Culled—Proshare
May 5, 2020
By FBNQuest Research
Material reductions to our 2020-22E EPS forecasts and PT
We have kept our Outperform rating on MTN Nigeria (MTNN), but cut our price target by -10% to N181.6, implying a potential upside of 56.6% from current levels. The downward revision to our price target is underpinned by i) average cuts of c.-7% to our 2020-22E EPS forecasts, and ii) a 150bp increase to the equity risk premium assumption in our DCF to 7.5%. MTNN’s Q1 2020 PBT was up by high-single-digits and was in line with our forecast. However, going forward, we expect earnings growth (and margins) to be moderated by the escalation of dollar-linked costs – mainly the cost of tower leases.
On its Q1 2020 conference call, management stated that the adjustment of the official exchange rate from c.N307 to N360 / US$ by the CBN will be applied to some dollar-linked tower contracts effective 1 April 2020. Management’s guidance on the potential impact on margins was limited. However, on the assumption that about 30% of operating costs are dollar-linked, we estimate a c.-180bp y/y contraction in 2020E EBITDA margin to 51.9%, implying a 9% y/y growth in absolute EBITDA to N687.3bn. We forecast strong revenue growth of 13% y/y for 2020E on the back of strong double-digit (+40% y/y) growth in data revenue and single-digit (+6% y/y) growth in voice.
However, given the limited pass-through arising from the uptick in operating costs, we forecast 2020E PBT growth of 6% y/y to N308.5bn. On a relative basis, MTNN shares are trading on a 2020E P/E multiple of 10.9x for 9.2% EPS growth in 2021E. These compare with the 9.7x multiple for a 3% EPS growth that our universe of non-financial stocks (ex-oil and gas) is trading on.
Q1 PBT up 9% y/y, thanks to double-digit topline growth
MTNN’s Q1 revenue grew by 17% y/y, driven by growth in both data and voice revenue. Although voice revenue was up by 7% y/y, data revenue, with a stellar growth of 59% y/y, was the stronger of the two revenue lines. The solid growth in data was underscored by a 32% y/y growth in active data subscribers to 26.8 million. Data traffic (up +130% y/y) benefitted from increased data demand for remote working and entertainment following the nationwide lockdown towards the end of Q1.
On its part, voice revenue growth was achieved on the back of a 14% y/y growth in active subscribers to 68.5 million. Thanks to the solid topline growth, PBT advanced by 9% y/y. However, PAT growth decelerated to 5% y/y because of a higher effective tax rate of 33% vs. 30.9% in Q1 2019. Sequentially, revenues were up 5% q/q. In contrast, PBT and PAT declined by -2% q/q and -6% q/q respectively.
