Analysts Downgrade MTN Nigeria Shares to Hold, Slash Target Price
Analysts have downgraded MTN Nigeria Plc, slashed the telecommunication company’s price target, citing negative impacts of exchange rate fluctuations in the economy.
“We have revised our target price down to N234.26 from N257.91, 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”, CSL Stockbrokers Limited said in a note on Wednesday.
In the first half of 2024, MTN Nigeria saw substantial growth driven primarily by double-digit increases in both voice and data, despite experiencing inflationary pressures which increased Operating Expenses significantly.
Details from MTN Nigeria unaudited financials showed that voice revenue increased by 12.4% year on year to N632.38 billion while data sales rose by 54.7% to N727.33 billion in 12 months.
For 2024, analysts at CSL Stockbrokers Limited maintained that MTN Nigeria will sustain its robust topline growth. “Our projections indicate a 45.0% year on year growth in data revenue and an 8.0% year on year growth in voice revenue”.
The investment forecasted a 26.1% year on year increase in revenue for the year which is expected to print at N3.11 trillion in 2024 from N2.47 trillion in 2023, adding that MTN Nigeria has shown resilience in managing its FX-denominated obligations.
In H1 2024, analysts said MTN Nigeria 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$416.6 million reported in December 2023.
Analysts said the reduction was strategically implemented to mitigate exposure to further FX volatility. Additionally, the company recently renegotiated its tower lease agreements with IHS and ATC, securing more favourable terms.
“Looking ahead, we forecast the company will record no further FX losses if the exchange rate stabilizes around our base estimate of N1,448.71/US$ in 2024”, CSL Stockbrokers said in its equity review note. Based on these projections, the investment firm expects MTN Nigeria to post loss before tax of N742.17 billion for 2024.
Analysts said they expects MTN Nigeria’s subscriber base 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, the note stated. Analysts also noted that the contribution of data revenue to overall revenue is projected to rise to 50%, compared to 43% in 2023.
“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”, CSL Stockbrokers said in the report.
Analysts said despite the growth, the contribution of voice revenue to overall revenue is expected to decline to 40% in 2024, down from 46.07% in 2023.
The note explained that MTN Nigeria revenue from Fintech segment improved by 11.0% year on year, 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 year on year to 5.5 million, according to details obtained from the financial statement in the first half of the year.
“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”.
Analysts at CSL Stockbrokers maintain the firm’s 10% year on year growth forecast in fintech revenue in 2024, with its contribution to overall revenue expected to rise to 5%, up from 3.5% in 2023.
In the period, the company’s digital revenue saw a significant increase of 98.9% y/y, reaching N30.44 billion. According to CSL, Management attributed this growth to the increased adoption of digital products and expanded partnerships with content creators.
Analysts said 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 by 5.6 million year on year to 19.6 million.
The report noted that the company’s instant messaging platform, Ayoba, accounted for 46.5% of total digital users, recording 9.1 million active monthly users. MTN Nigeria is actively onboarding new partners within its digital ecosystem and expanding its range of service offerings to sustain business growth.
“We forecast a 65% year on year 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% year on year growth in total revenues to N3.11 trillion in 2024, up from the N2.47 trillion recorded in 2023”, CSL Stockbrokers said.
Analysts observed that MTN Nigeria’s direct network operating costs grew faster than revenue, increasing by 111.9% year on year to N586.80 billion in H1 2024, up from N276.96 billion in H1 2023.
Also, operating expenses of the company jumped significantly, up 51.4% in 12 months 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, according to analysts.
Consequently, its earnings before interest tax depreciation and amortisation (EBITDA) decreased by 10.9% in 12 months, according to analysts note, 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.
MTN Nigeria’s operating profit declined by 27.7% year on year to N304.55 billion in H1 2024, down from N421.04 billion in H1 2023.
“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”, CSL Stockbrokers said.
Details from the telecom company financials revealed that net finance costs surged by 95.96% year on year, reaching N168.16bn in H1 2024, up from N85.81bn in H1 2023.
Analysts said the increase reflects a 79.1% rise in the company’s finance costs and a decline of 8.9% in finance income.
The drop in finance income was attributed to lower interest earnings on investments, while the rise in finance costs stemmed from higher interest expenses on borrowings and leases, said analysts at CSL.
MTN Nigeria 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 telecom company said it has 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).
“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.
In the review, CSL Stockbrokers forecasted that MTN Nigeria will post a loss before tax of N742.17 billion for financial 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”, the investment firm stated. #Analysts Downgrade MTN Nigeria Shares to Hold, Slash Target Price
