MTN Nigeria Communications Plc

MTN NIGERIA COMMUNICATIONS PLC

Company Overview
MTNN was established on November 8, 2000 to provide GSM Cellular Network Systems and related services in Nigeria. It remains the largest telecommunications company in Nigeria with over 60 million subscribers. MTNN is a subsidiary company of MTN International (Mauritius) Limited. It is a member of the MTN Group headquartered in South Africa. MTN Group is a telecommunications company with presence in Africa and the Middle East. MTNN produced 28.2% of group revenue in 2018 behind South Africa which produced 33.2%.   The companyꞌs shares were listed by introduction on the Nigerian Stock Exchange (NSE) on 16th May, 2019. Yello Digital Financial Services Limited was established during the year under review in order to provide mobile financial services.

MTNN would leverage on 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.

Mr. Pascal Dozie is the chairman of the board of directors while Mr. Ferdinand Moolman is the chief executive officer of the company. Dr. E. Ndukwe joined the board on June 1, 2018.

Investment Thesis
Data revenue is expanding due to vast coverage, improving smartphone use and large subscriber base. Data revenue more than doubled in two years from NGN67.9 billion in 2016 to NGN165.2 billion in 2018.

Yello Digital Financial Services Limited is awaiting the authorisation of the Central Bank of Nigeria before it begins mobile banking operations in Nigeria. We expect digital revenue to rally having lost 53.5% in two years.

The business is capital intensive. Capital spending increased to NGN201.2 billion, up from NGN193 billion of a year ago. This increased indebtedness and 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 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.

Its Quarter 1 result to 31st March 2019 showed that Return on Equity (RoE) was 24.9% while Return on Assets (RoA) was 3.3%. Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) margin was 53.3% compared to 41.8% of the corresponding quarter of the previous year. Profit Before Tax (PBT) and Profit After Tax (PAT) got better by 44.1% and 50.4% respectively compared to the previous period.

Valuation
Earnings Per Share (EPS) of NGN357.9 surpassed the three-year average EPS of NGN258.4. Book Value Per Share (BVPS) was NGN538.8, up by NGN261.6. At present, a share of MTNN trades at 0.4 and 0.3 times 2018 year-end earnings and book value respectively. We put a share of MTNN at a value between NGN141.5 and NGN167.9.

Financial Overview
At 31 December 2018, MTNN had revenue of NGN1.039 trillion, up by NGN151.9 billion from the end of 2017. A strong growth in airtime and subscription, as well as the continued expansion of data revenue, supported the overall revenue acceleration. Airtime and subscription rose 21.5% to NGN676.4 billion, data revenue was up 41.4% to NGN165.2 billion, SMS gained 13.1% to NGN14.3 billion and digital revenue decreased 41.4% to NGN40.7 billion.

Operating profit of NGN266.1 billion was a 35.8% improvement on the reported figure for the prior year. Both PBT and PAT increased by 105.2% and 79.7% respectively compared to 14.8% and 8.7% drop of 2017. The operating profit margin was 25.6% compared to 22.1% in December 2017. PBT margin and PAT margin gained 9.1% and 4.9% respectively to 21.3% and 14%.  Return on Average Equity (RoAE) rose to 87.7% in 2018 from 83.4% of 2017. Return on Average Assets (RoAA) was 15.2%, having gained 7.1% in one year.

Earnings Per Share stood at NGN357.87 compared to NGN199.15 in the previous year. Shareholdersꞌ fund jumped by 94.4% to NGN219.4 billion. Total assets dipped 2.9%. Total debt was NGN175.3 billion out of which NGN143.9 billion was short-term in nature. Total debt was 79.9% of shareholdersꞌ fund and 18.6% of total assets. Operating profit and cash flow from operation can cover the interest payment 4 times and 3.6 times respectively.

Business Risk
The digital business is attracting a number of participants with the liberalisation of mobile financial services. Rapid technological growth produces substitute products and interruption of operations. This would lead to price and product erosion with impact on revenue and profit margins. Non-compliance with regulations could result in losses emanating from fines.

Recommendation: Buy