The never-ending twists and turns involving beleaguered GSM operator, Emerging Markets Technology Services (EMTS) – operators of 9Mobile – took another turn as Teleology Holdings Limited (run by Adrian Wood) has pulled out from Teleology Nigeria (the consortium of investors that bought the telco). What led to the pullout according to 9Mobile was non-fulfilment of its part of the contractual obligations.
This is after Teleology became the preferred-bidder after the network was put up for sale – as a result of its default on a $2.1 billion loan from a syndicate of Nigerian banks – and had also fulfilled all requirements.
It should, however, be noted that, despite several reports about the NCC’s final approval of the sale, there is yet to be any official confirmation of same from the regulator.
In view of same this article seeks to highlight five areas of 9Mobile’s business that will require urgent attention to turn the network’s fortunes around in the shortest time possible, and to ensure maximum returns on the inevitable (and significant) capital investments that will be injected into 9Mobile to achieve these objectives.
5 key areas Teleology should focus
As with any telecommunications network, the name of the game for 9Mobile is to achieve strong EBITDA margins. This is necessary to ensure that enough free cash flow is generated for reinvestment into network assets. Traditionally, network operations have been characterised by strong revenue growth from core services – driven by a large subscriber base – as well as controlled operating expenses, culminating in high net margin percentages.
However, with decreasing revenues from voice and SMS services due to the proliferation of over-the-top (OTT) platforms that provide the same services via internet protocol, the business models of network operators are undergoing a reconfiguration.
This is the context in which the new owners of 9Mobile must rebuild.
To achieve strong network subscription growth and robust service revenues in the shortest time frame, 9Mobile must focus on, and invest in, the following five key areas:
- Service Quality
- Network investment
- Digital Services
- Enterprise Services
9Mobile’s total subscriber is peaked at almost 22 million at the end of 2016, continuing the strong year or year growth demonstrated over the prior three year period. This consistent growth was in spite of the fact that the network charged higher prices than its competitors across all its services.
Subscriber acquisition was primarily driven by the network’s reputation for high quality voice/data connectivity – despite its higher price points – and increasing customer dissatisfaction with other operators. Such dissatisfaction stemmed from a variety of issues ranging from high dropped-call rates and unsolicited SMS marketing, to poor customer service.
However, as at the end of 2017, 9Mobile’s total network subscribers had dropped to just over 15 million – including a loss of over 4 million subscribers over a 6 month period. To quantify such subscriber losses in financial terms, based on an ARPU of around $4.50/₦1,620, that means over ₦6 billion in revenues was potentially lost by the network. Surveys have shown that the network’s service quality significantly dropped after the exit of the prior owners which was the main cause of the subscriber exodus.
By quickly restoring consistent delivery of high quality voice and data connectivity – thereby regaining its reputation as a high quality network provider – 9Mobile can reclaim a significant portion of its lost subscribers based purely on loyalty to the network stemming from extended periods of customer satisfaction.
It will be difficult, however, for 9Mobile to again attract a significant number of new customers simply on the basis of their dissatisfaction with other networks. This is primarily due to rectification of the other networks’ operational deficiencies resulting from increased regulatory scrutiny.
Consequently, 9Mobile’s focus – in terms of its B2C activities – should (continue to) be on the youth segment of the population, particularly those in regions of the country with low teledensity rates; and strategies built around targeted products/services that cater directly to youth demographic segment need to be quickly developed.
The second key area on which 9Mobile must focus is network investment. To achieve the above discussed service quality significant capex – ranging from 30-40% of total revenues on average – must necessarily be (re)invested in network equipment and capabilities. Thus the bulk of any capital to be invested in the company by the new owners must necessarily be allocated to address these concerns.
Moreover, market data (both domestic and international) points towards significant increases in demand for data – based on the fact that the bulk of all network activity in the market is related to internet access and usage.
Research from Ovum predicts telecoms data revenue to grow at a CAGR of 25.1% between 2016 and 2022. Additonally, non-SMS data only accounted for 16.4% of mobile revenue in Africa in 2016, but is expected to rise to 47.5% in 2022.
All network providers in the Nigerian market have already witnessed healthy growth in their respective data revenues – at a rate of 20% on average. This in turn has been one of the primary drivers of growth in their overall service revenues, notwithstanding, consistent declines (of 4 – 7%) in revenues from their core voice and SMS services.
The other side of the coin is that for a network operator to capture the increasing demand for data, and by extension revenues from same, significant capital expenditures are required to optimise the operator’s capacity to satisfy this demand by constantly investing in the maintenance and upgrade of the network infrastructure.
So, for 9Mobile to ensure that it is able to attract a significant amount of subscribers over the short term and sustain such growth, it is imperative that the EMTS focuses heavily on its network investments. Additionally, 9Mobile should target its network investments predominantly towards maintaining and increasing its 3G, 4G (LTE), and W-CDMA capabilities. This is despite market leaders increasingly focusing on 5G roll outs. 3G & 4G-LTE network capabilities are still the most important network infrastructure in a developing market like Nigeria. This is certainly the case, at least until deployment of a critical mass of broadband fibre optic connections across the country by the infrastructure companies (Infracos) that have been licensed for this purpose.
As a side note, with the rising costs associated with traditional network infrastructure, innovative operators are increasingly finding ways of integrating cloud technology into their services for not only lower costs but also provide their own branded OTT services. This may be something for the management of 9Mobile to also consider.
Digital services have brought about a new frontier for network operators. Examples of such services include access to multimedia content, mobile financial services, healthcare (virtual care) and location-based or lifestyle services. 9Mobile’s competitors have seen significant revenue growth from this service segment, ranging from 15 – 25% annually on average, and with same forming an increasing proportion – predicted to reach as high as 15% by 2022 – of overall service revenues.
Although it is true that digital services generate lower margins for network providers, they also require much lower capex investment and such services, when properly executed, have proven to be a primary driver of net margins for African telecoms businesses over the last few years.
Given that revenues from core services such as voice and SMS are struggling revenues, digital services combined with growing data access and usage demand, will serve to significantly offset the decline.
Notwithstanding that data access/usage will be the main source of revenue-growth for operators, these revenue channels will not generate the necessary EBITDA for the required cashflow to invest in maintaining/upgrading network assets. This means that digital services – with much lower capex and cost profiles – can and should be the predominant means of driving subscriber and overall service revenue growth, as well as potentially becoming a significant source of revenue for an operator; including revenues that would be generated from outside the mobile network ecosystem.
Total number of mobile network subscribers in Nigeria have crossed 160 million, representing over 70% of the country’s population. Total internet subscribers are just over 100 million which represents almost 60% of the populace.
This shows that the mobile communications market is nearing peak saturation thus limiting the scope for future growth – based on traditional models and services. This means the only real growth opportunities for a network seeking to gain significant market share quickly – like 9Mobile – is in the enterprise/B2B segment.
While the consumer market is forecasted to grow by 0.6% on an annual basis globally, the B2B market is expected to grow by 2.6%. These growth projections are even bigger in developing markets such as Nigeria, with the largest opportunities predicted to be in information security, enterprise mobility management, unified communications, cloud services and analytics.
It is estimated that there are almost 10 million registered businesses in Nigeria – and a lot more than that when informal businesses are factored in. Currently, the total size of the enterprise market is under 1 million – given that total fixed/wired subscribers is just over this number and not all of those customers will be businesses.
Additionally, almost all of these businesses rely to some extent on data access and usage, with a growing number increasingly digitizing their models and operations. When one also considers the large and equally growing number of new entrepreneurs, with data-hungry businesses that are almost completely reliant on internet connectivity, then the opportunities become even clearer.
By developing innovative, solution-driven services for Nigerian businesses, 9Mobile could quickly find itself as the leading network provider in this segment.
As EMTS focuses its investments in the forementioned areas of focus, such efforts must equally be matched with significant expenditure on promoting 9Mobile’s services and targeting its marketing communications appropriately.
Key activities must include extended televsion/radio advertisement campaigns and programme sponsorship; powering strategically beneficial national events/initiatives; endorsement of celebrated personalities; social media advertising campaigns; and partnerships with local communities and/or institutions that work with the target demographies.
Naturally, 9Mobile will also have to develop attractive promotional offerings in the short term to acquire an initial base of new subscribers. Innovative (low cost-large data) promotional packages and zero-rated service bundles (such as data-free use of social media or entertainment services) will quickly need to be developed and heavily marketed in an extended all media campaign.
Another concern of key importance that will be addressed by appropriate marketing investment is its effect on customer psychology. The more investment made in highly visible brand marketing, the more the public will see the network as a stable entity – an important psychological association that is desperately needed by 9Mobile in the wake of all its recent turbulence.
After a tumultuous year, with significant subscriber losses amidst debt troubles and ownership uncertainty, the first steps have now been taken towards the recovery of EMTS and its network 9Mobile; the steps being the achievement of financial and management stability.
What is now key for the management team is for an extensive review of the network’s current position in respect of the five above-highlighted areas, and appropriate statetgies developed and implemented to ensure the network immediately begins to recapture lost ground and gain additional market share in the shortest time period.
The telecommunications sector is currently undergoing rapid change, and this presents an basis for 9Mobile – as with its competitors – to adapt its business models and operations accordingly. 9Mobile may have suffered serious disruption of late, but given that the entire sector is also experiencing wider disruption from outside forces, a window of opportunity has presented itself for the network to capitalise on the shifting landscape by focusing on the five highlighted areas.
Olumide Mustapha (Esq. MIOD ACTI ACIArb BL(Hons) QSEW BA) is a Senior Partner at Technolawgical Partners – one of the leading Telecoms/Media/Technology advisory firms in Nigeria. He is a Corporate Lawyer, Business Analyst and Tax Consultant with specialised expertise in African Telecoms, Media and Technology sectors. He is a qualified legal advisor in both the UK and Nigeria and has over 10 years experience working with local and international clients in these sectors to sustainably grow their businesses. Follow Olumide on his Twitter account and Medium blog for regular legal, business, and tax insights related to the new Africa economy.
Why Insurance firms are selling off their PFAs
It has not been uncommon over the years to have insurance companies with pension subsidiaries.
The idea of mitigating risks and curtailing losses at the bare minimum begins from the insurance industry and only crosses into the pension space with the need for retirement planning. For this reason, it has not been uncommon over the years to have insurance companies with pension subsidiaries. However, controlling the wealth of people is no easy feat – and crossover companies are beginning to think it might not be worth it competing with the big guns; that is, the pension fund administrators (PFAs) that already cater to the majority of Nigerians.
A few months ago, AXA Mansard Insurance Plc announced that its shareholders have approved the company’s plan to sell its pension management subsidiary, AXA Mansard Pensions Ltd, as well as a few undisclosed real estate investments. It did not provide any reason for the divestment. More recently, AIICO Insurance Plc also let go of majority ownership in its pension arm, AIICO Pension Managers Ltd. FCMB Pensions Ltd announced its plans to acquire 70% stakes in the pension company, while also acquiring an additional 26% stake held by other shareholders, ultimately bringing the proposed acquisition to a 96% stake in AIICO Pension. The reason for the sell-off by AIICO does not also appear to be attributed to poor performance as the group’s profit in 2019 had soared by 88% driven by growth across all lines of business within the group.
So why are they selling them off?
Pension Fund Administration is, no doubt, a competitive landscape. Asides the wealth of the over N10 trillion industry, there is also the overarching advantage that pension contributors do not change PFAs regularly. Therefore, making it hard to compete against the big names and industry leaders that have been in the game for decades – the kinds of Stanbic IBTC, ARM, Premium Pension, Sigma, and FCMB. Of course, the fact that PFAs also make their money through fees means the bigger the size, the more money you make. With pressure to capitalize mounting, insurance firms will most likely spin off as they just don’t have the right focus, skills, and talents to compete.
The recent occurrence of PENCOM giving contributors the opportunity to switch from one PFA to another might have seemed like the perfect opportunity for the smaller pension companies to increase their market shares by offering better returns. More so, with the introduction of more aggrieved portfolios in the multi-fund structure comprising of RSA funds 1, 2, & 3, PFAs can invest in riskier securities and enhance their returns. However, the reality of things is that the smaller PFAs don’t have what it takes to effectively market to that effect. With the gains being made from the sector not particularly extraordinary, it is easier for them to employ their available resources into expanding their core business. There is also the fact that their focus now rests on meeting the new capital requirements laced by NAICOM. Like Monopoly, the next smart move is to sell underperforming assets just to keep their head above water.
Olasiji Omotayo, Head of Risk in a leading pension fund administrator, explained that “Most insurance businesses selling their pension subsidiaries may be doing so to raise funds. Recapitalization is a major challenge now for the insurance sector and the Nigerian Capital Market may not welcome any public offer at the moment. Consequently, selling their pension business may be their lifeline at the moment. Also, some may be selling for strategic reasons as it’s a business of scale. You have a lot of fixed costs due to regulatory requirements and you need a good size to be profitable. If you can’t scale up, you can also sell if you get a good offer.”
What the future holds
With the smaller PFAs spinning off, the Pension industry is about to witness the birth of an oligopoly like the Tier 1 players in the Banking sector. Interestingly, the same will also happen with Insurance. The only real issue is that we will now have limited choices. In truth, we don’t necessarily need many of them as long all firms remain competitive. But there is the risk that the companies just get comfortable with their population growth-induced expansion while simply focusing on low-yielding investments. The existence of the pandemic as well as the really low rates in the fixed-income market is, however, expected to propel companies to seek out creative ways to at least keep up with the constantly rising rate of inflation.
Nigerian Banks expected to write off 12% of its loans in 2020
The Nigerian banking system has been through two major asset quality crisis.
The Nigerian Banking Sector has witnessed a number of asset management challenges owing largely to macroeconomic shocks and, sometimes, its operational inefficiencies in how loans are disbursed. Rising default rates over time have led to periodic spikes in the non-performing loans (NPLs) of these institutions and it is in an attempt to curtail these challenges that changes have been made in the acceptable Loan to Deposit (LDR) ratios, amongst others, by the apex regulatory body, CBN.
Projections by EFG Hermes in a recent research report reveal that as a result of the current economic challenges as well as what it calls “CBN’s erratic and unorthodox policies over the past five years,” banks are expected to write off around 12.3% of their loan books in constant currency terms between 2020 and 2022, the highest of all the previous NPL crisis faced by financial institutions within the nation.
Note that Access Bank, FBN Holdings, Guaranty Trust Bank, Stanbic IBTC, United Bank for Africa and Zenith Bank were used to form the universe of Nigerian banks by EFG Hermes.
Over the past twelve years, the Nigerian banking system has been through two major asset quality crisis. The first is the 2009 to 2012 margin loan crisis and the other is the 2014 to 2018 oil price crash crisis.
The 2008-2012 margin loan crisis was born out of the lending institutions giving out cheap and readily-available credit for investments, focusing on probable compensation incentives over prudent credit underwriting strategies and stern risk management systems. The result had been a spike in NPL ratio from 6.3% in 2008 to 27.6% in 2009. The same crash in NPL ratio was witnessed in 2014 as well as a result of the oil price crash of the period which had crashed the Naira and sent investors packing. The oil price crash had resulted in the NPL ratio spiking from 2.3% in 2014 to 14.0% in 2016.
Using its universe of banks, the NPL ratio spiked from an average of 6.1% in 2008 to 10.8% in 2009 and from 2.6% in 2014 to 9.1% in 2016. During both cycles, EFG Hermes estimated that the banks wrote-off between 10-12% of their loan book in constant currency terms.
The current situation
Given the potential macro-economic shock with real GDP expected to contract by 4%, the Naira-Dollar exchange rate expected to devalue to a range of 420-450, oil export revenue expected to drop by as much as 50% in 2020 and the weak balance sheet positions of the regulator and AMCON, the risk of another significant NPL cycle is high. In order to effectively assess the impact of these on financial institutions, EFG Hermes modelled three different asset-quality scenarios for the banks all of which have their different implications for banks’ capital adequacy, growth rates and profitability. These cases are the base case, lower case, and upper case.
Base Case: The company’s base case scenario, which they assigned a 55% probability, the average NPL ratio and cost of risk was projected to increase from an average of 6.4% and 1.0% in 2019 to 7.6% and 5.3% in 2020 and 6.4% and 4.7% in 20201, before declining to 4.9% and 1.0% in 2024, respectively. Based on its assumptions, they expect banks to write-off around 12.3% of their loan books in constant currency terms between 2020 and 2022, a rate that is marginally higher than the average of 11.3% written-off during the previous two NPL cycles. Under this scenario, estimated ROE is expected to plunge from an average of 21.8% in 2019 to 7.9% in 2020 and 7.7% in 2021 before recovering to 18.1% in 2024.
Lower or Pessimistic Case: In its pessimistic scenario which has a 40% chance of occurrence, the company projects that the average NPL ratio will rise from 6.4% in 2019 to 11.8% in 2020 and 10.0% in 2021 before moderating to 4.9% by 2024. It also estimates that the average cost of risk for its banks will peak at 10% in 2020 and 2021, fall to 5.0% in 2022, before moderating from 2023 onwards. Under this scenario, banks are expected to write off around as much as 26.6% of their loan books in constant currency terms over the next three years. Average ROE of the banks here is expected to drop to -8.8% in 2020, -21.4% in 2021 and -2.9% in 2022, before increasing to 19.7% in 2024.
Upper or optimistic case: In a situation where the pandemic ebbs away and macro-economic activity rebounds quickly, the optimistic or upper case will hold. This, however, has just a 5% chance of occurrence. In this scenario, the company assumes that the average NPL ratio of the banks would increase from 6.4% in 2019 to 6.8% in 2020 and moderate to 4.8% by 2024. Average cost of risk will also spike to 4.2% in 2020 before easing to 2.4% in 2021 and average 0.9% thereafter through the rest of our forecast period. Finally, average ROE will drop to 11.6% in 2020 before recovering to 14.4% in 2021 and 19.0% in 2024.
With the highest probabilities ascribed to both the base case and the pessimistic scenario, the company has gone ahead to downgrade the rating of the entire sector to ‘Neutral’ with a probability-weighted average ROE (market cap-weighted) of 13.7% 2020 and 2024. The implication of the reduced earnings and the new losses from written-off loans could impact the short to medium term growth or value of banking stocks. However, in the long term, the sector will revert to the norm as they always do.
Even with a 939% jump in H1 Profit, Neimeth still needs to build consistency
Neimeth has been one of the better performers in the stock market in the last one year.
Neimeth’s profit after tax for H1 2020 might have jumped by 939% from H1 2019, but there’s still so much the company needs to do to remain in the game.
For the first time in years, Pharmaceutical companies across the globe are in the spotlight for a good reason. As the COVID-19 pandemic rages on, the world waits patiently for this industry to produce a vaccine that can once again lead us back to the lives we all missed. Nigeria is also not an exception, it seems. One of Nigeria’s oldest pharmaceutical companies, Neimeth, has been one of the better performers in the stock market in the last one year. However, there is still so much the company needs to do to earn profits consistently.
Neimeth’s recently released H1 2020 results show a jump of 19.4% in revenue from ₦976 million earned in H1 2019 to ₦1.165 billion in H1 2020. While this is impressive, its comparative Q2 results (Jan-March ‘ 20) show a drop in revenue of 25.4% from ₦748.8 million earned in Q2 2019, to the ₦568.7 million revenue in Q2 2020. In similar vein, while its profit-after-tax soared by 939% from ₦5.447 million in H1 2019 to ₦56.596 million in H1 2020, its quarter-by-quarter results show a drop of 118%. While there is a truth that some months are better performers than others, Neimeth’s extreme profit jump in the half-year results juxtaposed with the more-than-100% drop in the first quarter of this year, reveal wide-gap volatility in its earning potential. Its revenue breakdown attributes the quarter-by-quarter drop in revenue to a comparative drop in its ‘Animal Health’ product line by a whopping 897.42%. The ‘Pharmaceuticals’ line also only experienced a marginal jump of 2.57%.
Full report here.
Current & Post-Covid-19 Opportunities
A 2017 PWC report had revealed that by 2020 the pharmaceutical market is expected to “more than double to $1.3 trillion. Mckinsey had also predicted that come 2026, Nigeria’s pharma market could reach $4 billion. The positive outlook of the industry is even more so, following the disclosure by the CBN to support critical sectors of the economy with ₦1.1 trillion intervention fund.
The CBN governor, Godwin Emefiele, had stated that about ₦1trillion of the fund would be used to support the local manufacturing sector while also boosting import substitution while the balance of ₦100 billion would be used to support the health authorities towards ensuring that laboratories, researchers and innovators are provided with the resources required to patent and produce vaccines and test kits in Nigeria.
While manufacturing a vaccine for the Covid-19 pandemic might be nothing short of wishful, the pandemic presents a global challenge that businesses in the healthcare industry could leverage. Through strategic R&D, it could uncover a range of solutions, particularly those that involve the infusion of locally-sourced raw materials.
In order for the company to attain sustainable growth, it needs to come up with structures and systems that are dependable, while also tightening loose ends. One of such loose ends is its exposure to credit risk. It’s Q2 2020 reports reveal value for lost trade receivables of N693.6 million carried forward from 2019. To this end, it notes that while its operations expose it to a number of financial risks, it has put in place a risk management programme to protect the company against the potential adverse effects of these financial risks.
At the company’s last annual general meeting (AGM), the managing director, Matthew Azoji, had also spoken on the company’s efforts to gain a larger market share through its initiation of bold and gradual expansion strategies.
The total revenue growth and profitability of the half-year period undoubtedly signals a potential in the company. However, we might have to wait for the company’s strategies to crystalize and attain a level of consistency for an extended period before reassessing the long-term lucrativeness of its stock or otherwise. That said, it certainly should be on your watchlist.