Nigerian Telcos had a harsh year in 2023, and the pain continues into 2024. The problem was less a matter of internal operating difficulties than a struggle against the consequences of the federal government’s fiscal and monetary policies. Analysts observed that the continuous rise in domestic interest rates and the gradual slide in the external value of the local currency have created a crab squeeze impact on the telcos’ net earnings. MTN was not left out of the fray and was caught in the hustle and flow of business survival in a year of heightened uncertainty.
The tough economic circumstances contributed to the company’s retained earnings depletion and the savaging of shareholders’ funds, which fell to a negative N208.0bn as net earnings slipped to N40.8bn. In response to the macroeconomic challenges, investors swiftly offloaded MTN shares due to the sizable foreign exchange losses reported in the company year-end 2023 financial statements. The telco giant incurred an FX loss of N740bn.
The digital data carrier reported a loss after tax of N137.0bn, attributed mainly to its net foreign exchange (FX) loss. Profit After-tax (PAT), adjusted for the forex loss, fell by 14.3% to N344.5bn. Earnings per share (EPS) took a hit, tumbling to negative N6.38k (N16.56k adjusted for the forex loss, down -14.1%). Due to the Naira devaluation in the year, higher energy costs and general inflation, EBITDA came under pressure and recorded a growth of 12.35% to N1.20trn in FY 2023 (EBITDA margin decreased by 4.5bps to 48.7%). EBITDA was also affected by the introduction of VAT on leases in Q4 and a provision relating to the Tax Appeal Tribunal’s (TAT) decision on the FIRS VAT assessment (also taken in Q4).
Due to MTN Nigeria’s significant losses, inability to distribute dividends for 2023, and suspended medium-term guidance for earnings before interest, tax, depreciation, and amortisation, the market has adjusted its price to reflect the company’s fundamentals.
Investor Indicators:
- Market Capitalization N5.55bn
- Recent Price N222.90
- P/E (12-month trailing) 41.38X
- P/BV 0.56X
- P/S 1.55X
- EPS (2023) N6.38
- Div Yield 6.26%
- Payout ratio -0.87X
Key Highlights
- MTN Nigeria’s revenue rose by +22.69% to N2.46trn in FY 2023 from N2.01trn in FY 2022.
- Voice revenue climbed by +9.7% from N1.03bn in FY 2022 to N1.13bn in 2023.
- The mobile network operator’s profitability slid, with Pre-tax and Post-tax profits declining by -133.31% and -138.09% to N-177.89bn and N133.84bn, respectively, in FY 2023.
- The group’s total assets grew by +17.41% to N3.18trn in FY 2023 from N2.71trn in FY 2022.
- Total borrowings increased by 70.69% to N63.63bn in FY 2023 from N75.56bn in FY 2023.
- Mobile subscribers grew by 5.3% to 79.7 million, while active data users increased by 12.7% to 44.6 million in FU 2023.
- Interest expense (borrowings) nudged finance cost higher by 60.86% to N236.92bn in FY 2023, while finance income grew by +87.50% to N25.81bn in FY 2023.
- Retained earnings declined by -184.33% to N208.01bn in FY 2023 from N246.67bn in FY 2022.
- Cash and cash equivalents improved by 1.32% to N354.16bn in FY 2023 from N349.78bn in FY 2022.
- MTN Nigeria’s Foreign exchange loss increased to N740.43bn in FY 2023 from N81.82bn in FY 2022.
- Earnings per share declined to N6.38k in FY 2023 from N16.76k in FY 2022.
Revenue
In FY 2023, MTN Nigeria Communication Plc recorded a revenue of N2.47trn. This represents a 22.69% rise year-on-year compared to the same period in FY 2022. On a Q-o-Q basis, revenue increased by 13.3% to N695.9bn in Q4 2023 from N614.21bn in Q3 2023 (see chart 1 below).
Chart 1:
Segmental Revenue
Data revenue growth remained strong in 2023, rising by 39.8% Y-o-Y to N1.07trn from N764.82bn in FY 2022. The growth was supported by the strengthening of the company’s data bundles, an increase in the penetration of smartphones, and investment made to expand coverage and capacity. The telecom giant’s active data users increased by 12.7% Y-o-Y to 44.6m for FY 2023. While the 4G network covers 81.5% of Nigeria’s population, 5G covers 11.3%. Voice revenue also grew by 10.45% to N1.14trn due to the increase in the mobile subscriber base (see chart 2 below).
Chart 2:
Profitability
The telco giant recorded a huge loss before tax of N177.8bn in FY 2023, which has led to a complete wipe-out of shareholders’ funds. The primary driver behind this unprecedented loss is a massive foreign currency loss of approximately N740bn ($569.54m) in 2023, an increase from N81bn in FY 2022, raising its net finance cost by 341.9% to N951.5bn. In June, the Central Bank of Nigeria (CBN) adopted new forex rules, leading to an approximately 96.7% devaluation in the exchange rate to N907.1 per dollar by the end of December. The devaluation drove higher finance costs and foreign exchange losses for the Mobile Network Operator, which impacted the group’s profitability (see chart 3 below).
Chart 3:
Cash Flow
MTN Nigeria generated more revenue from operating activities in FY 2023 than FY 2022. However, net cash flows from investing activities saw a larger impact, increasing from N485.97bn in FY 2022 to N765.98bn in FY 2023. Meanwhile, net cash generated from financing activities decreased from N270.08bn in FY 2022 to N147.25bn in FY 2023. Despite these fluctuations, analysts opine that it is crucial for investors to leave their sight set on what really matters, given MTN’s strong cash flow generation position with some double-digit growth. Additionally, the group’s cash and cash equivalents, as of December 31, 2023, declined by -1.32% to N345.16bn in FY 2023.2023 (see chart 4 below).
Chart 4:
Ratios
In FY 2023, MTN exhibited a mix of performance in its financial ratios compared to FY 2022. Despite an increase in current assets from N761.04 in FY 2022 to N975.78bn in FY 2023, the surge in current liabilities from N1.17bn in FY 2022 to N1.90bn in FY 2023 outpaced the growth in current assets, making the liquidity ratio decrease from 0.65x in FY 2022 to 0.51x in FY 2023. the leverage ratio experienced a shift from 2.06% in FY 2022 to -25.93% in FY 2023.
Return on Equity (ROE) improved from 1.05% to 2.95%, primarily attributed to a net loss of -N133.841bn in FY 2023, contrasting with the positive net income of N351.382bn in FY 2022. Additionally, the negative shareholders’ equity of -N45.404bn in FY 2023 further exacerbates the negative ROE. The ROA decreased from 0.13% in FY 2022 to -0.04% in FY 2023, indicating a negative return relative to its total assets. Additionally, the increase in total assets from ₦2,716,000 in FY 2022 to ₦3,188,827 in FY 2023 did not translate into positive returns. The asset turnover ratio improved from 0.74 in FY 2022 to 0.77 in FY 2023 (see chart 5 below).
Chart 5:
MTN Nigeria’s Share Price Movement
The share price fluctuated throughout the year, but there were periods of relative stability followed by periods of volatility. MTN Nigeria’s share price started the year at N215 and remained relatively stable for the first few weeks. Retaining a broad upward momentum of +11.63% to N240 in March 2023. The stock dipped briefly between mid-April and May before rising to a drunken sailor-like stroll to N273.40 as of June 30, 2023, resulting in a +27.2% Year-to-date (YTD) return. Despite fluctuations, the share price of MTN Nigeria showed some resilience throughout the year, ending at N264 in December, which is slightly higher than where it started (see chart 6 below).
Chart 6:
Fundamental Valuation
MTN Nigeria’s fundamental valuation shows that the price-to-earnings ratio declined to 41.38x in FY 2023 from 12.82x in FY 2022. The telecom industry trades at a PE ratio of 19.6x, higher than its 3-year average PE of 15.1x (see chart 7 below).
Chart 7:
Competitor Analysis
Nigeria is Africa’s largest ICT market, with about 82% of the continent’s telecom subscribers and 29% of internet usage. However, the industry faces challenges, and multiple causes affect market operators.
The market structure is oligopolistic (a few service providers, in this case, four). MTN Nigeria is the market leader with the largest market share of 38.79% as of May 2023, according to the Nigerian Communications Commission (NCC). As of December 2023, MTN saw a +5.3% year-on-year (Y-o-Y) growth in total subscribers, rising to 77.1m customers. However, the company faced significant challenges, particularly in its financials. Despite experiencing a +22.69% growth in earnings to N2.46trn, MTN suffered a sharp -139.3%% decline in profit, which plummeted to -N137.02bn. This drastic decline in profitability was driven by an astounding 804.9% rise in net foreign exchange loss, totalling N740.43bn as of December 2023.
Nevertheless, Airtel Nigeria has emerged as a formidable competitor with a customer base of 61.83m as of December 2023. The telco reported a notable +13.31% increase in earnings, rising to N1.66bn using a benchmark exchange rate of N886.76. However, Airtel was not immune to the challenges posed by currency depreciation, as it suffered a sizable N72.65bn (US$178m) foreign exchange loss (see Dashboard below).
Dashboard 1:
Closing Thoughts
Nigerian telcos will have a tight operating season in 2024 as interest rates rise, inflation hangs in double digits, and access to foreign exchange (FX) improves but remains inadequate at the official exchange market (NAFEM); foreign exchange translation losses will reduce but continue to put a squeeze on margins.
If 2023 is considered difficult, the pain will continue in 2024. On the bright side, however, the economy will experience less FX volatility in Q2 2024, but an appreciation of the local currency will require some time; the notable improvement in the relative value of the naira to the US dollar will emerge in 2025. In other words, MTN Nigeria may find itself off the boxing ropes but will still feel sore from body bruises caused by jabs from a slower increase in data usage, slender growth in voice patronage, and declining consumer real disposable income. Business will remain decent for telcos, but the roaring growth days are slowly ending. Investors may increasingly search for profit-taking opportunities as hidden value head room shrinks.
