MTN Nigeria released its Q1 22 results with EPS increasing 31.3% yoy to NGN4.8. Revenue performance (+22% yoy) was positive overall on the back of growth across all service segments. Data revenue grew by 54.5% yoy, SMS by 25.1%, voice by 4.7%, and Others by 25.9%. In addition, PBT grew by 39.4%, while PAT grew by 31.3%. Below, we review the key highlights of the Q1 22 results and reiterate our Buy recommendation for MTN Nigeria.
Positive performance in key metrics: MTNN recorded solid performance across all revenue lines. Also, MTNN has managed to grow its subscriber base qoq after declining significantly in 2021. The overall average revenue per user has increased by c26% yoy, and average data revenue per user has grown by 43% yoy. The fintech subscriber base has also gained momentum with c10.7mn subscribers, more than double the base in Q1 21.
Margin expansion: MTN Nigeria has consistently improved profit margins as revenue growth continues to surpass expense growth. Q1 22 EBITDA margin (54.6%) improved yoy and qoq (53.1% in Q1 21 and 54.1% in Q4 21). Net margin also followed a similar trend despite a significant increase in tax expenses (59.9%). Although, operating expense is rising, management has managed to keep the growth rate below overall revenue growth.
Healthy leverage: MTNN has maintained a healthy leverage position. As of Q1 22, the Debt (including lease liability) to Asset ratio came down to 50.8% (down from 59.5% in Q1 21). The company has also been able to moderate FX exposure risk by limiting its FX borrowings to less than 10% of its total borrowing.
Key negatives and concerns
It's not all rosy for the telco – we highlight some of the negatives and critical concerns that we have.
Significantly higher tax expense: We noted a significant increase (+59.9%) in tax expense, which is much higher than the 39.4% increase in profit before taxes (PBT). This is partly due to an increase in education tax rate from 2.0% to 2.5% by the federal government and lower tax expense in Q1 21 (due to release of an over-provision in deferred tax provisions).
Inflationary pressures on margin: In Q1 22, the telco's direct network cost increased by 14.3% while total operating expenses increased by 22.2%. This is partly due to network expansion. However, higher fuel cost and local inflationary pressures are also contributing factors. Although MTNN's revenue has outstripped cost, profit margins could be affected should these macro issues persist.
Elsewhere, the Association of Licensed Telecommunication Operators of Nigeria is proposing a 40% increase in Voice, SMS, and Data tariffs to cushion Nigeria's consistently high inflation. Although it has not been approved yet, we believe the impact could be mixed as higher tariffs could affect traffic growth.
SIM disconnection: In April 2022, the federal government of Nigeria announced that the deadline for the SIM registration exercise would no longer be extended, and SIMs that have not complied with the National Identification Number (NIN) requirement would be barred from making outgoing calls.
When the directive was announced, c23mn MTNN subscribers had not submitted their NIN, but as we predicted, it has picked up since with 8.7mn subscribers submitting their NIN. Currently, revenue from outgoing calls from the barred customers account for c7% of service revenue. Although it is not alarming, we remain concerned about the potential escalation of restrictions to incoming calls and data services by the Nigeria Communications Commission (NCC).
We reiterate our Buy recommendation
We have a buy recommendation on MTN Nigeria, with an unchanged 12-month target price of NGN240, translating to an ETR of 13%, but the mobile money upside potential could deliver an additional 25% (depending on the commencement and proper execution of the payment service bank). MTNN is trading at an EV/EBITDA of 7.5x and a P/E of 14.3x. We have a Buy recommendation for the following reasons:
Positive revenue and profit outlook: We expect significant 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. We expect other revenue lines to maintain a stable growth trajectory. We expect this to also translate to a decent dividend payout. We forecast an EPS of NGN20 for FY 22, translating into an NGN16 DPS (assuming an 80% payout ratio – management guidance) equivalent to c7% dividend yield.
Well-positioned for the future: Apart from MTNN's current market dominance, it is also well-positioned to maintain market leadership for the foreseeable future. With the recent acquisition of a 5G licence, MTNN will have an additional competitive advantage over the other operators who could not secure a 5G licence.
Potential upside from new PSB licence: The Central Bank of Nigeria has granted MTN Nigeria final approval to operate a Payment Service Bank (PSB). The mobile money arm will give MTNN a sizable upside potential (although it is still unclear when operations will commence). Although the Nigerian payment market is competitive, we believe telco-led mobile money services' network effect, a strong network of agents, and first-mover advantage give MTNN a solid competitive chance. As a result, we believe the new business opportunity could add as much as NGN56.8 ($0.13) per share to MTNN's valuation (from our blue sky valuation).