MTN Nigeria: Keeping revenue up for fourth year running

MTN Nigeria Communications Plc is losing the growth momentum that saw it through to a 39 percent advance in profit from a 12.6 percent rise in revenue in 2019.

The communications company is keeping revenue up for the fourth year running but profit has proceeded from a slowdown in the first quarter to a drop at half-year ended June 2020.

The company is yet in the process of rebuilding profit from a loss of N80 billion in 2015. Its closing profit of N202 billion last year remains below the peak figure of N209 billion the company reported as far back as 2014. The recovery process has lost steam in the current financial year in the face of increased operating challenges in the second quarter.

A fundamental boost in business volume last year is keeping revenue on the uptrend. Mobile subscribers grew by over 6 million to 64.3 million in 2019 and active data users rose by 6.5 million to over 25 million. However, rising costs, led by interest expenses, are undermining profit capacity this year.

Profit slowed down sharply to less than 6 percent improvement in the first quarter of 2020 and extended into a drop of roughly 16 percent in the second quarter on quarter-on-quarter reading. The half-year position is a year-on-year profit decline of about 5 percent to N95 billion.

The challenge from the angle of costs centres on the company’s huge finance expenses – which is growing rapidly for the second year. Last year, interest expenses rose by 86 percent to close at over N125 billion. At the end of half-year operations in June 2020, finance cost was up by 26 percent year-on-year to N72.5 billion. The company devoted an increased proportion of operating profit to net finance expenses at 32 percent at the end of June compared to 26.6 percent at the end of last year.

The company has added further to its already huge balance sheet debts this year. Total borrowings shot up from N412 billion at the end of 2019 to N524 billion at mid-year 2020.

At N535 billion, finance lease facilities account for over half of the finance expenses at the end of half-year operations. The facilities have expanded by N19 billion over the six months of the current financial year.

While finance cost is on the rise, finance income continues to disappoint – dropping by over 27 percent year-on-year to N7.6 billion in June 2020. Net finance expenses, therefore, grew by 38 percent to N65 billion over the period.

The strength to convert revenue into profit weakened at the end of half year trading with profit margin declining from a star record of over 17 percent at the end of 2019 to 14.8 percent. Operating expenses generally grew ahead of revenue in the second quarter, which caused operating profit to step back from about 19 percent growth in the first quarter to 8 percent at the end of June 2020.

MTN Nigeria Communications closed the first half of the 2020 financial year with a turnover of over N638 billion – which is a year-on-year growth of 12.5 percent. The company’s key income lines are airtime/subscription, data services, value-added services and other revenues. Airtime/subscription contributed 58 percent of revenue at half-year but data, value-added services and other revenues are the revenue growth drivers for the year.

The operating pressure the company faced in the second quarter reflects accelerated growth in operating costs while revenue growth slowed down. Compared to the 12.5 percent growth in revenue at half-year, direct network operating cost – the biggest expenditure line, grew by 24 percent to over N148 billion at half-year.

Cost of handsets and accessories rose by 68 per cent to N9 billion and employee benefits grew by 28 percent to over N19 billion.

The effect of the generally rising expenses is a slowdown in operating profit from 18.6 percent in the first quarter to 8 percent to N204.5 billion at the end of June 2020. The high growth of 38 percent in net finance expenses consumed more than all the increase in operating profit.

MTN Nigeria Communications closed the first half of the year with an after-tax profit of under N95 billion. This is a decline of 4.7 percent – a worse record for the company than an increase of 5.6 percent it recorded at the end of the first quarter.

Net profit margin declined at half-year from 17.6 percent in the same period in 2019 to 14.8 percent. The company closed the period with earnings per share of N4.66, compared to N4.89 per share in the same period last year.

Management needs to strengthen revenue in the second half of the year in order to accommodate rising costs and defend profit margin. A slowdown in the cost leading lines will also be required to stem further encroachment on margins.