Investing can be one of the most complicated ventures anyone can undertake.
Several Wall Street firms use advanced mathematical models, employ PhD holders, and develop entire research departments just to select stocks or commodities that might perform well.
However, some investors achieve remarkable success by simply investing in a high-performing sector. While this method might seem crude, it has proven surprisingly effective.
For years, in the Nigerian market, the telecom sector has been a go-to for investors wishing to bypass the intricate analysis and complex research typically involved in investment decisions.
The sector has been growing exponentially, and even the most average investor who recognized the opportunity early on could pass as a Warren Buffett understudy. A modest investment, combined with exceptional service delivery and increased consumption, could do the heavy lifting. But is this trend about to change?
The telecom sector has had consistent performers. For instance, in 2022, Airtel Africa posted $5.25 billion in revenue and $1.5 billion in profit, with basic earnings per share at 17.7 cents, a 5.2% increase from 2021. Airtel Africa has consistently shown strong returns, with 1-year returns of 7.94%, 3-year returns of 11.69%, and 5-year returns of 15.64%.
These numbers depict a thriving sector. However, as the general business climate in Nigeria undergoes a seismic shift with businesses adjusting to prevailing economic realities, many were surprised by the revelation that the sector is in an “ICU.” Even the most pessimistic experts had envisioned the telecom sector surviving at best, with dire conditions at worst.
Karl Toriola, CEO of MTN Nigeria, speaking at the telecom investment forum hosted by the Financial Derivatives Company (FDC) in Lagos, stated that despite significant growth over the past two decades of liberalization, the telecom sector now faces serious threats due to rising costs and unsustainable pricing. He warned that investments may indeed cease in the coming years as profit margins continue to dwindle.
A closer examination reveals the gravity of these issues. In 2023, MTN Nigeria reported a significant loss of N137 billion, following a profitable year in 2022 with N348.7 billion in profits.
A review of stock performances for the top listed telecom companies in Nigeria also highlights the sector’s struggles. MTN Nigeria (-24.32% YTD) and Airtel Africa (-14.52%) reflect the sector’s challenges.
Signs of a Contracting Telecom Sector
Unchanged Tariff Charges: Data and call rates have largely remained unchanged despite inflation in other commodities and prices in Nigeria. MTN TruTalk, for example, still offers calls for as low as 14 kobo per second across all local networks in Nigeria after paying a daily access fee of ₦10. While this is beneficial for customers, it signals a contracting market where revenues are dwindling and price points remain stagnant.
Increased Energy Costs: Energy costs have risen globally, and Nigeria is no exception. Compounding this issue is the country’s unreliable electricity supply. According to Venture Africa, telecoms were promised at least 18 hours of electricity supply in 2001, but 23 years later, Nigeria has yet to resolve its power issues. As energy costs continue to rise, more telecoms are likely to struggle.
Dwindling Bottom Line: A healthy bottom line attracts more investors, improving infrastructure and processes. Conversely, a declining bottom line indicates a struggling business, leading to a drying up of the investor pipeline. As the numbers suggest, Nigerian telecoms are having difficulty posting positive returns, and this trend may continue.
Implications for Prospective Investors:
Customer Base Reduction Projections: According to the Nigerian Communications Commission (NCC), Nigeria had over 156 million active internet subscriptions as of June 2023, with mobile data accounting for the majority. Some telecoms are considering load shedding, meaning that some infrastructure would be shut down during certain times of the day or in specific areas to reduce costs. This could lead to reduced quality of service and drive customers toward alternatives like Starlink, which is already the third-largest ISP in Nigeria. If quality further deteriorates, more users may switch from traditional ISPs like MTN, Airtel, and GLO.
Lower Overall Growth Potential and Returns Projections: The sector shows limited growth potential, with potential solutions likely to have detrimental short-term effects. If telecoms increase tariffs, many customers may cut back on data and airtime spending. If they refuse to raise tariffs and operate with current revenue numbers, operations may become unsustainable, as Toriola pointed out. These tough decisions are expected to adversely affect both customers and telecoms in the short term.
The telecom sector has experienced rapid growth since its inception in Nigeria in the early 2000s. As with any sector that has seen such growth, stagnation is expected at some point. The key issue now is how the sector will manage and overcome these challenges.
This means that expecting multiple double-digit stock returns or exceptional profits from Nigerian telecoms may be unrealistic. Investors should recognize the current realities of the sector and adjust their return projections accordingly.