In this note, we update our views on MTNN for 2024E following the publication of its 2023FY financials. As we noted in our last update (see our MTNN 9M-23 Earnings Update here), the steep foreign exchange devaluation in 2023 ensured a decline in MTNN’s EBITDA margin (-448bps to 48.7%), given the expected adjustment on tower contract costs to the higher reference FX rate. The biggest surprise for us, however, stemmed from the foreign exchange losses recorded in the period, with the outturn (NGN740.43 billion) substantially larger than our estimate (NGN295.77 billion). Thus, influencing the telco’s first loss since 2015, when regulatory fines impacted the company’s bottom line. For 2024E, we reduce our 12M TP by 22.5% to NGN245.47 (previously: NGN316.75) and downgrade the stock to a “HOLD”. The downward revision to our TP reflects our expectations of the further currency devaluation in 2024E. While our valuation of the telco points to a downside potential of 8.3% on current market price, we remain positive regarding MTNN’s operations despite the pressure on margins driven by its continuous ramp-up of gross connections and capacity roll-outs, particularly on the data channels, evidenced by increased data traffic per user as of 2023 and increased mobile penetration. Pertinently, we cite any movement in the currency as a key risk to our estimates in the short to medium term, especially as structural issues that impede naira stability still exist. On our estimates, MTNN is trading on a 2024E EV/EBITDA of 4.9x.

Strong fundamentals despite pressures:For 2024E, we estimate a 3.3% y/y increase in MTNN’s subscriber base to 82.33 million by year-end (2023FY: 79.70 million). We expect the data channel to be the largest value contributor for MTNN in 2024E with sustained investments in data network coverage and capacity – we project a 33.9% y/y growth in data revenue. On voice, we project a 9.9% y/y growth, driven by the expected subscriber base increase, sustained usage in voice propositions, and an increase in mobile tariffs. Notably, we expect a sustained increase in revenue contribution from the data segment, highlighting current consumer patterns. Overall, we model a revenue growth of 22.6% in 2024E and an average of 18.1% in 2025-2028E. We project EBITDA margin to be lower at 45.2% (-355bps y/y), reflecting heightened cost pressures from the higher FX pricing on tower contracts, energy costs and the highly inflationary environment. Consequently, we forecast a loss per share of NGN14.86 (2023FY loss per share: NGN6.73), highlighting the impact of the steep FX depreciation in Q1-24, as we project net FX losses of NGN957.90 billion in 2024E.

FCF generation still premium: Amid the headwinds in the operating environment, we like that MTNN still boasts of a positive FCF generation through its capex cycle, highlighting the telco’s ability to achieve cash conversion at the operating level. We note that MTNN’s FCF margin came in strong at 17.6% in 2023FY, having averaged 15.4% since 2020FY. We expect a sustenance in this trend. On our estimates, we project an 11.5% average FCF margin over 2024-2028E. The lower but still strong average reflects the normalisation of the cash impact of net FX losses.

Valuation: Our year-end target price is NGN245.47/s, derived from a 60/40 blend of DCF and sector relative valuation estimates. Our DCF FV is derived from an equal blend of FCFF (NGN203.62/s) and FCFE (NGN224.53/s) estimates, assuming a 21.5% WACC and 4.0% terminal growth rate. We utilised the EV/EBITDA multiple for our multiple-based FV and derived a fair value of NGN292.56/s based on Bloomberg’s Middle East and African peer average (5.3x).

2024E Key Estimates

We expect MTNN’s revenue growth for 2024E to maintain its historical pace, growing by 22.6% in 2024E. Our expectation is predicated on a higher ARPU (+17.5% y/y) outturn in 2024 amid a projected 3.3% y/y increase in mobile subscribers to 82.33 million. We believe data revenue (+33.9% y/y) will be the key driver of the growth, with voice revenue (+9.9% y/y) maintaining its steady pace.

• Data: MTNN’s focused capex on enhancing its data capabilities in 2023FY resulted in an increase in its 4G (+240bps to 81.5%) and 5G (+820bps to 11.3%) coverage, with data usage per user increasing by 29.1% y/y to 8.6GB. We expect MTNN to sustain the investments in its data network coverage and capacity in 2024E as it tries to position and capitalise on the still untapped potential of data in the Nigerian market (2023 smartphone penetration: 55.6%).
• Voice: Voice revenue is expected to maintain its steady pace, benefitting from the increase in subscribers and a possible increase in mobile tariffs. While there are no definite indications on the magnitude of increase that MTNN (and other mobile network operators) may be proposing, we believe that the telcos may be able to secure at least a c. 10.0% tariff increase, with possible approval and implementation in Q3, as the Federal Government (FG) may be wary of compounding cost of living woes in the short term.

We project an EBITDA margin of 45.2% in 2024E, coming in short of the five-year average (51.9%) and the previously set medium-term guidance (53.0% – 55.0%). The margin depletion majorly stems from the impact of higher tower contract costs and inflationary and energy costs. In the medium term, amid the possible softening of cost pressures we forecast MTNN to record gradual EBITDA margin expansion towards 50.7% by 2028E – 190bps shy of the historical 5-year average. The biggest risk to our EBITDA margin forecast is further currency pressures. Utilising management’s guidance on the impact of currency movement on EBITDA margin – 10.0% devaluation of NGN/USD = 1.30ppts impact on EBITDA margin – any further depreciation of the naira exchange rate to the US dollar towards our bear-case scenario of c. NGN2,000.00/USD could translate to an EBITDA margin of c. 40.0%.

EBITDA margin sensitivity to FX changes

 
Net FX losses in 2023FY came in at NGN740.43 billion, influenced by the currency devaluation in the period. MTNN reported a NGN907.00/USD reference rate in 2023FY, implying a devaluation of 49.2% from the NGN461.00/USD reference rate in 2022FY. As of 2023FY, MTNN’s total FX assets stood at NGN134.29 billion (USD148.05 million), while liabilities in the period were NGN1.63 trillion (USD1.80 billion). USD-denominated lease liabilities and borrowings constituted the bulk of the liabilities at 43.1% and 32.8%, respectively. Our expectation considers the further depreciation of the exchange rate in Q1-24, ascribing an indicative rate of c. NGN1,500.00/USD for the year. Subsequent to the aforementioned, the net impact is a 61.2% increase in MTNN’s net FX liabilities to NGN2.42 trillion (2023FY: NGN1.50 trillion). Cascading together, we project a higher net FX loss of NGN957.90 billion in 2024E. As such, we forecast another year of losses for MTNN, with an estimated loss per share of NGN14.86 in 2024E. We expect normalisation of the net FX balance to kick in from 2025E onwards and support a return to normalcy for MTNN.

Valuation

The net impact of the changes to our model is an increase in our discount rate (WACC) to 21.5% (Previous estimate: 17.0%) following our higher cost of equity print (27.4% | Previous estimate: 18.4%).    Thus, we downgrade the stock to a “HOLD” (from “BUY”), with a revised TP of NGN245.47/share (Previous: NGN316.75), implying an 8.3% downside potential. On our estimates, MTNN is trading at a 2024E and 2025E EV/EBITDAs of 4.9x and 4.0x, respectively. We believe that investors may not have fully priced in the near-term pressures on MTNN’s fundamentals and the possibility of another year with no dividends, thus the current valuation. We maintain that our current relatively low valuation of MTNN may only be for the short term as we expect a normalisation of their numbers from 2025E onwards, which will translate to a subsequent re-rating of the stock.

Risks to Rating and Price Target

Key risks that could keep our rating and target price from being achieved include:
•    Macroeconomic deterioration in Nigeria
•    Delay in mobile tariff review
•    Exacerbation of FX woes