MTN Q1 2019 Conference Call; Key Takeaways, Management Keeps Firm Hand on Profit Machine

Proshare

Wednesday, May 15, 2019    / 07:15AM / Teslim Shitta-Bey, Managing Editor 


Yesterday’s MTN Q1 2019 Conference Call drew interest from several local investors and financial analysts as the company’s Q1 result provided a unique platform for the Telco to reinforce investor confidence in its recent listing on the Nigerian Stock Exchange (NSE) by way of introduction. Key points of its presentation are captured in Proshare’s holding review. A more detailed analysis of the company’s business model, pricing and strategy will follow at a later date.


Highlights

  • Quarterly revenues have grown steadily over the last 2 years with total revenue rising from N249bn in Q1 2018 to N282bn in Q1 2019, representing a rise of +13.3% Y-o-Y. Given that call charges have remained constant over the period, the rise can be attributed to an increase in talk and data usage or what amounts to a rise in the average revenue per user (ARPU).


Chart 1 MTN Quarterly Revenues Q1 2018-Q1 2019


Proshare Nigeria Pvt. Ltd.


Source: MTN Q1 Conference Call Presentation

 


  • The Telco giant was able to increase operating income, Q-o-Q from N123bn in Q4 2018 to N150bn in Q1 2019, a rise of about +22%. But on a Y-o-Y basis EBITDA hopped from N104bn in Q1 2018 to N150bn in Q1 2019, representing a growth of +44.2%. 

 

 

Chart 2 MTN Quarterly EBITDA Q1 2018-Q1 2019


Proshare Nigeria Pvt. Ltd.


Source: MTN Q1 Conference Call Presentation


Quarterly CAPEX expenditure of the group has been on a forward flight until Q1 2019 when the company appears to have cut back spending, leaving a larger amount of cash on the table for investors. CAPEX rose from N18bn in Q1 2018 to N63bn in Q1 2019, representing an upward bubble of +250% Y-o-Y. But Q-o-Q, MTN controlled the glide in capital costs by bring CAPEX down by -14% from N74bn in Q4 2018 to N63bn in Q1 2019. This could mean that the company is slowing down expansion (unlikely) or is teasing investors with higher cash dividends before listing on the Nigerian Stock Exchange (NSE), a quite plausible explanation.

 

 

Chart 3 MTN Quarterly CAPEX Q1 2018-Q1 2019

Proshare Nigeria Pvt. Ltd.


Source: MTN Q1 Conference Call Presentation

 


  • Usually investors gloat over a company’s rising free cash flow (FCF), because the larger the cash flow the better the investor’s return. Higher discounted free cash flows mean higher intrinsic values of shareholder equity. Y-o-Y MTN’s adjusted free cash flow has risen from N47bn in Q1 2018 to N87bn in Q1 2019, reflecting a growth of +85.1%. Q-o-Q free cash flow has been bolder in growth, rising from N38bn in Q4 2018 to N87bn in Q1 2019, representing a quarterly leap of +129%.
  • The company’s major source of revenue in Nigeria comes from voice  services; this is increasingly becoming an anomaly as global trends in Telco revenues indicate that the largest growth area for telephony businesses is digital data services. MTN still makes over 75% of its revenue in the local market from Voice services while Data services accounts for a relatively small 14.9%, although data as a proportion of revenue has steadily increased from 7.3% in 2016 to 12.2% in 2017 and 14.9% in 2018. This means that the company still has significant headroom to grow data services as a proportion of total revenue.




Table 1 Breakdown of MTN Revenue by % Contribution 2016-2018


Proshare Nigeria Pvt. Ltd.

Source: MTN Q1 Conference Call Presentation

 

 

Getting A Hold on Strategy

Deconstructing the pace of the company’s streams of revenue growth per service offered, shows that its compound annual growth rate (CAGR) for other smaller activities has grown by a relatively modest +14% in the last 3 years, Fintech growth has risen by +50%, Digital by -42%, Data by +64% and Voice by +13%. This signifies a turning point in the company’s product mix and business configuration.

With data becoming a faster growing segment of the business, and Fintech equally becoming important to MTN’s core activities the company may have to break free from its conventional strategic mindset of differentiation, cost leadership and niche marketing.

The world of digital natives is a clear departure from the world of digital migrants. While natives are young, savvy and impatient, migrants are older, less tech capable and more patient with poor service quality. As natives rise as a proportion of telephony users, data service delivery will become a more meaningful part of the service architecture; AI will be a more plausible proposition to manage the user’s service experience and loyalty will no longer be part of the service equation. The netizen expects and insists on excellence; its absence leads to early and unemotional migration. Since migration costs have become almost become nil, the new generation of telephone service users will take the high road as soon as desires (as distinct from needs) are unmet.

MTN’s forward strategy must crack down on cost and allow consumers achieve customized experiential service satisfaction. In doing this MTN must be prepared to address issues of financial service delivery, and the integration of a customer’s retail purchase needs of goods and services (B2C and perhaps even B2B) with instant payment solutions. The folding of communication with finance and consumer retail services will redefine the landscape of telecommunications creating a fresh digital ecosystem with amorphous borders. Disruption is not to be expected, it is to be anticipated and if MTN is to remain the largest player in the environment it must begin an experiential migration to the future.


All About The Accounting

In a manner similar to the way IFRS9 led to a disruption of banking sector annual financial statements (AFS) in 2018, IFRS16 will have a similar but if powerful impact on the books of non-financial institutions in 2019, as IFRS16 replaces the old IAS 17. The new rules change the way companies report lease transactions in their statement of financial position and profit and loss accounts. Application of the new IFRS16 rule drove MTN’s EBITDA to 53.3% of revenue in Q1 2019 from the alternative IAS17 rule which would have placed EBIDTA at 44.2% of revenue. This also meant that PAT as a per cent of revenue fell to 17.2% as against 18.2% under IAS17.

 

Diagramme 1 Impact of IFRS16 Rule on MTN Quarterly Financial Statement

Proshare Nigeria Pvt. Ltd.

Source: MTN Q1 Conference Call Presentation


For investors IFRS16 will knock off a few millions from MTN’s profit after tax (PAT) in 2019 and will slightly reduce distributable earnings. This would modestly weigh down the price of the company’s equity if priced-in by analysts.

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Keeping An Eye on Momentum

In a world of Fintech disruption, artificial intelligence (AI), data analytics and machine learning, staying at the top of a crumbling business model may not be the smartest way of building an enduring franchise. This appears to be a refrain that MTN is well aware of and is addressing through strategic growth of its data market, building its 3G and 4G network capabilities and growing its ability to preempt rather than respond to customers mercurial expectations. In the new Telco ecosystem, migrants are becoming extinct and natives are taking charge of the high ground of consumer power. How well MTN takes charge of the new business imperatives will be closely monitored by Proshare

 

Proshare Nigeria Pvt. Ltd.


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13.  MTN Nigeria – Interim Financials For H1 2018

14.  Neither MTN Nigeria Nor Any of Its Advisers Has Filed Any IPO Application With SEC Nigeria

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16.  MTN Nigeria IPO Teaser – Listing and Precursory Information



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