November 3, 2023/CSL Research

MTN Nigeria’s 9M 2023 Revenue growth was driven largely by double-digit growth in voice ((+10.6% y/y to N834bn) and data revenue ((+36.4% y/y to N749.53bn), amidst inflationary growth in Operating Expenses (+22.2% y/y to N417.42bn). A 174.41% y/y increase in Net Finance Cost to N375.96bn contributed significantly to the decline in Pre-tax Profit, which was down 42% y/y to N232.47bn in 9M 2023 from N400.67bn in 9M 2022.

We believe that the firm’s recent lease agreement with NTEL for an additional 10MHz frequency division duplex (FDD) in the 2.6GHz spectrum in September 2023, and the earlier agreement reached in May for 900MHz and 1800MHz spectrum bodes well for the company’s future, as it should enable the company expand its coverage and capacity of its network more efficiently in order to meet rising demand for data and improve the quality of its offerings and customer experience.

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 indicate that the company is well primed to 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 32.58% compared to the last closing price of N240/s implies 0n o2 November. We arrived at our target price using a Discounted Cash Flow (DCF) and Relative valuation, assigning a weighting of 60:40.

MTN Nigeria’s 9M 2023 UNAUDITED results, showed the company sustained the momentum in its Revenue growth, reporting a 21.8% y/y growth in Revenue to N1.77tn from N1.46tn in 9M 2022. On a q/q basis, Total Revenue increased by 4% to N614.2bn in Q3 2023 from N590.6bn in Q2 2023. The growth in Service Revenue (up 21.4% y/y) remained the major driver of the rise in Total Revenue. Service Revenue growth was supported by voice (+10.6% y/y to N834bn) and data revenue (+36.4% y/y to N749.53bn).

Data Revenue remained strong in 9M 2023, increasing by 36.4% y/y to N749.53bn from N549.66bn in 9M 2022. The growth in Data Revenue could be attributed to increased usage. The growth was also supported by the revamp of the company’s data bundle offerings, an increase in the penetration of smartphones, and investments in its network to expand coverage and capacity and enhance customer experience. The company noted that its active data users increased by 13.3% y/y to 43.1 million, adding 3.6 million active users in 9M 2023. The company’s 4G network now covers 80.5% of the population, up from 79.1% in December 2022. Data usage (GB per user) grew by 29.1% to 8.6GB, while the number of smartphones on MTN’s network increased by 7.6%, bringing smartphone penetration to 53.4% from 52% as at 9M 2022. As a result, MTN recorded a 46.3% growth in data traffic, with the 4G network accounting for 83.7% of the total traffic up from the 78.5% recorded as of 9M 2022.

The management noted that its 5G network now covers 7.5% of the population and is on track to reach its 10% target by year-end. We maintain that the rollout of the 5G spectrum will lead to significant growth in data subscribers in the medium to long term as customers experience improved satisfaction when downloading and uploading content from the internet. This, coupled with increased investment in the company’s 4G network 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.

We note that the company has entered a leasing arrangement for an additional 10MHz frequency division duplex (FDD) in the 2.6GHz spectrum in September 2023, after the successful conclusion of a 2-year lease agreement with NTEL in May 2023. This investment is expected to enable the company to expand the coverage and capacity of its network to meet the rising demand for data and improve the quality of its offerings and customer experience.

Voice Revenue grew at a double-digit rate of 10.6% y/y to N834bn in 9M 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 4.8% y/y increase in its subscriber base, adding 2m subscribers to increase the mobile subscribers to 77.8m in 9M 2023.

We expect to continue to see slow growth in voice Revenue due to the growing shift to a data-centric model driven by increased smartphone penetration, and increased data users. We believe that increased investments in infrastructure, especially in the rural areas will support the slow growth in voice revenue in the short to medium term. We maintain our estimate that 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 moderation in voice Revenue will be offset by growth in non-voice Revenue especially mobile data and Mobile Financial Services (MFS). we note a significant improvement in fintech Revenue, up 5.6% y/y to N64.69bn, and digital Revenue, up 55.4% y/y to N24.71bn in 9M 2023. We expect the fintech segment to continue its upward trajectory in the medium to long term as the company increases the adoption of its core fintech services (wallet and MoMo agent business).

The company noted that its fintech active users declined by 20.4% y/y but rose by 27.2% q/q to 8.9 million. The y/y decline was attributed to a slowdown in activity on the over-the-top (OTC) platform following the cash shortages in Q1. However, the OTC platform has recovered from the setback, growing by 25.5% when compared with Q1. MoMo PSB active wallets rose by 53.1% y/y and 15% q/q to 3.6 million, representing 40.6% of the company’s fintech users. The company’s fintech transaction volume was up by 47.6% y/y, with the company’s MoMo agents growing by 55.7% y/y to 293,000. Also, the company’s MoMo merchants have reached 197,000 since the firm started building its merchant ecosystem in March 2023. The company noted that it is still dedicated to promoting consumer education and awareness while making the most of its extensive distribution network to increase the number of active wallets, scale the agent and merchant ecosystem, and broaden the range of services that are offered to customers. We expect the fintech segment to continue its growth trajectory, with an expected growth rate of 10% for 2023e.

The management noted that growth in digital revenues was due to increased adoption of its digital products and the growth of its active digital subscriber base, which rose by 67% y/y to 16.1 million. Also, expanded digital offerings and optimization of user customer journey experiences contributed to the y/y growth. Content value-added services and rich media services were the major drivers of the digital revenue line. The company noted that growth in the monthly active users of Ayoba, its instant messaging platform, remains on track with the addition of over 2.8 million users, bringing the active users to approximately 8 million. We believe that the digital segment has a positive long-term outlook and we forecast a growth rate of 5% for 2023e.

MTNN CAPEX expenditure was up by 6.9% y/y to N405 billion. Despite the impact of the naira devaluation, the company has continued to invest in network capacity and coverage, with the focus now primarily on its 4G and 5G networks. We note that in August, the company signed a US$125 million trade facility with Access Bank UK and raised N125 billion through commercial paper in line with its funding strategy to support capex deployment.

Growth in Direct Network Operating Costs Surpassed Revenue growth, climbing by 34% y/y to N447.60bn in 9M 2023 from N333.93bn in 9M 2022. Operating Expenses rose by 22.2% y/y to N417.42bn in 9M 2023 from N341.64 in 9M 2022. The growth in Opex was driven mainly by higher lease rental costs impacted by the naira devaluation, higher consumer price index (CPI) and energy costs, and the 2023 Finance Act which introduced VAT on tower leases effective September 2023. Despite that, EBITDA increased by 16.3% y/y to N907.93bn in 9M 2023 from N780.57bn in 9M 2022. However, EBITDA margin shrunk by 240bps y/y to 51.2% in 9M 2023. Operating Profit grew by 13.2% y/y to N608.43bn in 9M 2023 from N537.68bn in 9M 2022, despite an increase in Depreciation & Amortisation to N299.5bn in 9M 2023. Looking ahead, we expect EBITDA margin to continue to be impacted by the new VAT on tower leases, inflation and increased energy costs, 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 174.41% y/y to N375.96bn in 9M 2023 from N137bn in 9M 2022. The elevated Net Finance Cost mirrors the 173.4% y/y increase in Finance Cost despite a 157.1% y/y rise in Finance Income. The increase in Finance Income was driven by higher interest earned on amortized investments. On the other hand, Finance Costs rose due to increased borrowings and a forex loss of N232.8 billion y/y on their company’s net foreign currency liabilities following the significant devaluation of the naira in June. To sustain revenue growth, the company used trade lines to fund credits used for its network capital expansions. This resulted in an additional unrealized forex loss of N87.5billion on outstanding matured trade obligations as of 30 September 2023.

Pre-tax Profit decreased by 42% y/y to N232.47bn in 9M 2023 from N400.67bn in 9M 2022. Consequently, Net Profit declined by 45.2% y/y to N147.36bn in 9M 2023 from N181.62bn in 9M 2022. EPS declined to N7.06/s in 9M 2023 from N12.89/s in 9M 2022.

The management noted that it has reallocated the leases for its towerco services of approximately 2.5k network sites due to expire in 2024 and 2025, for which IHS Nigeria Limited (IHS) currently provides tower services. It was noted that after a transparent and competitive tender process, ATC Nigeria Wireless Infrastructure Solutions Limited (ATC) was selected as the preferred tower company to provide tower services to those sites. Also, the company noted that it still has an additional 12k sites within the broader IHS portfolio, expiring between 2025 and 2029, with the majority expiring in 2029. For the 2025 portfolio of towers, the firm noted that it will commence a review of that portfolio. We believe the company will continue to explore ways to manage its network towers efficiently while minimizing its tower costs.

Also, the company stated that it has received the judgment issued by the Tax Appeal Tribunal sitting in Lagos. The judgment pertains to the VAT assessment for the periods covering 2007 and 2010 – 2017, as issued by the Federal Inland Revenue Service (FIRS) to the Company. The tribunal upheld the principal liability of $US47.8m and set aside the interest and penalty charges of US$87.9m. MTNN has decided to appeal the decision of the tax appeal tribunal to get clarification of the interpretation of the VAT act provisions concerning the transaction that led to the filing of the case in court. The transactions in question include; VAT payable on an offshore training service provided to employees of the company, transponder services provided for a non-resident company, and software licencing and upgrades. The firm noted that the company remains committed to meeting its tax obligations. We believe that if the appeal court affirms the judgment of the tribunal, the firm will book a loss, which will significantly affect its profitability in the short term.

Valuation

We maintain our Buy recommendation on MTNN with a target price of N318.20/s. Our target price implies an upside potential of 32.58% compared to the last closing price of N240/s implies 0n 02 November. We arrived at our target price using a Discounted Cash Flow (DCF) and relative valuation, assigning a weighting of 60:40.

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