MTN Nigeria Navigates Profits Amid Naira Devaluation Challenges

InfoStride News reports that MTN Nigeria has faced significant foreign exchange losses, primarily due to the devaluation of the naira, impacting the company’s overall profitability and returns.

In the 9M 2023 period, the company witnessed a substantial 42% year-on-year drop in pre-tax profit, amounting to N233 billion compared to N401 billion in the same period the previous year. Basic earnings per share also declined by 45% year-on-year, reaching N7.06 and moderating the trailing twelve-month EPS figure to N10.81. The share price decreased from its 9M 2023 Year-to-Date (YtD) position of about 23% to approximately 11% YtD, reflecting the influence of policy changes and macroeconomic challenges.

MTN Nigeria CEO, Karl Toriola, attributed the tough operating conditions in the first nine months of 2023 to the removal of the fuel subsidy, currency devaluation, and the impact of the 2023 Finance Act. The company faced challenges with interest rates, as the continuous upward adjustment by the Central Bank of Nigeria contributed to a significant 173% growth in finance costs, impacting the bottom line.

Foreign exchange losses remained a consistent trend, experiencing an impressive 736% year-on-year growth to N232.832 billion in the first nine months of the fiscal year. Simultaneously, interest expenses on borrowings rose by 79% to reach N82.861 billion. These losses stem from the translation of foreign-denominated balances due to the depreciation of the naira against various currencies.

Despite the decline in overall profitability, MTN Nigeria has shown positive aspects in terms of revenue growth. In the third quarter, it achieved the highest quarterly revenue for the entire year, resulting in a cumulative 21.4% growth in revenue over the first 9 months. Earnings before interest, tax, depreciation, and amortization (EBITDA) also grew by 16.3% to N907.9 billion.

However, the EBITDA margin decreased by 2.4 percentage points to 51.2%, indicating a shift in profitability concerning operating income. The company attributed this to the impact of forex harmonization on operating expenses and rising inflation. Despite the decrease, the EBITDA margin is considered healthy.

The company’s medium-term focus, as outlined in the 2022 full-year report, emphasizes expense efficiencies and disciplined capital allocation to achieve service revenue growth of at least 20% and an EBITDA margin target range of 53-55%. The Q3 2023 report indicates proactive measures to mitigate macroeconomic volatility, but the overall profitability performance highlights the need for further actions.

Investors’ confidence can be influenced by the total returns the stock offers, including dividend yield and capital gain. In 2022, MTN Nigeria paid out N317.530 billion in dividends, equivalent to N15.60 per share, representing an 88% payout ratio and a yield of 6.55%. The recent interim dividend of N5.60 for the period ending June 30, 2023, raises questions about the sustainability of dividends given the challenges faced.

The share price has declined by 3.8% since the release of Q3 earnings results, and the YtD gain of 10.70% trails the NGX All-Share Index YtD gain of 38.98%, indicating that the stock performance lags behind the broader market index. Despite the decline, the trailing twelve-month earnings multiple of 22.02x suggests that investors may still be optimistic about the company’s growth potential, willing to pay a premium for its earnings.