- MTN Nigeria witnessed substantial growth in net foreign exchange losses in 2022 and Q1 2023.
- The recent Naira devaluation raises concerns about the impact on net foreign exchange losses and bottom-line growth contraction.
- Despite challenges, the company has demonstrated impressive revenue growth and operational efficiency and analysts’ price targets indicate positive investor sentiment, with expected increases in dividends.
MTN Nigeria Communication Plc (MTNN) recently released its Q1 results, unveiling a significant 43.95% surge in finance costs primarily driven by higher interest rates and substantial growth in net foreign exchange losses.
The company witnessed a remarkable 560% year-on-year increase, resulting in N11.82 billion in net foreign exchange losses.
This growth trend aligns with the previous year, where net foreign exchange losses rose to N56.221 billion from N22.002 billion, indicating a substantial year-on-year growth of 156%.
The high finance costs impacted net profit margins. While earnings in 2022 grew by 20.16%, surpassing the five-year CAGR of 19.76%, profit after-tax margin declined by 1.21%.
A cursory review of the financial statements indicates that these net foreign exchange losses primarily stem from the translation of foreign-denominated balances.
Operating in a global market, MTN Nigeria conducts transactions in various foreign currencies.
As the naira depreciated against these currencies, the value of foreign-denominated balances translated into naira at a lower rate, resulting in foreign exchange losses that impacted on the company’s financial position.
Another contributing factor to the increase in net foreign exchange losses is the rise in the Nigerian Autonomous Exchange Rate (NAFEX).
MTNN’s financials indicate that while there have been no substantial operating losses or significant asset devaluation, the deterioration in foreign exchange rates has had a major impact on the business.
The NAFEX rate rose from N424.11 to approximately N461.10 per US dollar, leading to adverse effects on the company’s financials.
MTNN explains that a 10% devaluation in the exchange rate would result in a 1.3 percentage point impact on its EBITDA margins, highlighting the sensitivity of the company’s financial performance to fluctuations in foreign exchange rates.
The recent Naira devaluation and removal of fuel subsidies have raised concerns about MTN Nigeria’s ability to navigate the foreign exchange market and sustain profitability.
During the Q1 earnings call, the company acknowledged the difficulties in accurately modelling the impact of inflationary pressures resulting from the removal of subsidies.
While the exact extent of these pressures is uncertain, MTN Nigeria plans to actively pursue tariff increases to counterbalance the rising costs associated with inflation and ensure sustainable profitability.
However, the company must carefully balance the need for tariff adjustments with the potential impact on customer satisfaction and market dynamics.
MTN Nigeria has also emphasized its commitment to re-denominate certain categories of foreign-denominated items.
This strategy involves converting these items into the local currency, which could help mitigate the impact of the Naira devaluation.
As MTN Nigeria prepares to release its Q2 earnings in two weeks, the company faces a challenging operating environment.
The first quarter of 2023 was marked by macroeconomic headwinds, cash shortages, and other disruptions that placed additional economic pressure on activity, consumers, and businesses.
Despite these challenges, MTN Nigeria remained resilient. In 2022, the company achieved a remarkable 21.64% year-on-year revenue growth, outperforming its five-year compounded annual growth rate (CAGR) of 14.13%.
This positive revenue growth continued into Q1 2023, with revenue expanding by 21% to reach N568.14 billion.
MTN Nigeria has also demonstrated its commitment to rewarding shareholders through dividend payments.
In 2022, the company declared a dividend of 15.60 NGN per share, representing a substantial increase of 18.90% compared to the previous year.
Analysts expect dividends to further increase for the upcoming fiscal year, with a consensus estimate of 18.43 NGN per share, indicating an additional growth of 18.13%.
Investor sentiment towards MTN Nigeria has improved, as reflected in the surging share price and analysts’ price targets. With a year-to-date gain of 27.91%, MTN Nigeria’s stock has outperformed the broader market.
According to the consensus estimate of seven analysts, the 12-month price targets for MTN Nigeria have a median target of 294.76.
The high estimate stands at 327.37, while the low estimate is set at 250.00, suggesting a modest upward movement in the stock price over the next year.
Given the expected impact of future net foreign exchange losses, increased investor sentiment, surging share price, and projected dividend increases, investors should exercise caution and conduct thorough research.
It is crucial to assess MTN Nigeria’s strategies for managing net foreign exchange losses, evaluate the company’s financial performance, and consider the overall market conditions before making investment decisions.
On the other hand, effective risk management, closely monitoring foreign exchange rates, and implementing operational efficiency measures will be critical for MTN Nigeria to mitigate the impact on profitability and sustain its financial performance.
