February 6, 2023/CSL Research

MTN Nigeria’s (MTNN) reported impressive FY 2022 results, with total Revenue growing by 21.6% to N2.01 trillion from N1.65 trillion in 2021. This was on the back of a 64.1% increase in digital revenue and a 46.9% increase in its data revenue. Revenue generated from digital services grew to N22.04bn in 2022 from N13.44bn in 2021, while revenue derived from data services surged to N764bn in 2022 from N520bn in 2021. This performance was positively impacted by a surge in mobile subscribers (up 24% y/y) and active data subscribers (up 24% y/y). The company also saw growth in the Service Revenue (up 13% y/y to N638.1bn) in FY2022. Overall, the company’s Profit after-tax peaked at a 5-year high (20.2% y/y growth to N359 billion).

We expect the company’s outlook to remain positive in 2023. We expect the upbeat performance in Data Revenue to be sustained by the company’s efforts in deepening its 5G coverage and expanding its 4G coverage. In addition, we expect the recovery in Voice Revenue to persist in the interim as the network continues to recover from the NIN-SIM saga.  This, coupled with our expectation that inflationary pressures will moderate in 2023 should soften the impact of the increased network cost on Operating Expenses and the company’s Finance Cost.

Given the impressive result posted by the company, we have made minor revisions to our model. The overall impact is a marginal increase in our price target to N275.82/s from N249.83/s previously, hence we retain our BUY recommendation. This implies an upside potential of 16% from the last closing price of N237.9/s. MTN is currently trading at a P/E of 13.49x compared to an industry P/E of 10.79x. We arrived at our target price using Discounted Cash Flow (DCF) and relative valuation methods, assigning a weighting of 60:40.

MTNN FY 2022 Nm

Source: Company, CSL Research 

MTNN sustains double-digit Revenue growth.   

MTNN’s FY 2022 results were impressive with total Revenues surging by (21.6% y/y) to N2.012trn, driven by an increase in Service Revenue, up 21.5% y/y to N2.006trn in FY 2022. The company saw increases across all revenue generating streams while data Revenue was up 46.9% y/y. Management noted that the increase in Data Revenue was positively impacted by the impressive roll-out of their 5G spectrum, the expansion of their 4G network which now covers about 74% of their broadband penetration, and the increase in their fintech operations. On the back of an increase in active mobile subscribers (up 24% y/y) we saw a recovery in voice Revenue (6.8% y/y) indicating an upbeat in customer’s patronage of voice calls. Also the recovery of subscribers lost during the NIN-Sim linkage crisis, (management noted that about 9.5 million subscribers were recovered) contributed to the recovery in data revenue. 

Fintech Revenue grew 19.6% y/y, supported by the increased interest in the company’s flagship airtime lending service (MTN Xtratime). Notably, the company’s PSB service known as the (MOMO service) has contributed significantly to the growth in fintech revenue. With over 15millon over-the-counter subscribers and 2million active wallet users, the service is primed to increase its contribution to MTN’s revenue base. The management had noted the need to increase the conversion of OTC subscribers to wallet users indicating that a payment platform might just be around the corner. We expect continued growth in Fintech Revenue to be driven by continued uptake of the service. Additionally, we think the expansion of service offerings (based on management’s guidance) in this segment that allows for cash deposit of old naira notes and the facilitation of a payment system to take advantage of the CBN cash withdrawal limits bodes well for future growth.  

We highlight that the company also added 7.2 million active data users to its network.  Management noted that the company ended the year with increased 4G coverage which stands at 74%. 

Accelerated growth in data revenue to offset slowing momentum in voice Revenue.  

The continuous decline in voice Revenue to about 60% in 2022 reflects the growing shift to a data-centric model, driven by increased smartphone penetration, increase in active data users, increase in the conversion rate of 3G to 4G and the roll out of the 5G network. Despite the 6% recovery in voice revenue due to the recovery of subscribers lost in the Sim-NIN saga, we believe that voice Revenue will moderate in the near term as the country becomes more data centric..  

Overall, we estimate voice Revenue will grow by 5%  in 2023e, which is slightly lower than the growth of 6% y/y reported in 2022. We also estimate the contribution of voice Revenue to overall Revenue will moderate to 45% in 2023e from 51.7% in 2022.  

However, we believe the slowing momentum in voice Revenue will be offset by faster growth in non-voice Revenue, especially mobile data, digital and Fintech. Rising smartphone penetration along with increasing internet penetration (47.36 as at Dec-2022), continued investment by the company in deepening their 5G coverage and expanding their 4G coverage should spur rapid growth in data usage and in turn improve data Revenue.  Against this backdrop, we estimate data Revenue will grow 40% y/y in 2023e while the contribution of data Revenue to overall Revenue will improve to 45% from 38% in 2022. All in, we project FY 2023 Revenue of N2.25trn, implying a growth of 12% when compared with FY 2022.  

Network Operating Costs surge on…… 

Direct Network Operating Cost rose significantly, up 18.8% y/y to N459.03bn. Management attributed the surge in Network Operating Cost to the several headwinds currently facing the country. The continuous scarcity of FX, energy crisis, increase cost of terminals are some of the challenges faced by the company. The extra cost incurred in rolling out the 5G network also contributed to the increase in the Network Operating Cost, these headwinds are expected to continue to pressure Network Operating Costs in the interim. Hence, we estimate a growth of 7.8% in 2023e. 

Growth in Revenue strengthens EBITDA Margin  

MTN Nigeria reported EBIDTA growth of 22% y/y to N1.07trn and EBITDA margin of 53.2%. EBITDA grew by 22% y/y to N1.97trn in FY 2022 from N877.07bn in FY 2021 while EBITDA margin grew 0.2ppts y/y to 53.2% (FY 2021; 53.0%). 

The company recognized a depreciation of N102.26bn in FY 2022 on its right of use assets, bringing total depreciation to N283.11bn in FY 2022. We estimate depreciation charge of N306.32bn in 2023e. In line with our expectation of double-digit growth in Revenue (+12% y/y in 2023e), we forecast EBITDA of N1.26trn in 2023e. Our EBITDA forecast translates to an EBITDA margin of 56% (FY 2022; 53%).       

Capex Expenditure drives an increase in net Finance Cost.

As the company continues its drive towards 4G and 5G network and fibre infrastructure expansion, rural telephony expansion, and driving spectrum efficiency, Net Finance Cost grew by 22% to N199.33bn, owing to a rise in Finance Cost to N213.09bn from N160bn ) amidst a marginal Increase in Finance Income ( N21.84bn from N11.94bn). The surge in Finance Cost was largely due to the increased cost in CAPEX expenditure by the company, up by 18.6% to N361bn, with network expansion taking 76.5% of the total expenditure. We project Finance Cost of N225.1bn in 2023e. We have also modelled an increase of 10% y/y in Finance Income in 2023e, considering the sizeable increase in the company’s cash and cash equivalents (N349.50bn in FY 2022 vs. N260.89bn in FY 2021).  

Sustained double digit top line growth buoys Profitability.    

Pre-tax Profit grew 22.3% y/y to N533.97bn in FY 2023, supported by higher growth in Profit after tax (up 20.2% to N358.88 in FY 2022). Consequently, EPS grew 39% y/y to N17.79 in FY 2022 from N14.67 in FY 2021.   The company’s management declared a final dividend of N10/s bringing total dividend declared in 2022 to N15.60/s. 

Based on our expectations of sustained double-digit growth in Revenue driven by an accelerated growth in data revenue, modest increase in Network Operating Costs and sub-inflationary growth in OPEX, we estimate Pre-tax profit of N788.75bn in FY 2023e, translating to a growth of 40% when compared to N533.97 reported in FY 2022. Our PAT forecast of N544.24bn translates to an EPS of N26.7 in 2023e.  

Valuation 

Given the impressive result posted by the company, we have raised our target marginally to N256.82/s. We also retain our BUY recommendation. This implies an upside potential of 8.0% from the last closing price of N237.9/s. MTN is currently trading at a P/E of 13.49x compared to an industry P/E OF 10.79x. We arrived at our target price using Discounted Cash Flow (DCF) and relative valuation methods, assigning a weighting of 60:40.