to the GDP has risen to 10.3 per cent in 2019, with nominal GDP rising 200.0x from N26.3bn to N7.4tn. Interestingly, the sector has been the fastest-growing at a normalised average (excluding 2000 2001) of 34.9 per cent between 2000 and 2010 before moderating to average growth of 4.6 per cent from 2011 to 2019.” Highlighting opportunities for growth in the sector, Afrinvest noted that with broadband penetration relatively low in Nigeria compared with peers such as South Africa and Egypt, more investments would be required and there are significant earnings prospects.

“Currently, the Average Revenue per User (ARPU) of our coverage companies remains weak relative to levels in other peer countries such as South Africa and Egypt. We believe platforms of operators can be leveraged to catalyse change in other sectors, especially financial services, and deliver enhanced earnings performance,” it said. Afrinvest added that the major pressure point for the indus-try has been regulation, with NCC’s heavy regulatory fines and policies to ensure fair competition restraining the growth of some major players. “Similarly, regulation has restricted the expansion into other business lines with strong prospects such as financial services, unlike in markets like Kenya and South Africa. We believe the speed and flexibility of regulation would shape the trajectory of growth and investment in the sector,” the investment advisors observed. While analysing the progress recorded in the global telecoms industry in the last 10 years, Afrinvest noted that between 2010 and 2019, mobile operators globally had invested over $1.5tn to deploy mobile and fixed broadband networks. It added, however, that investment was slowing as CAPEX grew at a CAGR of 0.4 per cent between 2017 and 2019 from -3.3 per cent CAGR between 2014 and 2016.

“Relative to industry GDP, CAPEX has averaged 5.0 per cent between 2014 and 2019. With the need to invest in 5G infrastructure which is critical to the digital economy in the future, operators would need to increase investment to unlock its transformative potentials. “This is even more important as mobile operators have been exploring alternate sources of revenue lately given the need to monetise data as the falling share of voice revenue is leading to new revenue streams,” it said. Given this backdrop, Afrinvest said some of the key trends that would shape the telecoms industry include the development and adoption of 5G network, rise of IoT, evolution of the content ecosystem, and the transformative power of artificial intelligence (AI).




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