Revenue lines remain strong driven by data growth
MTN N in its recently released Q1 2020 result reported a 16.7% y/y growth in Revenue to N329.2bn from N282.1bn in Q1 2019. On a q/q basis, Revenue growth was modest at 5.1% q/q growth from N313.3bn in Q4 2019. Across key Revenue lines, the Q1 2020 Revenue growth was driven by higher Data revenue (+58.9% y/y to N74.0bn), Voice revenue (+6.1% y/y to N194.0bn), Value added services (+33.9% y/y to N11.4bn) and Digital revenue (+12.1% y/y to N9.3bn). On an annualised basis, reported Q1 Revenue printed ahead of our forecast by 1.7% due to faster recovery in Digital service revenue and higher Data revenue growth. The growth in Revenue was supported by improved operational KPIs as mobile subscribers increased by 4.2 million subscribers while Data users increased by 1.7m subscribers. In addition, voice traffic was higher by 7.2% y/y while data traffic growth surged by 130.4% y/y. In line with expectations, we believe the data traffic growth was driven by increased user rate due to the stay at home measures to curb the COVID-19 outbreak.
Currency devaluation drives Operating costs higher
Total Operating expenses climbed higher by 18.2% y/y to N155.7bn in Q1 2020 from N131.7bn in Q1 2019 driven by higher Direct Network Operating Costs (+ 20.8% y/y), discounts & commission (+15.7% y/y), Interconnect costs (+7.6%), Accessories cost (+64.3%) and Employee benefits cost (+33.8%). According to the company, the recently implemented naira devaluation impacted significantly on its dollar cost which contributes to a decent proportion of the total cost. In addition, the higher surge in Accessories cost remains due to the company’s strong drive to improve smartphone penetration rate which stood at 42.6% as at Q1 2020. Despite the faster growth in Operating expenses, EBITDA growth remained healthy in Q1 2020, growing by 15.3% y/y to N173.5bn from N150.4bn. However, EBITDA margin was pressured lower, down 0.6ppts y/y to 52.7% in Q1 2020.
Bump in finance costs the sticking point
MTNN recorded a 47.2% y/y jump in Net Finance Costs to N35.0bn in Q1 2020 from N23.8bn in Q1 2019. This was driven by weaker Finance Income (down 34.5% y/y to N5.7bn) and a significant rise in Finance Costs (up 25.3% y/y to N40.7bn). The growth in Finance cost was driven by higher Interest expense on borrowings (+103.5% y/y) & lease liabilities (+10.8% y/y) and Foreign exchange loss (+39.9% y/y). The spike in Interest expense on borrowings was primarily driven by devaluation which impacted the company’s interest payments on its FCY loans which stood at US$84.9m at the end of Q1 2020. Nevertheless, Pre-tax profits grew by 8.9% y/y to N76.3bn in Q1 2020 from N70.1bn in Q1 2019. Higher Effective tax rate (Q1 2020 – 33.0% vs. Q1 2019 – 30.9%) placed further strain on Net Income which grew 5.6% y/y to N51.1bn in Q1 2020 from N48.4bn in Q1 2019. Earnings per Share printed at N2.51/s for Q1 2020. Annualised Q1 2020 EPS of N10.10/s prints below our forecast of N11.12/s for 2020e due to higher than expected Interest expense and Effective tax rate.
Outlook: 2020 Forecasts remain on track despite emerging headwinds
Revenue growth expected to remain impressive
For the rest of the year, we remain confident in the ability of MTN N to sustain its revenue growth. The company stated that the COVID-19 lockdown measure is expected to weigh on voice traffic but expects it to be offset by increased data traffic as users resort to using of internet for telecommuting, entertainment and social media engagements. Furthermore, Value Added Services continues to gain significant traction as MTN Xtratime and the launch of MusicTime continue to drive growth. Thus, we retain our Revenue forecast of N1.3tn which remains largely in line with annualized Q1 2020 performance.
Profit lines forecast retained but devaluation, finance cost remain key risks
We remain concerned about the impact of further devaluation on Operating expenses for MTN N. While the company has not stated the percentage of its costs that are dollar-based, it highlighted that it is affecting Opex management significantly. Nevertheless, we have modeled this impact in our model with Opex (excluding depreciation) to Revenue ratio forecasted at 47.2% (Q1 2020 – 47.3%). Thus, we retain our Operating expenses forecast. In addition, we retain our key profit lines forecast as we watch developments on the company’s Interest expenses as well as Tax expenses.
Target price & BUY rating retained
Notably, since our last note, MTN N has appreciated 12.6% to N112/s (as at 30 Apr 2020). The company’s fundamentals across Revenue & Net Income growth, Return on Equity, and Operating Efficiency remains very healthy with high leverage the only sticking point. Furthermore, MTN N trades at a steep 49.6% discount to our EM peer average PE ratio. Thus, we retain our BUY recommendation on the stock with a target price of N177.11/s which implies an upside of 58.1% to the closing price of N112.0/s as at 30 April 2020.
