Can MTN Nigeria Grow 2019 YoY Earnings By 90% To Justify N150/Share Valuation?

Company: MTN NIGERIA Plc
Rating: Hold
Current Market Price: N132.55
Year High: N159.30
Year Low: N99.00
Fair Value: See Valuation Analysis Below
Equity Analyst: Jeariogbe Tunde Segun

Key Financial Ratio
• In this report, we observed the full year financial performance indices of MTN Nigeria Plc for the full year ended December 31, 2018, and compared same with the full year statistics of 2017 for the purpose of establishing growth.
• The report also compared the five-year performance indices and ratios.
• Since the results observed in this report were all posted before the listing of MTNN’s shares on the floor of the exchange, shares outstanding used in estimating the ratios is 407,090,263 units, as against the new 20,354,513,050 shares outstanding.
• Thus, to establish the possible picture of investment ratios post-listing, we tested the new shares in issue on the old financial indices as if 2018 and 2017 financials were posted after listing. See the Investment Ratios column below for our findings.
• On the strength of the above, our valuation model explored ratios calculated with both old and new shares outstanding.
• We finally concluded on the need for the management of MTNN to improve its next earnings by at least 90% over 2018’s to maintain valuation in the range of N150.00 and above. See below for our findings.

Company Figures
• Between the year 2018 and 2017, total Turnover value improved by 17.13%, moving from N887.18 billion to N1.03 trillion.
• Direct Network Operating Cost stood at N305.51 billion as against N268.35 billion posted in the comparable year of 2017.
• Operating Profit was estimated at N266.11 billion after growing by 36.40% from the N195.10 billion of the previous year.
• Operating Expenses stood at N309.85 billion as against N268.35 billion in 2017.
• Finance Cost reduced appreciably by 60.75% to stand at N67.33 billion from N131.54 billion posted in a similar year of 2017.
• Profit before Tax soared by 106.74% to stand at N221.34 billion compared to the N107.06 billion achieved through 2017.
• After considering the tax expenses, a total of N145.68 billion was reported as profit for the year. This is 80.96% improvement over 2017 profit.

• Current Assets between the two years dropped by 18.87% to N195.85 billion, as against the previously reported N241.41 billion.
• Non-Current Assets inched up by 2.43% to stand at N745.88 billion as against N728.19 billion of 2017 financial year
• Current Liability for the period equally builds by a marginal 7.25% at the current estimate of N580.94 billion, compared to the N541.65 billion estimate at the end of the 2017 financial year.
• Non-Current liabilities dropped appreciably by 55.11%, from the previously reported N315.10 billion to N141.43 billion
• Thus, Net Debt for the period is N219.35 billion as against the N112.85 billion achieved at the end of the year 2017.
• Property Plant and Equipment stood at N607.02 billion, this is 4.22% above the 2017 estimate of N582.43 billion.
• Due to the large drop in Non-Current Liabilities, Net Assets soared by 94.37% to stand at N219.35 billion as against N112.85 billion reported in the 2017 financial year.

Financial/Solvency Ratio
• Estimated Debt Ratio confirmed that Total Debt reported for the period is 0.77x or 77% of Total Assets, this is a drop from the 0.88x/ 88% estimated from the 2017 financials
• As shown in the below table, Total Debt value for the period can swiftly replicate Equity 3.29x this is better than the 7.59x replicate of 2017 financial year. Please understand that the company used less debt in the current year
• Also tested is the Equity Ratio that confirmed that total Equity is only 23% of the company’s total Assets as against the 12% Equity contribution to Total Assets in the comparable year. This is encouraged by the improvement achieved in the Net Assets between the two years under comparison.

Financial/Solvency Ratio
• Estimated Debt Ratio confirmed that Total Debt reported for the period is 0.77x or 77% of Total Assets, this is a drop from the 0.88x/ 88% estimated from the 2017 financials
• As shown in the below table, Total Debt value for the period can swiftly replicate Equity 3.29x this is better than the 7.59x replicate of 2017 financial year. Please understand that the company used less debt in the current year
• Also tested is the Equity Ratio that confirmed that total Equity is only 23% of the company’s total Assets as against the 12% Equity contribution to Total Assets in the comparable year. This is encouraged by the improvement achieved in the Net Assets between the two years under comparison.

Profitability Ratios
• EBITDA Margin is estimated at 25.61% for the current year, this is the same as 16.45% growth over the 2017 estimate of 21.99%. Two things can be established from this: the firm is able to report a profit after settling its operating expenses and also improve in profitability within the two years compared in this report
• Pre-tax Margin builds up outstandingly within the two financial years, as it is currently estimated at 21.30% as against the 12.07% estimate in 2017
• Likewise, Profit Margin doubled by 54.50% at the current estimate of 14.02% against 9.07% estimate in 2017.
• Direct Network Operating Cost is same as 29.40% of the Turnover figure, this is a marginal decrease of 2.80% from 30.25% of 2017. We are of the opinion that the company may have achieved its lowest level of direct operating cost.
• Return on Average Equity stood at 87.71%, same as 4.05% improvement over the previous estimate of 84.29%. This, in our rating, is very commendable.
• Meanwhile, Return on Average Assets stood at 15.24% up above the 8.07% estimate in 2017.


Efficiency Ratios
• Operating Expenses is estimated at 29.82% of the Turnover figure as against 30.71% in 2017, the 2.91% depreciation is fair and shows that the telecommunications firm is effectively gauging its Operating Expenses per time.
• Turnover fairly overruns the Total Assets Value as it is currently estimated to be 110.34% of the Total Asset at the end of the 2018 financial year. Nevertheless, this is 20.59% improvement over the 91.50% estimated in the comparable year.
• Working Capital Ratio is currently above unity at 1.38x up from the 0.77x achieved in the similar year of 2017. Please note that a working capital ratio of less than 1.0 is a strong indicator that there will be liquidity problems in the future, while a ratio in the vicinity of 2.0 is considered to represent good short-term liquidity.

Investment Ratios
• Since the company- MTN Nigeria is a newly listed equity on The Nigerian Stock Exchange (NSE), we have divided our investment ratios into two parts.
• The first part observed the ratios by the old shares outstanding (407,090,263) as at the time the result was made available to its then shareholders; while
• The second part tested the same results with the new shares outstanding (20,354,513,050) at the listing.

Investment Ratios at Old Shares Outstanding
 Earnings per Shares stood at N357.87 as against the N197.77 earned at the end of 2017 financial year, this is same as 80.96% improvement.
 Thus, Total Comprehensive Income builds by 78.72% to stand at N356.67 against N199.57.
 Book Value per unit of MTNN stood at N538.83 up from N277.22 in 2017.
 Capital Expenditure per share is N407.15, lower than the N562.36 in the 2017 financials.
 Please note that some investment ratios were excluded since MTNN was not listed on NSE as at the period under review.

Valuation
 While attempting to rightly place each share of MTNN shares, we adopted two valuation models: the first is the Free Cash Flow to Equity (FCFE) and General 2-Stage Dividend Discount Model. We have placed our fair value at the average of the two valuation models.
 When we valued the shares with the current interim dividend of N94.85, on FCFE, we arrived at N298.42, while on 2-Stage DDM we arrived at N1,826.18, thus the average of these two valuation models is N1,062.30.
 Meanwhile, at our test approach, we re-valued with our test ratio outcomes using the new shares outstanding as noted above. We arrived at the dividend paid by relying on the company’s stated dividend policy in its first-quarter financials where it targeted 80% payout ratio in its subsequent performance. In other words, our presumed dividend per share is N5.73. On the strength of this, FCFE valued each unit of MTNN shares at N23.30 while 2-Stage DDM placed the shares at N110.24. In line with the above approach, we settled for the average of the two valuation approaches at N66.77.
 In order to further establish our valuation approach, we did valuation by comparison, and so compared few high cap listed equities financial indices to that of MTNN as shown below.


 In our opinion, MTN Nigeria compared better with Dangote Cement in financials (See above table for details). We are of the opinion, that for MTNN to maintain higher valuation it will have to improve its Earnings for the on-going financial year by at least 90% YoY. If this is achieved it will be able to take care of its over-bloated shares outstanding and build its valuation metrics in the coming years.
 In other words, we await subsequent performance indices from this firm for proper valuation.

Five-Years financial performance

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