August 18, 2023/CSL Research

MTN Nigeria’s H1 2023 numbers were buoyed largely by double-digit growth in voice (12.1% y/y to N562.6bn) and data revenue (+34.9% y/y to N470bn), amidst inflationary growth in Operating Expenses (+18.8% y/y to N267.3bn). A net FX loss of N131.5bn contributed significantly to the decline witnessed in Pre-tax Profit, which declined by 25.4% y/y to N200.3bn in H1 2023 from N268.6bn in H1 2022.  

We maintain our positive medium to long-term outlook on MTN Nigeria, we believe the company is well positioned to benefit from further growth in mobile and data penetration in Nigeria’s telecommunications industry. Additionally, the significant investments made by the firm in improving its 4G and 5G network infrastructure and expanding data coverage should attract new customers to its network.  

We maintain our Buy recommendation on MTNN with a target price of N318.20/s. Our target price implies an upside potential of 14% compared to the last closing price of N274.40/s 0n 17 August. We arrived at our target price using a Discounted Cash Flow (DCF) and Relative valuation, assigning a weighting of 60:40. 

Source: Company, CSL Research 

MTN Nigeria’s sustained the momentum in its Revenue growth, reporting a 22% y/y growth in Revenue to N1.1tn in H1 2023 from N950bn in H1 2022. On a q/q basis, Total Revenue increased by 4% to N590.6bn in Q2 2023 from N568.1bn in Q1 2023. The growth in Service Revenue (up 21.6% y/y) remained the primary driver of the rise in Total Revenue. Service Revenue growth was supported by voice (+12.1% y/y to N562.6bn) and data revenue (+34.9% y/y to N470bn). 

Data Revenue remained strong in H1 2023 increasing by 34.9% y/y to N470bn from N348.4bn in H1 2022. The growth in Data Revenue could be attributed to the increased usage supported by the enhanced capacity through network expansion and smartphone penetration. Data revenue was negatively impacted by the harmonization of telecommunication codes by the NCC in Q2 and the implementation of a minimum age requirement for sim registration from 16 to 18 years. The company reported that its 4G network now covers 80% of the population, up from 79.1% in December 2022, and data usage (GB per user) grew by 28.2% to 8.1GB in the period under review. The number of smartphones on our network increased by 1.8 million, bringing smartphone penetration to 53.0%. The company reported that active data users increased by 11.5% to 41.0 million as it added 1.5 million active users in H1 2023.  

The management noted that the company has rolled out 833 cumulative 5G sites in 15 cities covering approximately 6% of the population, with the 5G spectrum now constituting approximately 21% of the data traffic in 5G-colocated clusters. We believe the roll out of the 5G spectrum will lead to significant growth in data subscribers in the medium to long term as customers experience improved speed when downloading and uploading contents from the internet. This, coupled with the expected hike in data tariffs should accelerate the growth in data revenue over the medium to long term. Hence, we maintain our projections of a growth of 40% in data Revenue in 2023e. We also estimate the contribution of data Revenue to overall Revenue will improve to 45% from 38% in 2022. 

Voice revenue grew at a double-digit rate of 12.1% y/y to N562.6bn in H1 2023.  We attribute the growth in voice revenue to its rural expansion program and the increase in voice subscribers which was supported by the company’s revamped voice proposition and increased customer value management. The firm recorded a 4% y/y increase in its subscriber base, adding 1.5m subscribers to increase the mobile subscribers to 77.1m in H1 2023.  

We expect the growth in voice revenue to moderate due to the growing shift to a data-centric model driven by increased smartphone penetration, and increased data usage. Also, given the recent directive of the NCC as contained in its new quality of service business rules, instructing telcos to deactivate any line that has not been used for any revenue-generating activity for 6 months, we expect voice revenue to be negatively impacted in H2 2023. Overall, we estimate voice revenue will grow by 5% in 2023e, compared to the growth of 6% 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 decline in voice revenue will be offset by growth in non-voice revenue especially mobile data and Mobile Financial Services (MFS). We saw a significant improvement in Fintech Revenue, up 7.8% y/y to N43.6bn, and digital revenue, up 49.9% y/y to N15.3bn in H1 2023. We expect to see the fintech segment contribute significantly to total revenue in the medium to long term, as the management noted that the fintech segment is on a good trajectory in terms of MoMo users and agents despite the slowdown in the growth of active MoMo users (up 33% y/y) in H1 which was due to the cash crunch. The company noted that an effective system in which the fintech business will run is now firmly in place. They noted that the company is well positioned to lead the transaction from cash to digital payments in Nigeria, working through the urban highly digitised ecosystem, but with incredible strength in the rural ecosystems where people are still very much reliant on cash. We also note that the minority investment by “Mastercard” may contribute to scaling the business in the long term. 

Considering MTN’s strong footing in the Nigerian telecoms market (market share of 38.5% as of June 2023 based on data obtained from Nigerian Communications Commission) coupled with its significant holdings of spectrum and fibre networks, we believe the company is well positioned to benefit from further growth in mobile and data penetration in Nigeria’s telecommunications industry.  

Additionally, the significant investments made by the firm in network infrastructure and expanding data coverage should enable the company to retain existing customers while innovative data bundle offerings should help attract customers to its network. MTNN’s CAPEX expenditure was down by 13.8% to N176.3 billion as the company’s capex deployment in H1 was impacted by the shortage of FX and supply chain challenges. MTN Nigeria has redirected capex from voice to data communication; a significant portion of capex is now targeted towards network expansion/upgrade and optimization for data.    

MTN Nigeria reported growth in direct network operating costs which surpassed Revenue growth, climbing by 28.3% y/y to N276.9bn in H1 2023 from N215.8bn in H1 2022. Operating Expenses rose by 18.8% y/y to N267.3bn in H1 2023 from N224.9 in H1 2022. The growth in Opex reflects the continued exposure to Naira depreciation, elevated inflation and unavailability of FX leading to increased costs of lease rentals and additional site rollout. Despite that, EBITDA increased by 20.6% y/y to N614.4bn in H1 2023 from N509.3bn in H1 2022. However, EBITDA margin shrunk by 58bps y/y to 53.3% in H1 2023. Operating Profit grew by 19.7% y/y to N421.5bn in H1 2023 from N352.3bn in H1 2022 despite an increase in Depreciation & Amortisation to N192.8bn in H1 2023.  

We note that the forex unification did not have any material impact on H1 EBITDA margins. The management noted that this was due to the nature of the company’s tower contracts. The company’s tower contracts are paid quarterly in advance, so, as of H1, the company had paid up to the end of June. Looking ahead, in H2, we expect EBITDA margins to be impacted by the new VAT on tower leases, which is expected to be effective in September 2023. In line with our projections of a double-digit growth in Revenue, we project EBITDA margin of 56% in 2023e, supported by growth in Revenue and cost optimization initiatives implemented by management. 

Net Finance Cost increased, up 164.3% y/y to N221.1bn in H1 2023 from N83.6bn in H1 2022. The elevated Net Finance Cost mirrors the 161.8% y/y increase in Finance Cost despite a 132% y/y rise in Finance Income. The increase in Finance Income was driven by higher interest earned on amortized investments (up 208.4% to N12.95bn). On the other hand, Finance Costs rose mainly due to the company’s exposure to the foreign exchange crisis given the recent devaluation of the naira with net FX loss, increasing by 864.5% to N131.5bn. The management noted that this was mainly because of the free-floating of the Naira, which led to an approximately ?127 billion loss in Q2. Given the scarcity of forex, the company’s foreign currency facilities were necessary to fund its capex program, as it took on part of its trade lines, which had to be revalued. The company noted that the foreign exchange devaluation may not have a significant effect on the company in Q3, given the nature of the company’s tower portfolio, However, we expect the full impact to kick-in in Q4. 

Pre-tax Profit decreased by 25.4% y/y to N200.3bn in H1 2023 from N268.6bn in H1 2022. Consequently, Net Profit declined by 29.1% y/y to N128.68bn in H1 2023 from N128.68bn in H1 2022. EPS declined to N6.32/s in H1 2023.  

Despite the impact of the forex loss, the firm declared an interim dividend of ?5.60/s in H1 2023. 

Outlook 

Nigeria’s mobile market is forecast to continue its upward trend, with mobile subscribers hitting 219.7 million in June 2023 and mobile broadband penetration reaching 41.07% according to Latest data from the Nigerian Communications Commission (NCC). Similarly, the number of broadband subscriptions grew to 89.73m in June 2023. The growth in mobile connection is projected to be driven by further uptake of mobile services, especially in rural areas, enabled by the improving affordability of mobile services to lower income populations.

MTN Nigeria’s efforts to accelerate 4G and 5G network coverage in order to capitalize on growth opportunities and drive data usage will bode well for the company’s revenue, as we believe there is still unmet demand in the data space, and the company is well positioned to capitalize on the opportunity given its efforts to expand network capacity. We note that the company will continue to drive its broadband strategy to capture significant market growth. We note that the fintech segment will contribute significantly to the growth of the company, as the company continues to improve the effectiveness of its platform while also driving growth in active MoMo wallets.  

Overall, we believe the strong footing of MTNN in the Nigerian telecoms market coupled with its significant holdings of spectrum and fibre networks should put the firm in a highly competitive position to benefit from further growth in mobile and data penetration in Nigeria’s telecommunications industry. 

Valuation

We maintain our Buy recommendation on MTNN with a target price of N318.20/s. Our target price implies an upside potential of 14% compared to the last closing price of N274.40/s implies 0n 17 August. We arrived at our target price using a Discounted Cash Flow (DCF) and Relative valuation, assigning a weighting of 60:40. 

Source: Company, CSL estimates