MTN Nigeria Engages Aggressive Debt Financing Strategy
MTN Nigeria Communications has engaged one of the most aggressive debt financing strategies that seem to have taken the risk of the business off its shareholders. The company’s interest-bearing debts and lease liabilities have multiplied more than six times from N175 billion at the end of 2018 to over N882 billion in the nine months of trading in 2019.
Added to that are interest free supplier credit amassed to the tune of over N330 billion at the end of September, 2019. This is an increase of over 54 percent year-on-year; representing the extent the company is sitting on funds of its suppliers to finance its own operations.
The company’s asset base of about N1.54 trillion at the end of the third quarter is funded mostly with debts. Shareholders’ funds of N90.6 billion [mostly retained earnings] account for less than 6 percent of the size of the balance sheet. It is roughly 10 percent of interest bearing debts and leases and about 27 percent of trade and other payables outstanding.
The effect of the company’s financing strategy is that it has shielded investors from the risk of the business while enhancing their return. The company is hopeful of finishing the 2019 financial year with increased growth momentum that is in force for the second year.
MTN Nigeria registered a five-year best record growth of 17 percent in revenue in 2018 and lifted profit by 80 percent. The company is steering growth good enough to keep its recovery engines firing to the end of 2019.
The telecommunications company is in the process of rebuilding profit from a loss of N80 billion in 2015. The 2018 financial year provided a big step forward, which has been sustained so far in the 2019 interims. The prospects for MTN Nigeria building back profit towards the region of N209 billion it set as far back as 2014 remain good.
The company’s third-quarter report in September 2019 shows that revenue is growing at an even rate of 12 percent year-on-year and the company grew profit about two and half times as fast as revenue to N148 billion over the period.
The strength to push profit that high reflects the success of the company’s cost management programmes. Management has succeeded in keeping costs in check while improving revenue. The result in improved profit capacity with reduced operating cost margins and profit margin increased to the highest record in five years.
The company’s shareholders can look forward to another good earning story at the end of 2019, having already enjoyed an interim cash dividend of N2.95 per their 2 kobo share at the end of half-year operations. After-tax profit was up by 29 percent at the end of the third quarter in September 2019, upon the elevated growth of 80 percent at the end of 2018. With that, group profit had already exceeded the 2018 full year figure of N145.7 billion.
The company closed third quarter operations in September 2019 with revenue of N856.48 billion, a year-on-year increase of 12 percent. Airtime/subscription remains the company’s main income line, accounting for 62 percent of revenue. But the revenue growth drivers are data and interconnect/roaming, which grew by 33 percent and 22 percent respectively over the review period.
The full year revenue projection of N1,150 billion for MTN Nigeria for 2019 is unchanged. This will be an increase of 11 percent for the year, slowing down from 17 percent in the prior year. This indicates that the company would sustain revenue growth for the third year running after two years of decline in 2015 and 2016.
At N148.32 billion, after tax profit grew by 29 percent year-on-year at the end of September 2019 – about two and half times the 12 percent growth in turnover. This means the company converted an increased proportion of each naira of revenue into profit.
Net profit margin is up from 14 percent at the end of 2018 to 17.3 percent at the end of September 2019. This remains the highest profit margin the company has recorded since 2015. A slip in profit margin is expected however in the final quarter and profit delivery may be below the quarterly average.
Full-year after-tax profit projection is revised downward from N203 billion to the region of N195 billion for MTN Nigeria in 2019. This will be an increase of 34 percent over the closing profit figure of N145.7 billion in 2018. It remains a strong profit improvement for the second year but yet below the profit high of N209 billion as far back as 2014.
The summary of the company’s operations at the end of September 2019 is that costs remained generally moderated against an improvement in revenue. This enabled the company to keep profit capacity higher than any time since 2015.
The company’s biggest cost centre – direct network operating costs is its biggest cost saving area. It dropped by close to 22 percent to N178 billion over the review period, slightly ahead of the 21 percent drop at half year. This means a cost saving of as much as N49 billion for the company over the nine months of the year.
Value-added service cost is another major cost saving centre, which dropped by about 37 percent to a little below N9 billion during the review period. Almost all other cost lines of the company remained moderated relative to revenue. This enabled the company to maintain a 39 percent leap in operating profit to over N286 billion at the end of the third quarter.
With rising debts, cost of finance remains a challenge to management, as it continued to accelerate. At close to 92 billion at the end of September 2019, finance expenses accelerated from 46 percent growth at half year to 73 percent year-on-year.
Finance income went down by less than 4 percent at the end of September, an improvement from a 15 percent drop at half year. Net finance costs accelerated from 73 percent growth at half year to 113 percent to stand at over N74 billion at the end of the third quarter.
The company is diluting the cost of its borrowings with its huge interest-free supplier credit. At over N330 billion at the end of September, trade and other payables grew by over 54 percent from the 2018 closing figure.
The company’s borrowings have continued to expand from N175 billion at the end of 2018 to N295 billion at the end of June and further to over N381 billion at the end of September 2019. There are also lease liabilities of over N501 billion that were added this year. The rapid growth in finance expenses is therefore expected to continue.
The company ended the third quarter operations with earnings per share of N7.29, improving from N5.65 in the same period in 2018. The full-year earnings per share expectation are revised downward from N9.97 to N9.58 for MTN Nigeria in 2019.
A sharp drop from the earnings per share of N357.87 reported at the end of 2018 is to be expected. The drop follows a large increase in the volume of shares in the process of listing on the Nigerian Stock Exchange.
Comments are closed.