06, 2020 / 09:36 AM / by FBNQuest Research / Header Image
Rolling over to 2021E: price target up 14%
MTNN's Q2 2020 earnings missed our forecasts primarily because of a negative surprise on the revenue line. The weakness was underpinned by a decline in demand for voice services - particularly in the mass market segment during the lockdown.
As such, voice revenue missed our forecast by around 8% due to changes in traffic patterns in favour of data. Following the results, we have cut our 2020-22E EPS forecasts by around 4% on average. Despite the downgrade to our earnings forecasts, our new price target of N206.1 is about 13.5% higher because (i) we have rolled forward our DCF valuation to 2021E, and (ii) a higher proportion of leverage in MTNN's capital structure.
Beyond Q2, management says that it sees an encouraging recovery in voice revenue, following easing of the lockdown restrictions. The company was behind in its capex deployment in H1 because of disruptions to supply chains caused by the pandemic. Management disclosed plans to accelerate its 4G capex roll out in H2. On our new estimates, we forecast 2020E sales and PBT growth of 11% and 3% y/y respectively. Our new 12M price target implies a potential upside of 75% from current levels. As such, we reiterate our Outperform rating.
Q2 PBT and PAT down by double-digits
Q2 PBT and PAT declined by 13% y/y and 15% y/y respectively. Although most cost lines increased y/y due to the adverse effects of the COVID-19 pandemic, the key drivers of the double-digit decline in earnings were increases of 29% y/y and 11% y/y in direct network and operating costs and other operating costs respectively. The rise in transmission cost was on the back of an escalation in fx-linked costs (mainly tower leases) following the CBN's adjustment of the official fx rate to N360/US$ from N307 previously.
Also, a change in the accounting treatment of the value added tax (VAT) on lease payments to an expense when the obligation is created, as opposed to it being depreciated over the term of the lease, contributed to a -363bp contraction in EBITDA margin to 49.7%. Net interest expense also spiked by 29% y/y. These negatives completely offset revenue growth of 8% y/y. Sequentially, revenue, PBT and PAT fell by 6%, 17% and 15% respectively.