…Impressive Top-line Growth In An Unprecedented Year
MTN Nigeria ended the year on a strong note, delivering an impressive topline performance, slightly above our forecast (+1.61%). Service revenue grew by 14.69% YoY to NGN1,339.03bn, led by growth in data (+51.49% YoY) and voice (+5.64% YoY), further complemented by a surge in fintech revenue (+27.18% YoY).
MTN shrugged off the early impact of the suspension of new SIM registration in late December, as it added 12.2 million customers in 2020, bringing its total customer
base to 76.5 million. As we rightly expected, the strong growth in data revenue was prompted by the COVID-19 lockdown, which led to a combination of increased active data users (+29.37% YoY) and data usage per user.
The company supported this increased demand by expanding its network capacity, 4G penetration, and coverage in rural areas, with the company’s 4G population coverage now at 60% (compared to 44% in 2019FY).
We like the growth in the company’s Fintech segment, as revenue rose by 27.18% YoY. The company expanded its MoMo agent network, registering over 280,000 (+159.26%YoY) sub-agents during the year. Fintech subscribers increased to 4.7 million from about 1 million in the prior period, while transaction volume rose to 51.5 million (+134.09% YoY).
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We expect growth in revenue to continue to be led by mobile data and fintech revenue, driven by a robust subscriber base, continuous 4G network rollouts and increased rural connectivity. Nonetheless, we view the current suspension of new subscriber additions as a dampener on topline expectations, particularly if the stalemate prolongs beyond the first half of the year.
Increased Operating Expenses Weigh Down Margins
Brand Spur Nigeria understands that there was an 8.52% growth in operating profit, on the back of a 9.71% increase in EBITDA. The growth in EBITDA reflects the company’s strong cash generation, delivering a healthy free cash flow of NGN387.1bn (ex IFRS 16 adjustments). However, the EBITDA margin dipped by 250bps to 50.93%, largely due to heightened cost pressures.
Operating expenses grew by 21.28% YoY, attributable to the roll-out of new sites, the 23.86% adjustment in the official exchange rate which triggered higher lease rental
costs, and a 2.5% increase in VAT. Other factors that impacted OPEX are the change in the treatment of non-recoverable VAT on lease payment, and other one-off items – such as the donation to the coalition against COVID-19 in April 2020 and costs of Personal Protective Equipment (PPE).
While we expect to OPEX threatened by additional site rollouts and the effect of further devaluation on leases, Management has guided at ongoing efforts towards optimization of its cost structure, supported by a non-recurrence of one-off cost items in 2021, which should help preserve margins.
Higher Finance Costs Add to Bottomline Pressures
The company’s CAPEX for the year recovered from a slow start to settle at NGN298.63bn (+43.37%YoY), with CAPEX intensity increasing by 80bps to 22.18%. The company supported this with additional borrowings of NGN143.68bn, raising its stock of debt by 26.33% to NGN521.15bn.
This triggered an increase in net finance cost by 25.40% to NGN127.84bn, which added further pressure on net margins.
As a result, net margin dipped by 613bps to 15.24%, with PBT and PAT increasing by only 2.61% YoY and 0.95% YoY, to NGN298.87bn and NGN205.21bn, respectively. Management has expressed ongoing plans at tapping the debt markets in 2021, which should help diversify funding sources and lower funding costs. Also, the rebounding yield environment should support interest income.
Recommendation
While we expect top-line performance to remain robust, we continue to keep an eye on the bottom line and the possible threats to the bottom line.
We forecasted a 2021 EPS of 11.15 and applied a Target P/E ratio of 17.20x to arrive at our Target Price of NGN191.73.
This represents an upside potential of the upside from its current price, we, therefore, recommend a BUY on the counter.
