May 3, 2024/Cordros Report
We update our views and estimates on MTNN for 2024E following the publication of the company’s Q1-24 financials. As we noted in our initial review of the performance, currency pressures remained a sticking point as further naira depreciation in Q1-24 exacerbated the telco’s woes. Notably, we highlight that operating performance took a big hit in the quarter, highlighting the impact of persisting FX pressures, higher energy costs and the introduction of VAT on tower leases. Precisely, Q1-24 EBITDA declined by 1.9% y/y, with the EBITDA margin weakening to 39.4% (Q1-23: 53.3% | Q4-23: 42.3%). While we maintain our HOLD rating, we reduce our year-end TP by 16.4% to NGN206.03/s (previously: NGN245.47/s). The downward revision to our TP reflects our expectations of further pressures on operating performance through the year. We now factor in heavier strains from direct network costs, the cost of devices (broadband, SIMs majorly), and roaming and transmission costs. Our model utilizes a stronger FX rate of c. NGN1,400.00/USD (prev.: c. NGN1,500.00/USD), leading to a forecast of a lower net FX loss of NGN796.36 billion (previously: NGN957.90 billion). Notwithstanding, we maintain that any movement in the currency remains 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 4.6x.
Strong topline but weaker margins: For 2024E, we make no adjustments to our revenue expectations. We maintain our estimate of a 3.3% y/y increase in MTNN’s subscriber base to 82.33 million by year-end (2023FY: 79.70 million). As evidenced in Q1-24 performance, 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, and sustained usage in voice propositions to spur an increase in voice traffic. Overall, we model a revenue growth of 22.6% y/y in 2024E and an average of 18.1% in 2025-2028E. We now project an EBITDA margin of 39.8% for 2024E (prev.: 45.2%), reflecting heightened cost pressures from the higher FX rates, passthrough effects of FX depreciation on tower contracts amid the introduction of VAT payments, elevated energy costs, and the highly inflationary environment. We now forecast a loss per share of NGN15.78, even as we now project a lower net FX loss of NGN796.36 billion in 2024E.
Dividends may still be far off: On our estimates we do not expect any return to shareholders until at least 2026E. For clarity, on our projection of a NGN330.93 billion loss in 2024E, we expect MTNN’s negative equity balance to worsen to NGN371.77 billion (vs negative balance of NGN40.84 billion in 2023FY), with retained earnings coming in at a negative NGN538.95 billion. While we expect the equity balance to become positive in 2025E (NGN11.76 billion), we still expect a negative retained earnings balance of NGN155.41 billion after accounting for a PAT of NGN383.54 billion. As such, we do not expect any dividends until 2026E, when the retained earnings balance turns positive (NGN198.05 billion).
Valuation: Our year-end target price is NGN206.03/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 (NGN163.04/s) and FCFE (NGN195.70/s) estimates, assuming a 21.1% WACC and 4.0% terminal growth rate. We utilised the EV/EBITDA multiple for our multiple-based FV and derived a fair value of NGN246.03/s based on Bloomberg’s Middle East and African peer average (5.3x).
