MTN hammered on Nigeria pain

MTN had a torrid start to the year, as its share price plummeted by 28% due to the collapse of the Nigerian Naira.

Nigeria is MTN’s biggest market and the one where it makes a large chunk of its money. In the 2022 financial year, Nigeria contributed 40% to MTN’s total service revenue.

The country is even more important to MTN’s bottom line. MTN contributed 46% to the operator’s earnings before interest, taxes, depreciation, and amortization (EBITDA).

This explains why MTN remains committed to Nigeria despite the country’s numerous economic and political challenges.

Over the years, Nigeria has been a troublesome region for MTN investors who have endured big swings in the share price.

For example, MTN’s share price traded between R200 and R250 a share from 2014 to 2015, and the company was doing well.

It ended abruptly in late 2015 after the Nigerian Communications Commission (NCC) handed MTN a $5.2 billion fine for non-compliance with SIM registration regulations.

MTN negotiated the fine down to $1.7 billion, but it was still significant for the South African operator.

Between 2015 and 2023, there were many further fines and disputes between MTN and Nigerian authorities, which hurt the company.

In MTN’s latest Nigerian headache, it has been the victim of a rapid decline in the value of the local currency, the Naira.

To understand the situation, it is valuable to delve deeper into the Nigerian Naira’s problems.

Nigeria has historically struggled to increase the liquidity of the Naira. It has not been easy to sell the Naira at its listed exchange rate value.

The low interest in the Naira has a few different dynamics. The Nigerian central bank pegged the currency to the US dollar to strengthen the Naira.

This move kept the Naira artificially inflated as its price was not determined by market forces but by a predetermined rate that constantly had to be managed.

Because the Naira’s value is artificially inflated, outside investors have little confidence in buying the currency at its official “predetermined” valuation.

A result was that many more individuals and businesses wanted to sell their Naira than those who wanted to buy Naira.

The lack of demand for the Naira means that Nigeria’s central bank cannot allow all the Naira sellers to act on their wishes and sell their currency.

This is because it must keep the naira at a predetermined rate. Excessive selling of the currency would cause that rate to drop significantly. This is what causes the low liquidity.

This dilemma created a secondary black market for the naira where it could be bought and sold informally at a much weaker rate than was market-determined.

The black-market rate is typically the exchange rate used within Nigeria between its citizens. However, foreign investors and businesses must pay the official exchange rate.

The black-market rate is known by investors, further lowering their confidence in the Nigerian naira.

In June 2023, Nigeria lifted the US dollar peg, and the Naira was allowed to trade freely.

However, government-regulated and multinational corporate transactions still had to be done at an official exchange rate.

The official Naira exchange rate lost 27% of its value overnight.

At the end of January, the Naira experienced another extreme currency devaluation, where it fell by 40% relative to the US dollar in a single day.

This was due to the central bank revaluing the official exchange rate, bringing it closer to the black market rate.

MTN was a victim of the rapid currency devaluation and poor liquidity. In its 2023 Q3 trading update, it said the availability of foreign exchange has been constrained in Nigeria.

The company also stated that the previous official currency devaluation had a material impact on its results.

The most recent currency devaluation was much more severe than the previous one MTN was referring to. As such, it put significant pressure on the operator’s finances.

In its full year trading statement MTN said its financial performance has been negatively affected by the sharp devaluation of the Naira, which reduced its headline earnings per share (HEPS) by R5.93.

This is a significant impact which reduced MTN’s headline earnings by 56% to 72% for the 2023 financial year. Reducing HEPS from R8.24 to R10.55 to the reported range of R2.31 to R4.62.

The 2023 result represents an overall earnings decrease of 70% to 90% from the 2022 financial year.

The result is seen in the share price. Over the last year, MTN lost 43% of its value. Most of this loss came over the last two months.

Tracking the ZAR/NGN currency movements since the beginning of 2023 and comparing it to the MTN share price shows a strong relationship between the data series.

The MTN share price movements had a correlation coefficient of 0.66 with the ZAR/NGN movements.

The chart below shows the correlation between the ZAR/NGN exchange rate and the MTN share price.

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This article was first published by Daily Investor and is reproduced with permission.