MTN Nigeria has released its FY 21 results. The key positives include outstanding revenue and profitability growth (which beat expectations), impressive cost management, fintech subscriber growth, improved leverage and stable capex intensity despite huge license and spectrum spending.
In this report, we review the key highlights of the FY 21 results and reiterate our investment case for MTN Nigeria.
Reiterate Buy with an unchanged TP of NGN240
We reiterate our Buy recommendation on the back of:
Strong forecast earnings growth, which is driven by the accelerating adoption of internet services and increased internet traffic, alongside MTNN’s market leadership.
Improving leverage and strong balance sheet management.
MTNN will be paying a final dividend of NGN8.57, bringing the total dividend for 2021 to NGN13.12 (6.6% dividend yield on the current price of NGN197.5). We forecast a dividend payout of NGN16.2 in 2022 and retain our target price at NGN240, bringing our estimated total return to 30%. MTNN currently trades at an EV/EBITDA FY 21 of 4.8x, below the African telco median of 5.4x
1) Outstanding revenue growth
We had expected muted H2 21 growth due to the high base effect of H2 20 (internet traffic surged due to Covid) and we expected overall revenue growth to come in at 18% with profit growth at 30%. The actual result is much better, showing 23% growth in revenue and a 46% growth in profit.
The conclusion is that the 2020 financial result was not an outlier but the beginning of a new era, as Covid stimulated a behavioural shift that is driving accelerated adoption and usage of internet.
Data (55%), Value Added Services (52%), Interconnect and roaming (27%) and SMS (276%) demonstrated strong growth. The largest revenue contributor currently, voice revenue, grew by 7%.
2) Improved profitability and cashflows
Profitability improved as EBITDA margin and net margin expanded, fuelled by revenue growth and cost management. Management attributes the low cost growth (10.3%) to proper cost management, which was reflected in the low growth in staff costs and other administrative expenses.
Overall, MTNN continues to demonstrate strong profitability ratios across the board. Return on equity (79%), return on assets (14%) and return on invested capital (35%) all remain above our estimated cost of equity (18.6%) and weighted average cost of capital (9.4%). The factors highlighted above also translate to growth in free cashflow. MTNN grew FCF by 21% in 2021.
Management has provided guidance of a minimum growth of 20% in service revenue, and an EBITDA margin of 53-55% and we believe this is very reasonable. The growth is expected to be driven by strong growth in data revenue and minimal but resilient growth in other revenue lines. However, we are cognisant of likely competitive pressure from Airtel Africa as the telco might seek ways to accelerate utilisation of its 4G in the absence of a 5G license.
3) Spectrum, licences and capex
Capex intensity (Capital expenditure to revenue) increased slightly from 17.8% to 18.4% on the back of 26.8% growth in capex. The expansion in capital expenditure was necessitated by expanding internet usage and traffic, renewal of its Unified Access Service licence and the acquisition of a 5G license.
Looking ahead, management intends to keep capex intensity around 18%. Ideally, 5G rollout should be more expensive but the company is putting more priority on 4G population coverage expansion and has said 5G capex will be solely determined by clear demand for the technology.
4) Improved leverage
As we mentioned in 9M 2021, the telco's decision to switch from mostly foreign-denominated borrowing and floating rate loans to local-currency-denominated fixed-rate borrowing is paying off. Previously, the telco used a lot of floating rate and foreign currency loans which exposed the telco to foreign exchange losses during devaluation and interest rate risks. However, the telco took advantage of the low yield environment in Nigeria in 2020 to raise more local currency debt. In 2021, finance costs grew by 11.4% yoy on the back of slightly higher interest rates in Nigeria and the additional NGN90bn debt in 2021. Overall, leverage improved on the back of strong liability management and increased profitability. We calculate the average cost of borrowing to have declined from 11.4% in 2020 to 9.7% in 2021. The interest coverage ratio increased from 14.0x to 18.7x, while net debt/EBITDA declined from 0.4x to 0.3x yoy.
1) 25.9% increase in direct network cost
Direct network cost increased by 25.9% on the back of network expansion, as previously highlighted. Foreign exchange depreciation also impacted direct network costs given that some of the tower lease contracts are dollar-denominated. The percentage of the lease contracts that are dollar-denominated have not been disclosed. However, management disclosure claims that for every 10% devaluation, there is a 1% contraction in EBITDA margin. As we have previously highlighted, the Nigerian Naira is currently overvalued and we expect further devaluation in the future. This is a major source of risk that we continue to keep an eye on.