MTN Nigeria’s recent financial performance reveals a complex picture, marked by strong revenue growth but significant profitability challenges, raising questions about the future of its stock. As the telecom giant grapples with rising costs, currency fluctuations, and liquidity pressures, investors are left wondering whether to buy, sell, or hold its shares.
Strong Revenue Growth Amid Operational Struggles
In the first nine months of 2024, MTN Nigeria posted an impressive 33.6% growth in service revenue, driven by strong performances in data, voice, fintech, and digital services. Despite this growth, the company’s profitability has been severely impacted by external macroeconomic factors.
MTN reported a 5.3% decline in EBITDA to N860.153 billion, with the EBITDA margin contracting to 36.3%. Rising energy costs, inflationary pressures, and the depreciation of the naira have contributed to these challenges. The company’s loss before tax also ballooned to N713.63 billion, a significant worsening from a loss of N9.85 billion during the same period in 2023.
Escalating Finance Costs and Foreign Exchange Losses
MTN’s finance costs surged by 85% year-on-year, reaching N303.37 billion, while foreign exchange losses nearly doubled to N904.93 billion. These losses have overshadowed the company’s operating profits of N475.30 billion, pushing shareholder equity further into the negative zone, now at N573.56 billion—up from a negative N40.84 billion at the end of 2023.
The company’s CEO, Karl Toriola, attributed the significant losses to the further depreciation of the naira, which has led to a revaluation of foreign currency-denominated obligations. Toriola highlighted that MTN Nigeria has been taking measures to reduce its foreign currency exposure, including a major reduction in trade line obligations, which fell from US$416.6 million at the end of 2023 to US$57 million by September 2024.
Liquidity Struggles and Cost-Cutting Efforts
Despite the reduction in foreign currency obligations, MTN’s liquidity challenges remain severe. The company’s current ratio of 0.29 indicates that it has just 29 kobo in current assets for every N1 in current liabilities. This liquidity issue has led to the launch of a N250 billion Commercial Paper (CP) program to raise funds.
The first CP issuance in November 2024 raised N75.18 billion, oversubscribed due to strong investor demand. However, the high borrowing costs—yields of 27.5% for a 181-day term and 29% for a 265-day term—signal the growing financial pressure on the company. These high yields reflect the tightening financial conditions in Nigeria and the rising cost of borrowing.
Challenges in Profitability and Dividends
With MTN currently unprofitable, concerns are mounting about its ability to pay dividends in 2024, mirroring its performance in 2023. The company’s interest expenses have surged by 58% to N130.84 billion in the first nine months of 2024, further straining its ability to cover interest expenses and affecting its profitability.
Despite these challenges, MTN Nigeria has taken steps to mitigate costs, including renegotiating contracts, which saved the company N54 billion. However, the high cost of financing, coupled with foreign exchange vulnerabilities, continues to weigh heavily on its financials.
Investor Outlook: Buy, Sell, or Hold?
MTN Nigeria’s stock presents a nuanced investment case.
Encouraging Factors:
- Revenue Growth: The telecom giant continues to demonstrate strong revenue growth, particularly in data, voice, fintech, and digital services.
- Favorable Ratings: MTN has received favorable ratings from agencies like GCR and Augusto & Co., with national scale long-term issuer ratings of AAA and A1+, respectively. These ratings reflect confidence in MTN’s operational resilience, despite the negative outlook due to foreign currency exposure and rising business costs.
- Market Position: MTN remains the fourth most valuable company on the Nigerian Exchange (NGX), with a market capitalization of N3.46 trillion, and analysts maintain a consensus “Buy” rating with a 12-month target price of N214.95, suggesting a potential upside of +26.37%.
Red Flags:
- Share Price Decline: Despite the positive revenue growth, MTN’s share price has fallen 36% year-to-date in 2024, closing at N170.10 on December 6, 2024, significantly down from its 52-week high of N295.
- Rising Costs: The company faces mounting finance costs and foreign exchange losses, which have eroded profitability and investor confidence.
- Liquidity Risks: The company’s low current ratio and increasing debt levels point to ongoing liquidity struggles.
Key Risks:
- Negative Equity: The significant negative equity position remains a major concern, as MTN’s financial health is further undermined by escalating borrowing costs.
- Foreign Exchange Vulnerabilities: Despite efforts to reduce foreign currency exposure, MTN remains highly vulnerable to fluctuations in the naira, which continue to affect its profitability.
Conclusion: A Hold for Most, Buy for High-Risk Investors
MTN Nigeria’s stock is a mixed investment case. The company’s strong revenue growth and market position are offset by severe profitability challenges and liquidity pressures. While it remains well-positioned for long-term growth, the near-term financial difficulties and negative outlook warrant caution.
For most investors, a Hold strategy is prudent, as the company’s recovery from its financial challenges may take time. However, for those with higher risk tolerance and a long-term investment horizon, the stock may offer potential upside once its liquidity and forex risks are mitigated.
