Starcomms Plc
Transcription
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 ϮϬϬϬϬ <ŽƌĞĂϮϬϬϲ ϭϴϬϬϬ ϭϰϬϬϬ ϭϮϬϬϬ < <ŽƌĞĂϮϬϬϮ ϭϬϬϬϬ DĞdžŝĐĐŽϮϬϬϲ ƌĂnjŝůϮϬϬϳ DĞdžŝĐŽϮϬϬϮ ϴϬϬϬ ϲϬϬϬ 'WƉĞƌĐĂƉŝƚĂ͕;h^ΨͿ ϭϲϬϬϬ ϰϬϬϬ ůŐĞƌŝĂϮϬϬϮ /ŶĚŝĂϮϬϬϲ /ŶĚŝĂϮϬϬϮ ŬĞŶLJĂϮϬϬϮ EŝŐĞƌŝĂϮϬϬϮ ϭ͘Ϭй ^ŽƵƚŚĨƌŝĐĂϮϬϬϮ ŐLJƉƚϮϬϬ Ϭϳ EŝŐĞƌŝĂϮϬϬϳ ŬĞŶLJĂϮϬϬϳ ϳ ƌĂnjŝůϮϬϬϮ ŐLJƉƚϮϬϬϮ ůŐĞƌŝĂϮϬϬϳ ϮϬϬϬ Ϭ ϭϬϬ͘Ϭй ϭϬ͘Ϭй DŽďŝůĞdĞůĞĚĞŶƐŝƚLJ;йͿ Source(s): IMF, ITU, CSL DŽďŝůĞƐƵďƐĐƌŝďĞƌƐƉĞƌϭϬϬŝŶŚĂďŝƚĂŶƚƐ͕ϮϬϬϲ Graph 2: Mobile teledensity and real GDP P growth rate ϭϬϬ͘Ϭ ϵϬ͘Ϭ ϴϬ͘Ϭ ϳϬ͘Ϭ ϲϬ͘Ϭ ϱϬ͘Ϭ ϰϬ͘Ϭ ϯϬ͘Ϭ ϮϬ͘Ϭ ϭϬ͘Ϭ Ϭ͘Ϭ ϭϮϬ͘Ϭ UAE ϭϭϬ͘Ϭ ϭϬϬ͘Ϭ Kuwait ϵϬ͘Ϭ Korea (Rep.) ϴϬ͘Ϭ Saudi Arabia ϳϬ͘Ϭ Seychelles South Africa Tunisia Algeria ϲϬ͘Ϭ Morocco ϱϬ͘Ϭ Brazil Mexico ϰϬ͘Ϭ ϯϬ͘Ϭ Iran ϮϬ͘Ϭ Graph 3: Mobile subscriber evoluttion in Nigeria ϳϬ͘Ϭй ϲϬ͘Ϭй ϱϬ͘Ϭй ϰϬ͘Ϭй ϯϬ͘Ϭй ϮϬ͘Ϭй ϭϬ͘Ϭй Ϭ͘Ϭй Nigeria Egypt E India Kenya ϭϬ͘Ϭ Ϭ Ϯ ϰ ϲ ZĞĂů'WŐƌŽǁƚŚƌĂƚĞ;йͿ͕ϮϬϬϬϲ Source e(s): ϴ ϭϬ IMF, ITU, CSL DŽďŝůĞ^ƵďƐĐƌŝďĞƌ;DDͿ Source(s): WĞŶŶĞƚƌĂƚŝŽŶ;йŽĨWŽƉƵůĂƚŝŽŶͿ 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 D͕ϭй DƚĞů͕ϭй ĞůƚĞů͕Ϯϴй DdE͕ϰϬй '^D͕ϵϵй 'ůŽďĂĐŽŵ͕ϯϭй 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 dĂďůĞϱ͗DĂŝŶƚƚĞůĞƉŚŽŶĞůŝŶĞƐƉĞƌϭϬϬŝŶŚĂďŝƚĂŶƚƐ 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 ϲϬϬй ϭϰ͕ϬϬϬ͘Ϭ ϴ͘Ϭй ϱϬϬй ϭϮ͕ϬϬϬ͘Ϭ ϳ͘Ϭй ϰϬϬй ϭϬ͕ϬϬϬ͘Ϭ ϲ͘Ϭй ϱ͘Ϭй ϴ͕ϬϬϬ͘Ϭ ϯϬϬй ϰ͘Ϭй ϲ͕ϬϬϬ͘Ϭ ϮϬϬй ϯ͘Ϭй ϰ͕ϬϬϬ͘Ϭ ϭϬϬй Ϯ͘Ϭй Ϯ͕ϬϬϬ͘Ϭ Ϭй ϮϬϬϮ ϮϬϬϯ ϮϬϬϰ ϮϬϬϱ ϮϬϬϲ ϭ͘Ϭй Ͳ ϮϬϬϳ Ϭ͘Ϭй 'ƌŽǁƚŚZĂƚĞŝŶDĂŝŶdĞůĞƉŚŽŶĞůŝŶĞƐ;LJŽ ŽLJͿ 'ƌŽǁƚŚZĂƚĞŝŶDŽďŝůĞĐĞůůƵůĂƌƐƵďƐĐƌŝďĞĞƌ;LJŽLJͿ Source(s): &ŝdžĞĚ>ŝŶĞƐƵďƐĐƌŝďĞƌ;ϬϬϬͿ 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) ϴϬ ϳϬ ϲϬ ϱϬ ϰϬ ϯϬ ϮϬ ϭϬ Ϭ Source(s): eMarketers, Interne et World Stats ϭϬͮW Ă Ő Ğ Equity | Nigeria | Telecommunicatio ons Graph 13: Internet subscriberr evolution in Nigeria ϯ͕ϱϬϬ͘Ϭ Ϯ͘Ϭй Ϯ͕ϱϬϬ͘Ϭ Ϯ͕ϬϬϬ͘Ϭ ϭ͘ϱй ϭ͕ϱϬϬ͘Ϭ ϭ͘Ϭй ϭ͕ϬϬϬ͘Ϭ ĂďůĞͬ^ĂƚĞůůŝƚĞ ds͕ϵй Ͳ s^d͕ϱϭй ŝĂůͲhƉ͕ϵй Ϭ͘ϱй ϱϬϬ͘Ϭ Connection type es*, 2006, Nigeria tŝͲ&ŝ͕ϭй ϭ͕Ϭй KƚŚĞƌƐ͕ϱй й ^>͕ϯй &ŝdžĞĚtŝƌĞůĞƐƐ ;DͿ͕ϰй Ϯ͘ϱй ϯ͕ϬϬϬ͘Ϭ Graph 14: CSL Ϭ͘Ϭй tŝƌĞůĞƐƐ ;ZĂĚŝŽͿ͕ϭϴй /ŶƚĞƌŶĞƚƐƵďƐĐƌŝďĞƌ;ϬϬϬͿ 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. KƉĞĞdžƚŽ^ĂůĞƐ ϯϲй ůĞŶ ŶĚĞĚZWh ϯϬ ϮϬ ϯϮй ϯϬй KƉĞdžƚ ^ĂůĞƐ Ϯϴй Ψ DĂƌŐŝŶ;йͿ ϯϰй ϭϬ Ϯϲй Ϯϰй Ͳ ϮϬϬϱ ϮϬϬϲ ϮϬϬϳ ϮϬϬϱ ϮϬϬϲ ϮϬϬϳ 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 ϭϱ͘Ϭ Ϭ͘ϰϮ ϭϬ͘Ϭ Ϭ͘Ϯϳ ϱ͘Ϭ Ϭ͘ϰϭ Ϭ͘Ϯϱ Ϭ͘ϭϮ Ϯ Ͳ ϮϬϬϯ ϮϬϬϯ ϮϬϬϰ ϮϬϬϱ ϮϬϬϲ ϮϬϬϳ ϮϬϬϰ ϮϬϬϱ ϮϬϬϲ ϮϬϬϳ 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. dŽƚĂůĚĞďƚƚŽƐƐĞƚƐ dŽƚĂůĚĞďƚƚŽƐƐĞƚƐ ϱϰ͘ϳй ϮϬϬϯ ϴϯ͘Ϯй ϮϬϬϰ ϱϲ͘Ϯй ϮϬϬϱ ϰϲ͘ϴй ϰϮ͘Ϯй ϮϬϬϲ ϮϬϬϳ 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 ϳ͘ϰ ϭϯ͘ϵ ϳ͘ϲ ϵ͘ϵ ϭϯ͘ϵ ϭϬ͘Ϯ ϵ͘ϵdž 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 ([email protected] 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