MTNN Share Rated Strong Buy as Firm Plans to Raise Debt Capital
MTN Nigeria Plc has been rated strong buy for equities investors as telecommunication giant is set for capital raise in the fourth quarter of 2020.
Due to strong performance, Chapel Hill Denham forecasted 12-month price target of ₦180 per share despite a 3.3% fall in earnings per share.
Slightly bearish analysts at CardinalStone however set ₦149.36 price target on MTN Nigeria share, having noted the impacts of rising cost on results.
In spite of the fact that the strong borrowings position, the management disclosed plan to visit debt market at the earnings call with analysts Wednesday.
The leverage level as at the end of third quarter is already high according to the company’s financials, and a visit to the debt market is expected to raise financial risks.
However, analysts at Chapel Hill Denham thinks otherwise.
“We see significant headroom for the company in this regard considering its net debt-to-EBITDA ratio of 0.41x excluding lease liabilities”, the firm stated.
Chapel Hill Denham said: “If we capture the lease liabilities, the net debt-to-EBITDA ratio of 1.71x still compares favourably with Airtel Africa’s 2.2x as at the same period.
Importantly, analysts said the low interest rate environment in Nigeria indicates that MTNN’s borrowing costs will trend downwards for improved earnings in the coming quarters.
Chapel Hill Denham expects this could trigger an upgrade of consensus EPS for 2020 as analysts recognised MTN Nigeria credit rating of A1+ and Aa by GCR and Agusto & Co. respectively.
At the moment, the telco giant has a total of ₦100 billion commercial paper in issue with more compelling yields as against the yields on corresponding Government securities.
In its financial statement scorecard for the period, there are indications that swollen operating costs actually hit MTN Nigeria Plc profit margin.
Due to ₦257.429 billion dividend pay, MTNN shareholders’ funds has now reduced by about 20% to ₦117.4 billion from ₦149.5 billion in 2019.
Listed on the premium board on the local bourse, MTNN share price has remained flat at ₦140 per share in the last 7-trading sessions.
This indicates that the Nigeria’s telecom giants has gained ₦50 each on 20.354 billion outstanding shares since it listed in May, 2019.
Operating expenses grew 17.9% year on year to ₦136.3 billion from ₦115.6 billion, raced faster than average inflation rate in 2020,
While the company’s total equity has dropped, its debt to equity rose strongly from 282.8% of the capital structure to more than 433% at the end of 9-months of 2020.
The result showed that MTNN net margin has been depleted to 14.8% from 17.4% in the comparable period in 2019, thanks to its high cost profile.
Despite its early start into the financial year 2020, cost pressure seems to have tamed MTN Nigeria potential as third quarter results showed declined margin.
CardinalStone forecast target price of ₦149.36 means that MTN share only has less than 6.7% upside to market price.
The Telecom giants that just announced a profit after tax of ₦49.4 billion, 0.7% lower compare to compare period in 2019.
The flat third quarter numbers drove 9M: 2020 earnings to ₦144.2 billion, which translates to 3.3% drop and about 71.4% of CardinalStone analysts 2020 forecast.
The telco giants was able to expand revenue by 16.6% year on year following a 55.5% sustained surge in data revenue year on year.
The results also indicated that there was 7% year on year recovery in voice revenue following setbacks from movement restrictions in Q2’20.
Notably, mobile subscribers and active data users grew by 21.8% and 37.7% apiece to 75.0 million and 30.7 million, respectively.
On its yearly review, MTN Nigeria reported a 20.1% increase in cost of sales while rate of growth demand side was 13.9%.
This dragged down gross profit margin to 10.9% in the 9 month of financial year 2020 and earnings per share suffered setback.
At 66.8% in the comparable period in 2019, the Telcos giant gross profit margin was slightly higher then as cost pressure mounted in 2020.
This was as a result of uptick recorded in cost of sales margin in the 9-month of financial year 2020, expanded from 33.2% in 2019 to 35%.
However, CardinalStone said the Telcos giant earnings before interest tax, depreciation and amortisation (EBITDA) margin contracted by 2.6 percentage points to 50.6% as operating costs grew.
Thus, the cost pressures were driven inter-alia by the impact of naira depreciation on lease contracts and new investments on networks, CardinalStone stated in its equity note.
Down the line on the financing side, MTNN net finance costs rose by 22.7% to ₦30.5 billion in the review quarter, weighed by higher interest expense on leases which grew 33.7%.
This followed with lower interest income on amortized costs investments dropped 55.2% year on year.
Management also attributed net finance cost pressures to an increase in borrowing, analysts explained.
In the period, MTNN total borrowing increased by 23.4% year on year from ₦412.5 billion to ₦508.9 billion.
Debt to equity finance rose strongly, from 282.3% in the comparable period in 2019 to 433.3% at the 9M-2020.
But then CardinalStone detailed that over 9M’2020, capital expenditures (including rights of use of assets) printed 26.1% higher at ₦194.2 billion as the MTNN deepened its mobile and data coverage across the country to accommodate increased traffic over the period.
So, net cash balance stood at ₦238.7 billion at the end of 9M’20, bolstered by a surge in net operating cash flow which grew 224.1% to ₦228.6 billion.
Commenting on its cash position, CardinalStone explained that the impressive year-on-year cash improvement reflected improved working capital management and higher non-cash charges.
However, analysts stated that in the last quarter of the financial year, the knock-on effect of naira depreciation and illiquidity are likely to leave cost mostly higher.
Yet, the sustained expansions in coverage, rural connectivity, and subscriber base could see the company reach our full-year PAT forecast of ₦201.2 billion, CardinalStone stated.
In its equity note, Chapel Hill Denham expressed concern over FX devaluation induced cost pressure that weakened the EBITDA margin.
According to analysts, the management disclosed that Naira devaluation was partly responsible for the fall in the EBITDA margin to 50.6% and 51.0% in Q3-20 and 9M-20 from 53.2% and 53.3% in Q3-19 and 9M-19 respectively.
The 9M-2020 EBITDA margin tracks behind Chapel Hill Denham forecast of 50.7% in the period
“We highlight that, for the period July-September 2020, Airtel Nigeria’s EBITDA margin increased to 54.2% from 53.1% in the corresponding period of 2019.
“The other factor mentioned by management for the fall in the EBITDA margin is increased investments in network, but we are less worried about this as it will underpin revenue growth in future”, Chapel Hill Denham said.
However, analysts maintain BUY rating on MTNN with a 12-month target price of N180.00, which implies a total return of 34.1%.
“This comprises capital gain of 28.6% and dividend yield of 7.8%”, Chapel Hill Denham said.
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MTNN Share Rated Strong Buy as Firm Plans to Raise Debt Capital
