The significant foreign exchange losses incurred by MTN Nigeria, attributed to the devaluation of the naira, have exerted an adverse impact on the company’s overall profitability and returns.
The company recorded a 42% year-on-year drop in pre-tax profit, reaching N233 billion in 9M 2023 compared to N401 billion in the corresponding period of the previous year. Also, basic earnings per share declined by 45% year-on-year reaching N7.06, moderating the trailing twelve-month EPS figure to N10.81.
The share price has declined from its 9M 2023 Year-to-Date (YtD) position of about 23% to approximately 11% YtD.
This reflects the impacts of policy changes and other macroeconomic headwinds. MTN Nigeria CEO, Karl Toriola, commenting on the company’s 9M 2023 results, stated:
Another challenge is the issue of interest rates. The continuous upward adjustment of monetary policy rates by the Central Bank of Nigeria (CBN) as a response to escalating inflation created added pressure on interest expenses. Coupled with foreign exchange losses, this contributed to a significant 173% growth in finance costs, which impacted the company’s bottom line.
Foreign exchange losses have remained a consistent trend throughout each quarter of the year. culminating in an impressive 736% year-on-year growth to N232.832 billion in the first nine months (9M) of the fiscal year. Simultaneously, interest expenses on borrowings also experienced a considerable uptick, rising by 79% to reach N82.861 billion.
A cursory review of the financial statements reveals that these net foreign exchange losses stem from the translation of foreign-denominated balances.
Operating in a global market, MTN Nigeria engages in transactions denominated in various foreign currencies. The depreciation of the naira against these currencies led to the translation of foreign-denominated balances into naira at a lower rate. Consequently, this resulted in foreign exchange losses.
However, despite the decline in the company’s overall profitability, there are positive aspects to the financial performance.
The company has been consistent in growing revenue. Specifically, in the third quarter (Q3), it achieved the highest quarterly revenue for the entire year. The cumulative effect over the first 9 months of the year is an impressive 21.4% growth in revenue, which was driven by double-digit increases in voice, data, and digital services.
Furthermore, supported by the service revenue, earnings before interest, tax, depreciation and amortization (EBITDA) grew by 16.3% to N907.9 billion.
Despite the positive EBITDA growth, EBITDA margin decreased by 2.4 percentage points, to 51.2%. This indicates a shift in the company’s profitability concerning its operating income.
The company explained that the EBITDA margin was under pressure in Q3 due to the impact of forex harmonization on operating expenses, exacerbated by the effects of rising inflation.
However, even with this decrease, the EBITDA margin, standing at 51.2%, is still considered healthy. But the critical factor is for the company to continue to align its manageable factors, such as revenue and operating costs, to mitigate the impact of certain macroeconomic challenges, and achieve and surpass its guidance.
According to the company’s 2022 full-year report, the medium-term focus is directed towards expense efficiencies and disciplined capital allocation to support earnings and cash flow generation, to achieve its service revenue guidance of “at least 20%” and EBITDA margin target range of 53-55% over the medium term.
While the Q3 2023 report from the company provides insights into proactive measures aimed at mitigating the impacts of macroeconomic volatility and unlocking significant network cost efficiencies, the overall profitability performance highlights the need for further actions.
These additional efforts are considered necessary not only to sustain and surpass previous financial performance but also to align with and achieve the company’s specified guidance, to bolster company value, return to shareholders and investor confidence
Investors’ confidence can be boosted by the total returns the stock offers, in terms of dividend yield and capital gain.
In 2022, with profit after tax of N358.877 billion, the company paid out N317.530 billion in dividends, equivalent to N15.60 per share N15.60 per share, representing about 88% payout ratio, which currently offers a yield of 6.55%.
The company has recently declared an interim dividend of N5.60 for the period ending June 30, 2023, and, following the trend from the previous year, is expected to pay a final dividend next year.
However, the sustainability of this dividend is in question due to these challenges. The 9-month post-tax profit is only 41% of the 2022 full-year post-tax profits, and the diminished retained earnings amounting to N147 billion further complicate the situation.
The share price has experienced a 3.8% decline since the release of the Q3 earnings results. Additionally, the Year-to-Date (YtD) gain for the company is 10.70%, trailing the YtD gain of the NGX All-Share Index (NGXASI), which stands at 38.98%. This suggests that the company’s stock performance has not kept pace with the broader market index.
Despite the recent decline in share price, the trailing twelve-month earnings multiple of 22.02x indicates that investors may still be optimistic about the company’s growth potential.
This multiple is considered relatively high, especially when compared to other companies listed on the NGX, suggesting that investors are willing to pay a premium for the company’s earnings.
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