MTN Nigeria recently released its 2023 FY results, reporting its first-ever loss of N177.8 billion, which resulted in a wipe-out of shareholders’ funds.
The company attributed the losses to forex losses, stating that it had cost the company a whopping N740 billion in 2023.
MTN also said that its financial statements were prepared for December 2023 using N907/$1 as the exchange rate. The current exchange rate is around N1600/$1.
Should this be a major concern for MTN Nigeria?
A negative shareholders’ fund is a major event in the financial lifecycle of a company and should be taken seriously. It means that the company’s shareholders no longer have any equity on paper and could need a substantial injection of equity to remain in effective control.
For shareholders of MTN, a wipeout of its shareholder’s funds does not mean investors in the company no longer have shares in it. It also does not mean that the company has gone insolvent, especially in the case of MTN. At worst, the impact will be that MTN might not be able to pay dividends due to the losses.
However, MTN’s ability to post robust operating profits should mean the company can return to positive shareholder funds as quickly as this year.
It could also result in a drop in its share price (as has been the case this year) but this are all expected and could even be a buying opportunity.
So what then?
Typically, negative shareholders’ funds require that the company recapitalize, or inject profits into the business organically by posting profits in its next financial year. This situation can be made worse if the company is tight on cash and then needs to resort to its creditors for a lifeline.
This is where MTN is quite different. Despite the massive losses reported, the company still has a robust free cash flow of N631 billion. The company also reported that it has a cash balance of N345 billion per its balance sheet. MTN’s capital structure has mostly relied on high gearing to finance its business, which is no surprise that its combined interest-bearing loans are around N1.1 trillion.
MTN also generated a very high return on assets (14%) and a return on average equity of 119.5% in 2022, respectively. It is therefore not surprising that it relies heavily on debt to finance its operations. MTN is also solid in terms of its ability to rely on profits to return shareholder funds to positive.
For example, last year MTN generated a profit after tax of N358 billion, which is more than 8x its negative shareholder funds of N40.4 billion. If you adjust for the one-time forex losses incurred in 2023, MTN could have reported a profit before tax of over N400 billion. In fact, despite the losses incurred, it generated an EBITDA of N1.2 trillion, thus showing it has enough cash flow to keep creditors happy.
Based on this, it is unlikely that MTN will be significantly affected by the wipe-out of its shareholders’ funds. However, it could consider raising capital to ensure its balance sheet is stronger and able to withstand any further headwinds. The exchange rate is currently N1600/$1 compared to the N907 used by MTN in 2023, which suggests its Q1 results could be further affected.
MTN relies heavily on foreign currency to purchase assets needed for its business. Thus, to keep posting strong margins, it will need to either increase its tariffs, reduce costs, or do both. However, these are the normal ordinary courses of business and can be addressed expeditiously.
