Meristem Predicts MTNN Stock Could Rise 36% by December
MTN Nigeria Plc stock has more than 35% upside potential, analysts at Meristem Securities Limited stated this in an equity report.
Estimates on the company hinge on expectation of solid performance in the financial year 2020, thus makes MTNN share price cheaper now.
The investment banking firm is now advising its customers to BUY the telecom giant’s stock currently trading at ₦116.
Meristem is seeing the stock price going vertical, thus raised its price target for December, 2020 to ₦157.62.
What this means is that investors could gain about 36% if the stock is purchase at today’s price.
In Q1 of 2020, MTN Nigeria bolstered earnings following an increase in demand for data as most companies move businesses online.
Analysts said data revenues lead impressive topline performance.
Meristem stated that MTN Nigeria began the year on a strong note with an impressive performance across its core business offerings.
The breakdown of the telecom giants’ financial statement shows that service revenue surged by 16.68% to ₦329.17 billion.
This was driven largely by +58.94% growth in data and +6.14% in voice revenues.
The company added 4.2 million mobile subscribers during the period, bringing total subscribers to 68.5 million.
Data revenues continue to impress due to the expansion of its 4G network coverage which supported growing traffic demand from data subscribers.
At the end of Q1:2020, the company’s 4G population coverage increased to 48% compared to 44% in 2019.
A rally point for improvement include the fact that active data subscribers grew by 1.7 million to 26.8 million.
Across business segments, a larger portion of revenue growth was derived from its Consumer Business Unit.
The segment jerked up +18.26% year on year, and now accounts for 86.06% of total revenue.
Also, MTN Nigeria’s Wholesale and Enterprise Business Units also recorded revenue increases of 14.93% and 5.73% respectively.
The near-term outlook holds promising results for revenue growth, analysts at Meristem explained.
While voice revenue growth is expected to slow down, topline performance will be driven by data revenue.
This was fueled by a surge in data traffic as a result of the outbreak of the COVID-19 pandemic.
Higher Finance Costs are a Sore Spot
MTN Nigeria’s earnings before interest, tax, depreciation and amortisation, EBITDA, margin contracted slightly by 61bps on an IFRS 16 basis.
Analysts explained that this was due to a higher operating cost profile during the period.
Most notably, direct network operating costs grew by 18.30%.
This happened on back of +25.45% increase in lease related expenses, which the company attributes to its expanded 4G network sites.
Nonetheless, EBITDA grew by 15.35% to ₦173.52 billion, reflecting the company’s strong cashflow generation.
Furthermore, net cashflow from operations were enhanced by the absence of regulatory fines, considering that the company concluded payments on its ₦330 billion fine in the first half of last year.
However, a +47.19% spike in net finance costs meant that much of the double-digit growth in topline was not transmitted to bottom line.
The financial report shows that profit before tax and profit after tax grew by 8.86% and 5.58% respectively.
Then, MTNN’s net margin then contracted to 15.54% as against 17.17% in Q1:2019.
In subsequent quarters, the company’s margins are expected to be pressured by the negative impact of the Naira devaluation on network operating costs.
Furthermore, funding costs are expected to remain elevated in the near term, due to the company’s rising debt stock.
Analyst at Meristem believe that this would increase pressure on bottom line performance.
COVID-19 Induced Risks Appear Moderate
Analysts explained that capital expenditure in the first quarter dipped significantly by 53.90% to ₦27.04 billion.
However, the management attributes this to supply chain disruptions caused by the COVID-19 pandemic.
As such, it becomes imperative for the company to implement measures to ensure minimal disruptions to its network else, it could risk losing subscribers to competition.
Potential liquidity risks stemming from the COVID-19 pandemic appear to be muted as the company possesses significant cash reserves totaling ₦178.99 billion.
Meristem estimate show that this is about 11% of total assets.
Also, the company has actively reduced its foreign debt obligations over the years, from 51.35% in 2018 to 8.00% at the end of Q1:2020.
Analysts stated that this helped to reduce the impact of currency devaluation on debt costs.
Management has indicated its intention to continue to explore alternative financing means in the near term.
This would help to optimize funding costs and support further network expansion, analysts stated.
In its recommendation, Meristem stated that although topline performance is expected to remain robust.
Analysts at the firm maintains a balanced outlook for bottom line due to rising cost pressures.
“We forecasted a 2020 EPS of ₦11.61 and target price of ₦157.62.
“This represents an upside potential of 35.88% from its current price, hence we recommend MTNN Stock a BUY”, Meristem stated.
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