MTN FY20 results: Operationally strong but no final dividend disappoints

MTN released its FY20 results (for the year ended 31 December 2020) on 10 March. Overall, the result was operationally very solid, especially when considering the COVID-related headwinds that faced all the markets in which the company operates, with MTN delivering on its past medium-term guidance.

Below we highlight our key observations from these results:

• MTN’s reported HEPS were up 60% YoY at ZAc749 but we note that this included EPS of ZAc128 for “non-operational” items. Excluding these non-operational items, normalised HEPS increased by 51.5% YoY to ZAc877. As a word of caution regarding these non-operational items – the likes of hyperinflation adjustments and foreign exchange losses – have been recurring items in MTN’s results over the years and thus should not be considered as one-offs!
• Service revenue and EBITDA grew by 11.9% and 13.4% YoY, respectively, on a currency-neutral basis, which is a good result and consistent with MTN’s medium-term guidance. It is also good to see positive operating leverage coming through. We note that the reported numbers were stronger than this, thanks to foreign exchange tailwinds in 2020.
• Group leverage improved nicely (down from 1.2x EBITDA to 0.8x). However, ongoing issues with the repatriation of cash out of Nigeria, in particular, means that the Holdco’s gearing remained flat at 2.2x EBITDA and above target.
• As far as forward guidance is concerned (see bullet points below), revenue growth guidance is stronger than before, implying that we should see further positive operating leverage coming through.
  • Group services revenue grew in the low-to mid-teens.
    • South Africa (SA) service revenue increased by mid-single-digits;
    • Nigeria service revenue grew in the mid-teens; and
    • The company will accelerate fintech to target a more than 20% service revenue contribution.
  • Holdco leverage of not above 1.5x;
  • asset realisation programme (ARP) proceeds of at least R25bn; and
  • an ROE above 20%.
• While we view these results as good, MTN decided not to pay a final dividend (after previously passing on an interim dividend). The company is guiding to an FY21 dividend of ZAc260/share, with a promise to buy back shares or pay a special dividend, depending on cash upstreaming from Nigeria and its non-core asset realisation progress. The market really did not like it when MTN passed on a dividend at the interim stage, and the initial market response this week to the stock, which had otherwise produced a good result, suggested that this disappointment was overshadowing everything else. However, at the results presentation, management stressed that the ZAc260 dividend guidance was based purely on what it expects could be funded by the SA business alone. In our view, this implies considerable upside potential for returns to investors in the form of special dividends or share buybacks if cash upstreaming from Nigeria improves and the asset realisation programme delivers. One of the strongest messages coming through from the results presentation was the priority currently being given to reducing gearing. While the lack of a dividend is undoubtedly disappointing, on reflection, we believe this is the right move for MTN to take at this point.
• MTN has announced a whole new strategy called “Ambition 2025”, which looks interesting – structurally separating its infrastructure assets and platforms (fintech, for example) to reveal better value, and talking about attracting third-party capital into those etc. The Group will be hosting a capital markets day in mid-2021, where this new strategy will be fleshed out.
• There was not much progress announced on ARP vs what has been said previously. However, management expressed confidence in some significant progress on this over the course of this calendar year – namely the listing of IHS Group and a tower deal in SA. It was also pointed out that its guidance of releasing at least R25bn (mentioned above) was based on identified assets that it values at closer to R40bn, implying that there could be a reasonable upside surprise here. MTN is valuing its 29% stake in IHS Group at R27bn (no big change here) or c. R15/share.

In conclusion, while the dividend news was disappointing, the confident outlook reflected in MTN’s growth guidance and its prospects for execution on several of the material value-unlock transactions over the balance of this year, lead us to believe that the investment case for MTN remains attractive at current share price levels.