May 11, 2021/Proshare

by FBNQuest Research

3% increase to our price target

We maintain our Outperform recommendation on MTN Nigeria (MTNN) and increase our price target by 2.6% to NGN221.2 following its impressive Q1 ’21 results. The results continue to reflect improving trends in the operating environment and increased consumer appetite for telecoms services. Despite a deceleration in subscriber growth due to regulatory restrictions on new SIM sales and activation during the quarter, we estimate that MTNN’s blended and data ARPU were up 5% y/y (6% q/q) and 14% y/y (13% q/q) to NGN1,736 and NGN1,082 respectively.  

Following its accelerated site roll-out (with 4G coverage at 62% from 48% Q1 ’20), data revenue grew 43% y/y to.N106bn and now contributes a 28% share of total revenue, up from 23% in Q1 ’20 (25% Q4 ’20). This growth was driven by a 21% y/y increase in active data subscribers to 32.5 million and a 27% y/y rise in smartphone penetration to 36.3 million. Although active data subscribers declined by c.71,000 on a sequential basis, data revenue grew 16% q/q on the back of an 87% y/y increase in data traffic. The recovery in voice also carried on into Q1, with an 8% y/y increase in revenue. As such, we have increased our sales forecast by around 3% on average over the ’21-22f period. Earlier this month MTNN issued a NGN110bn 7-year 13.0% fixed rate bond.  

We expect to see a further reduction in net interest expense following its strategy of substituting fixed-rate debt for some of its variable debt. Consequently, we have lowered our net interest expense by c. -25% on average. These revisions underpin the 12% average increase to our ’21-22f earnings forecasts. However, our new price target is only c.3% higher because we have increased the risk-free rate driving our DCF model by 150bps to 12.5%. Looking ahead, we expect the resumption of SIM sales and activation to bode well for revenue and earnings.  

Also, MTNN’s recent acquisition of an additional (800MHz) spectrum from Intercellular Nigeria will be supportive of data traffic. As such, we forecast ’21f sales and PBT growth of 13% and 28% y/y to NGN1.5trn and NGN383bn respectively. Having shed -4.6% ytd vs. -2.4% for the ASI, the shares now imply a potential upside of 37% from current levels. Consequently, we retain our Outperform recommendation on the shares. 

Q1 PBT up 34% y/y

MTNN’s Q1 PBT grew 34% y/y to NGN103bn. The key drivers were sales growth of 17% y/y, a 90bp y/y EBITDA margin expansion to 53.1% and an 11% y/y reduction in net finance costs to NGN30bn. Further down the P&L, PAT expanded by 43% y/y, thanks to a 433bp reduction in the tax rate to 28.4%. Sequentially, sales advanced 4% q/q. However, PBT and PAT grew 18% q/q and 21% q/q respectively.