MTN Nigeria Communications Plc – H1 2023 Results Transcript

By Published On: August 25th, 2023Categories: Earnings, Transcripts

Introduction – Chima

  • Good day everyone and thank you for joining this call to discuss MTN Nigeria’s results for the six months ended 30 June 2023. I’m Chima Nwaokoma, I’m responsible for Investor Relations at MTN Nigeria. With me on the call are Karl Toriola, our Chief Executive Officer; Modupe Kadri, our Chief Financial Officer; Hassan Jaber, our Chief Operating Officer. We also have Thato Motlanthe, our Group Investor Relations Executive.
  • Karl will be providing an overview of the business performance and outlook for the remainder of the year. Then Modupe will cover some financial points and thereafter we’ll move on to the Q&A.
  • Please note that this call is scheduled for an hour, and it’s being recorded. All participants are in a listen-only mode. If you want to ask a question, kindly indicate by raising your hand and we will enable you to speak. The chat function is also available to enter your question.
  • I would like to remind us that our results were released last Friday and a version of the release is on our website
  • With these, I’ll hand over to Karl.

Operational performance – Karl

Good afternoon, everyone. It’s a pleasure to be in touch with all of you again through this channel. For many of you, particularly the international investors, we met with recently, the message and the theme remain consistent with what we said and all that we have to add is actually hardcore financials at this point, which is probably broadly in line with what we told you about.

  • I’ll be providing an update on how we’re managing our operations in the current macro backdrop before handing over to Modupe who I’m sure will get the majority of the questions as a result of the devaluation to cover some highlights. Thereafter, I’ll return and conclude with our priorities for the remainder of the year.
  • I’m going to go to slide four in the presentation and I think to start with, it’s important to give you some context on the operating environment. The first half of the year remained challenging due to the ongoing adverse global macroeconomic and geopolitical environment, the cash shortages experienced in Q1, forex paucity, and supply chain uncertainties which I think to some extent is improving.
  • The impact of these was exacerbated by the removal of the fuel subsidy, I think the first or second day into the regime of the new President, putting upward pressure on inflation which reached an 18 year-high of 22.8% resulting in a monetary policy tightening by the Central Bank with the monetary policy rate now at 18.75%.
  • The immediate impact of the forex liberalisation was an approximately 60% movement in the exchange rate since the announcement to around N756/US$ at the end of June 2023, as the market seeks an equilibrium level and seeks to attract flows to fulfill the demand. The 2023 Finance Act led to a 0.5 percentage points increase in the education tax to 3%, driving a higher effective tax rate (ETR).
  • Despite the challenging backdrop, we delivered a robust commercial and financial performance in H1, and we are well-positioned to take advantage of the further opportunities which we see in our markets and our demographics.
  • In terms of navigating the challenging environment on slide five, the inflationary environment is challenging as I mentioned, and we continue to focus on disciplined capital allocation and efficiency in key areas. You will be interested to know that if you exclude our TowerCo contracts, our operating expenditure is growing at a lower rate than our revenue.
  • In the commercial space, we revamped our products and propositions while we continue to pursue various customer value management (CVM) initiatives. In our supply chain, we advanced purchase orders for capacity and resilience using trade lines for letters of credit establishment to support capex. In addition, we focused on redenominating our foreign currency contracts to local currency contracts to reduce forex exposure and further manage our operating expenditure. We have adequate balance sheet headroom to support our capex with a well-structured TowerCo agreement, helping us to mitigate rising energy costs.
  • In terms of Ambition 2025, our solid operational performance in H1 was driven by execution excellence. We added 1.5 million mobile subscribers and 1.5 million active data subscribers in H1 and we’ve pretty much stabilised and are looking forward to a strong positive outlook in terms of our sales and distribution transformation which has been taking place over the last 12 months or so. This was achieved despite the implementation of a minimum age requirement for sim registration, increasing the minimum age from 16 to 18 years in Q2 which impacted the run rate of gross connections and active data subscribers in the quarter.
  • We continued to see an increased demand for data and momentum in our fintech ecosystem.
  • We maintained our financial resilience delivering service revenue and EBITDA margin in line with our medium-term guidance.
  • We continued to progress on our strategic priorities while delivering on our shared value aspiration.
  • We rolled out 833 cumulative 5G sites in 15 cities covering approximately 6% of the population. 5G now constitutes approximately 21% of the data traffic in 5G-colocated clusters. So, we see quite a lot of value from that and with increased penetration of high 5G capable handsets, we expect that to increase.
  • In terms of our non-financial highlights on slide seven, our commercial momentum driven by increased demand for our services was underpinned by a robust financial performance in H1.
  • Mobile subscribers were up 4%, active data users up by 12%, and active MoMo wallets up 33%.
  • ARPU was up by 12% on increased usage from our new and existing base likewise data usage was up 28% to 8.1GB per user. Fintech transaction volume was up 67% demonstrating the underlying momentum in the ecosystem.
  • Our Fintech journey of progress, which I’m sure will attract a few questions, is on a good trajectory in terms of MoMo users and agents and we’ve communicated to the market that the slowdown in growth of active MoMo users in H1 was due to the cash crunch, which was impacted by OTC transactions and the time we spent laying the solid foundation for the business and strengthening our control systems, which we believe are now firmly in place.
  • We’re now focused on customer education and awareness to enable us to scale the adoption of our MoMo wallets and merchant ecosystem and you’ll see that scaling, education, and marketing visibility, coming through in H2. We’re well positioned to lead the transaction from cash to digital payments in Nigeria, working through the urban highly digitised ecosystem, but with incredible strength in the rural ecosystems where people are still very much reliant on cash.
  • Nigeria is the largest economy in Africa, but has a largely underpenetrated fintech, particularly once you get out of the big cities. We have the biggest inbound remittance in Africa and very low insurance penetration (less than 3%) and this presents significant opportunities for us.
  • Our sustained growth is underpinned by our connectivity operations and platform businesses. We see success as leading connectivity operations in key areas of voice, data, and Own the Home. ‘Own the home’ is a huge area of focus for us. In voice, the CBN initiatives are driving usage and we’ve revamped our voice propositions and are driving rural coverage expansion as well as ramping up gross connections. On data, we’re looking at 4G and 5G coverage expansions, sustained increase in data traffic, rising smartphone penetration, rich spectrum holding, and of course, CVM initiatives.
  • In terms of ‘Own the Home’, fixed broadband as we call it; it’s about driving mobile broadband penetration, providing fixed wireless access, and increasing fibre deployment in key clusters where we see opportunity. We’re deploying 5G routers for higher speed and lower latency; we are enhancing our portfolio offerings and partnerships to capture opportunities while delivering a leading customer experience.
  • From a platform perspective, we are focused on building the largest and most valuable platforms in fintech, digital, and enterprise business.
    • In Fintech, our focus is on driving the growth of wallets and the merchant ecosystem while investing in customer education and awareness creation and providing more advanced services across our fintech verticals as we acquire wallets and customers.
    • We continue to see rising demand for our digital solutions which cuts across gaming, OTT video, e-commerce and digital advertising, rich media services, and much more. You might have heard that we launched Apple Music in Nigeria, to our customers.
    • Our enterprise business continues to have strong growth momentum as we continue to co-create customer-specific solutions that enable digital transformation across verticals. In addition, we are powering industries and leveraging private and advanced connectivity solutions.
  • In terms of progress against our medium-term guidance, we’re pleased that our H1 results are in line with our medium-term guidance.
  • The outlook for FY 23 will depend largely on the impacts of levels of exchange rate and the new VAT on tower leases effective September 2023.
  • The extent of these factors remains a key nearer-term risk to our medium-term guidance, however, we remain committed to executing our Ambition 2025 service sustained growth and profitability of the business to the benefit of all our stakeholders.

I’ll now hand over to Modupe to take us through the financials. Thank you.

Key Financial Points – Modupe

Thanks, Karl, and thanks everyone for joining us.

  • As Karl mentioned, our H1 results are in line with medium-term guidance with service revenue growth at approximately 22% and an EBITDA margin of 53% as at H1. Our service revenue was driven mainly by the double-digit growth in voice, data, and digital services.
  • Fintech was up by 7.8%, still recovering from the impact of the SIM registration requirements on Xtratime.
  • Forex liberalisation did not have any material impact on H1 EBITDA margins, due to the nature of our tower contracts. We’ve said it previously that our tower contracts are paid quarterly in advance, so, as at H1, we had paid up to the end of June. So, there’s little impact on that.
  • Our profit before tax was down by 25.4% but up 17.6% if we had adjusted for the unrealised forex loss.
  • Despite the impact of the forex loss our interim dividend was maintained at ₦5.60 kobo per share, same as last year.
  • I think we’ve talked sufficiently on the revenue growth and efficiency drive margin improvement slide, so I’ll just skip to slide 14 to hopefully talk extensively about the impact of the forex liberalisation, which I guess most of your questions might be targeted towards.
  • On 14 June 2023, the Central Bank announced changes in the Nigerian forex operations.
  • This led to approximately 60% movement in the exchange rate, since the announcement to ₦756.24/US$ at the end of June 2023. So even as of today, Nafex is at ₦765.48/US$.
  • In terms of EBITDA margin, there was no material impact as earlier stated.
  • The USD component of our opex is between 40% and 45% and these are largely lease rental costs.
  • We will not see the full impact of the foreign exchange devaluation in Q3, as a substantial part of the tower portfolio is based on the previous quarter’s average. However, the full impact would kick-in in Q4.
  • In terms of EBITDA margins in H2, it’s also expected to be impacted by the new VAT on tower leases. Currently, that’s effective September 2023, unless the President decides to push it forward again like he did with some aspects of the 2023 Finance Act.
  • In terms of our net finance costs, we recorded an unrealised forex loss of ₦131.5 billion as against ₦13.6 billion as at H1 2022 and that’s mainly because of the free-floating of the Naira.
  • This was led by approximately ₦127 billion in Q2 due to the Naira devaluation.
  • Our foreign currency facilities were required to fund our capex program given the paucity of forex and so we took on some of the trade lines, and that had to be revalued. That’s what’s contributed largely to the devaluation as at H1.
  • However, notwithstanding, this investment enabled us to enhance the capacity and coverage of our network and sustain revenue growth in line with our guidance. So, we are tapping on the I&E window to source forex to settle our outstanding obligations.
  • In terms of capex, we expect our FY 23 capex intensity to be above our target level of 18% as a result of the need for additional naira required to fund our FY 2023 capex, following the devaluation.
  • Moving on to understand our tower agreements, it’s basically split into two; there’s the energy component and the lease rental component. The impact of the rising energy costs is also mitigated by our tower contracts and supported by our expense efficiency program.
  • The bulk of the tower contracts reside with a particular service provider and that contract is all-inclusive, while the rest of the portfolio is based on a pass-through concept. So basically, if the energy prices change above a particular threshold, then we would every quarter be adjusting that, and if prices fall back, then there’ll be a reversal on that with the rest of the portfolio.
  • Our tower lease costs are paid quarterly at the beginning of each quarter likewise the exchange rate is adjusted at the start of the quarter and for some of the portfolio, it’s based on the average of the previous quarter. Our sensitivity analysis shows that a 10% movement in the exchange rate would have a direct negative impact of approximately 1.3 percentage points on the EBITDA margin, pre any mitigation actions, and by mitigation actions, we’re talking about possibly tariff increases that would change the mix of that calculation.
  • Looking at energy pass-through 80% of our tower contracts do not have energy pass-through, while 20% have a pass-through element, mitigating the impact of rising energy costs.
  • All our tower contracts have US dollar and Naira CPI escalation, and this is applied annually on the prior December rate. So, in terms of CPI, the Naira CPI for FY 23 would be determined based on December 2022.
  • In terms of capital allocation, we adopted a disciplined approach. Our capex deployment in H1 was impacted mainly by the paucity of the FX and supply chain challenges.
  • Despite this, we continued to invest in the capacity and coverage of our network, focusing mainly on the 4G and 5G networks.
  • As a result, core capex, excluding the right-of-use assets was down by 13.8% to N176.3 billion and capex intensity was 15.2% in line with our target level. With the devaluation and the ramping up of our capex plan, that is likely to exceed our target levels by the year-end. Consequently, as at H1, free cash flow was up by 75.9% to ₦347.7 billion.
  • We anticipate a ramp-up of our capex program in the remainder of the year as we pursue growth opportunities.
  • In terms of our capital structure, we continue to maintain a disciplined approach to funding activities to reduce market risk and maintain a strong balance sheet.
  • We have comfortable balance sheet headroom to strengthen leverage performance metrics. Our net debt to EBITDA currently is 0.4x.
  • We’re replacing our floating rate instruments with fixed-rate long-term facilities to reduce the interest rate risk. As you know, we took some 7-year and 10-year bonds, and that accounts for the bulk of the bonds as of today.
  • We are seeking to take out additional long-term fixed-rate instruments to mitigate against the volatility in the market. As at H1, our trade lines stood at N172 billion, and we are tapping forex from the I&E windows to settle outstanding obligations.

With these, I’ll hand over back to Karl to talk about the conclusion on the outlook and then we’ll take questions.

Outlook – Karl

Thank you very much, Modupe.

We’re committed to exceeding our Ambition 2025 strategy. For the remainder of the year, we’ll focus on the following priorities:

  • Accelerated 4G and 5G network coverage to take advantage of growth opportunities and drive data user growth and usage. We do believe that there’s still unmet demand in data space, so big opportunity there as we expand our network capacity.
  • We will continue to drive our broadband strategy to capture significant market growth.
  • We will very firmly accelerate our platform play and drive the growth of active MoMo wallets and the fintech ecosystem while of course driving other revenue streams such as digital and enterprise.
  • We will continue to focus on expense efficiencies, probably even more so now in light of the devaluation and its impact, and we will continue to focus on disciplined capital allocation.
  • Lastly, we have an experienced management team, which I think all of you are now familiar with. Stable experienced management team, overseeing the execution of our Ambition 2025 strategy to enable us to sustain and grow the profitability of the business.

That’s pretty much the presentation. I do, however, want to take the opportunity to extend our invitation to you on our Capital Markets Day scheduled to hold on the 14th and 15th of November this year in Abuja.

We will be providing you with progress updates on the execution of our Ambition 2025 strategy and we’re also going to try and create a forum and a platform for you to learn about Nigeria’s macro story and to interact with our management team, as well as government policymakers. In addition, we would like you to have an opportunity to visit key markets in Abuja to understand the potential around replacing cash with MoMo and the financial opportunity in Nigeria.

With that, I’ll hand over to Chima to lead us through the Q & A

Question and answers – Chima