July 27, 2019/Cordros Report
Event: MTNN recently published H1-19 results, with EPS growth of 34.8% y/y, driven by increased revenue, gross margin expansion, and a lower effective tax rate. The EPS achieved missed our estimates (annualized) for the six months period by 4% majorly due to a positive surprise on the cost of sales line. Annualised, the H1-19 EPS was 16% below the consensus estimate for 2019E. The company has proposed an interim dividend of NGN2.95/s.
H1-19 revenue grew by 12.1% y/y, behind our estimates by 6% and consensus by 3% when annualized. Data revenue grew faster (+30.0% y/y) than Voice/Airtime revenue (+9.7%) with the former’s contribution to revenue growing 200bps to 18.2%, while the latter’s contribution declined 200bps to 63.3%, as the Nigerian mobile market steadily transitions from a voice market to a data market. According to management, data revenue growth was driven by increased smartphone penetration (+210 bps to 39.2%) and an increase in active data subscribers (+11.0% to 20.7 million), while voice revenue growth was supported by an increase in subscribers (+5.7%), relatively stable tariffs and a focus on pro-consumer activities .
Gross profit margin expanded by 975 bps y/y to 67.2% – a two year high – ahead of 57.0% we estimated for the period. In addition to the higher revenue, gross margin benefited from lower CoGS which declined by 13.5% y/y, benefitting from lower digital expenses arising from MTNNs Value Added Services (VAS) optimisation initiatives.
OPEX rose 23.8% y/y, with the ratio-to-revenue coming in at 33.6%, both higher than our estimates, following increased depreciation and amortization (+40.7% y/y) on account of the implementation of IFRS 16. Despite the double-digit growth in OPEX, EBIT and EBITDA surged by 39.5% y/y and 39.9% y/y with the associated margins coming in at 33.6% (+659 bps) and 53.8% (+1,069 bps), respectively.
MTNN net finance costs grew by 72.7% y/y, as the company recorded NGN33.5 billion in interest expense on its leases following the implementation of IFRS 16. Interest income on bank deposits also declined by 32.6% amidst the declining yield environment. Gross debt as at end-June was NGN794.00 billion (vs. NGN175.32 billion as at 2018FY).
On a quarter on quarter basis, revenue grew marginally by 1.0% q/q, while gross margin contracted by 484 bps to 65.0% following a 10.9% increase in Direct network and technology operating costs. It is not clear at this stage what led to slow revenue growth. EPS grew by 4.4% q/q.
The company will be holding a conference call at 3.00PM (GMT +1). Click here to register.
Comment: MTNNs H2-19 EPS is slightly below our expectations (4% variance). Despite the quarter on quarter weakness, we expect the focus to be on the positive half-year earnings and dividend, hence, we do not foresee a negative reaction. On our estimates, the stock is trading at forward (2019E) P/E and EV/EBITDA multiples of 12.6x and 4.1x respectively, a discount to the Middle East and Africa peer averages of 14.8x and 5.65x. Our estimates are under review.