Research Portal

MTN “Currency caution”

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I’ve revised my MTN forecast again following release of the results for the six months ended 30 June 2016. A combination of weaker operating performance in Nigeria together with a stronger rand suggests a normalised adjusted result rather worse than the first half, which was down 12%.

Whilst provisionally forecasting a 21% decline in adjusted earnings to 1011 cents per share or R18,4 billion for the year to December 2016 I’ve revised that to a 24% decline to 972 cents or R17,7 billion. This compares with R28 billion in F2014.

My earnings estimates have been below market consensus and some more ambitious market assumptions but I’m happy to keep it that way.

Nigeria is the key to this as it contributed 48% of group EBITDA in F2014 and 46% in F2015. For the first six months of F2016, Nigeria contributed R14,4 billion or 49% of group EBITDA. There is just one caveat – these numbers reflected an overvalued naira on translation to rand.

Whilst the average rate of exchange was NGL13,52/ZAR for the period, the rate as at 30 June 2016 for balance sheet purposes had already moved out to NGL19,33/ZAR – a 43% difference and a 50% differential compared with the rate of NGL12,88/ZAR as at 30 December 2015.

This explains the 21% decline in shareholders equity between year-end and 30 June and why my year end book value has fallen to R58,91 per share, down 27% compared with December 2015.       

Investors need to be mindful that the rand weakened against all the currencies of the major contributing countries this past half, in addition to falling 22% on the US dollar. The ZAR move on the Nigerian naira was 18,5% to 13,52/NGL versus 16,59/NGL.

This has now reversed with the rand having strengthened markedly.

In my model, I am using a rate of NGL23,00 to the rand for the second half for a blended rate of NGL18,26/ZAR for the fiscal year compared with NGL15,63/ZAR for F2015 – a 17% move.

However, on the assumption of EBITDA of NGL180 billion in H2 compared with NGL195 billion in H1 it means that EBITDA in rand is 45% lower in H2 compared with H1. In rand, annual EBITDA would work out to R22,25 billion compared with R27,50 billion in 2015, down 19%, and R31,62 billion in F2014.  

If I assume EBITDA of NGL361 billion next year, then at an exchange rate of NGL23,00/ZAR this equates to R15,69 billion or 30% lower than my estimate for F2016.

If the rate had to move out to NGL27/ZAR – which would entail the naira weakening further to NGL370/USD and the rand holding at R13,70/USD as it is now – then profits would fall further to R13,37 billion. In this scenario, profits out of Nigeria shrink in rand by almost 60% since 2014.

There are minority interests in Nigeria to the extent of 21,17%. This dilutes the earnings contribution relative to EBITDA. In 2014 for example, profit after tax works out to R13,82 billion but the share attributed to MTN ordinary shareholders is R10,90 billion or 598 cents per ordinary share, which is 39% of headline earnings per share versus a 48% contribution to EBITDA.

I estimate that this year on a normalised basis the net contribution is 246 cents per share in H1 – 41% of normalised adjusted group EPS – dropping to 122 cents per share in H2 and thus 368 cents per share for the year or 38% of group EPS.

Assuming the currency is at NGL23/ZAR for F2017, then on my current estimates Nigerian share of EPS drops further to 237 cents per share or 27% of group earnings. At NGL27/ZAR EPS is 202 cents or 35 cents per share less.      

At the full year results on 3 March 2016, MTN anticipated a 2016 dividend of 700 cents compared with 1310 cents in 2015. Therefore, the interim dividend declaration of 250 cents squares with the typical 35/65 split and so 700 cents seems likely for the year.

My EPS estimate of 972 cents for the year equates to a dividend cover of 1,4x. However, the dividend equals R12,7 billion and disproportionately funded from South Africa due to cash tied up in Nigeria. Cash remains tied up in Iran. On the basis of my current estimates there is no scope for MTN to revert to its previous progressive dividend policy.  

At the time of my note dated 20 June (“MTN losing their wires?”) the price was R145 and I observed that levels closer to R135 offer relative attraction and that depending on how the Nigerian situation plays out this year up to R150 could be feasible. The recommendation was to trade the volatility and be cautious to commit long term money, a view that is unchanged on the basis of the interim result and recent currency developments. 

Whilst this is a reasonable underlying result there is little to move the needle on the share. At just below R130, MTN on the basis of my 2016 estimate is on a forward PE is 13,4x and a yield of 5,4%.

Share price of MTN and Vodacom in ZAR cents over three years

MTN and Vodacom based to 100 over three years

Have a great day!

Mark Ingham