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MTN Profit Skips Forward Slightly as Costs Take a Toll

Stock & Analyst Updates	1626 VIEWS
Stock & Analyst Updates
1626 VIEWS

Wednesday, March 03, 2021 / 06:00 PM / by Proshare Research/Header Image Credit: MTN

Telco behemoth, MTN Nigeria Communications Plc saw a +2.61% in its pre-tax profit to N298.87bn in 2020. Its profit rose a smidgen above 2019 figures, bucking analysts expectations that forecast a COVID-19-induced surge in corporate earnings in 2020 as stay-at-home families increased their use of data and voice services to maintain a semblance of social normality. Analysts enthusiastic forecast for 2020 was premised on the trend of the need to work from home which would, expectedly, have required an increase in the demand for data and voice services. Notably, both data and voice revenues rose in 2020 but not enough to make a splash in revenue.

MTN's financials for the year ended December 2020 saw revenue from data service rise by +51.49% and revenue from handsets and accessories grow by +233.03% while other revenues grew as follows; voice went up by +5.64%, interconnect and grew by roaming +6.43%, digital revenue crawled by +3.06%, while value-added services shuffled forward by +24.94%, other revenues grew by +2.36%, but SMS income dropped by -8.73%, and rental income slumped by -2.06%. The growth in revenue of +15.38% was outdone by the rise in total expenses which bounced up by +18.46% and squashed growth in overall profit. Virtually all expense line items grew in 2020 except for roaming cost and advertisement, sponsorships, and sales promotion which declined by -26.73% and -23.73% respectively. Some analysts have attributed the slow rise in profit to the fact that MTN has already attained the maturity stage of its business life cycle and squeezing faster earnings growth relative to cash flow could be a mountain to climb. The company's free cash flow in 2020 grew by +3.2% which exceeded the growth of its profit before tax (see Illustration 1 below).

Illustration 1: Telecommunications Business Cycle

Key Highlights/Takeaways

Profit before tax rose by +2.61% to N298.87bn in 2020.
Revenue rose by +15.38% to N1.35trn in 2020.
Total assets rose by +30.67% to N1.96trn in 2020.
The debt-to-equity ratio declined to 26.54% in 2020 from 27.46% in 2019 as the company beefed up retained earnings.
Equity rose by +22.30% to N178.39bn in 2020 from N145.86bn in 2019.

Revenue - Shaking off COVID-19 Dust

MTN Nigeria Communications Plc recorded an increase in its revenue in 2020. Its revenue rose by +15.38% to N1.35trn in 2020 from N1.17trn in 2019 as the company shook off the dust raised by a ravaging COVID-19 pandemic and a slowdown in global economic activities (see Chart 1 below).

Chart 1: MTN Nigeria Communications Plc Revenue (N'bn)

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Source: MTN Financial Statement, Proshare Research

The largest slice of the Telcos total revenue in 2020 came from voice and data revenues which accounted for 56.92% and 24.69% respectively of total figures. This occurred as it recorded an increase in the number of its mobile and data subscribers which grew by +19.0% and +29.4% respectively. MTN saw all its revenue components in 2020 record growth except for it short message services (SMS) which dipped by -8.73%, and its rental income which tumbled by -2.06% (see Table 1 below).

Table 1: Breakdown of MTN Revenue

	2019	2020		Contribution to Revenue
	(N'bn)	(N'bn)	%change	Contribution to Revenue
Voice	725.45	766.39	5.64%	56.92%
Data	219.4	332.37	51.49%	24.69%
SMS	13.51	12.33	-8.73%	0.92%
Interconnect and roaming	125.04	133.08	6.43%	9.88%
Handset and accessories	2.21	7.36	233.03%	0.55%
Digital	35.94	37.04	3.06%	2.75%
Value added services	37.17	46.44	24.94%	3.45%
Other revenues	11.03	11.29	2.36%	0.84%
Revenue other than from contracts with customers
Rental Income	97	95	-2.06%	7.06%

Source: MTN Financial Statement, Proshare Research

PBT - Slow Steps Up the Ladder

MTN's profit climb in 2020 was off analysts expectations as the rise in pre-tax profit recorded a rise in its profit before tax, there were projections by many analysts that it would record a significant increase in its profit before tax as there was an increase in data subscriptions as some companies switched to remote working. Its profit before tax rose by +2.61% in 2020 rising from N291.28bn in 2019 to N298.87bn in 2020 (see Chart 2).

Chart 2: MTN Nigeria Communications Plc PBT (N'bn)

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Source: MTN Financial Statement, Proshare Research

The Expense Surge

The rise in MTN's 2020 expenses ran ahead of the rise in its revenue during the year. Its total expenses rose by +18.46% in 2020 to N920.05bn from N776.66bn in 2019. Most of the cost components rose in 2020 except for roaming cost and advertisements, sponsorships, and sales promotion which declined by -26.73% and by -23.73% respectively. The three major contributors to cost were direct network operating cost, depreciation of property and equipment, and interconnect costs with contributions of 33.75%, 16.33%, and 12.22% respectively. A further reason for the rise in the group's cost is its recent roll out of 5G connectivity and the depreciation of the naira against the United States of America dollar. (see Table 2 below).

Table 2: Breakdown of MTN's Expense

	2019	2020	% Change	% Contribution to the Expenses
Direct network operating costs	246.6	310.5	25.91%	33.75%
Value added services	12.5	12.82	2.56%	1.39%
Costs of starter packs, handsets, and accessories	12.77	20.57	61.08%	2.24%
Interconnect costs	105.25	112.47	6.86%	12.22%
Roaming costs	4.04	2.96	-26.73%	0.32%
Transmission costs	5.55	6.11	10.09%	0.66%
Discounts and commissions	56.59	68.53	21.10%	7.45%
Advertisements, sponsorships, and sales promotions	19.85	15.14	-23.73%	1.65%
Employee costs	30.71	45.33	47.61%	4.93%
Depreciation of property and equipment	147.81	150.2	1.62%	16.33%
Amortisation of intangible assets	30	36.7	22.33%	3.99%
Depreciation of right of use assets	54	72.13	33.57%	7.84%
Other operating expenses	50.99	66.59	30.59%	7.24%
Total	776.66	920.05	18.46%

Source: MTN Financial Statement, Proshare Research

Total Assets: Building the Balance Sheet

MTN Nigeria saw a rise in its total assets in 2020 as assets rose by +30.67% on the back of stronger cash balances reflecting the mature stage of the Telco's business with cash flow outpacing profit and revenue growth. Its total assets rose from N1.5trn in 2019 to N1.96trn in 2020 (see Chart 3 below).

Chart 3: MTN Nigeria Communications Plc Total Assets (N'bn)

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Source: MTN Financial Statement, Proshare Research

Equity: Boost for Shareholders

MTN's equity rose by +22.30% to N178.39bn in 2020 from N145.86bn in 2019. MTN's relatively low equity compared to other highly capitalized stocks could be attributed to its low free float and the relatively low number of authorized shares outstanding. The implication may be pleasant for existing shareholders as low equity dilution would improve return on average equity (ROaE) going forward (see Chart 4).

Chart 4: MTN Nigeria Communications Plc Equity

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Source: MTN Financial Statement, Proshare Research

The major contributor to the Telco's rise in equity was the growth in its retained earnings which accounted for over 90% of the total equity in 2020. The local telecom group's retained earnings rose by +25.69% from N127.71bn in 2019 to N160.52bn in 2020 (see Table 4).

Table 4: MTN Nigeria Communications Plc Equity

	2019 (N'bn)	2020 (N'bn)	% Change (Y-o-Y)
Share premium	17,216	17,216	0.00%
Other reserves	521	239	-54.13%
Retained profit	127,713	160,524	25.69%
Total	145,857	178,386	22.30%

Source: MTN Financial Statement, Proshare Research

Eyeballing the Ratios

Current Ratio

MTN's current ratio rose from 0.67 in 2019 to 0.70 in 2020 which suggests that MTN's had a current asset of N0.703 for every N1 of current liabilities. Both current assets and current liabilities rose in 2020. While its current assets rose by +98.9% in 2020, its current liabilities rose by +88.53%. All components of its current assets rose considerably in 2020. Inventories rose by +137.4%, current investments +167.72%, restricted cash +25.92%, cash and cash equivalents +136.67% while trade and other receivables declined by -3.90%.

On the other hand, all current liability items saw a rise in 2020 except for provisions. Increases were recorded in trade and other payables +59.61%, borrowings +487.31%, derivatives +100%, lease liabilities +63.26%, contract liabilities +33.10%, current tax payable +63.52% while provisions declined by -3.73% (see Chart 5 below).

Chart 5: MTN Nigeria Communications Plc Current Ratio

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Source: MTN Financial Statement, Proshare Research

Acid-Test Ratio

The telecoms giant's acid-test ratio rose to 0.7 in 2020 from 0.66 in 2019. This implies that for every N1 of current liabilities, MTN had N0.70 of very liquid assets to cover those immediate obligations. MTN's significant rise in inventory by +137.4% in 2020 did not have a major impact on the acid-test ratio because it had a low inventory base. Its inventory rose from N909m in 2019 to N2.16bn in 2020 (see Chart 6).

Chart 6: MTN Nigeria Communications Plc Acid-test Ratio

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Source: MTN Financial Statement, Proshare Research

Returns on Equity

MTN has very high returns on equity and this is because of its low equity base. The decline in returns on equity could be attributed to the increase in shareholder's fund by +22.30% which outweighed the increase in profit after tax of +0.95% (see Chart 7 below).

Chart 7: MTN Nigeria Communications Plc Returns on Equity (%)

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Source: MTN Financial Statement, Proshare Research

Debt to Equity Ratio

Its debt-to-equity ratio slid to 26.54% in 2020 from 27.46% in 2019 despite the rise in its total borrowings by +26.33%, with total borrowings rising from N412.54bn in 2019 to N521.15bn in 2020. The decline in its debt-to-equity ratio could be largely attributed to the significant increase in its equity by +30.70% (see Chart 8 below).

Chart 8: MTN Nigeria Communications Plc Debt to Equity Ratio (%)

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Source: MTN Financial Statement, Proshare Research

Price to Earnings Ratio

MTN's price to earnings ratio increased from 10.51 in 2019 to 16.86 in 2020. This implies that MTN was trading roughly 17 times earnings. MTN's P/E ratio could be compared to Vodacom's ratio to understand if its stock is overvalued or undervalued. Given that Vodacom operates in a developed market and Nigeria operates in a developing context, analysts would expect that Vodacom's earning per share would be higher than that of MTN, hence the lower P/E ratio, but since MTN P/E ratio is slightly above Vodacom's P/E ratio, MTN's stock does not appear overvalued.

Conclusion

Technology stocks were a major beneficiary of the coronavirus pandemic in 2020. Given that MTN has the largest market share in the telco sector, the problems resulting from coronavirus lockdowns and the need to maintain social distancing, the work and play environment of Nigerians has morphed in a way that gives companies like MTN a counterintuitive 'virus bonus'. This was noticed in the increase in the demand for data and voice subscriptions in 2020. Industry experts project that MTN's revenues will climb upwards in 2021 buoyed by increased penetration, and an improvement in service, which would lead to a larger number of subscribers.

According to MTN Nigeria's outgoing CEO, Ferdi Moolman, the company's operating environment remains challenging and uncertain because of the pandemic but MTN would refine its strategy by making its operating model future-fit to adapt to a dynamic environment. Furthermore, he noted that MTN was well-placed to unlock the opportunities that have emerged in the areas of financial inclusion along with the rising demand for connectivity and digitalization.

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