MTN Nigeria Communications Plc

MTN NIGERIA COMMUNICATIONS PLC

Ticker:                          MTNNNature of Business:    Telecommunications Services Location :                            Nigeria
Recent Price:           NGN187.0052-Week High/Low: NGN209.90/157.00Estimated Fair Value:    NGN110.94-NGN136.26
Expected Return:    10.8%Consider Buy:                       Below NGN123.60Business Risk:            Average
Financial Risk:      AverageEconomic Moat:                  StrongCorporate Governance: Strong

Company Overview
MTN Nigeria Communications Plc (MTNN) was established on 8th November 2000 to provide GSM Cellular Network Systems and related services in Nigeria. It remains the largest telecommunications company in Nigeria with over 60 million mobile subscribers and over 30 million active data users. MTNN is a subsidiary of MTN International (Mauritius) Limited. MTN Group Limited, a company headquartered in South Africa, is the ultimate parent company of MTNN. MTN Group Limited is a telecommunications company with a presence in Africa and the Middle East. South Africa and Nigeria are responsible for the bulk of the revenue of the group. South Africa produced 25.4% of group revenue in 2020 behind Nigeria which produced 32.3%. The company’s shares were listed by introduction on the Nigerian Stock Exchange (NSE) on 16th May 2019. MTNN has three subsidiaries namely, XS Broadband Limited, Visafone Communications Limited and Yello Digital Financial Services Limited.

Dr. Ernest Ndukwe is the chairman of the board of directors while Mr. Karl Toriola replaced Mr. Ferdinand Moolman as chief executive officer in March 2021. Mr. Ferdinand remains a board member even though he is now the group chief risk officer of MTN Group Limited. Rob Shuter resigned on 1st September 2020. Mr. Modupe Kadri was named an executive director-cum-chief financial officer on 1st March 2020.

Investment Thesis
MTNN provides broadband fixed wireless access service, telecommunication services and mobile financial services in Nigeria. It leverages its broad distribution network to grow data revenue and drive opportunities in the digital business. In addition, it stands to benefit from the young and growing population of Nigeria in which it is located.

Data revenue is expanding due to vast coverage, improving smartphone use and a large subscriber base. Data revenue more than doubled in two years from NGN154.1 billion in 2018 to NGN332.4 billion in 2020. MTNN is promoting financial inclusion by reaching many people with financial services through Yello Digital Financial Services Limited. We expect its financial services offerings to increase once final approval for the establishment of a Payment Service Bank is obtained from the Central Bank of Nigeria.

The business is capital intensive. Capital spending increased to NGN256.7 billion, up from NGN207.3 billion of a year ago. This translated to capital spending per share of NGN12.61 compared to the prior year’s NGN10.18. The increased indebtedness has exerted liquidity pressure on the company. But more spending on its network would pay off going forward by increasing coverage and usage.

The listing of the company by introduction on the NSE would prevent dilution of control as interested investors could only buy from existing shareholders. But dilution is inevitable in the near future as the company tries to raise more finance to invest in its network. A public offer would reduce its debts and ease the pressure on profits and liquidity.

MTNN’s Quarter 3 results to 30th September 2021 showed that Return on Equity (RoE) was 118.5% while Return on Assets (RoA) was 10.5% for the first nine months of the year 2021. Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) margin was 52.6% compared to 51% achieved in the corresponding quarter of the previous year. Profit Before Tax (PBT) and Profit After Tax (PAT) got better by 51.9% and 52.7% respectively compared to the previous period.

Valuation
At present, a share of MTNN trades at 18.6 and 21.3 times 2020 year-end earnings and book value respectively. We put a share of MTNN at a value between NGN110.94 and NGN136.26. A 10.8% return is anticipated on the stock of the company.

Financial Overview
MTNN had revenue of NGN1.3 trillion as at 31 December 2020, up by NGN176.6 billion from the end of 2019. Strong growth in data subscription, as well as the continued expansion of voice revenue, supported the overall revenue acceleration. Data revenue added NGN113 billion year-over-year or 64% of the total revenue increment. Voice revenue, a major revenue source, produced 56.9% of the total revenue of MTNN for the 2020 financial year (2019: 62%). Data revenue rose 51.5% to NGN332.4 billion, voice revenue was up 5.6% to NGN766.4 billion, SMS dropped 8.7% to NGN12.3 billion and digital revenue gained 3.1% to NGN37 billion.

The operating profit of NGN426.7 billion was an 8.5% improvement on the reported figure for the prior year. Both Profit Before Tax (PBT) and Profit After Tax (PAT) increased by 2.6% and 1% respectively compared to 31.6% and 39.5% rise of 2019. The operating profit margin was 31.7% in 2020 compared to 33.6% in 2019. PBT margin and PAT margin lost 2.7% and 2.1% respectively to 22.2% and 15.2%.  Return on Average Equity (RoAE) rose to 126.4%% in 2020 from 111.5% in 2019. Return on Average Assets (RoAA) was 11.8%, having deteriorated by 4.8% in one year.

Earnings Per Share stood at NGN10.08 in the year under review (2020) compared to NGN9.99 in the previous year. Shareholdersꞌ fund jumped by 22.3% to NGN178.4 billion. Total assets rose by 30.7%. Total debt was NGN1.2 trillion out of which NGN245.4 billion was short-term in nature. Total debt was 651.9% of shareholdersꞌ fund and 59.2% of total assets. Operating profit and cash flow from operation covered interest payment 3.3 times and 3 times respectively.

Business Risk
The financial technology business is attracting a number of participants with the liberalisation of mobile financial services. Digital and data communication services are also competitive.  These would lead to price erosion and thin profit margins. In addition, rapid technological growth produces substitute products and may interrupt the operations of MTNN. We are of the opinion that the failure of the company to comply with regulations could result in losses emanating from fines.

Recommendation: Overpriced

Earnings Chart of MTN Nigeria Communications Plc

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