Foreign Exchange Woes:  MTN Nigeria posts a decline in profits.

MTN Nigeria recently released its Q2 2023 results, showing the communication giant encountered significant challenges related to foreign exchange, which has pronounced impacted its financial performance.

The pre-tax profits for the second quarter of 2023 experienced a substantial decline of 64.32% when compared to the same period in the previous year. This decline translated to a decrease of N44.612 billion in pre-tax profits.

This downward trend in profits has had a cumulative effect, leading to a reduced half-year pre-tax profit of N200.391 billion for the current year, down from N268.635 billion during the corresponding period last year.

Examining the key highlights from the second quarter of 2023 in comparison to the second quarter of 2022 provides insight into the specific factors contributing to this financial outcome:

Key Q2 2023 vs Q2 2022 numbers: 

  • The company’s revenue displayed growth, indicating an increase of 23.27% and reaching a total of N590.605 billion.
  • However, this growth in revenue was overshadowed by a significant rise in direct network operating expenses, which surged by 29.28% to N140.313 billion.
  • While operating profit also saw an increase, it was of a more moderate nature, growing by 24.26% to N214.958 billion.
  • Notably, there was a remarkable surge in Finance Income, which experienced a growth of 340.15%, amounting to N11.708 billion.
  • Conversely, Finance Costs witnessed a substantial increase of 259.78%, totaling N182.054 million.
  • The overall Profit for the year faced a substantial decline of 67.70%, resulting in N27.399 billion.
  • Earnings per Share followed a similar downward trajectory, showing a decline of 67.07% to N1.38.
  • In contrast, Cash and Cash Equivalents showed positive growth, increasing by 42.86% to N499.288 billion.
  • The company’s Total Assets also experienced growth of 8.99%, reaching N3.138 trillion.
  • Long-term and Short-term borrowing showed an upward trend of 23.98%, with a combined total of N855.067 billion.

Insights: The company’s pre-tax profit was significantly impacted by the expansion of finance costs, primarily attributed to the substantial increase in foreign exchange losses. Notably, the foreign exchange loss demonstrated an extraordinary year-on-year surge of 955.12%, culminating in a substantial N126.815 billion.

This surge in foreign exchange losses directly contributed to the overall rise in the company’s finance costs, playing a pivotal role in the observed decline in pre-tax profit.

Further examination of the financial notes reveals that the company’s finance charges were heavily influenced by the devaluation of the Naira. The Naira’s value declined from N461.10/$1 in December 2022 to N756.08/$1 in June 2023. This devaluation was a result of the Central Bank of Nigeria’s decision to merge all foreign exchange windows into the Investors’ and Exporters’ (I&E) window. This move aimed to facilitate a more flexible exchange rate regime against the US Dollar and other global currencies.

The stock of MTN Nigeria Communications PLC (MTNN) has experienced a decline since the release of its Q2 results.  As of the last trading day on Friday, August 4, 2023, the stock closed at 277.00 NGN per share on the Nigerian Stock Exchange (NGX). This represented a 1.1% decrease from its previous closing price of 280.00 NGN per share. Additionally, the stock has seen a 2.81% decline compared to its 52-week high of 285.00 NGN per share, which was achieved on July 11, 2023.

Indeed, it is important to consider the broader context when evaluating a stock’s performance. Despite the recent declines, MTN Nigeria’s stock has demonstrated a positive trend over the year, with a significant gain of 28.8% in value so far. This suggests that the stock has shown resilience and potential for growth despite short-term fluctuations.

Furthermore, the company’s earnings per share (EPS) performance over the past five years provides additional insights into its financial health. Despite the drop in EPS in the first half of the current year, the company has maintained a strong EPS compound annual growth rate (CAGR) of 19.96% over the past five years. Additionally, the trailing twelve months EPS, which stands at 15.17, reflects the company’s earnings over the most recent 12-month period.

Assessing the stock’s valuation, the current price is trading at an earnings multiple of 18.26x. This valuation metric, often referred to as the price-to-earnings (P/E) ratio, gives investors an idea of how much they are paying for each unit of earnings. MTN Nigeria’s P/E ratio of 18.26x suggests that investors are willing to pay 18.26 times the company’s earnings for a share of its stock.

P/E ratio peer comparable analysis also provides insights into relative valuations within the market.  Investors often compare P/E ratios of companies within the same industry or sector to gain insights into relative valuations. While a higher P/E ratio might indicate higher growth expectations, it could also mean that the stock is relatively overvalued. Conversely, a lower P/E ratio could suggest that a stock is undervalued, but it could also reflect lower growth prospects or market skepticism.

In this case, MTN Nigeria’s P/E (TTM) ratio of 18.26 is slightly higher than Airtel Africa’s P/E (TTM) ratio of 16.48. This suggests that based on current market prices and trailing twelve-month earnings, investors are willing to pay a slightly higher premium for MTN Nigeria’s earnings compared to Airtel Africa’s earnings.

However, it is important to note that P/E ratios alone may not provide a complete picture of a company’s valuation. Other factors, such as growth prospects, industry dynamics, financial health, and market sentiment, should also be considered when evaluating the investment attractiveness of these companies.

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