July 1, 2024/WSTC Securities

MTN Nigeria Communications Plc recorded a 33% year-on-year revenue growth to N752.98bn in Q1 2024 from N568.14bn in Q1 2023. The development was supported by a strong growth trajectory in data revenue (+53% year-on-year to N349.00bn), and the segment contributed 46% to total revenue. Additionally, voice revenue grew by 14% year-on-year to N267.51bn (Q1 2023: N234.50bn). Data revenue growth was supported by increased active subscribers, which rose 8% to 44.50 subscribers. Also, the performance reflects the implementation of price optimisation across some data bundle offerings similarly, growth in total mobile subscribers by 1% to 77.70m led to higher voice revenue. Despite increases in subscriber base, we saw total subscribers fall by 3% on a quarter-on-quarter basis from 79.70 subscribers in Q4 2023, underpinning the Group’s compliance with the NIN-SIM directive.

The uptrend in revenue growth was offset by higher total operating expenses, which went up 72% year-on-year to N456.02bn (Q1 2023: N265.49bn). The higher operating costs were majorly driven by elevated network operating costs (+87% to N252.82bn), reflecting the impact of the FX revaluation losses owing to the underlying built-to-suit (BTS) leases and maintenance costs. For context, we saw the exchange rate move from N907.11/$ at the end of December 2023 to N1309.39/$ by the last day of Q1 2024 (31% decline). Consequently, EBITDA declined marginally by 2% to N296.96bn.

The naira depreciation filtered significantly into higher net finance costs, which rose by 1616% year-on-year to N749.77bn (Q1 2023: N43.71bn). The significant growth is attributed to considerable foreign exchange (FX) losses, totalling N656.37bn. Overall, a loss before tax of N575.69bn was reported from a profit position of N162.91bn in Q1 2023, while a net loss was also reported following a tax credit of N183.00bn.

Regulatory update

In December 2023, the NCC issued an industry-wide directive requiring complete barring of subscriber lines not linked to their National Identification Number (NIN). All lines for which the subscribers failed to submit their NIN were to be barred on or before February 28, 2024.

As of March 29, 2024, the net effect of the directive was a 2m reduction in total subscribers despite initialling, barring 8.60mn affected subscribers. The Group’s aggressive drive for gross connections supported this.

The NCC has extended the deadline for barring subscribers with an unverified NIN to July 31, 2024. This provides more time for affected subscribers to complete the necessary verification exercise, as that will mitigate any potential impact on revenue.

Outlook

We expect total revenue growth to be sustained. However, we anticipate currency volatility and a higher inflationary environment will continue to negatively impact the Group’s performance.

Overall, we expect the Group to end the year with another loss after-tax position of N224.86bn, while negative net assets will be sustained until at least 2025.

In light of the challenges, the Group had an Extraordinary General Meeting (EGM) in April 2024 to discuss plans on how to reverse its negative equity position. The salient interventions, amongst others, include:

• Regulated tariffs increase by engaging with the authorities through the industry body to manage the effects of the challenging operating conditions. They believe this will support continued investment and long-term sustainability.
• Reduce USD exposures: The Group is focused on reducing various USD volatility exposures. One key area is the outstanding letter of credit obligations incurred to support capex requirements.

While these objectives would reverse the negative equity position if successfully implemented and achieved, tariff increases are not directly controlled by the Group and depend on the effectiveness of stakeholder engagement. We opine that reducing dollar liabilities and effectively sweating assets are more concrete plans to optimise cost efficiencies.

Valuation

We slightly adjusted our fair value to N257.94 from N257.58, and we now recommend a BUY on the stock. Although the price tanked by 19% year-to-date, the current price presents a decent entry price as we believe the Group’s core business performance remains strong in the medium to long term.