Telcos are taking a front-row seat in financial payments and settlements as more companies apply for payment service bank (PSB) licenses. In Nigeria, MTN Nigeria was the first to receive a PSB license.
The competitive dynamics of telcos veering into digital payment services in Nigeria could reshape the world of market competition in payment solutions, with telcos edging ahead of others.
The telco foray presents the following threats and opportunities:
Threats
- With telcos using their wide rural presence to provide platforms for payment and settlement of commercial and personal transactions, telcos may begin to see shriveling incomes
- The invasion of telcos into the payment and settlement arena with products such as MTN's "momo" could put pressure on the competitive position of big banks' digital payment platforms
- The biggest threat to banks' digital incomes is not other banks but telcos willing to leap into payment services. The turf wars for market share would introduce more market reflective pricing of payment services and improved service quality.
Opportunities
- Nigeria's large unbanked rural communities provide opportunities for telcos to penetrate a broad customer base using unstructured supplementary service data (USSD) code technology. The USSD allows customers to make transfers without worrying about internet data availability.
- The digital payment initiatives of telcos will enable them to scale alternative revenue sources and pitch tighter relationships with their customers by helping them resolve daily payment and settlement problems without automated teller machines (ATM) or bank branches.
- The size of telcos' daily cashflows and customer experience journey data place them in unique positions to profile customers and determine their capacity to meet small loan payments in short credit cycles. Although telcos cannot presently lend money to customers, they can serve as savings platforms enabling them to get creative with meeting customers' temporary or short-term liquidity gaps on a fee-for-service template.
MTN Nigeria's recent H1 2022 financial statement is instructive. Topline earnings increased as mobile subscribers grew by +7.6%, and active data subscribers increased by +13.2%. MTN purchased one lot of 100MHz in the 3.5GHz spectrum band during its H1 operations and plans to deliver 5G services across the country in Q3 2022. The company started its payment service operations on May 19, 2022; leveraging its commercial reach, it has recorded 4.2m registered Momo wallets, or less than five percent of its total phone subscribers, suggesting ample business headroom.
Key Highlights
- Revenue increased by +20.07% Y-o-Y from N791.26bn in H1 2021 to N950.09bn in H1'2022.
- Operating profit rose by +28.72% from N273.71bn in H1 2021 to N352.31bn in H1 2022.
- Finance income rose by +24.47% from N5.67bn in H1 2021 to N7.07bn in H1 2022.
- Finance costs spiked by +41.19% from N64.27bn in H1'2021 to N90.74bn in H1 2022.
- Basic Earnings per share grew Y-o-Y by +27.98% from N6.97k in H1'2021 to N8.92k in H1 2022.
- Total Debt increased by +11.72% from N578.34 bn in H1 2021 to N646.11 bn in H1 2022.
- Total Equity grew by +34.69% from N200.12bn in H1 2021 to N269.53bn In H1'2022.
- Total Assets rose by +16.44%% to N2.53trn
- Mobile subscribers increased by +7.6% to 74.1 million in H1 2022.
- Active data users increased by +13.2% to 74.1 million in H1 2022
Share Price Movement; A Bearish Crawl
MTN's share price steadied in the first five months of the year and reached a resistance value of N235 per share on June 27, 2022, and a 30-day simple moving average of N221.62. However, the share price established an uptrend loss of momentum and a support price of N190 on July 27, 2022. The telco's year-to-date (YTD) return grew +9.09% from N197 on January 4, 2022, to N 214.90k on August 5, 2022 (see chart 7 below).
Chart1: Share Price Movement of MTN Nigeria (January 4, 2022 – August 5, 2022)
Source: NGX, Proshare Research
Revenue: All Eyes on Sales
The telco reported a +20.07% increase in revenue. Revenue for the communication behemoth grew from N791.26bn in H1 2021 to N950.09bn in H1 2022. Voice and data services made for a sizable portion of the telco's income, accounting for 43.92% and 36.65%, respectively. Other revenue components increased, with phones and accessories accounting for 0.24% of total sales, increasing +131.95% year-on-year (Y-o-Y) from N964mn to N2.24bn in H1 2022.
A review of the revenue by customer segment showed that consumer business units accounted for 86.92% of overall telco revenue. In comparison, enterprise and wholesale units contributed 10.45% and 2.63%, respectively (see chart 2 below).
Chart 2: MTN Nigeria Revenue H1 2019-H1 2022 (N'bn)
Source: MTN Nigeria Financial Statement, Proshare Research.
Profit Before Tax: Scaling Moolah
After slowing from N142.40bn to N39.57bn in H1 2020, PBT recovered by +24.88% from N215.12bn in 2021 to N268.64bn in 2022. The growth came by a +28.72% rise in operating income and a +24.47% rise in finance income. Finance income grew from N5.67bn to N7.07bn. However, at the onset of a devaluation of the currency, Finance costs rose from N64.27bn to N90.74bn, reflecting a -420.30% loss in finance exchange, a +63.71% rise in interest expenses-borrowings and N122m loss to currency swap (see chart 3 below).
Chart 3: MTN Nigeria PBT H1 2019-H1 2022 (N'bn)
Source: MTN Nigeria financial statement, Proshare Research.
Current Ratio: Tightness on the Shop Floor
Between 2020 and 2021, the current ratio fell from 0.73 to 0.51, indicating a -19.44% decline in liquidity between H1 2021 and H1 2022. This was due to an N1.76bn inventory write-down, which N1.08bn was due to starter packs, phones, and accessories. MTN also reported a -36.12% cash and cash equivalents decline, resulting in an N69.36bn decline in bank balance and a 25.34 bn decline in short-term deposits (see chart 4 below).
Chart 4: MTN Nigeria Current Ratio H1 2020-H1 2022
Source: MTN Nigeria Financial Statement, Proshare Research.
Acid Test Ratio: Inventory Squeeze
The acid test ratio fell by -18.64% in H1 2022, from 0.63 to 0.51 in H1 2022. The implication is that MTN's short-term assets are incrementally lower than the growth of short-term liabilities. The decline in the acid test ratio could be attributed to a +107.98% rise in short-term borrowings that grew from N152.84bn to N317.86bn (see chart 5 below).
Chart 5: MTN Nigeria Acid-Test Ratio H1 2020-H1 2022
Source: MTN Nigeria Financial Statement, Proshare Research.
Asset Turnover Ratio: Keeping Assets Sweaty
MTN's assets turnover ratio rose by +3.12% from 0.365 in H1 2021 to 0.376 in H1 2022. Analysts note that MTN assets turnover growth signalled better utilization of its assets (see chart 6 below).
Chart 6: MTN Nigeria Asset Turnover Ratio H1 2020-H1 2022
Source: MTN Nigeria Financial Statement, Proshare Research.
Debt-to-Equity Ratio: Keeping Leverage in Check the Equity Route
The leverage ratio slid by - 17.05% from 2.89 in H1 2021 to H1 2022, despite the increase of +11.72% in borrowings. The telco borrowings grew from N578.34bn to N646.11bn, representing N328.25bn as short-term borrowings and N317.86bn as long-term obligations. Analysts noted that the significant decline in the debt-to-equity ratio resulted from a +34.69% rise in Equity (see chart 7 below).
Chart 7: MTN Nigeria Debt-to-Equity Ratio H1 2020-H1 2022
Source: MTN Nigeria Financial Statement, Proshare Research.
Closing Thoughts
Corporate competition between fintech companies and telcos will become stiffer in the months ahead, with the odds favouring the telcos. The broad service outlook would see telcos achieve the following:
- Higher data service revenues as more businesses take to online methods of cutting operating costs and building into customer experience journeys
- More startups gain online acceptability and penetration
- More youthful service providers begin to offer superior online content
- To reduce costs, more qualitative tertiary education move online and more skills training programmes in programming, computer science, and data analysis become accessible to those keen on making career changes and enhancing their incomes without the additional costs associated with travelling
- As digital commercial activities rise, many internet users would pay and settle transactions using PSB platforms such as MTN’s MoMo.
- MTN would increasingly see itself in retail competition with platforms such as Jumia and Jumia Pay. The problem with Jumia is that their fulfilment expenses would likely rise notably in a high inflation environment like Nigeria.
- PSBs will need to scale their businesses rapidly as they hunt for critical user figures that enable them to turn decent margins on services
- The decision of the federal government to impose a five percent tax on call and data services could have an initial adverse effect on the growth of data and call services. The rise is not likely to do severe damage to long-term growth.
The battleground between fintech companies and telcos is quiet for now, but as MTN and Airtel Africa scale their PSB services, blood will likely flow on the business battlefields; how MTN will be affected by this will depend on guile, guts and grit.