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MTN Nigeria’s Q2 22 report maintains strong earnings

MTN Nigeria Communications (MTNN) released its H1 22 unaudited results after the close of trading on Friday (29 July). The group reported Q2 22 EPS of N4.16 (+24.2% y/y), culminating in H1 22 EPS of N8.92 (+28.0%). An interim dividend of N5.60/s (+23.1% y/y) was proposed (below our estimate), implying an interim dividend yield of 2.8% on the last closing price.

The achieved EPS, when annualised, is in line with consensus forecast for FY 22 but by 4.9%, owing to a negative surprise on the Net interest line.

Although earnings were in line with the market’s expectation, we expect investor reaction to be buoyed by the increased dividend. Year-to-date, the stock is up 1.6%.

Revenue growth slowed to five-quarter low

Service revenue grew by double-digits for the eighth successive quarter in Q2 22. However, like AIRTELAFRI’s (SELL, TP: N1,051.07) performance last quarter, the pace of growth slowed to 18.0% y/y, a five-quarter low. Sequentially, revenue grew by just 1.7% q/q, the least since the start of the pandemic (Q2 20: -6.2% q/q). The revenue weakness was due to the restriction of outgoing calls for c.19m subscribers (when initially implemented) at the start of April, in line with the regulators directive. As a result, voice revenue (-2.9% y/y) declined for the first time since Q2-20.

Nonetheless, overall growth was driven by mainly data revenue (+50.6% y/y). Growth in data, which contributed 38.6% (Q2 21: 30.3%) to revenue, was delivered through a combination of increased active data subscribers (Q2 net additions: +0.9     million), increased usage (average MB per user rose by 61.8%) and traffic (+79.3% y/y), all supported by increased network capacity and 4G penetration. Notably, 4G population coverage increased to 77.9%, up from 71.7% in Q1 22.

Rising costs dampen EBITDA margin expansion

During the quarter, total expenses grew by 17.6% y/y, owing to the continued effects of Naira depreciation on lease rental costs, accelerated site rollout, and rising energy costs.  We also note that the surge in Maintenance costs (+26.4% y/y) and the new Information technology development levy (N1.31bn) contributed substantially to cost growth. According to management, the escalation of diesel prices in Nigeria contributed to the 10.1% increase in direct network operating costs with a 0.3ppt EBITDA margin impact.

However, due to the larger growth in Revenue, EBITDA (+18.6% y/y) grew, with the EBITDA margin printing 52.6% (vs 52.4% in Q2 21 and 54.6% in Q1 22).

Seven successive quarters of double-digit earnings growth

Net finance costs (+68.4% y/y) rose in Q2 22, following increased interest expense on borrowings – the group raised N127.0bn through a commercial paper issuance in April 2022. Overall, Q2 PBT grew 11.5% y/y, and PAT grew 24.6% y/y. Notably, the group’s PAT has grown by strong double-digits for seven successive quarters. The effective tax for the quarter was 32.2%, compared with 39.3% in Q2 21 and 32.6% in Q1 22.

Conclusion

Despite the revenue weakness, MTNN’s operational performance in Q2 22 was in line with our expectations. According to management, there has been a steady recovery in voice revenue since April 2022 as more customers were reactivated following NIN verification. Thus, we expect a pickup in revenue growth in Q3 22. Management expects EBITDA margin for FY22 to be slightly lower than the medium-term target 53%-55% (Coronation Research forecast: 53.2% in FY 22) due to the impact of the NIN-SIM linkage directive and a more aggressive rollout on the Payment Service Bank (PSB) than originally planned.

Nevertheless, analysts at Cordros Capital maintain our BUY recommendation on the stock. On our estimates, the stock is trading on 2022F P/E and EV/EBITDA multiples of 10.7x and 4.8x, a discount to emerging market peer multiples of13.3x and 6.1x.