MTN Nigeria Communications Plc – Primed to deliver value

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CardinalStone Research
We initiate coverage on MTN Nigeria Communications Plc (MTNN) with a 12-month target price and projected market capitalization of N148.54 and N3.02 trillion, respectively. Our 12-month target price implies a total return of 22.1% (dividend yield: 5.1% and capital appreciation: 17.0%) and a BUY recommendation on the stock.
We foresee robust growth in MTNN’s cash balance in the next five years
MTNN is likely to report strong growth in operating cash flow (CAGR of 18.1%) over the next five years. Aided by a relatively muted increase in investing cash outflows (CAGR of 8.6% over the same horizon), we believe the company’s reported cash balance can improve to c.N103.0 billion by FY’23E from N53.0 billion in FY’18. Healthy growth in operating cash flow could support sustained dividend pay-outs (mean pay-out ratio of 71.4% over our forecast horizon) and debt repayments without significantly reducing CAPEX intensity. MTNN also boasts annualized 9M’19 ROE and ROA of 218.1% and 12.8%, respectively, relative to averages of 24.4% and 9.5% for Bloomberg’s emerging and frontier market peers. However, the company’s valuation upside is largely capped by a high asset beta of 1.81 (using Bloomberg’s adjusted beta) that is justified by its relatively high risk. To this point, we note that the company’s upside from capital appreciation could easily increase to 45.0% (vs. our 16.9% projection) if the business becomes just as risky as the market.
DCF and multiples valuation summary
Using DCF methodology, we arrive at an equity value of N1.8 trillion for MTNN, which translates to a 12-month target price of N120.15. Our valuation assumes a beta of 1.81, risk-free rate of 14.0% (close to the 10-year government bond yield), and a cost of equity of 37.1%. Similarly, our application of relative valuation methodology assumes a 12-month target PE and EV/EBITDA of 16.7x and 6.3x, respectively. This approach yields a target price of N167.47 per share. In arriving at our blended target price of N148.54, we assigned a 40.0% weight to DCF valuation methodology and 30.0% weight apiece to PE and EV/EBITDA multiple valuations approaches.
Risks to expectations
We have identified three broad categories of risk that could significantly impact our projections. These are 1) regulatory risk; 2) commercial risk and; 3) macroeconomic risks. Regulatory risks include the likelihood of fines and levies that could significantly impact the profitability of MTNN. These risks can stem from various avenues, including potential backlash from a breakdown in international relations with South Africa. On commercial risks, we note that operational failures can materially impact MTNN’s market share, in view of the ease of portability in the sector. Finally, macroeconomic risks could arise from the impact of naira devaluation, high inflation, and insecurity on business operations. That said, we believe the launch of mobile money and 4G+ could positively impact MTNN in the coming years.

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