MTN Nigeria released its H1 22 results with EPS increasing 28% yoy to NGN8.9. Revenue performance (20.1% growth) was positive overall, on the back of growth across all service segments. Data revenue grew by 52.4% yoy, SMS by 37.4%, voice by 0.9%, fintech revenue by 27.8% and others by 34.8%. MTNN has declared an interim dividend of NGN5.6 (equivalent to a payout ratio of 63%). We reiterate our Buy recommendation for MTN Nigeria. Below, we review the key highlights of MTNN's H1 22 results
We have a Buy recommendation on MTNN
MTNN's growth story remains intact. We expect the double-digit revenue and profit growth to continue, on the back of data revenue acceleration driven by the increasing adoption of internet services and increased internet traffic, alongside MTNN's market leadership, and we expect the growth in data revenue to more than make up for a flat voice revenue.
We have a Buy recommendation on MTN Nigeria, with an unchanged 12-month target price of NGN299, translating to an ETR of 47%. MTNN is currently trading at a trailing 12M PE of 12.9x; although it is slightly higher than its Nigerian peer Airtel Africa's 10.9x PE, but lower than SAFCOM's current market valuation (16.8x).
Positive performance in key metrics: MTNN has maintained solid performance across most revenue lines. This is not surprising given the telco's excellent performance in Q1 2022. Worth noting is the strong growth in data as smartphone penetration increased to 51% (vs 49.3% in the previous year), and data traffic increased by 79%.
Margin expansion: MTN Nigeria has consistently improved its profit margin, despite the high inflation environment in Nigeria. H1 22 EBITDA margin increased to 53.6% (from 52% in H1 21) and net income margin increased to 19% (from 18% in H1 21).
Capital expenditure growth despite FX challenges: Capital expenditure increased by 67% despite Nigeria's FX challenges and the resulting impact on sourcing network equipment. MTNN has accelerated capex spend in H1 22 to avoid some of the imminent devaluation risks and the increasing difficulty in sourcing for FX in the country. We expect a lower capex spend in the second half of the year, given the frontloading, and we are confident that MTNN is making enough investment to commence the 5G rollout in Q3 2022
Interim dividend: On the back of strong double-digit growth in profit, MTNN declared an interim dividend of NGN5.6 (equivalent to a payout ratio of 63% and a dividend yield of 2.6% on current price). MTN has been consistent with dividend payments over the past five years, making it a great blend of strong growth and dividend yield.
Key negatives and concerns
Despite the impressive results, there are a few areas of concern, which we highlight below.
Inflationary pressures: As we highlighted previously, inflationary pressures remain a concern. Although we saw EBITDA margin and net income margin expansion in H1 22, the Q2 numbers show signs of pressure. Q2 EBITDA margin dropped to 52.6% (vs 54.6% in Q1) and net margin came down to 17.7% (vs 20.6% in Q1). Part of this is because MTNN's total operating expenses grew by 25% yoy in Q2 22, slightly higher than 23% yoy in Q1 22.
There is an ongoing conversation around a possible tariff increase, which could allay the impact of rising inflation on the operators’ margins. Although the regulator has not yet permitted the proposed increased in tariffs, we believe the impact could be mixed as higher tariffs could affect traffic growth.
Voice revenue slowdown: Voice revenue growth slowed down faster than we expected (5% yoy), growing by a mere 0.9% yoy in H1 22. Although we expect voice revenue to slow down over time, as increased data uptake enables OTT to cannibalise voice, we did not expect voice revenue to be flat. The slow growth was driven by a 2.9% yoy decline in q1 – we believe this can be attributed to the ban on outgoing voice calls for subscribers without National Identity Number (NIN), forcing a faster shift towards internet calls.