August 20, 2024/CSL Research

In H1 2024, MTN Nigeria saw substantial growth driven primarily by double-digit increases in both voice (+12.4% y/y to N632.38 billion) and data (+54.7% y/y to N727.33 billion), despite experiencing inflationary pressures which increased Operating Expenses significantly (+51.4% y/y to N404.63 billion). For 2024, we maintain our believe that MTN Nigeria will sustain its robust topline growth. Our projections indicate a 45.0% y/y growth in data revenue and an 8.0% y/y growth in voice revenue. Overall, we forecast a 26.1% y/y increase in revenue to N3.11 trillion in 2024 from N2.47 trillion in 2023.

The company has shown resilience in managing its FX-denominated obligations. In H1 2024, it made significant progress in reducing its FX-denominated Letters of Credit (LC) obligations, bringing them down to approximately US$100 million, a substantial decrease from the US$416.6 million reported in December 2023. This reduction was strategically implemented to mitigate exposure to further FX volatility. Additionally, the company recently renegotiated its tower lease agreements with IHS and ATC, securing more favourable terms. Looking ahead, we forecast the company will record no further FX losses if the exchange rate stabilizes around our base estimate of N1,448.71/US$ in 2024.

Based on these projections, we expect a Loss Before Tax of N742.17 billion for 2024. We have revised our target price down to N234.26/s from N257.91/s previously, reflecting the impact of huge FX losses and cost pressures on profitability and we have downgraded our recommendation on the stock from a BUY to a HOLD. Our target price implies an upside potential of 17.25% compared to the last closing price of N199.8/s on 20 August. We arrived at this target price using a combination of Discounted Cash Flow (DCF) and Relative valuation methods, with a weighting of 60:40 respectively. Currently, MTN trades at an EV/EBITDA ratio of 5.5x, slightly below its industry average of 5.7x.

MTN H1 2024 N’m

In its recently released unaudited H1 2024 results, MTN Nigeria continued its Revenue growth momentum, reporting a 32.8% y/y increase in Revenue to N1.54 trillion, up from N1.16 trillion in H1 2023. On a q/q basis, Revenue grew by 4.4%, reaching N786.14 billion in Q2 2024, compared to N752.98 billion in Q1 2024. The rise in total Revenue was primarily driven by strong growth in service revenue, which increased by 32.6% y/y. The growth in service revenue can be largely attributed to the substantial increase in data revenue, which surged by 54.7% y/y to N727.33 billion in H1 2024, compared to N470.02 billion in H1 2023.This growth was fuelled by an expanding user base and higher data usage, supported by improvements in service quality. The company reported an 11.1% y/y increase in data users, bringing the total to 45.6 million by the end of H1 2024. Additionally, MTN’s 4G network coverage expanded to 82.0% of the population, up from 81.5% in December 2023, while 5G coverage grew to 12.7%, up from 11.3% in December 2023.

The company’s subscriber base is expected to grow significantly, driven by the ongoing shift from an analog-centric to a digital-centric model, particularly in rural areas. This growth, combined with the anticipated increase in data tariffs, supports the projection of a 45% increase in data revenue, reaching N1.55 trillion in 2024, up from N1.05 trillion in 2023. Additionally, the contribution of data revenue to overall revenue is projected to rise to 50%, compared to 43% in 2023.

Voice revenue saw a 12.4% y/y increase, reaching N632.38 billion in H1 2024, up from N562.69 billion in H1 2023. This growth was driven by higher user activity and an expanding subscriber base, supported by customer value management initiatives, improved service quality, and revamped voice offerings. The company’s subscribers base grew by 2.9% y/y, adding 2.3 million subscribers and bringing the total to 79.4 million in H1 2024.

We remain confident that increased investments in infrastructure, especially in rural areas, will help mitigate the slow growth in voice revenue over the short to medium term. However, the ongoing NIN-SIM registration issues are likely to continue posing challenges to voice revenue growth. We project a 6% increase in voice revenue, reaching N1.23 trillion in 2024, up from N1.13 trillion in 2023. Despite this growth, the contribution of voice revenue to overall revenue is expected to decline to 40% in 2024, down from 46.07% in 2023.

Fintech revenue improved by 11.0% y/y, reaching N48.41 billion, driven by increased usage of the airtime lending product (Xtratime) and growing activity within the fintech ecosystem. The company’s active wallets grew by 135,000 y/y to 5.5 million. While the fintech business has shown slower growth than initially expected, we believe it will continue to scale in the medium to long term, given the company’s large subscriber base. We maintain our forecast of a 10% y/y growth in fintech revenue in 2024, with its contribution to overall revenue expected to rise to 5%, up from 3.5% in 2023.

Digital revenue saw a significant increase of 98.9% y/y, reaching N30.44 billion in H1 2024. Management attributed this growth to the increased adoption of digital products and expanded partnerships with content creators. The business has gained traction due to revamped digital offers, and a growing digital customer base. This led to a rise in the active user base of digital services ( which include rich media subscriptions and Ayoba), by 5.6 million y/y to 19.6 million. The company’s instant messaging platform, Ayoba, accounted for 46.5% of total digital users, recording 9.1 million active monthly users. The company is actively onboarding new partners within its digital ecosystem and expanding its range of service offerings to sustain business growth. We forecast a 65% y/y growth in digital revenue in 2024, with its contribution to total revenues expected to rise to 2.1% from 1.6% in 2023. Overall, we project a 26.1% y/y growth in total revenues to N3.11 trillion in 2024, up from the N2.47 trillion recorded in 2023.

Direct Network Operating Costs grew faster than revenue, increasing by 111.9% y/y to N586.80 billion in H1 2024, up from N276.96 billion in H1 2023. Operating Expenses also rose significantly, up 51.4% y/y to N404.63 billion from N267.33 billion. This rise in OPEX is attributed to elevated inflation, high energy costs, persistent Naira devaluation, and the introduction of the 2023 Finance Act VAT on tower leases. Consequently, EBITDA decreased by 10.9% y/y, falling to N547.69 billion in H1 2024 from N614.45 billion in H1 2023, while the EBITDA margin contracted by 17.44 basis points to 35.6% in H1 2024.

Operating Profit declined by 27.7% y/y to N304.55 billion in H1 2024, down from N421.04 billion in H1 2023. Additionally, Depreciation and Amortization expenses increased by 25.72%, reaching N243.15 billion in H1 2024. Looking ahead, we expect EBITDA margin to remain pressured due to the new VAT on tower leases, record-breaking inflation levels, and increased energy costs. As a result, we anticipate that the company’s EBITDA margin will decline to 36% in 2024, down from the 49% recorded in 2023.

Net Finance Costs surged by 95.96% y/y, reaching N168.16bn in H1 2024, up from N85.81bn in H1 2023. This increase reflects a 79.1% y/y rise in Finance Costs and a decline of 8.9% in Finance Income. The drop in Finance Income was due to lower interest earnings on investments, while the rise in Finance Costs stemmed from higher interest expenses on borrowings and leases. Additionally, the company experienced a substantial increase in FX losses, driven by the further devaluation of the Naira, resulting in FX losses of N887.68bn in H1 2024 compared to N454.67bn in H1 2023.

The company has shown resilience in managing its FX-denominated obligations. In H1 2024, MTNN significantly reduced its FX-denominated Letter of Credit (LC) obligations, bringing them down to approximately US$100 million from US$416.6 million in December 2023. This strategic reduction is aimed at mitigating exposure to further FX volatility.

Additionally, the company recently renegotiated its tower lease agreements with IHS and ATC, resulting in more favourable terms. The revised agreements have significantly reduced the US dollar-indexed component of the leases, which are now primarily Naira-based and linked to a discounted US Consumer Price Index (CPI). Moreover, a cap has been set on the Naira CPI escalator component. The new terms also remove technology-based pricing, transitioning to payments based on tower space and power for new upgrades. These revised contracts, effective from 1 April 2024, extend the existing contracts to 31 December 2032, with most of the previous site leases initially set to expire between December 2024 and December 2029.

MTN Nigeria, ATC Nigeria Wireless Infrastructure Solutions Limited (ATC), and IHS have mutually agreed to reallocate approximately 2,500 sites, initially awarded to ATC from IHS’s portfolio, as announced on 7 September 2023. The original tower lease agreements with IHS were indexed in U.S. dollars, leading MTN to initially transfer the contracts to ATC. However, with IHS now offering more favorable terms, a revised allocation has been reached. Under this revised agreement, ATC will provide tower services for up to 2,100 sites, while IHS will manage around 1,400 sites. Additionally, the deal includes the rollout of 1,000 new MTN Nigeria sites over the coming years. Looking ahead, we anticipate that the company will avoid further foreign exchange losses, assuming the exchange rate closes at our base estimate of N1,448.71/US$ in 2024.

Pre-tax profit surged by 529%, reaching N751.29 billion in H1 2024, compared to N119.43 billion in H1 2023. Despite reporting a tax credit of N232.23 billion in H1 2024, up from N33.84 billion in H1 2023, the company still recorded a Net Loss of N519.06 billion in H1 2024, significantly higher than the N85.5 billion loss reported in H1 2023. We have forecasted a loss before tax of N742.17 billion for FY 2024. While we expect MTN to return to profitability in 2025, assuming no further significant devaluation of the currency, we believe it will take about 3-4 years for MTN’s negative shareholders’ funds to return to a positive position.

Valuation

We have revised our target price down to N234.26/s from N257.91/s, reflecting the impact of huge FX losses and cost pressures on profitability. Additionally, we have downgraded our recommendation on the stock from a BUY to a HOLD. Our target price suggests an upside potential of 17.25% compared to the last closing price of N199.8/s on 14 August. We arrived at this target price using a combination of Discounted Cash Flow (DCF) and Relative valuation methods, with a weighting of 60:40 respectively. Currently, MTN trades at an EV/EBITDA ratio of 5.5x, slightly below its industry average of 5.7x.

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​​​MTNN H1 2024 Earnings Review.pdf