Agusto & Co recently released its 2021 Telecommunications Industry report which provides a comprehensive view of the Industry including the impact of the macroeconomic environment and COVID-19 on the Industry’s performance. The report covers recent developments in the regulatory environment and the attendant impact on the competitive landscape. Agusto & Co’s 2021 Telecommunications report highlights key risks and challenges of the Industry and provides a SWOT analysis. Furthermore, an analysis of the Industry’s financial and non-financial performance is provided, with a rating and an outlook that reflects Agusto & Co’s short-term view.
The Smartphone Revolution Continues to Drive Telephony Services across the Globe
The use of mobile phones has grown exponentially due to the smart phone revolution, a continuous upgrade of network infrastructure and improving quality of service. The latest technology – the Fifth Generation (5G), despite launch drawbacks due to the COVID-19 pandemic is commercially available in about 40 countries so far including Kenya and South Africa. Agusto & Co expects that the 5G technology will be commercially available in Nigeria by mid-2022. According to the International Telecommunications Union (ITU), global mobile phone subscriptions are expected to grow from 8.2 billion in 2020 to about 10 billion by 2025, driven by increasing affordability of smartphones and accelerating technological adoption in sub-Saharan Africa. Growth in the use of mobile phones should also be supported by population growth in the Asia-Pacific continent.
Telecommunication Services Provided Key Connectivity Platforms Following the Pandemic-induced Movement Restrictions
The COVID-19 pandemic posed an extraordinary test for the entire global community considering several social isolation measures mandated to curb the spread of the coronavirus. For this reason, the telecommunications industry provided businesses and individuals with connectivity, which fostered resilience as the world grappled with the pandemic. At the peak of the isolation, internet traffic in Europe increased by about 70% while demand for streaming services grew by at least 12%, with some of the streaming service providers having to lower video quality to manage the rise in internet traffic. In Nigeria, the proportion of mobile internet users to mobile phone subscriptions increased from 69.1% in January 2020 to 75.4% as at December 2020. Agusto & Co expects the country’s telecommunication consumption pattern to be sustained in the near-term given lingering concerns around the emergence of COVID-19 variants.
Nigeria’s Telecommunications Industry Remains Strategically Important Amid Regulatory Changes and a Fragile Economy
Nigeria’s telecommunications industry has continued to thrive on the back of the liberalisation in the early 2000’s. Between 2015 and 2020, foreign investments (portfolio and direct) attributable to the telecommunications industry amounted to US$3.9 billion, an average of 7% of Nigeria’s total capital importation during the same period. The industry has consistently remained one of the top five ranking economic sectors for foreign investments during the period. Agusto & Co believes the imminent deployment of 5G technology and the Federal Government of Nigeria’s target broadband penetration rate of 70% by 2025, will support substantial additional foreign investments in the near to medium term. Due to key connectivity support the industry provides, telecommunications was one of the economy’s few bright spots in 2020 (along with sectors such as financial institutions, agriculture and health services). Except during the 2016/2017 economic recession, the telecommunications industry’s real growth has consistently exceeded the country’s GDP growth. Furthermore, value-added services provided by telecommunications companies, albeit still a low contributor to overall earnings, has continued to expand. In 2020, two mobile network operators (9 mobile and Globacom) were granted payment service bank (PSB) licenses while MTN’s MoMo agency service which commenced in 2019 has about half a million agents across the nation.
Despite the aforementioned positives, the unstable macroeconomic environment in Nigeria poses a huge threat to successfully harnessing the vast potential the telecommunications industry. In the span of five years (2016-2020), Nigeria has gone through two economic recessions while the naira has continuously lost value against the world’s major currencies, negatively impacting purchasing power and the ability to maintain quality network equipment and services. In addition to the fragile macroeconomy, the telecommunications industry has also had its fair share of unfavourable regulatory changes through onerous tax regimes, delayed approvals and heavy regulatory penalties. Regulatory changes, with the initiation of the NIN-SIM verification exercise, drove a considerable decline in the industry’s growth rate to 6.3% in Q1 2021 from 17.7% in Q4 2020. In order to complete the NIN-SIM exercise, the NCC mandated the suspension of SIM card activations and registrations, thereby slowing the Industry’s growth pace. In only four months of the NIN-SIM verification exercise, the industry’s active telephony subscriptions reduced by 7.7% from 204.5 million as at the end of December 2020 to 188.7 million at the end of April 2021. On the back of anticipated SIM deactivations for subscribers without valid NINs, we estimate that the subscriber base will shrink by 3% (year-on-year) by the end of 2021 to 198 million subscribers. However, due to the sustained uptake in mobile internet services and increasing diversification of value-added services by telcos, we believe revenue will grow, albeit by a lower rate of 5% in 2021 (2020: 14%). We anticipate that logistics around the NIN-SIM verification exercise will be resolved by the end of 2021 and thus, double-digit top line growth should be restored by 2022.
The Outlook Remains Stable for the Telecommunications Industry
Agusto & Co expects the challenges of the Industry to remain: high business costs, especially given the consistent devaluation of the naira, prevailing inflationary pressures and the adverse impact of regulatory changes. However, the Industry’s outlook remains stable on the premise that telecommunications will provide recovery support to key economic sectors post-pandemic. Anticipated business diversification efforts of operators will also support our outlook.