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MTN’S HIGH LEVERAGED POSITION : A CHINCK IN ITS ARMOUR ?

Excessive use of debt financing against equity forces MTN to deliver Lilliputian net incomes against its leviathan turnovers .

For lack of differentiation in products , the intensity of competition in the telecom industry tends to be highly incisive compared to where it is otherwise . Sequel to this unique nature, for any player to generate superior Return On Investment ,ROI , or outperform its competitors ,it becomes a strongly heated battle ; but those with leadership instincts rarely become sleepless over this challenge. They strategically position themselves in the competitive telecom industry space and target greater market share , maintain cost leadership , strong corporate identity as well as quality service delivery . For MTN ,Nigeria , no doubt ,its industry and brand leadership could be traced to these .

Not only that .To achieve this feat , this player, with its intent for the industry leadership, has continued to identify both the opportunities and threats coming its ways that give it a strong idea of the present and future scenario .In a nutshell , to get an upper hand, it has gotten a strong grip or understanding of the competitive dynamics of this industry and its positions relative to other participants ..And these have continued to give it the necessary sinecure to outperform its competitors.

However, its excessive use of debt financing against equity remains a chink in its amour, and this is generating heated concerns : the outcome of this strategy is not impressive ; despite its leviathan turnovers , its net incomes have remained lilliputian in the last two years .

LEVIATHAN TURNOVER, YET LOW NET PROFIT MARGIN

By their fruits you shall know them, says the holy book . MTN, the telecom giant, remains the industry indisputable leader . It announced a ground-breaking full-year turnover in the financial year of 2020, the highest ever recorded by a Nigerian listed entity. .Specifically, the telecom giant’s revenue expanded by 15.1% year-to-year to N1.3 trillion in the review period. ,its nine month 2021 results stood at N1.2 trillion .However, despite maintaining overall leadership in turnover in the Nigerian Stock Exchange , its strategic drive for excessive debt financing that gives it very high leveraged posture is generating a lot of concerns . .

Debt financing is not a crime and no limitation is set for it by any law ,however , the proportion of equity to debt financing has to be justifiable by its impact on the company’s performance .And this prompts the question :Is the company better off with this strategy ? For MTN, this may somehow be difficult to defend going by its less impressive net profit margin, a strong metric of efficiency ; the whooping absolute figure of its finance cost was believed to be partly responsible for this uninspiring profit margin . For instance ,in the first nine months of 2021, its nets profit margin is 18% ,indicating making N18 profit from every its every N100 revenue made at the top line . In a nutshell , the damage from its huge finance costs is believed to be killing the company’s fortune at the bottom line

HIGH DEBT TO EQUITY POSTURE  OF MTN

A detailed analysis of MTN’s first nine months of 2021 shed more lights on this corporate giant performance and its love for debt financing . This telecom giant is excessively inclined to debt financing . A look at its capital structure and major leverage ratios confirm this .Its equity multiplier is on high side . With a total assets of N2.10 trillion and stockholders’ equity of N186b . in the first nine months of 2021 Its equity multiplier is 11.3 as against 11 in the corresponding period of 2020 . This means MTN used equity to finance 8.8% of its assets and the remaining 90.2 % is financed by debt as against 91 % in the third quarter of 2020

Also , its debt to equity ratio , a metric that indicates whether a company’s capital structure is tilted either towards debt or equity financing ,also followed the same trend .With the total debt at N542.3b and N521b as against the equity of N186b and 178.4b in the 9month 2021 and 2020 respectively , MTN’s total debt to equity was 2.9 or N2.90 This means that for every naira in equity, MTN has N2.90 in leverage. A ratio of 1 would imply that creditors and investors are on equal footing in the company’s assets.

Again ,looking at MTN leverage position from the long term debt gives the same picture. With a long term debt of N325b and N331b and N186b and 178 386 equity between 2020 and 2021 , MTN’s long term debt to equity were 1.75 OR 175 % and 1.85 or 185 % respectively within the two periods under review .This means its long term debt is almost twice its equity .

Has MTN chosen a wrong strategy ?

 For some companies, a high equity multiplier does not always equate to higher investment risk. A high use of debt can be part of an effective business strategy that allows the company to purchase assets at a lower cost. This is the case if the company finds it is cheaper to incur debt as a financing method compared to issuing stock.

If the company has effectively used its assets and is showing a profit that is high enough to service its debt, then incurring debt can be a positive strategy. However, this strategy exposes the company to the risk of an unexpected drop in profits, which could then make it difficult for the company to repay its debt.

Additionally, a low equity multiplier is not always a positive indicator for a company. In some cases, it could mean the company is unable to find lenders willing to loan it money. A low equity multiplier could also indicate that a company’s growth prospects are low because its financial leverage is low. Why has MTN chosen to finance its operations more with high level of debts than equity ? Some analysts believed MTN might be taken advantage of the global liquidity glut to take on more debt and drive faster corporate growth.  

BETWEEN HIGH DEBT FINANCING AND THE BOTTOM LINE

MASSIVE TURNOVER PROFILE

For MTN ,the implications of that strategy are damaging to the bottom line . This could be seen vividly in its leviathan turnover or revenue profiles in the last few years and a relatively Lilliputian profit after tax . The picture is clear. It maintained an upward trajectory growth and recorded double-digit growth in its turnover ; its third quarter results between 2018 and 2021 inched up from N764.45b to N856.55b ,N975.76 b to N1.206trillion respectively . Sales revenue was up by +23.62% Y-on-Y attaining an all-time high digit of N1.2trillion in 9month 2021.

REVENUE SOURCES

Detailed analysis of its September 2021 turnover revealed a Y-on-Y earnings generated from data business surged by +51.6%, SMS charges spiked by +301.57%, interconnect and roaming grew by +27.33%, revenue from voice grew by +9.23% while revenue from the sale of handset and accessories dipped by -2.36% .These results were driven by its high subscriber base , strong brand name ,large economics of scale ,wide range of product, fast expanding digital market as well as growing mobile and internet market across the globe

LILLIPUTIAN NET PROFIT RELATIVE TO MASSIVE TOP LINE

Despite this leviathan turnover in September , 2021 , its profitability relative profiles have not been a match to the company’s supersonic revenue momentum . Profit after tax grew Y-on-Y by +52.74% to N220.31bn in 9month 2021. In a percentage term ,the performance ,no doubt , is impressive ; however , its absolute figures show there is a spoiler somewhere draining its huge top line .

The spoiler is not hidden . Though its finance cost , traced to its debt profile , sunk marginally by -3.12% from N107.36bn in 9month 2020 to N104.01bn in 9month 2021 , this is huge enough to clip its net profit wings enormously . More so when its finance income slumped by -41.28% Year-on-Year (Y-on-Y) to N7.01bn in 9month 2021

A REVIEW OF THE STRATEGY ?

.For some analysts , this posture is quite ironical. Two years ago, this company opted to be listed on the Nigerian Stock Exchange and investors speedily zoomed in and bought its shares at a premium . This may not spring any surprise . MTN looked strategically good for investment because of its potentials as a market leader and strong value potentials. . Even ,late last year , it went to the market with new offers and it was another round of success .

However , MTN is probably aware of this spoiler ; the company appears to be reviewing its strategy on debt financing .The company’s leverage ratio nudged down by -38.88% Y-on-Y from 2.86 in 9month 2020 to 1.75 in 9month 2021 and its total debt dipped by -3.21% in 9month 2021 while its equity spiked higher by +58.37% . As at 2019 , its debt to equity ratio stood at 3.35 but decline to 2.86 and 1.75 in 2020 and 2021 September respectively . But ,in absolute term , the 9month 2021 financials of the technology company revealed that the company is still heavily financed by debt ..Recently, the telecom giant, MTN Nigeria (MTNN), announced MTN Group’s intention to proceed with a public offer for the sale of up to 575million shares in its subsidiary, MTN Nigeria. The offer for sale in MTNN will be done vis-a-vis a book build to institutional investors and fixed price to retail investors. The proposed offering is part of the 14% share sale plan by the parent company’s (MTN Mauritius) to the retail and institutional investors.

Given the current stake of 76.1% by MTN International (Mauritius) in MTNN, the initial volume offering of 575m shares represents 3.7% of the total interest by the parent company. Following the announcement, the knee-jerk reaction by investors saw MTNN share price trade at a high of N190/s during the trading activities

A NEED FOR BETTER COST CONTROL

The impact of finance cost is not the only spoiler as its cost of sales surged by +11.86% Y-on-Y from N179.21bn in 9month 2020 to N200.47bn in 9month 2021 However , if the finance cost had been minimized ,its net income or profit would have been better . This view may not be farfetched .Operating profit spiked by +36.27% from N307.01bn in 9month 2020 to N418.35bn in 9month 2021. But this positive impact of the operating profit would have been felt better with a more balanced debt to equity financing

GOOD INTEREST COVERAGE  DESPITE HIGH DEBT TO EQUITY ,

Meanwhile , the good thing about MTN is its ability to meet up with the challenges of interest payment . This is confirmed by its times interest earned ratio of 4.02 in the first nine months of 2021 as against 2.86 in the corresponding period of 2020 . A common solvency ratio utilized by both creditors and investors is the times interest earned ratio. Often referred to as the interest coverage ratio, the times interest earned ratio depicts a company’s ability to cover the interest owed on debt obligations, expressed as income before interest and taxes divided by interest expense. A ratio of 4 above means the business is able to meet the total interest payments owed on its outstanding, long-term debt four times over, or that the business income is four times higher than the interest expenses owed for the year.

Furthermore , its net operating cash flow to debt ratio also indicates the capability of MTN to successfully use debt to finance its operations . The Operating Cash to Debt Ratio Net cash generated from operating activities in the nine months of 2021 stood at 292,811 could cover 54 % of the company’s total debt of 542 321 compared to 44 % in the corresponding period of 2020 . This metric measures the percentage of a company’s total debt that is covered by its operating cash flow for a given accounting period. The operating cash flow refers to the cash that a company generates through its core operating activities. This usually represents the biggest stream of cash that a company generates.

In addition to the above ,one can confidently confirm that MTN has strong wherewithal for debt financing .This is equally displayed by its cash flow to operating earnings figures . Its cash flow covers 70 % of its operating income in the first nine months of 2021 compared to 75% in the corresponding period of 2020 .Its operating income stood at N418.35b compared to N307.01b in the same period in 2020 while its cash flow from its operations were N293b and N230b respectively Cash to income ratio is a litmus test which tells use the proportion of operating income which is based by operating cash flows. A low cash to income ratio might be because of management’s attempt to accelerate recognition of revenue. A very high ratio might also indicate revenue management.

LEADERSHP DRIVEN MOSTLY BY  BIGGER  MARKET SHARE BUT…….

Companies can be studied and evaluated on the basis of their market share, SWOT analysis etc., which would eventually help them drive business & sales revenue.

MTN’s major fortune driver remains its size advantage or market share . Size advantage is a leadership potential factor . First, having a capacity to match the resources and global distribution of large competitors brings advantages ; large companies also tend to devote a disproportionate share of their resources to training and education ;significant resources could open the door to many of mega-opportunities and enables it to become a significant employer

But the management of this telecom giant must not be oblivious of a strong limitation about size advantage : just as bigness without stretch and leverage is obesity, smallness without stretch and leverage is impotence. Sequel to this limitation , world class corporate managers drive or sustain size advantage by foresight, stretch, and leverage which provide the energy and rationale for proactive advantage building and industry re-engineering.

Analysts believed , MTN needs to drive its operations more efficiently ,to sustain its size advantage and leadership . This may not be farfetched as there are so many examples of companies that overcame seemingly insuperable resource handicaps and built positions of global leadership

In a nutshell ,size advantage may not be enough to gain competitive advantage over its competitors in the industry without generating cost advantage by a way of superior Return on Investment . Such type of strategies play a very important role in a telecom industry which is very competitive and where consumers are provided with almost similar products.

In the telecom industry , only a player with lowest cost and superior service delivery could gain industry leadership . MTN size advantage has ,indeed, delivered or enabled its to attain economies of scale. High capacity utilization, good bargaining power, high technology implementation are some of factors necessary that have allowed it to achieve this leadership

Although some of the players , to some extent, laying claim to differentiation, there are few products with unique features in the telecom market that could give any lasting differentiating factor. Sequel to this charging a premium price for the products due to high value added features is still rare for now . However , superior brand , major distribution channels, consistent promotional support ,among others . are the attributes of such products that could deliver a first mover advantage

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