Starcomms Plc

Equity/Nigeria/Telecommunications
Starcomms Plc
Initiating Coverage
We initiate coverage of Starcomms Plc with a fundamental long term BUY (A248)
and a short term hold recommendation. We firmly believe that Starcomms is very
well poised to capture growth in Nigeria’s evolving telecoms market in view of its
current standing as the leading fixed wireless service provider. We also believe that
Date:
17 July 2008.
management has a thorough understanding of the industry dynamics and
are clear on their growth strategies in the short and medium term. We have
Price Target: N19.32
used absolute and relative valuation models to arrive at a fair value for Starcomms
stock. Using a simple average of the prices derived from the models we derived a
fair value of N19.32 implying a 32.6% upside to the stocks current price of N14.57
Attractive industry fundamentals. Improved levels of economic growth coupled with the
low telephony penetration levels are the factors driving effective demand for telecom services in
Nigeria. According to the Nigerian Communications Commission (NCC) mobile penetration in
Nigeria is a mere 28% (compared to penetration levels of 86% in South Africa, 80% in Algeria
and 61% in Morocco) while fixed line penetration is just over 1%. Consequently, the uncaptured telephony market is still quite huge, offering enormous growth opportunities for
industry operators.
CSL
Bloomberg Ticker: STARCOMMS NL
Local Market Ticket: STARCOMMS
Rating: A248
Price: NGN14.57
Fiscal year end: December
Free float: 71%
Increasing competition. We foresee increased competition from new entrants as a result of
the licensing rounds of 2007. It is expected that entrance of new market participants will drive
differentiated product offerings, and reduce profit margins and ARPU.
Unique positioning. Starcomms is a multi-service telecoms operator with a market share of
51% among non-GSM wireless operators and a 32% market share of fixed lines in Nigeria. The
opportunity to provide nationwide operations by way of the unified access license (UAL) was
granted to it by NCC in 2006, which coupled with investments in enhancing service efficiency
with foremost CDMA technology, makes Starcomms well poised to capture growth in the
Nigerian telecom market.
Current ownership structure
Financial highlights
Revenues
EBITDA
Net Income
EPS(N)
2006A
13,615
2,094
(1,495)
(0.40)
2007A
20,506
4,737
1,016
0.28
2008E
39,466
6,687
(198)
(0.03)
2009E
69,002
15,236
4,536
0.66
22.10
6.56
2010E
91,524
26,895
10,501
1.53
9.50
3.72
P/E X
51.89
-
^E,
Ϯϵй
EV/EBITDA
22.42
14.81
Wh>/
ϳϭй
14.95
Outlook
We believe that the Nigerian telecoms industry will continue to attract increased capex (aimed
at enhancing coverage and developing network infrastructure), in the medium term. We
anticipate that the imminent fierce competition (particularly in the mobile segment) arising from
the influx of new entrants, and the ensuing decline in ARPU and industry margins would foster
product innovation and differentiation.
We firmly believe that enhanced investment in mobile infrastructure, and high GDP growth
rates, could drive mobile penetration in Nigeria to ~60% by 2012. It is expected that the strong
demand for internet services and broad band capabilities would facilitate the growth of the fixed
line sector. Going forward we believe that the growth in subscribers for Starcomms will
continue, primarily driven by an increase in its mobile and fixed line subscribers off increasing
penetration and population.
Risks in our valuation
While we are optimistic about the growth prospects of the stock; a sustained bearish
sentiment, as is prevalent in the market, along with the possibility of economic
downturn and political risks underlie our rating and price target.
Key financial Data
Total Asset: NGN80.0bn (FY’08E)
Gross Earnings: NGN20.5bn (FY’07)
Net Earnings: NGN1.0bn (FY’07)
Shares Outstanding: 6.878bn (FY’08)
Shareholders’ equity: NGN48.7bn (FY’08E)
Equity | Nigeria | Telecommunicatio
ons
CSL
Investment tthesis
Leading triple play provider with
first mover advantage in the
emerging Internet market.
The Nig
gerian telecoms market is one of the largest and the fa
astest growing markets in
Africa w
with an estimated (CAGR) of 25% between 2007 and 2011.
Market growth will be driven by low penetration levels (curre
ently estimated at 28%),
increase
ed demand for communication access, and a growin
ng population with rising
disposab
ble income.
As the lleading triple play provider of mobile, fixed and data serv
vices, Starcomms is set to
benefit ffrom consumer demand for Internet and broad band capa
abilities which is aiding the
growth of the fixed line sector.
Starcom
mms average revenue per user (ARPU) at $21 (2007) iss significantly higher than
those off incumbent GSM operators (MTN $16, Globacom $14, an
nd Celtel $12). Continuing
superiorr ARPU will be maintained through the appropriate mix
x of high quality product
offerings such as high speed Internet, and data and other broad band
b
services.
The com
mpany should leverage on its first mover advantage in the emerging Internet
market. The low Internet penetration estimated at 1%, indicate tremendous growth
opportunities in a burgeoning market.
Company bac
ckground
Founded in 199
95, Starcomms Nigeria Limited was granted a fixed wireless license by NCC in 1996,
to initially ope
erate as a local operator in Lagos State, South-Western Nigeria. Following the
commercial success of its operations in Lagos, Starcomms expanded th
he geographic scope of its
ompany migrated from its
operations to Kano and Maiduguri in 2003. In the same year the co
legacy IS-95B network to CDMA 20001X network platform which a morre robust platform capable
g voice, data and video signals. Until recently, the company was focused on the
of transmitting
provision of fixxed wireless services (as against mobile service) due to
o the five year exclusivity
period granted
d to the GSM operators. This regulatory restriction allowed
d it to become the leading
Nigerian fixed wireless services provider with an approximate market sh
hare of 32%. Following the
al of its Unified Access License in 2006, the compan
ny became a multiservice
NCC’s approva
telecoms provider, with the addition of mobile and internet services.
NIGERIAN TE
ELECOMMUNICATION INDUSTRY: HUGE POTENTIA
AL
Growth in the Nigerian
Telecommunivation market is
expected to continue owing to
lower mobile penetration and
growing population. However,
maintaining high ARPUs will
remain a challenge.
The Nigerian ttelecommunication sector has witnessed significant grow
wth in the total telephone
gross subscriber numbers as reflected by CAGR of more than 100% during 2001-07, primarily
h momentum to continue,
driven by incrreasing mobile penetration level. We expect the growth
esser pace, owing to relatively lower teledensity in Nigeria than in other emerging
though at a le
economies, g
growing population, increasing investments in infra
astructure, and ongoing
restructuring a
and liberalization. Meanwhile, the industry will face strong challenges to maintain its
high ARPUs an
nd margins in the medium-to-long term owing to rising co
ompetition, especially from
new entrants in
n the mobile space.
ϮͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio
ons
CSL
on
The Nigerian mobile market: In a sweet spot of positive inflectio
During 2001-06, the mobile segment in Nigeria has grown at a much faster pace (CAGR 161%)
emerging African economies like Algeria, Egypt and Kenya (average CAGR 101%)
than in other e
primarily due tto favorable policy changes, introduction of the unified licensing regime in 2006,
lack of an efficcient fixed line infrastructure and growth in population and
d GDP.
Table 1: Gro
owth rate in mobile subscribers
Gross Subscrib
ber
Nigeria
Algeria
Egypt
South Africa
Kenya
India
Korea (Rep.)
Mexico
Brazil
2001
788%
16%
105%
29%
371%
83%
8%
55%
24%
2002
489%
350%
61%
27%
98%
99%
11%
19%
21%
2003
101%
221%
29%
23%
34%
159%
4%
16%
33%
2004
190%
237%
32%
24%
60%
55%
9%
28%
41%
2005
103%
180%
78%
63%
81%
73%
5%
23%
31%
Source (s):
2006
74%
54%
32%
17%
59%
84%
5%
21%
16%
ITU
Table 2: Mobiile telephone lines per 100 inhabitants
Nigeria
Algeria
Egypt
South Africa
Kenya
India
Korea (Rep.)
Mexico
Brazil
Source (s):
2001
0.2
0.3
4.3
23.4
1.9
0.6
61.4
21.9
16.3
2002
1.3
1.4
6.7
29.4
3.8
1.2
67.9
25.8
19.5
2003
2.6
4.5
8.5
35.9
5.0
3.2
70.2
29.5
25.6
2004
7.2
15.1
10.9
44.1
7.8
4.8
76.1
36.6
35.7
2005
14.1
41.5
19.1
71.6
13.5
8.2
79.4
44.0
46.3
2006
24.1
63.0
23.9
83.3
20.9
14.8
83.8
52.6
52.9
2007
28.0
80.0
32.0
86.0
32.0
NA
NA
NA
64.5*
ITU (2001-06). World Cellular Information Services (2
2007),*for the month of
Jan, 2008(Anatel)
Despite its significant growth over the past few years, Nigeria still ran
nks lower than most other
emerging econ
nomies on mobile penetration. Nigerian mobile penetratiion at 28% as of 2007 is
lower than oth
her African countries such as Algeria (80%), South Africa
a (86%), and even Kenya
(32%) and Egyypt (32%).
We believe Nigeria is well on
its way towards a telecom
inflection point for significant
increase in penetration rates.
Mobile penetration is Nigeria
is expected to reach ~60% by
2012, from the current 28%.
By mapping mobile penetration with GDP per capita in various emerging
g economies we observe a
positive relatio
onship between the two, signifying a potential increase in
n penetration level with an
increase in GD
DP per capita (refer Graph 1). We also believe that once an
a inflection point in terms
of penetration level is reached in a country (the inflection point may vary from 20-30% for an
ntry) any further increase in penetration level is much faster. The triggers for a
individual coun
faster growth a
after inflection point typically include acceptance of the in
ndustry, favorable reforms,
increasing com
mpetition, improving service levels and declining cost fo
or customers. In our view
inflection pointts for some of the emerging economies were: Algeria (~
~15% penetration in 2004,
reaching ~80%
% in 2007), South Africa (~30% in 2002, reaching ~86% in 2007) and Brazil
(>25% in 200
03, reaching >64% in 2007). With the current penetratio
on of ~28% and favorable
policies, Nigeriia may well be on its own inflection point for significan
nt increase in penetration
levels.
ϯͮW Ă Ő Ğ CSL
Equity | Nigeria | Telecommunicatio
ons
Graph 1: Mobile teled
density and GDP per capita
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Source(s): IMF, ITU, CSL
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Graph 2: Mobile teledensity and real GDP
P growth rate
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Tunisia
Algeria
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Mexico
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Graph 3: Mobile subscriber evoluttion in Nigeria
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Source(s):
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NCC, BMI and Global Insight
Additionally, grraph 2 depicts mobile penetration – representing potentia
al for customer acquisition,
and growth in GDP – indicating telecom spending and ARPU developm
ment potential for various
African, Asian and Latin American economies. The third quadrant in this chart would typically
hat offer tremendous growth potential owing to higher GDP growth and lower
house stars th
relative telecom
m penetration. We would rate Nigeria, Egypt, Kenya an
nd India high on potential
opportunities w
within telecom sector. Taking reference from these, we firm
mly believe that Nigerian
ϰͮW Ă Ő Ğ CSL
Equity | Nigeria | Telecommunicatio
ons
mobile penetra
ation could reach ~60% by 2012, fuelled by growing population (expected CAGR of
2.2% for 2007-11), increasing investment in telecommunication infrrastructure and high GDP
growth rates (IIMF estimates Nigeria’s GDP growth at 9.0% in 2008 and 8.3% in 2009).
Mobile domin
nates the telecom markets
Mobile dominates the Nigerian
telecom markets accounting for
~94% of total telephone
connections.
Nigerian mobile sector is primarily
prepaid with ~99%of total
connections being prepaid
connection.
Similar to mostt other African nations like Algeria, Kenya, South Africa, Nigeria’s
N
mobile sector has
also dominated
d the total telephone connections, accounting for ~94%
% of total subscriber base
(including fixed
d lines). Within the mobile segment, prepaid virtually account for all of subscriber
base (~99% o
of the total mobile subscribers), in line with the trend in Africa, primarily owing to
reduced sign up requirements, ability of customers to control costs and close monitoring of
ow-income users. In addition, the prepaid business mod
del does not include longspending by lo
term service ccontracts and enables mobile operators to offer service
es to individuals with low
income, without much financial risk. A majority of post-paid mobile subscribers
s
in Nigeria are
nts.
corporate clien
Table 3: Mobille subscriber as a % of total telephone subscriber
Nigeria
Algeria
Egypt
South Africa
Kenya
India
Korea (Rep.)
Mexico
Brazil
2001
30.7
5.1
29.4
68.7
66.0
14.5
53.0
61.2
43.4
2002
69.1
18.8
36.7
73.9
78.7
23.9
55.7
63.4
47.3
2003
78.0
40.3
39.9
77.8
82.9
44.5
57.2
64.8
54.2
2004
89.9
66.3
44.7
81.1
89.5
60.8
53.1
68.0
62.4
2005
93.8
84.2
56.7
87.8
94.2
64.2
61.6
70.7
68.4
2006
95.0
88.1
62.5
87.8
96.2
80.3
62.7
74.2
72.0
Source (s):
ITU
hanges facilitating new
Competition in mobile: Getting competitive with regulatory ch
entrants
We believe tha
at competition in the Nigerian mobile sector will become
e fierce in the medium-tolong term owin
ng to new entrants, and ongoing reforms including unifiied access licensing which
facilitates entrry of existing fixed line player in the mobile space. Thiss would result into a less
ndustry and a potential decline in currently high industry ARPUs
A
and profitability.
concentrated in
GSM market is dominated by
a few strong companies with
MTN and Celtel together
controlling >75% of the
market.
i.
Highly co
oncentrated sector: Currently, the Nigerian mobile segment,
s
similar to other
African countries, is dominated by a few large GSM operators name
ely MTN, Celtel, Globacom
n
mobile subscribers
and Mtel. MTN and Celtel. These together control >75% of the nation’s
consistentt with concentration in Kenya (Safaricom controls 70% of market), Algeria (Orascom
Algeria controls 51% of market) and Egypt (Mobinil holds 52% of mobile market) and South
Africa (Vo
odacom South Africa with 56% of the market). How
wever, new entrants and
introductio
on of UAL regime in early 2006 would result in less conccentrated industry thereby
increasing the overall competitiveness. UAL allows a single service
e provider to offer multiple
services su
uch as mobile and fixed telephony, Internet, broadband and
a long distance services.
With NCC
C granting the fifth GSM license in January 2007 to Mudabala,
M
a wholly-owned
company o
of the government of UAE, competition is expected to beccome stiffer.
ϱͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio
ons
Graph 4: Mobile market share, Decem
mber 2007
CSL
Graph 5: GSM market share, Dece
ember 2007
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Source(s):
NCC
Graph 6: Alocation of digital mobile liicenses
Source(s):
ii.
Increasing competition will lead to
decline in ARPUs and in turn
profitability in the medium term.
Sourc
ce(s):
Industry reports
Graph 7: Allocation of UAL licenses
s
NCC
Source(s):
NCC
on is forcing innovation in
Decliine in tariffs and profitability: Increasing competitio
existin
ng products and is redefining tariffs. Notably, Glo Mo
obile, the second national
opera
ator, became the first to introduce per-second billing in a market dominated by per
minutte billing methods. In 2004 Glo Mobile offered basic prepa
aid starter packs for N1 as
compared with the then existing starter packs priced at N20,00
00. Celtel, one of the major
mobile players in Nigeria, launched a new network in Nov
vember 2007 called 'One
ork' which allowed subscribers to receive calls on their phones
p
in six west African
Netwo
counttries without any roaming charges. We believe increasing competition will result in a
contin
nuous decline in ARPUs and profitability of the industry in
n the medium term as new
entran
nts and existing participants attract lower income subscrribers having potential for
high vvolumes through cheaper plans.
ϲͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio
ons
CSL
Grraph 8: Declinig ARPU in Nigeria
Source(s): eshekels
iii.
Increase in private investment
in the sector despite
challenges from inadequate
infrastructure stregthens
Nigeria’s prospects as an
emerging telecommunications
market.
Risin
ng private investment: The Nigerian telecom market iss seeing an unprecedented
increa
ase in investment from private sector. In the early 2007
7, Mudabala Development
Comp
pany, a wholly-owned investment vehicle of the Governm
ment of UAE, entered the
Nigeriian telecom market by acquiring a license from NCC for $4
400.0mn. Telkom of South
Africa
a had bought a 75.0% stake in MultiLinks, another Nigerian private telecom
opera
ator, for $280mn (about N35.4bn) just as Zenith Bank off Nigeria acquired another
local telecom company, Cellcom for N4bn (approx US$
$32mn). Further, Sudan
ommunications Company (Sudatel), the national telecommunication company of
Teleco
Sudan
n, is targeting a 70.0% share in Intercellular, which iss one of Nigeria’s leading
privattely owned telecom operators. Entry of Mubadala, Sudatell and other foreign players
is te
estimony to the fact that Nigeria is an emerging
g global player in the
teleco
ommunication landscape despite the challenges posed by inadequate
i
infrastructure.
Gra
aph 9: Private Investment in the Nigerian telecom marke
et (US$)
Sourrce(s): eshekels
ϳͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio
ons
iv.
CSL
Number portability on the cards: To improve the quality of service and to further
intenssify the competition, NCC, in mid 2007, indicated its pllans to allow GSM mobile
phone
e subscribers to allow subscribers to move from one netw
work to the other, without
necesssarily changing their numbers. Such a move is expected to
t lead to an improvement
in qua
ality of services by the operators, a further reduction in tariffs
t
and in inactive lines
which
h were more than 25% of connected lines at the end of 20
007.
Poor quality sservice: A major challenge
The mobile ind
dustry in Nigeria has been repeatedly blamed of dropped call drop calls, poor audio
quality, call intterference, non-delivery of short message service, multiplle billing systems for SMS,
inability to reccharge and poor customer care services. As per industtry reports, experience of
network failurres and drop calls is being witnessed by over 70.0% subscribers of GSM
telecommunica
ations providers. Recently, major GSM players in Nigeria, MTN Nigeria and Celtel,
have been directed by NCC to pay N4.7bn as compensation to subscribers as a result of the
p
realizing customer
congestion on their networks in December 2007. However, major players
olds the key in future, have started augmenting their nettwork. Most operators are
satisfaction ho
rolling out mo
ore base stations. For example, in February 2008, Celte
el, a major GSM player in
Nigeria, annou
unced plans to commit $1bn fund in 2008 to improve network
n
quality. Similarly,
Giobacom sign
ned a $600mn deal with Alcatel to ensure network effficiency. The MTN Group
announced in O
October 2007 that it had secured a US$2bn loan from Standard Bank for its network
infrastructure expansion in Nigeria. To improve network congestion situation, Nigeria needs
phenomenal network expansion. Base stations have to be increased by
y four times to have total
e of Nigeria.
radio coverage
Lack of infrasttructure such as power and security also contributes to poor
p
quality service in the
Nigeria needs phenomenal network
country. We se
ee building of own power infrastructure by the operators as a costly diversion from
expansion to improve its network
their core busin
ness. For example, during the first half of 2007, MTN, the largest mobile operator in
congestion and poor quality
Nigeria,
receiv
nly, which implied that for
ed a daily public electricity supply of about 4-5 hours on
service.
w
led MTN to spend in
the rest of 19 hours everyday, it had to depend on its own generators which
0mn (about $5.55mn) monthly on diesel to power its 600
00 generator plants across
excess of N700
the country.
Fixed line ma
arket: Less penetrated than most others
Penetration off fixed line in Nigeria (~1.3% as of December 2006) has
h been significantly less
compared with
h other emerging countries like Algeria (~8.5%), and Eg
gypt (~14.3%) except for
Kenya (~0.8%
%). Nevertheless, Nigeria was the fastest growing fixed lin
ne market with a CAGR of
23% during 2
2001-2006 compared with an average CAGR of 3% obsserved in other emerging
African, Asian and Latin American economies. The growth in fixed line
e picked up particularly in
07, and should accelerate further in the medium-to-long term driven by lower
2006 and 200
existing penetrration levels, extensive use of CDMA fixed wireless and privatization of the state
owned Nigerian
n Telecommunication Ltd (NITEL) in 2006.
In spite of low
w penetration of fixed telephone line Nigeria features in
n the list of six countries
where most of Africa’s fixed telephone lines are concentrated.
ϴͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio
ons
CSL
dĂďůĞϰ͗'ƌŽǁƚŚ
ŚƌĂƚĞŝŶŵĂŝŶƚĞůĞƉŚŽŶĞůŝŶĞƐ
Gross Subscriber
Nigeria
Algeria
Egypt
South Africa
Kenya
India
Korea (Rep.)
Mexico
Brazil
2001
8%
7%
22%
-1%
6%
19%
0%
12%
21%
2002
17%
4%
16%
-2%
4%
7%
0%
9%
4%
2003
27%
10%
13%
0%
2%
1%
-2%
9%
1%
2004
16%
16%
8%
1%
-9%
10%
-6%
11%
1%
2005
19%
3%
10%
-2%
-6%
9%
1%
8%
1%
2006
38%
10%
4%
0%
4%
-19%
0%
2%
-3%
2003
0.72
6.74
12.73
10.28
1.04
3.92
52.51
15.99
21.61
2004
0.81
7.68
13.52
10.27
0.91
4.25
49.02
17.22
21.52
2005
0.93
7.82
14.57
9.97
0.82
4.55
49.5
18.23
21.38
2006
1.26
8.52
14.33
9.97
0.84
3.64
49.82
18.33
20.54
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2001
0.51
6.09
10.37
10.68
0.99
3.71
54.44
13.89
21.22
Nigeria
Algeria
Egypt
South Africa
Kenya
India
Korea (Rep.)
Mexico
Brazil
2002
0.58
6.22
11.49
10.4
1.02
3.93
54.05
14.88
21.69
So
ource (s):
ITU
The growth in fixed line subscribers in Nigeria has lagged the growth in
n mobile subscribers owing
to lack of infrastructure development combined with administtrative and bureaucratic
inefficiencies.
Graph 10:
Fixed line vs mobile subsc
criber growth, Nigeria Graph 11:
Fixed line subsc
criber evolution, Nigeria
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Source(s):
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NCC
Source(s):
WĞŶĞƚƌĂƚŝŽŶ;йŽĨWŽƉƵůĂƚŝŽŶͿ
NCC, BMI and Global Insight
ϵͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio
ons
CSL
Rising comp
petition: Largely from mobile
Strong demand from Internet
services and broadband
capabilities would facilitate growth
in the fixed-line sector.
The fixed line market is dominated by fixed wireless operators (74.0%
% of the fixed line market
share). The ma
ajor players in fixed line market include NITEL, Starcomms, Intercellular, Multi-Links
and Reltel. Starcomms occupies the leading position in the fixed line market, with a 32.0% market
nd of December 2007.
share at the en
The fixed line market faces strong competition from the mobile marke
et as reflected by the fact
e subscriber at the end of
that fixed line subscribers formed merely 6.0% of the total telephone
07. This is expected to change, though slightly and gradu
ually, in favor of fixed line
December 200
market led by an extensive use of CDMA fixed wireless technology ow
wing to poor availability of
fixed infrastruccture. Further, a strong demand for Internet services and broadband capabilities
would facilitate
e growth of the fixed-line sector.
Internet/datta market
Penetration of Internet subscribers in Nigeria is very low (0.7% in 2006)) and is way behind that in
nations including South Africa (9.0%) and Egypt (1.6%), mainly owing to a lack of
other African n
fixed-line infrasstructure and low level of ICT literacy. The situation is exp
pected to improve with the
introduction off new technologies and increased competition, taking the subscribers penetration to
~2% by 2011.. The growth in Nigeria is high compared with the Africa
an nation like South Africa
and Kenya and
d is expected to remain so with increasing Internet aware
eness and computerization
of the businesses. Broadband services, offering higher bandwidth conn
nections, would also boost
the demand ffor data market on the back of increased use of e-learning by students and
government ea
ager on getting broadband access to make use of applications like e-commerce or
e-government.
Further, there has been a significant difference in the Internet subscriiber and the user per 100
inhabitants, ind
dicating that the large proportion of Internet users are ussing a common destination
which is the cyyber cafes. When compared on the basis of Internet use
ers per 100 inhabitants to
other African e
economies, Nigeria lags behind by the huge gap, reflecting
g huge untapped potential.
Grraph 12:
Internet users per 100 inhabitants (2007
7)
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Source(s): eMarketers, Interne
et World Stats
ϭϬͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio
ons
Graph 13:
Internet subscriberr evolution in Nigeria
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Connection type
es*, 2006, Nigeria
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й
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Graph 14:
CSL
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WĞŶĞƚƌƌĂƚŝŽŶ;йŽĨWŽƉƵůĂƚŝŽŶͿ
Source((s):
Euro Monitor
Source(s):
Eshek
kels,
*based on survey, N=6000
Internet segme
ent has attracted the large number of operators signifying the intense competition.
In the year 200
06, there were more than 500 licensed ISPs and 100 VSAT
T firms and more than half
the Internet cconnection used VSAT links. With the data services also
o being provided by fixed
wireless operattors, competition has further intensified.
With huge yo
oung population and increasing integration of Nigeria with outside world, data
services are sure to expand. Further, deployment of the country's Next
N
Generation Networks
drive convergence of voice, data and video/TV, enabling the
t provision of triple-play
(NGN) would d
services that w
would further intensify already competitive sector. Alread
dy several CDMA and GSM
operators have
e started deploying 3G networks. For example, Globacom has launched commercial
service on the country's first 3G UMTS/HSPA network, offering advancced mobile data and voice
hnology could cash on this
services to cusstomers. Also, private telecom operators with CDMA tech
opportunity byy providing superior data capability using Ev-Do (E
Evolution-Data Optimized)
technology which is based based on advanced third generation CDMA 1x
x wireless technology
STARCOMMS
S: A RISING STAR
Table 6: Comp
petitor Data
Companies
Country
Subscriber growth
(FY06-FY07, in %)
ARPU growth
Opex/Subscriber
Capex/ Revenues
EBITDA margin
Churn rate
(FY06-FY07, in %)
(USD)
(FY2007, in%)
(%)
(%)
Telkom SA
South Africa
23.3%
-14.5%
132.7
19.6%
37.9%
MTN Group
South Africa
53.0%
-15.8%
116.8
6.5%
43.5%
33.8%
NA
Orascom Telecom holding
gs
Egypt
35.6%
-16.7%
37.9
41.1%
43.3%
7.6%
SK Telecom
South Korea
Vivo Participacoes S.A
Brazil
8.4%
-0.4%
355.7
16.4%
35.7%
2.5%
15.3%
11.8%
223.5
10.9%
17.8%
2.3%
Bharti
India
89.5%
-8.1%
66.0
40.4%
40.1%
NA
America Movil (1)
Mexico
23.0%
-5.2%
110.2
11.1%
40.7%
3.6%
Starcomms (2)
Nigeria
118.0%
-25.0%
250.13
53.0%
13.0%
NA
35.4%
-7.0%
20.9%
37.0%
10.0%
Mean (3)
149.0
0
or AmericaMovil are for its Mexico operations only. As the Company does not report a consolidated ARPU for itts Group operations.
1) APRU and churn rate fo
2) Growth in subscribers in
nclude growth in active subscribers for fixed line, data and mobile. For other competitors subscribers mainly inc
clude mobile subscribers.
3) Mean excluding Starcom
mms
Source (s):
Company reports, Bloomberg
ϭϭͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio
ons
CSL
Subscriber grrowth: A lot more to come
Starcomms witnessed the highest
subscriber growth in FY07 among
its international peers.
With a growing mobile market and under developed fixed line covera
age in Nigeria, Starcomms
witnessed a sttrong 118.0% increase in its total subscribers, the highe
est among its international
peers. The com
mpany added 197,000 mobile subscribers after introducing
g national mobility offering
in FY07, suppo
orted by an increase in both data and fixed wireless su
ubscribers. Bharti’s strong
growth of 89%
% was also reflective of lower relative mobile penetration in India (~13% in 2006).
South African companies Telekom SA and MTN Group and South Kore
ean company SK Telecom
paratively lower increases in their subscriber growth, in better
b
penetrated markets.
reported comp
The relatively higher subscriber growth of MTN is attributed to its con
ntinuous expansion in the
emerging markkets of Africa and the Middle East.
Going forward we believe that the growth in subscribers for Starcomm
ms will continue, primarily
ncreasing penetration and
driven by an increase in its mobile and fixed line subscribers off in
population.
ARPUs: Moving southwards
However, it also reported the
highest decline in its ARPUs when
comapred to its international peers.
Across all interrnational peers a strong subscriber growth (average 35.4%
%) was accompanied by a
decline in ARPU
Us (decline of 7%) primarily owing to strong competitive pressures, especially from
new entrants. With a growing subscriber base, Starcomms’ blended ARPU declined 25.0% to $21
$28 in FY06, though it was still higher than ARPU of other GSM operators in Nigeria,
in FY07 from $
like MTN Nigerria and Celtel which reported ARPU of $16 and $12 in FY
Y07. Compared with other
international pe
eers the ARPU decline has also been the highest for Starccomms as most of the new
subscribers havve a comparatively lower disposable income than the exiisting subscriber base. We
continue to exxpect a decline in the overall ARPUs for Starcomms ow
wing to a decline in voice
ARPUs mainly off competitive pressures and addition of lower income subscribers,
s
partially offset
e in data ARPUs off a rise in demand of data-related serrvices. We believe that an
by an increase
improvement in quality of service and constant innovation in products will also help contain the
quantum of de
ecline. Notably, Vivo, in Brazil, reported an 11.8% increase
e in ARPUs in 2007 mainly
off an increase
e in ARPU from its value-added services and a reductio
on in churn to 2.3% from
2.9% in 2006.
Network exp
pansion: Results in highest capex-to-revenue ratio
Starcomms highest capex-torevenue ratio reflects its focus on
network expansion.
Starcomms ha
as the highest capex-to-revenue ratio compared with all
a its international peers
signifying its o
ongoing network expansion aimed at increasing coverage from 11 cities to 31 cities
by December 2
2008, especially for mobile services. Among Starcomms international peers, Bharti
and Orascom Telecom Holdings also reported higher capex-to-revenu
ue ratio, mainly driven by
nsion aimed at increasing penetration. Peers in South Africca, Mexico and Brazil have
network expan
a comparative
ely lower capex-to-revenue ratio as these markets have
e relatively higher mobile
penetration. W
We believe Starcomms capex-to-revenue ratio will rem
main high in the near-tomedium term as it continues to expand its network coverage with modern IP-centric
ork.
NextGenNetwo
Higher opex per subscriber
pex per subscriber is higher than all its international peers
p
expect SK Telecom,
Starcomms op
mainly becausse of its comparatively smaller subscriber base with more than 50% of the
company’s sub
bscribers being fixed wireless customers, which typica
ally has higher operating
expenses wherreas operations of all of its peers are skewed towards mo
obile segment. SK Telecom
reported the h
highest opex per subscriber as a result of increasing ma
arketing expenses from its
ϭϮͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio
ons
CSL
growing need for advertising and promotional activities to push teleccom services in the South
m market which is approaching saturation.
Korean telecom
alysis
Financial Ana
Earnings
A cursory glim
mpse at Starcomms financials indicates that the compan
ny grew its turnover at a
CAGR of apprroximately 80% between 2005 and 2008, largely on the back of growth in its
subscriber basse which quadrupled during the period. However, EBITD
DA margins dipped from a
high of 19% in 2006 to 13% in 2007, as a result of higher energy cost and reduction in GSM
evenues. Starcomm’s blended ARPU also declined from $2
28 in 2006 to $21 in 2007,
interconnect re
consistent with
h the expansion of its customer base. As with most teleco
oms firms in their growth/
Investment ph
hase, Starcomms only earned marginal profits in 2007. Itt is expected that it would
not return to profitability until 2009, due to its roll out expansion plans which would entail
significant capiital expenditure.
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Asset Mix
ur expectations, about 70% of Starcomms total assets werre in fixed assets as at the
In line with ou
ed at improving network
end of 2007, which is reflective of its high capex spending aime
and attaining nationwide coverage. The increased capital expenditure
e
which grew at
infrastructure a
a CAGR of 96% between 2005 and 2007, was evident in the expanssion of its subscriber base
which grew at a CAGR of 99% during the period.
The company’ss liquid asset position was just about 17.3% of its totall asset base in 2007. The
company’s liqu
uidity position has improved over the years as current ratios
r
grew from 0.27x in
2003 to 0.41x in 2007, indicating that current assets grew from 27% to
o 41% of current liabilities
during the periiod.
ϭϯͮW Ă Ő Ğ CSL
Equity | Nigeria | Telecommunicatio
ons
ƵƌƌƌĞŶƚƌĂƚŝŽ;džͿ
Wy;EͿ
E'EΖďŶ
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Ͳ
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eption of 2007 when it issued new shares, Starcomms shareholders funds have
With the exce
always been in
n the negative due to accumulated deficits arising from itss operating activities. This
implies that th
he company has been relying on debt to fund a significa
ant proportion of its asset
base as depictted by its total debt to assets ratio which dipped from a peak of 83% in 2004 to
42% in 2007.
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dŽƚĂůĚĞďƚƚŽƐƐĞƚƐ
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ϭϰͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio
ons
CSL
Our Rating: A
A248
We have assigned Starcomms a fundamental long term buy rating based on the growth prospects
of the compan
ny, and our belief that management has a thorough understanding of the industry
dynamics and are clear on their growth strategies in the short and me
edium term. However, we
h sentiments pervading the
have placed a short term hold rating on the stock in view of the bearish
market which iif sustained pose a risk to our valuation and rating.
Valuation: offfers a 32.6% upside to current price
Table 7: Valuattion Matrix
sͬ/d;džͿ
Companies
Country
MTN Group
South Africa
m holdings
Orascom Telekom
Egypt
Bharti
India
America Movil
Mexico
Mobile 8
Indonesia
Tata
India
Bakri
Indonesia
Mean
A potential upside of 32.6%, makes
Starcomms a good buy.
2008E
6.4 x
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To value Starco
omms we have used both relative and absolute valuation models. While our relative
valuation mode
el was based on the mean Enterprise value multiple (EV
V/EBITDA) of international
peers which was estimated at 9.9x, the absolute model was premised on
o a Discounted Cash Flow
based on an estimated Weighted Average Cost of Capital of
o 14.5%.
(DCF) model b
Based on ou
ur DCF model, the fair value for Starcomms stock
k was computed to be
N19.48, whille the 2009 EV/Multiple discounted at the cost off capital yielded a value
estimate of N
N19.15. We therefore assign a fair value price off N19.32 to Starcomms
ordinary sha
ares using the above references implying a 32.6%
% to Starcomms share
price of N14..57.
Risks to our v
valuation
While we are optimistic about the growth prospects of the stock, a sudden
s
possible economic
ce target.
downturn and political risks, pose underlying risks to our rating and price
ϭϱͮW Ă Ő Ğ Equity | Nigeria | Teleco
ommunications
Year
Profit and Loss Account (N’000)
Turnover
Cost of Sales
Gross Profit
Operating Expenses
Operating Profit/(Loss)
Interest Expense & Financing charges
Profit/Loss before Taxation
Taxation Credit
Profit/Loss after Taxation
Profit/Loss Brought Forward
Profit/Loss Carried Forward
Year
Profit and Loss Account (N’000)
Turnover
Cost of Sales
Gross Profit
Administrative Overheads
Exceptional Items
EBITDA
Depreciation & Amortization
EBIT
Interest Expense
Profit/Loss before Taxation
Taxes
Profit/Loss after Taxation
Dividend Declared
Profit/Loss Brought Forward
Profit/Loss Carried Forward
2003
2004
2005
2006
6
3,308,678.0
(2,564,811.0)
743,867.0
(2,384,597.0)
(1,640,730.0)
(896,773.0)
(2,537,503.0)
1,444,426.0
(1,093,077.0)
(1,054,441.0)
(2,147,518.0)
5,168,345.0
(3,025,107.0)
2,143,238.0
(3,145,035.0)
(1,001,797.0)
(1,134,227.0)
(2,136,024.0)
156,395.0
(1,979,629.0)
(2,147,518.0)
(4,127,147.0)
6,344,212.0
(3,399,744.0)
2,944,468.0
(4,156,736.0)
(1,212,268.0)
(1,810,411.0)
(3,022,679.0)
453,886.0
(2,568,793.0)
(4,127,147.0)
(6,695,940.0)
13,614,796.0
0
0)
(7,165,261.0
6,449,535.0
0
0)
(6,152,976.0
296,559.0
0
0)
(2,365,048.0
(2,068,489.0
0)
0
573,472.0
(1,495,017.0
0)
0)
(6,695,940.0
(8,190,957.0
0)
CSL
2007
20,506,707.0
(11,427,148.0)
9,079,559.0
(6,776,635.0)
2,302,924
(1,851,111)
451,813
564,254
1,016,067.0
(8,190,957.0)
(7,174,890.0) 2008E
2009E
2010E
2011E
39,466,264.0
21,963,964.0
17,502,300.0
10,815,052.0
6,687,248.0
4,758,189.0
1,929,059.0
2,383,544.0
(454,485.0)
256,858.0
(197,627.0)
(7,174,890.0)
(7,372,517.0)
69,002,321.0
37,146,972.0
31,855,349.0
16,619,307.0
15,236,042.0
8,498,025.0
6,738,017.0
2,519,468.0
4,218,549.0
317,121.0
4,535,670.0
(7,372,517.0)
(2,836,847.0)
91,524,277.0
44,354,491.0
47,169,786.0
20,274,547.0
26,895,239.0
10,465,737.0
16,429,502.0
2,492,096.0
13,937,406.0
(3,436,196.0)
10,501,210.0
5,250,605.0
(2,836,847.0)
2,413,758.0
102,848,579.0
46,943,409.0
55,905,170.0
22,865,717.0
33,039,453.0
11,190,275.0
21,849,178.0
1,745,208.0
20,103,970.0
(6,031,191.0)
14,072,779.0
7,036,389.0
2,413,758.0
9,450,148.0
ϭϲͮW Ă Ő Ğ Equity | Nigeria | Food & Telecommunications
2008E
Balance Sheet (N’000)
Fixed Assets
Prepaid Licenses
Current Assets
Stocks
Debtors & Prepayments
Cash & Bank Balances
Total Assets
Creditors
Bank Overdrafts
Bank Loans
Trade Creditors
Overseas Creditors
Commercial Papers & Bankers Acceptancces
Other Creditors & Accruals
Shareholder Loans
Net Liabilities
Capital & Reserves
Share Capital
Share Premium Account
Profit & Loss Account
Accumulated Loss Brought Forward
Profit & Loss for Period
Dividend
Total Profit & Loss Account
Total Capital & Reserves
2009E
2010E
CSL
2011E
58,018,566.0
460,469.0
79,987,094.0
425,709.0
78,409,036.0
390,949.0
72,821,855.0
356,189.0
1,223,896.0
7,129,787.0
661,887.0
67,494,605.0
4,418,023.0
15,586,642.0
2,070,070.0
102,487,538.0
4,444,306.0
17,633,602.0
2,745,728.0
103,623,621.0
4,017,358.0
17,459,530.0
3,085,457.0
97,740,389.0
1,627,435.0
20,137,554.0
3,236,496.0
1,580,927.0
984,821.0
5,571,667.0
33,138,900.0
34,355,705.0
2,688,314.0
42,098,665.0
3,172,210.0
1,881,820.0
13,930,545.0
63,771,554.0
38,715,984.0
2,585,162.0
30,030,248.0
3,813,113.0
2,262,016.0
20,537,970.0
59,228,509.0
44,395,112.0
2,792,365.0
15,578,011.0
4,118,738.0
2,443,319.0
21,376,453.0
46,308,886.0
51,431,503.0
3,357,335.0
40,628,178.0
3,357,335.0
40,628,178.0
3,357,335.0
40,628,178.0
3,357,335.0
40,628,178.0
(9,175,323.0)
(454,485.0)
(9,629,808.0)
34,355,705.0
(9,629,808.0)
4,360,278.0
(5,269,530.0)
38,715,983.0
(5,269,530.0)
11,358,261.0
5,679,130.0
409,601.0
44,395,114.0
409,601.0
14,072,779.0
7,036,389.0
7,445,991.0
51,431,504.0
ϭϳͮW Ă Ő Ğ Equity | Nigeria | Food & Telecommunications
Key Ratios
2008E
2009E
2010E
2011E
0.00%
0.00%
44.35%
16.94%
0.00%
101.15%
12.41%
4.96%
46.17%
22.08%
6.57%
93.89%
25.27%
13.52%
51.54%
29.39%
11.47%
84.77%
29.37%
19.97%
54.36%
32.12%
13.68%
80.45%
32.70%
28.26%
2.40%
44.29%
35.43%
4.15%
64.16%
52.67%
7.10%
98.52%
82.40%
12.38%
Leverage
Total Debt/Equity ratio
Debt /Equity Ratio ( interesst Bearing)
Assets/ Equity
96.46%
66.22%
196.46%
164.72%
115.68%
264.72%
133.41%
73.47%
233.41%
90.04%
35.72%
190.04%
Share Data
Share Price (N)
EPS (N)
DPS (N)
P/E (x)
BV/Share (N)
P/Bv (x)
Sales/Share (N)
P/Sales (x)
Dividend yield
Dividend payout
Retention rate
Growth rate
14.57
4.99
2.92
5.74
2.54
100.00%
-
14.57
0.66
22.10
5.63
2.59
10.03
1.45
0.00%
0.00%
100.00%
12.41%
14.57
1.53
0.76
9.54
6.45
2.26
13.31
1.10
5.24%
50.00%
50.00%
12.64%
14.57
2.05
1.02
7.12
7.48
1.95
14.95
0.97
7.02%
50.00%
50.00%
14.69%
Profitability
ROE
ROA
Gross Margin
EBITDA Margin
Net Margin
Cost/ Income Ratio
Liquidity
Current ratio
Quick ratio
Cash ratio
CSL
ϭϴͮW Ă Ő Ğ Equity | Nigeria | Food & Telecommunications
CSL
CSL Ranking:
A-Fundamental Long Term Buy
d
B-Fundamental Long Term Hold
C-Fundamental Long Term Sell
1- Short Term Buy
2- Short Term Hold
3- Short Term Sell
4- High Dividend
5- Dividend (Moderate)
6- Low Dividend
7- Low Vo
olatility
8- Moderate Volatility
olatility
9- High Vo
For further enquiries, please contact CSL Re
esearch & Strategy at (cslresearchandstrategy@firstcitygroup.com
m) OR call 234-1-2713925.
This article is based on information available to the public but its accuracy or completeness cannot be guaranteed. This
s is not an offer to buy or sell or a
solicitation to buy or sell the securities mentione
ed herein. Opinions are expressed in good faith but are subject to change
e without notice. CSLS Limited may
effect transactions in securities of companies me
entioned herein and may also perform or seek to perform investment-ban
nking services for those companies
mentioned herein. Copyright © 2008 Equities Ressearch Unit, CSL Stockbrokers Limited, Lagos Nigeria.
ϭϵͮW Ă Ő Ğ