Mtn Group Company Report

s MASTERS IN FINANCE EQUITY RESEARCH

MTN GROUP COMPANY REPORT

TELECOMMUNICATIONS 6 JANUARY 2016

STUDENT: TOMÁS REALISTA [email protected]

Recommendation: HOLD

Price Target FY17: ZAR 121.52

Price (as of 5-Jan-17) ZAR 126.17 . We suggest a HOLD recommendation for MTN Group’s Bloomberg: MTN:SJ stock, with a target price of ZAR121.52 per share and an upside potential of 1.9%. 52-week range (ZAR) 103.94-146.68 Market Cap (ZARm) 242.358 . Regulatory pressures have hit MTN, with the Nigerian Outstanding Shares (m) 1920.884

Communications Commission imposing a regulatory fine of USD1.7 Source: Bloomberg Billion on MTN Nigeria for not meeting the deadline of disconnecting 5.1 million unregistered subscribers, knocking the company during the second half of 2015. Subscriber s and cash flows were highly affected and as a result the stock price plummeted. However, a resolution for the problem has been accomplished during the year of 2016.

. The macro-economic scenario remains a big challenge related with high inflation levels, currencies’ depreciation, corruption Source: Bloomberg and deteriorated external conditions. Accessible risks are in the (Values in ZAR millions) 2015 2016E 2017F major part related with foreign exchange currency fluctuations. Revenues 147,063 147,532 148,558 EBITDA 59,125 47,594 56,972 . MTN has to remain competitive and keep investing in its EBITDA margin 40% 32% 38% Net Profit 23,570 11,088 20,119 network rollout. The company levered up in order to keep operating EPS 11 6 10 successfully while facing the Nigerian Fine. Debt levels have DPS 8.3 7 7 P/E 9.6 21.9 11.6 increased substantially but are now expected to stabilize. EV/EBITDA 4.6 6.0 5.1 EV/Sales 1.9 2.0 2.0 . We expect MTN’s growth to improve more in the medium to Net Debt to EBITDA 0.74 1.07 0.88 long term, as a result of the challenges faced in the recent past. Dividend Yield 6.8% 5.5% 5.8% Source: Company Reports, Bloomberg and Analyst’s Estimates Company description MTN Group Limited is a South-African based multinational telecommunications company, operating in several countries in Africa and the Middle East. It provides wireless communication services, being a market leader in most of the markets it operates in.

THIS REPORT WAS PREPARED BY TOMÁS REALISTA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

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MTN GROUP COMPANY REPORT

Table of Contents

Executive summary ...... 3

Valuation ...... 4

Company overview ...... 5

Company description ...... 5

Shareholder structure ...... 6

Macroeconomic Outlook ...... 8

South Africa ...... 9

Nigeria ...... 10

Mobile Telecommunications Sector ...... 12

MTN Group Business Analysis ...... 13

Nigerian Regulatory Fine ...... 13

Business Analysis ...... 13

South Africa ...... 15

Nigeria ...... 16

Large OPCO Cluster ...... 18

Small OPCO Cluster ...... 19

Joint Ventures ...... 20

Capex and Net Working Capital ...... 21

Forex and other Risks ...... 22

Capital Structure and Cost of Capital ...... 24

ROIC and Growth Figures ...... 26

Comparables ...... 27

Final Considerations ...... 28

Appendices ...... 29

Disclosures and Disclaimer ...... 32

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MTN GROUP COMPANY REPORT

Executive Summary

MTN is a leading telecommunications company operating in 22 developing countries across Africa and the Middle East. The most significant markets are South Africa and Nigeria, representing 63% of EBITDA and 57% of Revenue as of 2015. Total revenue totalized ZAR147,063 million.

Since the company is present in emerging markets, it is subject to macro-economic challenges of the respective regions. In times of global uncertainty, external conditions slow down developing countries’ growth prospects. In general, these countries are characterized by sluggish growth, excessive inflation, currency depreciation, commodities dependency and corruptive systems, posing challenges for companies operating in such conditions. Major direct risks relate with foreign exchange currency fluctuations.

The telecom industry has grown a lot in the past and emerging markets still have a good potential for further growth. The sector is characterized by fierce market competition due to the services offered which tend to be similar between operators. Thus, price wars are common, even though companies need to invest in their network in order to ensure good quality to its subscribers. There has also been a clear trend related with the shift of voice revenue to data revenue.

In 2015, MTN Nigeria was imposed a fine of USD1.7 billion by the Nigerian Communications Commission for not meeting the deadline of disconnecting 5.1 million unregistered SIM cards. This impacted cash flows in all units due to decreased subscribers and restricted tariff plans, depressing the stock price. Nevertheless, MTN possesses a strong recognizable brand and knowledge in emerging markets which enabled it to overcome the fine problems.

MTN is expected to keep investing in its infrastructures and further success will be dependent on further network rollout and how the company deals with price tariffs managing subscribers’ retention and acquirement.

The company has levered up in the past years and we believe it will not require further significant debt issues. Its current market Debt-to-Equity ratio is 32%. ROIC was affected by the fine but is expected to stabilize.

Bad performance has haunted MTN’s stock behaviour but we expect the situation to improve. We provide a HOLD recommendation for the stock with a target share price of ZAR121.52.

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Valuation

The valuation method was carried out using nominal South African Rands (Rands or ZAR), hence comprising the South African inflation rate. A Free Cash Flow to the Firm technique was used, discounted to December 2017 (DCF model). The Exhibit 1: Enterprise Value Decomposition (ms of Rands) explicit forecast period is pending December 2022, after which a terminal value

Value of DFCF: applies. Joint 72 118; 25% Ventures: 33 063; 11% A sum of the parts approach was followed in order to value the different segments corresponding to the several geographies in which MTN operates: South Africa, Nigeria, Ghana, Cameroon, Ivory Coast, Uganda, Syria, Sudan and the Small Terminal Value: 1 2 183 935; 64% OPCO Cluster . The revenue model used for each geography (when information

Enterprise Value: was available) consists of estimations of market size based on each country’s 289,116; 100% population and market penetration, MTN’s market share and subsequent number Source: Company Reports and Analyst's of subscribers, as well as ARPU3. Estimates Both cash flows and terminal values for the several segments were discounted at a South African WACC4, as all of them were also estimated in South African Rands. Exhibit 2: MTN Group Total Regarding the Joint Ventures (Iran in the major part), a multiples analysis Value Decomposition by Region (EV/EBITDA and EV/Revenue) was performed according to some of the most Small relevant Arab telecom companies5. From Exhibit 1, the sum of the several DFCF OPCO South Sudan 16% Africa Syria 3% 29% totalize 25% of the enterprise value, while the terminal value is roughly 64%. The 0% Uganda Joint Ventures represent 11% and were considered in the enterprise value 2% calculation as they are part of MTN’s core business. Exhibit 2 decomposes each Ivory Coast region’s total value (DCF + Terminal Value) as a percentage of the aggregate. 5%

Cameroon Nigeria Book value of debt was used as a proxy for the market value since the company 3% Ghana 35% 7% does not provide debt information and considering a residual risk of default for the Source: Company Reports and Analyst's future. Excess cash is expected and was considered. Estimates Exhibit 3 presents the several components of the equity estimate which totalize ZAR233,430,094,408. MTN has 1,920,884,000 shares implying a target price of ZAR121.52, a 3.7% capital loss excluding yearly expected dividends, and a 1.9% overall expected return (including dividends of R7 per share). This scenario suggests a HOLD recommendation for the stock, which is reasonably in line with other analysts and overall market sentiment. Furthermore, one can analyse and

1 OPCO stands for “Operating Company”. 2 Yemen, Benin, Afghanistan, Congo B, Rwanda, Zambia, Liberia, Conakry, Cyprus, Bissau and South Sudan. 3 Average Revenue Per User (average monthly service revenue divided by average monthly active customers). 4 Weigthed Average Cost of Capital. 5 OOREDOO, Zain, TCell and Etisalat.

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consider our estimated cost of equity of 11.06%, which technically would entail a SELL recommendation.

Exhibit 2: Equity Value Decomposition (ms of Rands)

300 000 270 000 240 000 210 000 180 000 150 000 120 000 90 000 60 000 30 000 0

Source: Company Reports and Analyst's Estimates

Company overview

Exhibit 4: MTN Revenue Decomposition by Country (2015) Company description Joint Ventures Small OPCO 9% 14% MTN Group Limited (MTN) is a leading multinational profitable mobile Sudan South Africa 2% 25% telecommunications group currently operating in 22 countries across Africa and Syria 2% the Middle East. Based in South Africa, MTN is listed in the Johannesburg Stock Uganda 3% Exchange. The majority of its subscribers are based in South Africa and Nigeria, Ivory Coast Nigeria 32% 4% Cameroon contributing with 57% for total revenue in 2015 (Exhibit 4). Nonetheless, it is also 4% Ghana 5% present in other countries: the Large OPCO Cluster group is constituted by Ghana, Source: Company Reports Cameroon, Ivory Coast, Uganda, Syria and Sudan; the Small OPCO Cluster group Exhibit 5: Small OPCO Cluster is composed by Yemen, Benin, Afghanistan, Congo B, Rwanda, Zambia, Liberia, Revenue Decomposition (2015) Conakry, Cyprus, Bissau and South Sudan (Exhibit 5); there are also some Joint South Sudan Bissau 6% Yemen Cyprus 2% 15% Ventures comprised by Iran, Botswana and Swaziland, being Iran the largest one 6% Conakry Benin 5% with over 94% of the subscribers. Exhibit 6 presents information about MTN 16% Liberia 4% subscribers’ base weights by region. Zambia 14%

Afghanistan Exhibit 6: MTN Subscriber's Base Weights by Region Rwanda 12% Congo B 6% 14% Joint Ventures 23% 21% 21% 21% 21% 21% 21% 21% 21% 21% 20% Source: Company Reports 14% 14% 15% 15% 15% 15% 15% 15% 14% 14% Small OPCO Cluster 14% 25% 25% 25% 25% 25% 26% 26% 26% 26% 26% 27% Large OPCO Cluster

25% 27% 27% 26% 25% 25% 25% 26% 26% 26% 27% Nigeria

13% 12% 13% 13% 13% 13% 13% 13% 13% 12% 12% South Africa 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F

Source: Company Reports and Analyst's Estimates

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“Committed to leading the delivery of a bold new digital world to its customers”6, Exhibit 7: MTN Group Total Revenue (ms of Rands) MTN operates solely in the mobile communications business for both particular 200 000 175 000 and business groups. The company’s value derives from its very strong brand and 150 000 visibility, and being such a big telecom company it is a leader in most of the markets 125 000 7 100 000 it operates in. The vast subscribers’ base of 232,500 customers in the end of 2015 75 000 8 50 000 reflects group revenue – MTN is the biggest telecom operator based in Africa . 25 000 Exhibit 7 shows information about MTN’s past and estimated total revenue, and 0

Exhibit 8 about subscribers.

2012 2013 2014 2015

2016F 2017F 2018F 2019F 2020F 2021F 2022F Source: Company Reports and Analyst's As expected, service revenue comes from outgoing and incoming9 voice usage, Estimates data traffic which includes not only internet usage but also digital services (e- Exhibit 8: MTN Group Total commerce, digital media and MTN Mobile Money financial services), and SMS Susbcribers (000s) usage. Regarding product revenue, equipment devices such as phones and 297 276 286 257 266 233 238 247 tablets also play a relevant role (Exhibit 9). 208 223 189

Shareholder structure

2013 2014 2015

2012 10

2017F 2018F 2019F 2020F 2021F 2022F 2016F According to MTN , 15.91% of its equity is owned by the Government Employees Source: Company Reports and Analyst's Pension Fund (GEPF) which is managed by the Public Investment Corporation Estimates (PIC)11. The Swiss private bank Lombard Odier Darier Hentsch & Cie (M1 Limited)

Exhibit 9: MTN Group Revenue owns 9.92% of MTN Group. MTN Zakhele, a special purpose vehicle created in a Analysis (2015) Broad-Based Black Economic Empowerment (BBBEE) transaction in 2010, owns

Devices Other SMS 4.16% of MTN. BBBEE is a South African Government programme aimed to 5% 1% 3% allocate wealth by enabling certain disadvantaged South Africans to own and Data manage companies’ equity in privileged conditions12. Both MTN Holdings and its 23% Outgoing voice 58% directors also hold 0.58% and 0.10% of MTN, respectively. The remaining 69.33% Incoming voice are public. There is no evidence indicating a future change to the current 10% shareholders’ structure configuration. It should be noted that MTN Zakhele expired Source: Company Reports

6 MTN’s official motto and strategy for the future. 7 Vodacom, MTN’s major competitor operating in Africa, mostly concentrated in South Africa, had 61,648 subscribers in the end of 2015; Maroc Telecom, a big competitor operating in Morocco and other African countries registered 51,000 subscribers; Safaricom, based in Kenya and present in other markets had 23,300; Etisalat, another competitor based in the United Arab Emirates had 167,000 subcribers; Ooredoo, based in Qatar had 117,000 customers. 8 MTN registered ZAR147,063 million of revenue in 2015 vs. ZAR77,333 million of Vodacom; ZAR53,257 million of Maroc Telecom; ZAR24,704 million of Safaricom; Etisalat, not based in Africa but in the United Arab Emirates registered ZAR217,840 million in revenue; Ooredoo (Qatar) cashed ZAR136,680 million. 9 Incoming voice comprises interconnect revenue, i.e. ”what mobile operators charge each other to accept competitor traffic on their networks”, Source: MTN 10 Source: MTN’s official information on shareholders (Dec-15), available on the website. 11 PIC is an asset management unit that provides financial services and is owned by the South African Government. 12 Is is intended to balance the effects of the discrimination of black people during the Apartheid.

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on November 24th 2016, but a new vehicle named MTN Zakhele Fughi was created owning reasonably the same amount of shares the previous entity did.

There is not a fixed organized group holding the majority of the company (>50%), as MTN typically has diverse minor shareholders over the world. PIC owns the major part of it and there is no indication of the South African Government having a negative influence on shareholding decisions. Typically, the board of directors takes some of the decisions which have been seen, such as the appointment of the new CEO initiating functions in 2017.

MTN Group owns several legal entities in a vertical scheme in which all of them hold diverse shareholdings in the several countries MTN is present in. The entire structure is detailed in Exhibit 10.

Exhibit 10: MTN Group Structure (2015)

Source: Company Reports

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Macroeconomic Outlook

When assessing the business state of any company it is necessary to analyse the involved countries, since their performance will certainly pilot cash flow projections and influence operations. Although most of the literature relates with the impact of telecommunications in economic growth, the opposite is also true. A more stable country will attract investment, produce more richness and channel it wisely, Exhibit 11: MSCI Indices Performances (USD) boosting wealth and improving consumption, granting better opportunities for

500 100% companies in general. MTN is present in emerging markets which tend to have an 450 90% 400 80% increased level of uncertainty associated, related both with external and internal 350 70% 300 60% challenges. Regarding external influences, Exhibit 11 shows the cumulative 250 50% 200 40% performance of MSCI World Index (developed markets) vs. MSCI Emerging 150 30% 100 20% Markets Index. In times of global uncertainty, a worldwide economic slowdown is 50 10% 0 0% clear, posing a deteriorated outlook on the world economy and unfavourable

external conditions. Accordingly, emerging markets are testifying downward

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 MSCI World (Developed Markets) pressures on growth prospects due to the uncertainty of more developed market MSCI Emerging economies. This fragility is associated with the dependency of emerging markets Source: Bloomberg on stronger economies, being that related either to international trade (large dependency on commodities’ prices, with low oil prices clearly having a negative impact), international financing, international aid and guidance or simply general market sentiment13. In general, when more developed economies struggle, it affects developing ones even more. This relationship is generally known and accepted. Furthermore, it makes investors channel their money to developed markets, which act almost as safe harbours. Another thing worth mentioning is that a stronger US Dollar also translates into less investment in emerging economies.

Concerning internal challenges, developing markets still have much to pursue. Although expected to grow more than developed ones, African economies are not prone to develop to the extent of the Asian tigers14 for instance. In a more theoretical matter, the true development of a country relies in the ability to depose their rulers’ corrupt methods of controlling power and to craft a nation where the government faithfully and evenly works for its citizens, with uniform political rights and independent institutions, enabling and promoting decent and fair opportunities for the majority, eventually bringing prosperity to ordinary citizens15. Nowadays, most emerging economies still swim in corruption, inequality and repression while

13 General attitude and behavior of investors concerning financial markets. 14 Hong Kong, Singapore, South Korea and Taiwan. 15 The Asian Tigers followed this type of ruling, allowing them to focus in their competitive advantages.

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small elites enrich by the cost of the majority16. This is the main reason why so Exhibit 12: Economic Overview many economies fail in achieving the levels of prosperity of the most developed 16% 15,7% 14% ones. Government structural reforms are essential and the lack of commitment in 12% 10,4% 10% that sphere threatens growth. It is also true that improvements have been done, 8,6% 8,5% 8% 8,9% 6,7% but they simply have not been enough. Even though in a smaller scale, many 6% 6,5% 5,9% 4,5% 4,9% 4,0% 5,3% 4% 3,5% 5,0% 2,7% African and Middle East emerging economies are still a mirror of oppressed 2% 1,3% 2,2% 2,1% 0% 0,1% 0,0% systems of the past under the influence of a more modern world.

-2% -1,8%

SA Hence, these countries face economic problems which are inevitably inter

NIG

IRAN

GHANA UGANDA

IV.COAST connected with their systems. MTN operates in 22 developing countries. Exhibit CAMEROON GDP Growth 2015 GDP Growth 2016F 12 provides an idea of the macroeconomic scenario in key MTN markets. One Inflation 2016F should be conscious that the overall types of problems affecting developing Source: IMF and Company Reports countries are somewhat similar in between them, being sluggish growth, corruptive

Exhibit 13: South African Real systems, excessive inflation, currency depreciation and commodities dependency GDP Growth (%) the common topics. Thus, we decided to provide a more detailed analysis just for 7% South Africa and Nigeria, the most significant markets for MTN. 6% 5% 4% 3% South Africa 2% 1% South Africa (SA) is currently facing several challenges. A weak economic growth 0% -1% and high inflation have marked its path. The South African economy relies mostly -2% -3% on financial services, tourism, manufacturing and wholesale/retail, with the government also playing an important role. Exports heavily affect the country’s Quarterly GDP Growth (YoY) Yearly GDP Growth GDP and its core sectors are the mining and minerals industry (around 50%) and Source: OECD and World Bank the automotive segment. Thus, South Africa is highly dependent on international demand mostly from China, Africa, Europe and the US. Exhibit 14: South African major economic indicators (% of GDP) Real GDP growth was highly impacted during the financial crisis of 2008 and has Government Debt in the right axis experienced a slowdown until now (Exhibit 13). South Africa has a prominent 7% 60% 6% current account deficit which has been slowly narrowing since 2013, but it can 50% 5% easily worsen due to current external conditions and further strikes17. To finance 4% 40% 3% 30% this discrepancy in the current account, South Africa relies in part on Foreign Direct 2% 1% 20% Investment (FDI)18. Government deficit is also slowly decreasing since the crisis, 0% 10% -1% but keeps forcing government debt upwards. Exhibit 14 summarizes these -2% 0% 07 08 09 10 11 12 13 14 15 economic indicators. Devaluation is a temptation to the monetary authorities as it CA Deficit Government Deficit offsets poor GDP performances due to the weaker rand positive effect on the Net FDI Government Debt Source: World Bank current account. The rand has been following a depreciation against the US Dollar

16 Source: “Why Nations Fail: The Origins of Power, Prosperity and Poverty", by Acemoglu, Daron, and James A Robinson, First Edition (2012), New York: Crown, 529 17 South African strikes are recurrent even though “platinum producers recently settled for a modest pay” (3 years from Nov-14). Source: BBC 18 Financial services help catalyze FDI, mostly towards the mining sector.

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Exhibit 15: USD/ZAR Exchange Rate in the last few years, reaching almost 30% in 2015 (Exhibit 15). This creates and SA Inflation SA Inflation in the right axis inflationary pressures for the economy which affects companies as labour costs

17 10% tend to grow more than revenue, with the unemployment rate registering 9% increasing large values (26.7% in Q1-2016, from 24.5% in Q4-201519). Political 15 8% 13 7% turmoil and corruption scandals are still present which discourages confidence and 6% 11 5% harms investment. Consumer and business confidence indicators are low (Exhibit 4% 16). Besides, the country is suffering a severe drought and electricity shortages20. 9 3% 7 2% Furthermore, social inequality and poverty have decreased in the last decade but 1% 5 0% still remain major challenges. Accordingly, financial conditions tightened with 07 08 09 10 11 12 13 14 15 higher borrowing costs as South Africa was in the verge of being downgraded to USD/ZAR SA Inflation junk status this year. Source: Bloomberg and StatsSA South African future is uncertain, yet South Africa is now very slowly recovering. It Exhibit 16: South African does have a very developed financial system, and most of its other sectors are Confidence indicators Business confidence index in the right axis currently growing. A real GDP quarterly growth (QoQ) in the 2nd quarter of 2016 20 90 of 0.8%21 has positively surprised investors. Annual GDP growth is expected to 10 70 continue improving in the future (around 2% by 202022). The government has 0 50 announced a restrictive fiscal policy to offset fiscal discrepancies and a prudent -10 30 -20 10 control of monetary policy should keep inflation steady (between 3% and 6%). The

South African economy remains one of the most robust in Africa and the National

Q3-10 Q4-09 Q2-11 Q1-12 Q4-12 Q3-13 Q2-14 Q1-15 Q4-15 Q1-09 23 Consumer confidence index Development Plan promises to implement some structural reforms that are vital

Business confidence index (=50 is to its further development. neutral) Source: StatsSA Nigeria

Exhibit 17: Crude Oil Prices With an economy highly dependent on its vital oil industry, Nigeria has been largely (Global price of WTI Crude, Dollars per barrel) affected by crude oil prices (Exhibit 17) which have largely decreased since the 160 fourth quarter of 2014 when global supply largely exceeded demand. Since then, 140 120 GDP growth has weakened and recently stumbled into negative values posing a 100 recession scenario (Exhibit 18). Agriculture is another key industry which has 80 60 witnessed a sluggish increase in output as a consequence of dry seasons. 40 20 Wholesale, retail trade and manufacturing also play important roles and have been 0 declining. One of the reasons is the Nigerian Naira (NGN or Naira) (Exhibit 19)

depreciation which increased imported inputs’ costs. The Naira has abruptly

Jan-04 Jan-09 Jan-14

Sep-05 Sep-10 Sep-15 May-12 May-07 devalued after the abandonment of a fixed exchange rate regime (US Dollar peg) Source: FRED of St. Louis (US Energy Information Administration)

19 Source: Statistics of South Africa 20 Constant power cuts pose a problem as the public monopolist entity Eskom is unable to serve all the country’s demand, raising electricity prices. 21 Source: OECD 22 Source: Government of South Africa 23 South African Government long-term development plan (2030).

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in June by the Nigerian Central Bank (Exhibit 20). The idea of stabilizing the Exhibit 18: Nigerian Real GDP Growth (%) exchange rate was abandoned as foreign reserves became scarce and low oil 8% prices did not allow for its continuation. The exchange rate keeps falling as capital 6% flows out of the country, increasing pressure on US Dollar liquidity. Inflation clearly 4% intensified which raises more economic instability. The current account surplus has 2% diminished over the years and has become negative with less oil exports. 0%

-2% Government deficit is controlled and expected to increase as an expansionary

2008 2009 2010 2011

2007 budget was announced in order to stimulate the economy. Government debt is

Q4-12 Q2-13 Q4-13 Q2-14 Q4-14 Q2-15 Q4-15 Q2-16

Quarterly GDP Growth (YoY) also stable but is prone to increase in the next few years. Exhibit 21 summarizes Yearly GDP Growth this information. Corruption is unfortunately still one of the major problems in Source: World Bank and Nigeria National Bureau of Statistics Nigeria being present in most of the political and economic sectors. In 2015 Nigeria ranked 136 out of 174 countries in the corruption index24. Furthermore, the country

Exhibit 19: USD/NGN exchange rate is also far from good in what safety concerns, with terrorism groups and crimes and NIG Inflation Nigerian Inflation in the right axis being recurrent. 220 17% With an economy not well diversified, the near term future of Nigeria is strongly 200 15% linked with the evolution of crude oil prices. While those prices have bounced back 180 13% recently, they still are very low compared to previous levels. OPEC meetings have 160 11% tried to arrange a cut in production but one should be aware that the US could 140 9% 120 7% offset that strategy again. One should also have in mind that oil prices suffer from 100 5% the fact that bull investors have had big losses in the past 2 years – eager of profits,

they will now try to cash in small amounts by desperately selling if oil prices rise a

2012 2007 2008 2009 2010 2011 2013 2014 2015

USD/NGN Nigerian Inflation small bit, which additionally pushes its level down in the short-term. The Naira is Source: Bloomberg and Nigeria National expected to stabilize. In the next few years, GDP growth rate is predicted to turn Bureau of Statistics positive yet still low.

Exhibit 20: USD/NGN exchange rate Exhibit 21: Nigerian major economic indicators (% of GDP) and NIG Inflation (YoY during 2016) Government Debt in the right axis Nigerian Inflation in the right axis 20% 16% 330 20% 14% 310 15% 18% 12% 290 10% 270 16% 10% 250 8% 14% 5% 230 6% 210 12% 4% 0% 190 2% 10% 170 -5% 0% 150 8% 07 08 09 10 11 12 13 14 15 CA Surplus Government Deficit USD/NGN Nigerian Inflation Net FDI Government Debt Source: Bloomberg and Nigeria National Source: World Bank and Nigeria Budget Office Bureau of Statistics

24 Source: Transparency International

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Mobile Telecommunications Sector

The telecommunications sector has been one of the epicentres of growth (Exhibit Exhibit 22: The Mobile Celular Boom 22) in the past, as the deregulation25 government movements (Exhibit 23) along 38% 350 40% with the massive technological improvements and overall receptivity of capital 300 35% 27% markets allowed the industry to develop like never before. Having had the most 250 30% 20% 25% 200 significant telecom business growth in the past, emerging markets are still the ones 20% 150 13% with the greatest potential for the future. This is due to the young rising population, 15% 9% 100 6% 10% expanding mobile penetrations, increased economic growth, and fewer fixed-line 3% 4% 50 2% 5% infrastructures. This last phenomenon makes mobile communications especially 0 0%

relevant in Africa. However, one should be aware that traffic costs are also higher

1990 1991 1992 1993 1994 1995 1996 1997 1998 Worldwide Mobile Cellular on a mobile network than on a fixed one, mainly due to bigger investments in Subscribers (ms) 26 As % of Fixed-Line Telephone infrastructures and costs associated with increased traffic . Subscribers Source: World Telecommunications Nevertheless, MTN and most telecoms face an extremely challenging operational Development Report 1999 environment in a very fast-paced industry. As previously seen, weak macro- economic conditions tend to harm business development due to low consumer Exhibit 23: Four Milestones of the Deregulation Wave: spending. This exacerbates the biggest challenge transversal to both mature and

1. In the United States: divesture of the developing markets, which is the fierce market competition among telecom monolithic AT&T into the regional Bell operating companies (RBOC) in 1982; companies. On the one hand, consumers seek a reliable service at the lowest 2. In the U.K: change from monopoly to duopoly in 1982 and complete liberalization of telecoms in 1991; possible price since there are several providers whose telecom services do not 3. In Japan: privatization of NTT in 1985; 4. In the EU: the end of voice service differ so much. Companies then need to practice lower prices in order to attract monopoly on January 1, 1998; new and existent costumers, decreasing overall profitability by lowering revenue Source: “The worldwide History of Telecommunications”, by Anthon A. per user (Exhibit 24). On the other hand, users demand better and faster Huurdeman (2003) connections entailing substantial capital expenditures which are fundamental to prosper in the sector. Nowadays in developed markets telecoms’ success is linked Exhibit 24: Total Revenue as % of Subscribers with better quality, diversity and technology progresses while in emerging markets, 1,5 differentiation is more related with rapid network rollout in order to face the 1,3 continuously growing demand. Exhibit 25 and Exhibit 26 provide information 1,1 regarding telecom comparables both from developed and emerging markets. 0,9 Regarding revenues, phones calls are still the main source of mobile telecom 0,7 revenue but technology advances are changing this situation. Mobile devices are 0,5 2012 2013 2014 2015 becoming more about internet than voice. Not only was there a data explosion with MTN Vodacom the cost of the gigabyte reduced, social networking has also gained a lot of

Source: Companies Reports notoriety. This phenomenon is transversal to all telecoms.

25 Deregulation meaning the untying of public monopoly telecom operators and respective governments. 26 Source: Comparison of fixed and mobile cost structures, GSMA and PwC.

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MTN Group Business Analysis

Exhibit 25: Telecommunication Companies Analysis Nigerian Regulatory Fine 25% 20% In order to describe MTN performance it is necessary to first explain the Nigerian 15% 10% Regulatory Fine. During the second half of 2015, the Nigerian Communications 5% Commission (NCC) imposed a NGN1.04 trillion (USD5.2 billion) fine on MTN 0% Nigeria for not meeting the deadline of disconnecting about 5.1 million unregistered -5% -10% SIM cards. Legal action was taken but MTN soon realized it should try to reach an 2012 2013 2014 2015 amicable solution with the Nigerian authorities for its best interest. Thus, a “without Sales Growth Rate Developing Profit Margin Developed prejudice good faith payment” of NGN50 billion (USD250 million) was made before Sales Growth Rate Developed Profit Margin Developing hand by MTN on 24 February 2016. On 10 June 2016 a settlement was reached Source: Bloomberg with a reduced fine of NGN330 billion (USD1.7 billion), leaving a NGN280 billion Exhibit 26: Return on Invested amount to be paid over 3 years27. MTN accrued the present value of this amount Capital of Telecom Companies in 2015 and 2016, impacting EBITDA by ZAR9,287 and ZAR10,499 million, 30% 27% respectively28. We considered the impact on future cash flows according to the 24% 21% ZAR/NGN exchange rate at the time each cash flow deduction will be done. 18% 15% Furthermore, as part of the resolution deal reached with the NCC, in the future 12% 9% MTN will have to initiate the process of listing its shares on the Nigerian stock 6% 3% exchange, which all in all will increase the stock’s liquidity29. The Nigerian Fine 2012 2013 2014 2015 ROIC Developing caught the markets by surprise depressing MTN’s stock price, decreasing roughly ROIC Developed 25% during the conversations and lately increasing only 13% after the settlement. MTN Source: Company Reports, MTN made sure nothing similar would succeed, disconnecting both Nigerian and Bloomberg and Analyst's Estimates non-Nigerian unregistered SIM cards throughout the end of 2015 and 2016. By Exhibit 27: MTN Revenue Breakdown mid-2016 the disconnection process was completed and it was expected that (as % of total revenue) around 18 million subscribers were disconnected to ensure full compliance across

63,2% 62,0% the group. This severely impacted cash flows and future projections for MTN 58,1% Nigeria, as we will further see.

23,1% 14,9% 17,8% 4,8% Consolidated Business Analysis 5,4% 5,5% 2,8% 3,1% 3,9% As previously said, MTN is operating in a difficult environment characterized by 11,2% 10,2% 10% poor macro-economic conditions, fierce market competition and regulatory pressures from national authorities. Its strong brand and knowledge in the 2013 2014 2015 African/Middle East markets are the key for survival. Since it operates in many Outgoing voice Incoming voice Data SMS countries which have similar characteristics, the company can be said to be Devices Other Source: Company Reports

27 NGN30 billion on 31 March 2017, NGN55 billion on 31 March 2018, 31 December 2018, 31 March 2019 and 31 May 2019. 28 This impacted the FCF projections by the same amounts. 29 Nevertheless, current big-ask spreads don’t indicate this to be a problem.

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Exhibit 28: Vodacom Revenue enjoying synergies related with expertise in emerging markets. Regarding MTN’s Breakdown (as % of total revenue) dispersion across Africa/Middle East, we don’t believe it to be associated with a 50,4% 47,2% loss of focus and a spread to an endless list of countries. MTN is adding value with 44,1% each new country, given the potential each market possesses. Currently, it is 14,2% 17,4% 21,3% 16,7% 18,4% 14,1% focusing in improving regional synergies in order to guarantee tactical area focus 4,3% 4% 4,9% 4,7% and organization – during 2016 MTN changed its operating structure, now 8,5% 7,8% 7% 7,2% 7,4% grouping countries per region instead of size. Nevertheless, our separated analysis consists in the old format as historical data was available in that arrangement. 2013 2014 2015 Outgoing voice Incoming voice The company has been following the market trend of increased data and less voice Data SMS Devices Other revenue, as can be seen in Exhibit 27. Voice revenue is currently under pressure Source: Company Reports and declined 6.2% in 2015, despite MTN’s reduction in tariffs of 25% resulting in Exhibit 29: Earnings Analysis 15% more billable minutes30. Nevertheless, MTN data revenue increased 30.2% 40 18 35 16 contributing 23% to total revenue (previously 18%). There was indeed a 108.5% 30 14 increase in data traffic even though data tariffs decreased about 45% during 25 12 10 31 20 2015 . The decrease in tariffs is related to the market competition typical in the 8 15 6 EPS (Rands) industry. Hence, the decline in voice revenue has been somewhat offset by the 10 4 Earnings Earnings (bsof Rands) 5 2 growth in data revenue. Data revenue also include digital services i.e. e- 0 0 2011 2012 2013 2014 2015 commerce, digital media and mobile financial services, which have been recording MTN Earnings a strong growth even though they still represent smaller amounts. Incoming voice Vodacom Earnings MTN EPS revenue (interconnect) keep declining as mobile termination rates keep decreasing Vodacom EPS Excluding Nigerian Regulatory Fine across the industry. SMS revenue has witnessed a decrease of about 3% per year Source: Companies Reports as data also poses itself as a viable substitute for texting. Devices revenue which

Exhibit 30: Revenue and EBITDA tend to increase as a result of more data usage, come mainly from smartphones, Margin Analysis tablets and routers, allowing customers to navigate more, thus being strategically 180 55% sold in bundles. Vodacom’s values are presented in Exhibit 28 for comparison 150 45% purposes. Overall performance was lower than expected with EPS32 declining 120 35% 33 90 51.4% in 2015 (Exhibit 29 presents both EPS and Earnings past values). Despite 25% 60 the storm, MTN continued to benefit from its large subscriber base. Exhibit 30

30 15% EBITDAmargin (%) Revenue Revenue (msof Rands) concerns revenue and EBITDA margins and Exhibit 31 shows the evolution of 0 5% 2011 2012 2013 2014 2015 MTN total subscribers34. MTN Revenue Vodacom Revenue MTN recognizes that 2015 was a problematic year impacted by challenges in the MTN EBITDA Margin Vodacom EBITDA Margin two biggest markets (Nigeria and South Africa), but is confident that 2016 Source: Company Reports

30 Source: Company Reports 31 Source: Company Reports 32 Earnings Per Share 33 EPS declined 25.3% excluding the Nigerian Regulatory Fine Impairment. 34 According to MTN, MTN Nigeria witnessed a decline in its subscribers’ base from 61,252,000 to 61,004,000 during 2015, but not all disconnections were completed yet. For 2016 projections we used the final number of subscribers provided during the year which takes into account both new subscribers and all deregistration batches in all countries.

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MTN GROUP COMPANY REPORT

represents a turning point with a new operating structure and a new CEO, “where

Exhibit 31: No. of Subscribers improving network quality and capacity remains a priority”. Increased data usage, (millions) more digital media content with MTN being the largest distributor of digital music 223,4 232,5 189,3 207,8 164,5 in Africa35, and mobile money presenting itself as a strong viable solution to 61,6 36,8 46,9 50,5 57,9 payment problems in Africa, makes digital revenue the key for future growth.

2011 2012 2013 2014 2015 Exhibit 32 helps understand the potential of mobile broadband access (wireless MTN Subscribers internet connection). Vodacom Subscribers Source: Companies Reports Exhibit 32: Mobile broadband access in emerging markets 69% 53% Exhibit 33: South African 31% 19% Telecommunications Sector Market 8% 4% Shares (Q1 of each year) Middle East & North Africa Sub-Saharan Africa 100% 2011 2015 2020 80% 60% Source: 2015 State of the Industry Report, Mobile Money, GSMA Intelligence

40% 20% South Africa 0% 2012 2013 2014 2015 2016 Vodacom MTN Group South African mobile services arrived to offset the old low fixed-line coverage by Cell C Telkom Telkom presented in the country. Nowadays the market is mostly split by Vodacom, Source: Companies Reports MTN and Cell C. Vodacom has traditionally been the higher quality one, with Cell

Exhibit 34: MTN SA Revenue C being a challenger trying to disrupt the market. MTN is the second largest Breakdown (as % of total operator, as can be seen in Exhibit 33. Lately the three have been evening up in revenue) 45% 44% 42% 32% perception and quality, with Telkom offering a poorer quality service with lower 21% 24% 17% 19% 15% prices. MTN is also said to be slightly falling behind the price competitive deals in 5% 6% 5% 9% some user profiles put forward by the rest of the market with more confusing pricing 6% 5% packages and fees, making the clearer, cheaper offerings from competitors a 2013 2014 2015 threat to them. Overall the market in South Africa is still very price competitive with Outgoing voice Incoming voice Data SMS most of the networks offering same things in differing packages. Devices Other Source: Company Reports During 2015, MTN South Africa (MTN SA) saw a decrease in handset revenue due to the “exceptional industrial action” in the first half of the year leading to less Exhibit 35: South African Market Shares and Subscribers devices supplied (impairment of obsolete handsets of R592 million). Data revenue 50% 40 testified a 37.2% increase amplified by large capital expenditures (almost doubled 45% 35 from 2014). Exhibit 34 presents MTN SA revenue breakdown as a percentage of 40% 30 total revenue. Total revenue managed to increase by 2.9%. Exhibit 35 shows 35% 25

Subscribers Subscribers (ms) information regarding market shares and subscribers. The subscribers’ base Market Market Share (%) 30% 20

enlarged 9.3% to 30.6 million mainly due to a better client experience. EBITDA

2012 2013 2014 2015 2016F MTN SA Subscribers margin increased from 32.1% to 33,4% benefiting from less devices sales and a Vodacom SA Subscribers MTN SA Market Share tighter cost control. ARPU has been declining as it is characteristic of the industry Vodacom SA Market Share Source: Companies Reports

35 Source: Company Reports

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MTN GROUP COMPANY REPORT

and it is assumed to stabilize in the foreseeable future (Exhibit 36). Cheaper and better offers attracted more customers, with the pre-paid segment growing by 12,3% to 25.3 million subscribers, even though the post-paid segment declined by Exhibit 36: MTN SA ARPU 3.3% to 5.2 million (in part due to the lower disposal of handsets). It has been (monthly Rands per user) typical to witness sluggish movements in the post-paid subscriber base (more 170 150 profitable but decreasing due to more complicated tariff schemes and less 130 110 desirable offers for the average consumer) and an increase in the prepaid one 90 70 (more desirable to the average consumer and tends to variate more with price 50

movements, which have been downwards). Typically, a larger prepaid subscribers’

2012 2013 2014 2015

2019F 2017F 2018F 2020F 2021F 2022F 2016F base translates into less Working Capital needs. Exhibit 37 compares South MTN SA ARPU African prepaid and post-paid segments’ ARPU. Vodacom SA ARPU

Source: Companies Reports For the future, aggressive price competition poses itself as a serious threat to MTN SA, which risks a poor performance in a highly penetrated market of an already sluggish economy. In fact, MTN SA saw a weakening in its subscriber base during the first half of 2016 of 2.6% even though it is expected to increase 2% year-on- Exhibit 37: MTN SA Pre-paid and Postpaid ARPU (monthly Rands per year (1.1 million net additions). Exhibit 38 contains information on our predicted user) subscribers and revenue for MTN SA. The key strategy to improve operational 300 250 performance is to continue boosting data revenue and handsets sales, with 200 smartphones playing a key role as their penetration rates keep increasing (Source: 150 100 Statista). This is accomplished by improving offers and investments in network 50 0 quality, with new spectrum frequencies already being added to enhance 2012 2013 2014 2015 customers’ experience. EBITDA margin is likely to slightly decrease due to higher Pre-paid ARPU handsets’ sales in 2016 compared to the previous period as well as increased Postpaid ARPU network related costs. We predict MTN SA’s mark et share to remain stable with a Source: Company Reports slight propensity to decline due to new possible competitive offerings from companies like Cell-C.

Exhibit 38: MTN SA Nigeria Subscribers and Revenue Forecast In Nigeria, deregulation of the telecommunications industry since 2003 has allowed 55 40 50 36 36 45 new mobile operators to replace the unreliable fixed line services of NITEL . The 40 32 35 28 industry was then almost monopolised by MTN due to their wide quality coverage 30 25 24 Subscribers Subscribers (ms) but the market has grown considerably and is nowadays much more evenly 20 20

Revenue Revenue (msof Rands) distributed by MTN, Globacom, Airtel and Etisalat (Exhibit 39), entailing vigorous

2012 2013 2014 2015

2016F 2017F 2018F 2019F 2020F 2021F 2022F MTN SA Revenue competition (MTN is still the market leader). The sector is now particularly MTN SA Subscribers Source: Company Reports and Analyst's characterized by rapid adaptation and business flexibility, i.e. to survive companies Estimates must quickly recreate tariff plans, engaging in price wars in order to expand their business and secure current customers. The challenging regulatory landscape is

36 Main wired telecommunications company which was owned by the government of Nigeria.

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Exhibit 39: Nigerian also characteristic and is precisely where MTN slipped in 2015, failing to Telecommunications Sector disconnect 5.1 million unregistered subscribers on time which resulted on a heavy Market Shares 100% regulatory fine. Fortunately, the process is completed and one should not expect 80% more surprises in the future. 60% 40% Nonetheless, MTN Nigeria was indeed negatively impacted by the NCC fine. First 20% of all, because of the obvious substantial loss of subscribers – MTN said it had to 0% 2013 2014 2015 2016 disconnect around 11.2 million subscribers in Nigeria, even though the number is MTN Globacom Airtel Etisalat not precise or not reflected in the company’s reports due to subscribers “rescued” Source: Nigerian Communications or acquired for the first time. The reported number of total subscribers in MTN Comissions Nigeria officially increased by 2.3% in 2015 to 61.252 million, but this was not a Exhibit 40: MTN Nigeria Market final number regarding the loss of subscribers. By mid-2016 when the last batch Share and Subscribers was disconnected, Nigeria reported 58.978 million subscribers (62.813 million in 50% 75 mid-2015). Second, the fine also entailed the suspension of regulatory services, 45% 60 40% 45 i.e. NCC restricted MTN’s new tariff plans and promotions to the market and

35% 30 eventually some were removed upon expiration. The situation lasted until MTN

Subscribers Subscribers (ms) Market Market Share (%) 30% 15 complied with the requirements. Nigeria’s competitiveness was compromised and 2012 2013 2014 2015 revenue kept declining (-2.1% in 2015). Exhibit 40 presents information about the MTN Nigeria Subscribers evolution of MTN Nigeria’s market share and subscribers. Following the market’s MTN Nigeria Market Share Source: Company Reports trend, voice revenue is declining and data revenue growing (18.8% in 2015), even with the regulatory requirements. Digital revenue keeps improving, contributing

Exhibit 41: MTN Nigeria Revenue now with over 50% to data revenue (mainly due to music and lifestyle services). Breakdown (as % of total revenue) Exhibit 41 details MTN Nigeria revenue breakdown. During 2015 the EBITDA 72% 71% 68% margin declined 5.6% to 53% mainly due to lower revenue, higher leasing costs 19% due to the sale of operating towers, Naira depreciation affecting expenses 15% 16% 10% 9% 11% denominated in US Dollars and an increase in the stake of digital services which 2,4% 1,9% 1,6% possess lower margins. 2013 2014 2015 Outgoing voice Incoming voice We expect MTN Nigeria to slightly lose some market share due to operators taking Data SMS advantage of MTN’s drawback. However, the company will slowly recover from the Devices and others Source: Company Reports loss in its subscriber’s base. Improved competitive offers will return since NCC regulations are now in order. More intensive capex rollout with new spectrums and Exhibit 42: MTN Nigeria Revenue and Subscribers 4G licenses, along with new improved digital services will allow for substantial data Forecast growth. MTN acquired Visafone Communications Ltd. in January 2016 for $220m 65 85 60 80 55 75 which contributed with 568,000 new subscribers. This acquisition was strategic 50 70 45 65 40 60 since technically it will allow MTN to use 4G LTE service in the 800Mhz spectrum 35 55 30 50

25 45 Subscribers (ms) (better quality since it is not used by other operators). Overall MTN will try to take 20 40

Revenue Revenue (bsof Rands) advantage of still being the dominant operator in Nigeria to further intensify its

2012 2013 2014 2015

2016F 2017F 2018F 2019F 2020F 2021F 2022F MTN Nigeria Revenue operations. Exhibit 42 presents forecasted values for subscribers and revenue. MTN Nigeria Subscribers EBITDA margin will further decrease, for the same reasons stated above as well Source: Company Reports and Analyst's Estimates

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MTN GROUP COMPANY REPORT

as for costs of reconnecting subscribers. We believe ARPU will keep diminishing in 2017 due to the effects of the Naira depreciation, slowly increasing later on Exhibit 43: MTN Nigeria ARPU (Exhibit 43). (monthly Rands per user) 100 90 Large OPCO Cluster 80 70 The Large OPCO Cluster is composed by some other important markets where 60 MTN operates. It is constituted by Ghana, Cameroon, Ivory Coast, Uganda, Syria 50

and Sudan. Mostly, it helps to make MTN’s business more geographically

2012 2013 2014 2015

2017F 2018F 2019F 2020F 2021F 2022F 2016F diversified and possesses a strong growth potential due to lower mobile Source: Company Reports and Analyst's Estimates penetration rates. However, macro-economic conditions keep damaging these markets entailing lower than expected performances. The subscribers’ base enlarged 0.7% to 57.1 million in 2015 and revenue in Rands barely increased (0.5% in 2015 vs 5.5% organically). Exhibit 44 summarizes these phenomena.

Exhibit 44: Large OPCO Cluster Overall, data revenue remains the main driver behind revenue progresses. Exhibit Revenue and Subscribers 45 shows past and predicted ARPUs evolution for the several markets. 50 100 40 80 MTN leads the market in Ghana (48% according to the National Communications 30 60 Authority) and has been performing well notwithstanding the tough economic 20 40 scenario the country currently lives, registering very high inflation levels.

10 20 Subscribers (ms) Subscribers are steadily increasing due to more appealing offers, reaching 16.2

0 0 Total Total Revenue (bsof Rands)

million in the end of 2015. Total revenue is also increasing (10.55% in Rands

2012 2013 2014 2015

2016F 2017F 2018F 2019F 2020F 2021F 2022F

Total Revenue Subscribers during 2015) being partly offset by the Cedi currency depreciation. Data revenue Source: Company Reports and is the main propellant of this growth, growing 80% in Rands and constituting now Analyst's Estimates 30.6% of total revenue. This was a result of substantive network rollout, increased smartphone penetration and more attractive offers, with financial services also providing their contribution. EBITDA margin increased to 40.5% from 37.4% mainly due to lower costs and no fees paid to the group in the year. ARPU levels have Exhibit 45: Large OPCO Cluster ARPUs (Rands) remained somewhat steady. We can expect MTN Ghana to keep following the 90 current positive trend for the future with increased subscribers, market share and 80 70 revenue and improved quality due to further investments in the network. 60 50 MTN Cameroon is also the market leader (56.2% according to MTN) but its 40 30 performance has not been the best. Aggressive competition made MTN lose 3.2% 20 10 of the market to Orange and Nexttel in 2015. Revenue has been declining.

Although it tends to follow the data trend, it is still not enough to offset diminishing

2012 2013 2014 2015

2016F 2017F 2018F 2019F 2020F 2021F 2022F voice revenue. Thus, MTN is making an effort to improve 3G and 4G network, Ghana Cameroon Ivory Coast Uganda increasing costs and harming EBITDA margin which decreased 6.6% to 36.2% in Syria Sudan 2015. MTN Cameroon was also hurt by the deregistration process but it is Source: Company Reports and Analyst's Estimates expected to slowly increase its subscribers’ base in the future, even though we predict revenue to keep decreasing in the short term.

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The Ivory Coast telecom market is dominated by MTN which provides the best network quality, owning around 34% of the highly competitive market. Thanks to better offers in general, subscribers grew by 4.1% to 8.3 million in 2015. Data growth has been boosting total revenue growth mostly due to network rollout and mobile money surges. MTN Ivory Coast is expected to keep gradually growing in the future with more innovative products and services offerings.

MTN Uganda is also a market leader and its subscriber base decreased 14.1% to 8.9 million in 2015 due to regulatory demands. However, it is expected that it will regain those customers in the short term. Data revenue has been following identical trends and the future is dependent upon further capital expenditures to boost revenue. Mobile money services are also a key part of the Ugandan business.

Regarding Syria, in spite of the country’s critical situation, MTN managed to grow the number of subscribers by 1.9% to 5.9 million. Thanks to data growth, revenue increased organically by 4,7%, even though it decreased in Rands. This is a major problem as the country faces high inflation levels. Organic revenue is expected to slowly increase but the growth in Rands will ultimately depend upon the outcome of Syrian conflicts.

MTN Sudan is another segment that suffered due to regulatory deregistrations, having a 5.5% decrease in its subscriber base to 8.5 million during 2015. However, revenue increased 15% organically speaking, again supported by data revenue. We expect Sudan to regain its subscribers’ increasing momentum in the future. As for revenue, it is expected to keep slowly increasing.

Small OPCO Cluster

The Small OPCO Cluster in its turn comprises smaller markets: Yemen, Benin, Exhibit 46: Small OPCO Cluster Afghanistan, Congo B, Rwanda, Zambia, Liberia, Conakry, Cyprus, Bissau and Revenue and Subscribers South Sudan. Together they account for 14% of MTN’s revenue and 15% of the 35 56 30 48 subscribers. Total revenue increased by 4% in 2015. In order to maintain data 25 40 20 32 revenue flows (+34.1% in 2015) and further growth, additional capital expenditures 15 24 are required and MTN has said it will maintain the investment levels made in the 10 16 5 8 Subscribers (ms) previous years. Revenue is expected to keep increasing in the future nevertheless 0 0

Total Total Revenue (bsof Rands) in slower levels which is related with challenging operating environments and weak

2012 2013 2014 2015

2017F 2018F 2019F 2020F 2021F 2022F 2016F macro-economic conditions. There is also not a lot of publicly available accurate Total Revenue Subscribers information regarding these markets. Thus, we chose to assume a stable growth Source: Company Reports and Analyst's Estimates rate for future revenue taking into account South African inflation. Subscribers increased 7.3% in 2015 reaching 37.4 million. Exhibit 46 has information regarding past and future predicted revenue and subscribers.

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MTN GROUP COMPANY REPORT

Joint Ventures

MTN is also involved in some joint ventures (Iran, Botswana and Swaziland) since it owns less than 50% of the respective businesses, thus being equity accounted. Exhibit 47: Joint Ventures Revenue (2015) Iran is the major one with 91% of the revenue (Exhibit 47) and 94% of the

Botswana Swaziland subscribers, representing around 8% of total revenue. We assume Iran totalizes 6,32% 2,30% around 90% of the joint ventures since there are also some smaller partnerships involving digital services. Thus, in order to value joint ventures, we calculated Iran’s Iran value based on EV/EBITDA and EV/Revenue multiples and extrapolated there 91,38% onwards. Exhibit 48 shows our estimated total values of the joint ventures. Source: Company Reports Even though MTN Irancell is measured as a joint venture, it possesses a great value derived from the high subscribers’ numbers it has and strong performances

Exhibit 48: Joint Ventures it carries. In 2015 subscribers reached 46.1 million which represented a 5% Value (millions of Rands) increase year-on-year. Revenue increased 17% to R13,600 million, boosted by a 60 000 more than 100% growth in data revenue which in its turn was sustained by the 50 000 increased adoption of 3G and 4G services due to enlarged smartphone 40 000 penetration, high capital expenditures to improve the network and lower data 30 000

20 000 charges, counterbalancing the decrease in voice revenue. EBITDA margin has

10 000 been decreasing due to higher costs. Continued data growth is projected and 0 MTN’s position (market leader with 47% market share) allows it to compete in the highly penetrated market. Furthermore, the easing of sanctions in Iran will allow Source: Company Reports, Bloomberg MTN to repatriate around R15.4 billion worth of funds from the country. Exhibit 49 and Analyst Estimates presents total revenue and subscribers’ figures regarding MTN Irancell.

Exhibit 49: MTN Irancell Revenue and Subscribers

30 000 60

25 000 50

20 000 40

15 000 30

10 000 20 (ms) Subscribers

Total Revenue (ms of Rands) of (ms Revenue Total 5 000 10

0 0 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F Total Revenue Subscribers Source: Company Reports, Bloomberg and Analyst’s Estimates

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MTN GROUP COMPANY REPORT

Capex and Net Working Capital

Capex

Capital expenditures are related with investments in the network in order to provide better quality and improved speeds. During 2015, the Group rolled out: 3,116 2G sites; 7,891 3G sites; 5,241 LTE sites. Since major countries possess good network coverage the key strategy continues to involve providing better data access, with 3G and LTE rollout having a very important role in what regards Exhibit 50: MTN Group Net Capex revenue growth. According to MTN, capex amounted to ZAR29,199 million in (bs of Rands) 70 2015, compared with ZAR25,406 million in 2014. One should note that there was 60 a lack of information regarding how many sites MTN actually has, the type of 50 40 antennas used in those sites, as well as capacity, utilization, maintenance and 30 20 construction data. Thus, we tried to work with the information available since it 10 would provide a more precise estimation than assuming more crude numbers. 0 -10

Regarding the DCF model, when we added reported values of Capex37 for a given

2013 2014 2015

2017F 2018F 2019F 2020F 2021F 2022F 2016F year to previous fixed assets, and took the respective year’s depreciation and D&A amortization (D&A) off, we would reach very imprecise values for the Net Capex ∆ PPE and Intangible Assets levels of that same year when compared to the actual values calculated on the end Net Capex of the period with actual fixed assets. This means Capex provided by the company Source: Company Reports and Analyst's Estimates cannot be directly applied as the Net Capex38, to be used in the FCF estimates. Thus, we decided to estimate Net Capex the other way around – by forecasting future fixed assets. Exhibit 51: Capex and Associated Assets (bs of Rands) In order to do that, we used total Capex values provided by MTN as a percentage

200 75 of total subscribers in order to estimate future Capex according to our future 60 160 subscribers’ forecast. From historical figures, we then assumed a reasonable 120 45 80 30 estimate for that Capex as a percentage of PPE. According to this value and based 40 15 Reported Reported Capex on our future Capex estimates, we then calculated new PPE. Intangible assets 0 0

were predicted based on the growth they have been demonstrating. After reaching

PPE and Intangible PPEand Intangible Asssets

2012 2013 2014 2015

2017F 2018F 2019F 2020F 2021F 2022F 2016F future PPE and intangible assets’ values, we calculated Net Capex according to PPE and Intangible Assets past figures and future D&A. We also cross-checked the calculations using Reported Capex Source: Company Reports and Analyst's Vodacom figures and the patterns found were similar. Estimates D&A in its turn was estimated based on future revenue’s forecast. Exhibit 50 presents Net Capex values and inputs. Exhibit 51 shows PPE and Intangible Assets and Reported Capex figures.

37 Provided by the company. 38 Since it is not representative of the company’s actual growth in fixed assets.

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MTN GROUP COMPANY REPORT

Net Working Capital

Working Capital was calculated as the sum of Trade and other Receivables, plus Exhibit 52: MTN Group NWC decomposition (bs of Rands) restricted and operating cash, minus Trade and other Payables. Trade and other 60 Receivables relate not only with revenue from services billed both by telecom service providers and third-parties acting on behalf of MTN, but also by financing 40 leases and a small amount of inventories. Restricted and operating cash is cash 20 required to keep operations going. Trade and other Payables relate with payments 0 to equipment suppliers and also short-term financing deals as well as payments to

-20 other telecom service providers. Net working capital has remained positive over the years and is assumed to keep growing at constant rates according to future -40 revenue. Furthermore, the prepaid trend will help decrease working capital needs. -60

Handsets’ sales will tend to increase in the future as more people will acquire

2014 2015

2017F 2018F 2019F 2020F 2021F 2022F 2016F devices, specially smartphones. Exhibit 52 provides the decomposition of NWC Operating Cash for the entire group. Restricted Cash Trade and other Payables Trade and other Receivables Forex and other Risks NWC ∆ NWC Being present in emerging markets makes MTN subject to political, corruption, war, Source: Company Reports and Analyst's Estimates revolution and other types of risks. Nevertheless, foreign exchange risk is the one posing the biggest threat. When assessing a company present in several developing markets with different currencies, it becomes crucial to take into Exhibit 53: MTN Stock Price Performance in different account these currencies’ risks. The company is based in South Africa, thus the currencies relative depreciation of the South African Rand against related group’s currencies 190 170 will provide better results since foreign operations will be translated at higher 150 values. However, a foreign investor should take into account that a depreciation of 130 the Rand against his currency will also diminish returns on the stock. Exhibit 53 110 presents the historical evolution of the stock price in Rands, US Dollars and Euros 90 70 in order to provide an idea of this effect. The best and simplest solution is to 50 individually hedge the risk. However, if the Rand depreciates significantly against 30 2012 2013 2014 2015 2016 the US Dollar, MTN can witness its most recent debt note of $1,000 million rise, thus incurring significant forex losses. Regarding other regions rather than South Rands US Dollars Africa, since payables are sometimes denominated in US Dollars, increased Euros depreciations in the respective countries’ currencies against the Dollar will also Source: Bloomberg translate into forex losses due to higher repayment values, which can impact EBITDA margins. This is the case in Nigeria, where some costs (like leasings) are denominated in Dollars and where the Naira inflation has been substantial39. MTN

39 Since MTN does not discriminate which costs are in USD, we cannot analyze the impact of further unexpected depreciation in NGN and other currencies.

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MTN GROUP COMPANY REPORT

informed that it is taking the necessary precautions regarding the limited US Dollar liquidity in Nigeria. One should also consider that although the same Nigerian inflation and consequent depreciation of the Naira has a potential to harm operations when translated into Rands, the regulatory fine which was originally denominated in Nairas witnessed a significantly decreased amount when considered in Rands or Dollars40. Appendix 11 presents exchange rate trends.

In what the future concerns, we assume that the evolution of the ARPUs in local currencies (which take into account their real growth and respective local inflations), when translated into Rands at future expected exchange rates match the evolution of the same ARPUs in Rands (which include their real growth and the South African inflation), thus indirectly taking into account future currency deviations. This implicitly assumes that the ARPU is a function of a country’s inflation and its real growth, and that a sharp currency devaluation goes along with high inflation levels.

Regarding the $1,000 million debt issued at 5 and 10 years, it is known that USD/ZAR exchange rate is expected to stabilize due to lower South African inflation41. Nevertheless, even if the Rand depreciates 50% losing half the value it has in relation to the Dollar, MTN would have enough cash to pay off the debt without running into liquidity problems. Exhibit 54 shows such impact on the target share price.

Another risk present in emerging markets is the fact that governments can impact big companies’ businesses that are “swimming” in cash. This can be done through regulatory requirements (MTN is now making a great effort to comply with every request regulatory authorities have, thus decreasing the risk) and significant tax

increases. Exhibit 55 summarizes effects on the target share price due to increased tax rates, even though such increases are not expected in the foreseable future (current value is 30%).

40 The exchange rate was around 12 NGN per 1 ZAR and after the abandonment of the peg it reached 22 NGN per 1 ZAR, prompting to stabilize afterwards. 41 Source: Statistics of South Africa

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Capital Structure and Cost of Capital

Capital Structure Exhibit 56: Capital Structures Analysis (2015) Typically, telecommunication companies tend to have high debt-to-equity ratios 140% 120% due to the nature of their business which involves capital-intensive projects. 100% 80% However, the fact that MTN operates in emerging markets discourages very high 60% 40% leverage levels because of the uncertainty associated. Exhibit 56 provides 20% 0% information on the different capital structures across the industry. MTN book debt- to-equity ratio was 50% as of 2015, while our emerging markets industry average was around 46% and the advanced economies’ industry average was 124%.

Debt/Equity Vodacom had a 126% book debt-to-equity ratio in the end of 2015, even though it Debt/Market Equity was closer to MTN a few years ago (70% in 2013). Regarding market values, in Debt/EV 2015 MTN had a Debt-to-Equity ratio of 31%, while Vodacom had 13%, being our Source: Bloomberg and Company Reports emerging markets industry average 18% and the advanced economies one 51%.

Exhibit 57: MTN Leverage In the end of 2015, Debt-to-Enterprise-Value was 28% versus 12% of Vodacom, Analysis while being 34% for developed markets. Nowadays Debt-to-Enterprise Value sits 35% at 32%. Exhibit 57 shows the evolution of leverage levels in the last years. 30% 25% Although MTN suffered with the Nigerian fine (debt issues and depressed stock 20% 15% price), the situation is considered stable. It is still considered investment grade by 10% credit rating companies and the amount of excess cash MTN usually keeps is 5% 0% considerable. For valuation purposes we assumed debt to grow such as Debt-to- 2012 2013 2014 2015 2016F Enterprise Value stabilizes around 32%. Since Debt-to-Enterprise Value is fixed, MTN Debt-to-Enterprise Value Net Debt-to-Enterprise Value variates according to the scheduled payments for the Source: Company Reports, Bloomberg and Analyst's Estimates Nigerian Fine. It is currently 18% but is estimated to stabilize at 20%. It is also expected that MTN keeps slowly increasing Debt-to-Equity (book) ratio due to Exhibit 58: Telecom further capital expenditures financed by debt, essential to enhance its network Companies Dividend Yields quality. Swisscom Deutsche Telecom AT&T On the 9th September 2016, MTN noticed its shareholders that it had entered into Proximus BT loan agreements (corporate bonds) totalizing $1,000 million ($500 million due in 5 Orange Tele2 years and the other $500 million due in 10 years) and R4,800 million with a 6.389% KPN Safaricom yield to maturity42. This was done in order to more easily face the regulatory fine Maroc Telecom Otel Telecom imposed in Nigeria during 2015, and to improve debt maturity structure without Zain Etisalat harming the credit rating. Saudi Telecom Vodacom MTN Regarding dividends, the telecom industry is also known for distributing large 0% 2% 4% 6% 8% 10% amounts of dividends (Exhibit 58). MTN dividend yield was 6.77% in 2015 and its Source: Bloomberg payout ratio 75% (Exhibit 59). It is expected that due to the unfortunate recent

42 Source: Bloomberg and Company Announcements

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Exhibit 59: MTN Dividend events like the Nigerian fine, MTN will pay a lower dividend of R7 per share in the Yield and Payout Ratio upcoming years, contrasting with the last 3 years average of R10 per share. 100% 8% 7% 95% 7% 90% 6% 85% 5% 80% Cost of Capital

5% 75% Payout Payout Ratio(%) Dividend Dividend Yield (%) 4% 70% In order to compute the cost of capital we used the WACC method. 4% 65% 3% 60% The cost of equity was based on the CAPM pricing model. For the South African 2012 2013 2014 2015 2016F Dividend Yield risk-free rate, the US 10-year government bond adjusted to the expected long-term Payout Ratio inflation43 differential between the USA and South Africa was used44. We estimated Source: Company Reports, Bloomberg and Analyst's estimates the unlevered beta according to the median of MTN and Vodacom unlevered betas, which in turn were calculated based on their raw betas against the MSCI ACWI Index45, beta of debts46, and estimated Net Debt-to-Enterprise Value. We then relevered the unlevered beta according to MTN’s expected Net Debt-to- Enterprise Value. We used 5.2% as the market risk premium, according to Damodaran47 (2005-2015) and added a country risk premium (CRP) of 2.5%. This is intended to reflect specific and systematic risks’ effect in the value of the company48.

Regarding the cost of debt, we took into account the average probability of default between MTN (according to the credit rating Baa3) and the industry in general, resulting in a value of 1.7%. Next, in order to calculate the cost of debt49 we used an annual recovery rate of 65%50 and a debt yield of 9.5% related with the last corporate bond MTN recently issued.

According to the cost of equity, the cost of debt, the Net Debt-to-Enterprise Value (current expected value as a proxy for the future51) and the implied tax rate of 30%, we reached a WACC value of 11.06%. Exhibit 60 summarizes these calculations and Exhibit 61 contains a sensitivity analysis regarding WACC figures.

43 Source: IMF (1+푖푛푓푙푎푡푖표푛푆퐴) 44 푅푆퐴 = (1 + 푅푈푆) × 푓 푓 (1+푖푛푓푙푎푡푖표푛푈푆) 45 Includes both developed markets and emerging markets; Source: Bloomberg 46 Source: “Corporate Finance,” by Jonathan Berk and Peter DeMarzo, Pearson, Third Edition (2014) 47 Source: Damodaran, http://pages.stern.nyu.edu/~adamodar/ 48 Damodaran estimates 2.85% country risk premium for South Africa. However, since MTN is a telecom, we consider it is not subject to the several risks present in the same extent as companies in other businesses. Thus we opted to calculate the difference between South Africa and US risk-free rates for the CRP (2.5%). 49 푅푑 = 푌푖푒푙푑 − (푃푑푒푓푎푢푙푡 × (1 − 푅푒푐표푣. 푟푎푡푒)) 50 Source: Moody’s, “Sovereign Default and Recovery Rates, 1983-2015” 51 Debt-to-Enterprise Value ratio is fixed, thus Net Debt-to-Enterprise Value variates according to the scheduled payments for the Nigerian Fine. It is currently 18% but is estimated to stabilize at 20%.

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Exhibit 62: Return on Invested Capital of Telecom Companies 30% 25% 20% 15% 10% 5% ROIC and Growth Figures 0% 2012 2013 2014 2015

ROIC Developing Return on Invest Capital ROIC Developed MTN The Return on Invest Capital (ROIC) is of utmost importance since when compared Source: Company Reports, Bloomberg to the WACC, provides us with an idea of how a company is using its capital to and Analyst's Estimates actually create value. In the past MTN has delivered very strong returns compared to our industry’s average (Exhibit 62). Unfortunately, MTN was affected by the Exhibit 63: MTN's ROIC vs. WACC Nigerian Fine more recently. The company is predicted to have a lower ROIC in 30% 2016 because of the accrued present value of the Nigerian Fine and due to the 25% operational consequences of the situation (as well as high levels of invested capital 20% the company usually has). Forecasted ROIC also falls short in the following years, 15% even though we expect it to slowly recover (Exhibit 63). Exhibit 64 provides 10% information about ROIC values between the industry for 2015. 5%

0% Growth

2012 2013 2014 2015

2016F 2017F 2018F 2019F 2020F 2021F 2022F

ROIC WACC The terminal growth rate is crucial in a valuation exercise, determining many times

Source: Bloomberg, Company Reports the overall recommendation. Taking into account the very large time horizon, one and Analyst's estimates must be careful when dealing with perpetuity calculations.

In order to be the most precise we would have to consider growth levels of each Exhibit 64: Return on Invested Capital in the Industry (2015) country’s telecommunications sector taking into account each country’s weight on 40% 35% MTN operations. Even surpassing the lack of information problems by using crude 30% 25% GDP forecasted growth numbers, we would still reach an unrealistic number for 20% 15% 10% the nominal growth rate. There are many countries having high levels of growth 5%

0% and inflation, in markets with a lot of volatility associated. For example, using the

KPN

Zain

MTN Tele2

AT&T long-term growth rate of South Africa plus inflation would generate very high levels

Etisalat

Orange

Proximus

Vodacom Swisscom

Safaricom of growth (7 to 8%) which does not reflect MTN’s business growth in the long-run.

OtelTelecom

Saudi Telecom MarocTelecom

Deutsche Telecom Thus, we opted to follow a more conservative approach and use a nominal long- Source: Bloomberg and Company Reports term growth rate resulting from the product of long term ROIC (average of last 3

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Exhibit 65: MTN Sustainable ROIC’s calculated, from 2019 to 2022) and the reinvestment rate (1 – long term Growth Rate Analysis 14% payout ratio of 75% for MTN). The resulting value was 2.83%. Nevertheless, a 12% sensitivity analysis was performed in order to have an idea of the impact of the 10% 8% different growth rates in the target share price (Exhibit 61). 6% Exhibit 65 provides with information regarding the sustainable growth rate MTN 4% 2% has been following. In the past MTN was growing a lot, but our estimated growth

0% is now sustainable, meaning the company is not forecasted to face financing issues

2012 2013 2014 2015

2017F 2018F 2019F 2020F 2021F 2022F 2016F to keep growing in the future. Sustainable Growth Rate Growth Rate Source: Bloomberg, Company Reports and Analyst's estimates Comparables

In order to deliver a better assessment on MTN’s stock, we also provide a valuation exercise based on multiples of comparable companies (Exhibit 66). The multiples used were P/E, EV/EBITDA and EV/Sales. Since MTN operates in emerging markets, we decided to do a valuation only with emerging markets telecoms (Exhibit 67) and another adding developed economies telecoms (Exhibit 68).

Based on the multiples approach it can be seen that the share prices found for MTN stock are very high comparing not only with the analyst estimate (Dec-2017) and with the closing stock price of ZAR126.17 in 2016, but also with the closing price of ZAR132.89 in 2015. The fact is that, due to the Nigerian Fine imposed on MTN during the second half of 2015, its stock price witnessed a massive crash (ZAR122.64 in the end of 2015 from ZAR205.55 as of Jul-2015). Hence, MTN cannot simply be compared in this particular time period given the distinctiveness nature of the situation dwelt. Not only were MTN’s cash flows harmed because of the fine, market sentiments also influenced and still keep swaying the price of the stock.

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One of the main conclusions that can be taken from this is that when the markets considers MTN has successfully recovered from most the Nigerian Fine effects, its stock can be perceived to be undervalued comparing with its peers. Even if its cash flows don’t necessarily reflect this, in case the market assimilates the difference, MTN’s stock price is likely to upsurge. And this can happen anytime in the future.

Final Considerations

It is clear that MTN is presently living a very challenging period. Despite all the trouble, MTN Group’s value is still substantial. It is extremely well placed in Africa, having a very recognizable brand and quite a following in the lower income segments. Its main advantage is the Africa competency, the good branch network and established brand it has. Its subscribers’ base speaks for itself, placing MTN as the biggest telecom in Africa. Nevertheless, in order to excel in this sector and especially in emerging markets which tend to have an increased level of uncertainty associated, companies have to constantly aim for simplicity, remaining organized and efficient in order to correctly face competitive threats and regulatory changes.

MTN has clearly failed in what regulatory demands respect, being essential to overcome these problems. The company has made the necessary adjustments being now much more cautious and aware. We believe the Nigerian Fine will be a topic of the past in 3 to 4 years. Nevertheless, the fact is that MTN is currently hurt and competitors are trying to take advantage from it. Its success will depend on how well it is going to face the constant competitive threats not only now, bouncing back from the Nigerian Fine problems, but further in the future. Operational performance will be contingent on enhanced competitive price offers and additional network coverage.

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Appendices

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Disclosures and Disclaimer

Research Recommendations

Buy Expected total return (including dividends) of more than 15% over a 12-month period.

Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.

Sell Expected negative total return (including dividends) over a 12-month period.

This report was prepared by Tomás Realista, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use.

The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content.

The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report.

The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report.

NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report.

The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers.

This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.

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