MTN GROUP COMPANY REPORT TELECOMMUNICATIONS 6 JANUARY 2016 STUDENT: TOMÁS REALISTA. Recommendation: Price Target FY17: ZAR 121.

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1 s MASTERS IN FINANCE EQUITY RESEARCH TELECOMMUNICATIONS 6 JANUARY 216 STUDENT: TOMÁS REALISTA 2232@novasbe.pt Recommendation: HOLD Price Target FY17: ZAR We suggest a HOLD recommendation for MTN Group s stock, with a target price of ZAR per share and an upside potential of 1.9%. Regulatory pressures have hit MTN, with the Nigerian Communications Commission imposing a regulatory fine of USD1.7 Billion on MTN Nigeria for not meeting the deadline of disconnecting 5.1 million unregistered subscribers, knocking the company during the second half of 215. Subscribers 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 216. The macro-economic scenario remains a big challenge related with high inflation levels, currencies depreciation, corruption and deteriorated external conditions. Accessible risks are in the major part related with foreign exchange currency fluctuations. MTN has to remain competitive and keep investing in its network rollout. The company levered up in order to keep operating successfully while facing the Nigerian Fine. Debt levels have increased substantially but are now expected to stabilize. We expect MTN s growth to improve more in the medium to long term, as a result of the challenges faced in the recent past. Price (as of 5-Jan-17) ZAR Bloomberg: MTN:SJ 52-week range (ZAR) Market Cap (ZARm) Outstanding Shares (m) Source: Bloomberg Source: Bloomberg (Values in ZAR millions) E 217F Revenues 147,63 147, ,558 EBITDA 59,125 47,594 56,972 EBITDA margin 4% 32% 38% Net Profit 23,57 11,88 2,119 EPS DPS P/E EV/EBITDA EV/Sales Net Debt to EBITDA Dividend Yield 6.8% % 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) See more information at Page 1/32

2 Table of Contents Executive summary... 3 Valuation... 4 Company overview... 5 Company description... 5 Shareholder structure... 6 Macroeconomic Outlook... 8 South Africa... 9 Nigeria... 1 Mobile Telecommunications Sector...12 MTN Group Business Analysis...13 Nigerian Regulatory Fine Business Analysis South Africa Nigeria Large OPCO Cluster Small OPCO Cluster Joint Ventures... 2 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 PAGE 2/32

3 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 215. Total revenue totalized ZAR147,63 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 215, 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 ZAR PAGE 3/32

4 Valuation Exhibit 1: Enterprise Value Decomposition (ms of Rands) Joint Ventures: 33 63; 11% Terminal Value: ; 64% Value of DFCF: ; 2 Source: Company Reports and Analyst's Estimates Exhibit 2: MTN Group Total Value Decomposition by Region Syria % Uganda 2% Ivory Coast Sudan 3% Cameroon 3% Small OPCO 16% Ghana 7% Enterprise Value: 289,116; 1% South Africa 29% Nigeria 3 Source: Company Reports and Analyst's Estimates 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 217 (DCF model). The explicit forecast period is pending December 222, after which a terminal value applies. 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 OPCO 1 Cluster 2. The revenue model used for each geography (when information was available) consists of estimations of market size based on each country s population and market penetration, MTN s market share and subsequent number of subscribers, as well as ARPU 3. Both cash flows and terminal values for the several segments were discounted at a South African WACC 4, as all of them were also estimated in South African Rands. Regarding the Joint Ventures (Iran in the major part), a multiples analysis (EV/EBITDA and EV/Revenue) was performed according to some of the most relevant Arab telecom companies 5. From Exhibit 1, the sum of the several DFCF totalize 2 of the enterprise value, while the terminal value is roughly 64%. The Joint Ventures represent 11% and were considered in the enterprise value calculation as they are part of MTN s core business. Exhibit 2 decomposes each region s total value (DCF + Terminal Value) as a percentage of the aggregate. Book value of debt was used as a proxy for the market value since the company does not provide debt information and considering a residual risk of default for the future. Excess cash is expected and was considered. Exhibit 3 presents the several components of the equity estimate which totalize ZAR233,43,94,48. MTN has 1,92,884, 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. PAGE 4/32

5 consider our estimated cost of equity of 11.6%, which technically would entail a SELL recommendation. Exhibit 2: Equity Value Decomposition (ms of Rands) Source: Company Reports and Analyst's Estimates Company overview Exhibit 4: MTN Revenue Decomposition by Country (215) Sudan 2% Syria 2% Uganda 3% Small OPCO 14% Ivory Coast 4% Cameroon 4% Joint Ventures 9% Source: Company Reports Cyprus 6% Conakry Liberia 4% Zambia 14% Bissau 2% Rwanda 6% South Sudan 6% Congo B 14% Ghana Yemen 1 South Africa 2 Benin 16% Afghanistan 12% Nigeria 32% Exhibit 5: Small OPCO Cluster Revenue Decomposition (215) Source: Company Reports Company description MTN Group Limited (MTN) is a leading multinational profitable mobile telecommunications group currently operating in 22 countries across Africa and the Middle East. Based in South Africa, MTN is listed in the Johannesburg Stock Exchange. The majority of its subscribers are based in South Africa and Nigeria, contributing with 57% for total revenue in 215 (Exhibit 4). Nonetheless, it is also present in other countries: the Large OPCO Cluster group is constituted by Ghana, Cameroon, Ivory Coast, Uganda, Syria and Sudan; the Small OPCO Cluster group is composed by Yemen, Benin, Afghanistan, Congo B, Rwanda, Zambia, Liberia, Conakry, Cyprus, Bissau and South Sudan (Exhibit 5); there are also some Joint Ventures comprised by Iran, Botswana and Swaziland, being Iran the largest one with over 94% of the subscribers. Exhibit 6 presents information about MTN subscribers base weights by region. Exhibit 6: MTN Subscriber's Base Weights by Region 23% 21% 21% 21% 21% 21% 21% 21% 21% 21% Joint Ventures 2% 14% 14% 14% % 14% Small OPCO Cluster % 26% 26% 26% 26% 27% Large OPCO Cluster 2 27% 27% 26% % 26% 26% 27% Nigeria 13% 12% 13% 13% 13% 13% 13% 13% 13% 12% 12% South Africa F 217F 218F 219F 22F 221F 222F Source: Company Reports and Analyst's Estimates PAGE 5/32

6 F 217F 218F 219F 22F 221F 222F F 217F 218F 219F 22F 221F 222F Exhibit 7: MTN Group Total Revenue (ms of Rands) Source: Company Reports and Analyst's Estimates Exhibit 8: MTN Group Total Susbcribers (s) Committed to leading the delivery of a bold new digital world to its customers 6, MTN operates solely in the mobile communications business for both particular and business groups. The company s value derives from its very strong brand and visibility, and being such a big telecom company it is a leader in most of the markets it operates in. The vast subscribers base of 232,5 customers in the end of reflects group revenue MTN is the biggest telecom operator based in Africa 8. Exhibit 7 shows information about MTN s past and estimated total revenue, and Exhibit 8 about subscribers. As expected, service revenue comes from outgoing and incoming 9 voice usage, data traffic which includes not only internet usage but also digital services (ecommerce, digital media and MTN Mobile Money financial services), and SMS usage. Regarding product revenue, equipment devices such as phones and tablets also play a relevant role (Exhibit 9). Shareholder structure Source: Company Reports and Analyst's Estimates Exhibit 9: MTN Group Revenue Analysis (215) Data 23% Incoming voice 1% SMS 3% Devices Source: Company Reports Other 1% Outgoing voice 58% According to MTN 1, 15.91% of its equity is owned by the Government Employees Pension Fund (GEPF) which is managed by the Public Investment Corporation (PIC) 11. The Swiss private bank Lombard Odier Darier Hentsch & Cie (M1 Limited) owns 9.92% of MTN Group. MTN Zakhele, a special purpose vehicle created in a Broad-Based Black Economic Empowerment (BBBEE) transaction in 21, owns 4.16% of MTN. BBBEE is a South African Government programme aimed to allocate wealth by enabling certain disadvantaged South Africans to own and manage companies equity in privileged conditions 12. Both MTN Holdings and its directors also hold.58% and.1% of MTN, respectively. The remaining 69.33% are public. There is no evidence indicating a future change to the current shareholders structure configuration. It should be noted that MTN Zakhele expired 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 215; Maroc Telecom, a big competitor operating in Morocco and other African countries registered 51, subscribers; Safaricom, based in Kenya and present in other markets had 23,3; Etisalat, another competitor based in the United Arab Emirates had 167, subcribers; Ooredoo, based in Qatar had 117, customers. 8 MTN registered ZAR147,63 million of revenue in 215 vs. ZAR77,333 million of Vodacom; ZAR53,257 million of Maroc Telecom; ZAR24,74 million of Safaricom; Etisalat, not based in Africa but in the United Arab Emirates registered ZAR217,84 million in revenue; Ooredoo (Qatar) cashed ZAR136,68 million. 9 Incoming voice comprises interconnect revenue, i.e. what mobile operators charge each other to accept competitor traffic on their networks, Source: MTN 1 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. PAGE 6/32

7 on November 24th 216, 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 (>), 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 217. 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 1. Exhibit 1: MTN Group Structure (215) Source: Company Reports PAGE 7/32

8 % 9% 8% 7% 6% 4% 3% 2% 1% % Macroeconomic Outlook Exhibit 11: MSCI Indices Performances (USD) Source: Bloomberg MSCI World (Developed Markets) MSCI Emerging 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, boosting wealth and improving consumption, granting better opportunities for companies in general. MTN is present in emerging markets which tend to have an increased level of uncertainty associated, related both with external and internal challenges. Regarding external influences, Exhibit 11 shows the cumulative performance of MSCI World Index (developed markets) vs. MSCI Emerging Markets Index. In times of global uncertainty, a worldwide economic slowdown is clear, posing a deteriorated outlook on the world economy and unfavourable external conditions. Accordingly, emerging markets are testifying downward pressures on growth prospects due to the uncertainty of more developed market economies. This fragility is associated with the dependency of emerging markets 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 sentiment 13. 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 tigers 14 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 citizens 15. 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. PAGE 8/32

9 SA NIG IRAN GHANA CAMEROON IV. COAST UGANDA Exhibit 12: Economic Overview 16% 14% 12% 1% 8% 6% 4% 2% % -2% 6, 1,3%,1% 1,4% 2,7% -1,8% 8,9% 4, 4,% 3,,% GDP Growth 215 Inflation 216F 15,7% 5,9% 4,9% 8,6% 8, 2,2% 2,1% Source: IMF and Company Reports Exhibit 13: South African Real GDP Growth (%) 7% 6% 4% 3% 2% 1% % -1% -2% -3% 7% 6% 4% 3% 2% 1% % -1% -2% Quarterly GDP Growth (YoY) Yearly GDP Growth Source: OECD and World Bank 6,7% 5,3% 5,% GDP Growth 216F Exhibit 14: South African major economic indicators (% of GDP) Government Debt in the right axis CA Deficit Net FDI Source: World Bank 6% 4% 3% 2% 1% % Government Deficit Government Debt small elites enrich by the cost of the majority 16. This is the main reason why so many economies fail in achieving the levels of prosperity of the most developed ones. Government structural reforms are essential and the lack of commitment in that sphere threatens growth. It is also true that improvements have been done, but they simply have not been enough. Even though in a smaller scale, many African and Middle East emerging economies are still a mirror of oppressed systems of the past under the influence of a more modern world. Hence, these countries face economic problems which are inevitably inter connected with their systems. MTN operates in 22 developing countries. Exhibit 12 provides an idea of the macroeconomic scenario in key MTN markets. One should be conscious that the overall types of problems affecting developing countries are somewhat similar in between them, being sluggish growth, corruptive systems, excessive inflation, currency depreciation and commodities dependency the common topics. Thus, we decided to provide a more detailed analysis just for South Africa and Nigeria, the most significant markets for MTN. South Africa South Africa (SA) is currently facing several challenges. A weak economic growth and high inflation have marked its path. The South African economy relies mostly on financial services, tourism, manufacturing and wholesale/retail, with the government also playing an important role. Exports heavily affect the country s GDP and its core sectors are the mining and minerals industry (around ) and the automotive segment. Thus, South Africa is highly dependent on international demand mostly from China, Africa, Europe and the US. Real GDP growth was highly impacted during the financial crisis of 28 and has experienced a slowdown until now (Exhibit 13). South Africa has a prominent current account deficit which has been slowly narrowing since 213, but it can easily worsen due to current external conditions and further strikes 17. To finance this discrepancy in the current account, South Africa relies in part on Foreign Direct Investment (FDI) 18. Government deficit is also slowly decreasing since the crisis, but keeps forcing government debt upwards. Exhibit 14 summarizes these economic indicators. Devaluation is a temptation to the monetary authorities as it offsets poor GDP performances due to the weaker rand positive effect on the 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 (212), New York: Crown, 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. PAGE 9/32

10 Jan-4 Sep-5 May-7 Jan-9 Sep-1 May-12 Jan-14 Sep-15 Q1-9 Q4-9 Q3-1 Q2-11 Q1-12 Q4-12 Q3-13 Q2-14 Q1-15 Q4-15 Exhibit 15: USD/ZAR Exchange Rate and SA Inflation SA Inflation in the right axis USD/ZAR Source: Bloomberg and StatsSA SA Inflation 1% 9% 8% 7% 6% 4% 3% 2% 1% % Exhibit 16: South African Confidence indicators Business confidence index in the right axis Consumer confidence index Business confidence index (=5 is neutral) Source: StatsSA Exhibit 17: Crude Oil Prices (Global price of WTI Crude, Dollars per barrel) Source: FRED of St. Louis (US Energy Information Administration) in the last few years, reaching almost 3% in 215 (Exhibit 15). This creates inflationary pressures for the economy which affects companies as labour costs tend to grow more than revenue, with the unemployment rate registering increasing large values (26.7% in Q1-216, from 24. in Q ). Political turmoil and corruption scandals are still present which discourages confidence and harms investment. Consumer and business confidence indicators are low (Exhibit 16). Besides, the country is suffering a severe drought and electricity shortages 2. Furthermore, social inequality and poverty have decreased in the last decade but still remain major challenges. Accordingly, financial conditions tightened with higher borrowing costs as South Africa was in the verge of being downgraded to junk status this year. South African future is uncertain, yet South Africa is now very slowly recovering. It does have a very developed financial system, and most of its other sectors are currently growing. A real GDP quarterly growth (QoQ) in the 2nd quarter of 216 of.8% 21 has positively surprised investors. Annual GDP growth is expected to continue improving in the future (around 2% by ). The government has announced a restrictive fiscal policy to offset fiscal discrepancies and a prudent 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 Development Plan 23 promises to implement some structural reforms that are vital to its further development. Nigeria With an economy highly dependent on its vital oil industry, Nigeria has been largely affected by crude oil prices (Exhibit 17) which have largely decreased since the fourth quarter of 214 when global supply largely exceeded demand. Since then, GDP growth has weakened and recently stumbled into negative values posing a recession scenario (Exhibit 18). Agriculture is another key industry which has witnessed a sluggish increase in output as a consequence of dry seasons. Wholesale, retail trade and manufacturing also play important roles and have been declining. One of the reasons is the Nigerian Naira (NGN or Naira) (Exhibit 19) depreciation which increased imported inputs costs. The Naira has abruptly devalued after the abandonment of a fixed exchange rate regime (US Dollar peg) 19 Source: Statistics of South Africa 2 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 (23). PAGE 1/32

11 Q4-12 Q2-13 Q4-13 Q2-14 Q4-14 Q2-15 Q4-15 Q2-16 Exhibit 18: Nigerian Real GDP Growth (%) 8% 6% 4% 2% % -2% Quarterly GDP Growth (YoY) Yearly GDP Growth Source: World Bank and Nigeria National Bureau of Statistics Exhibit 19: USD/NGN exchange rate and NIG Inflation Nigerian Inflation in the right axis USD/NGN 17% 1 13% 11% 9% 7% Nigerian Inflation Source: Bloomberg and Nigeria National Bureau of Statistics in June by the Nigerian Central Bank (Exhibit 2). The idea of stabilizing the exchange rate was abandoned as foreign reserves became scarce and low oil prices did not allow for its continuation. The exchange rate keeps falling as capital flows out of the country, increasing pressure on US Dollar liquidity. Inflation clearly intensified which raises more economic instability. The current account surplus has diminished over the years and has become negative with less oil exports. Government deficit is controlled and expected to increase as an expansionary budget was announced in order to stimulate the economy. Government debt is also stable but is prone to increase in the next few years. Exhibit 21 summarizes this information. Corruption is unfortunately still one of the major problems in Nigeria being present in most of the political and economic sectors. In 215 Nigeria ranked 136 out of 174 countries in the corruption index 24. Furthermore, the country is also far from good in what safety concerns, with terrorism groups and crimes being recurrent. With an economy not well diversified, the near term future of Nigeria is strongly linked with the evolution of crude oil prices. While those prices have bounced back recently, they still are very low compared to previous levels. OPEC meetings have tried to arrange a cut in production but one should be aware that the US could offset that strategy again. One should also have in mind that oil prices suffer from 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 small bit, which additionally pushes its level down in the short-term. The Naira is expected to stabilize. In the next few years, GDP growth rate is predicted to turn positive yet still low. Exhibit 2: USD/NGN exchange rate and NIG Inflation (YoY during 216) Nigerian Inflation in the right axis % 18% 16% 14% 12% 1% 8% Exhibit 21: Nigerian major economic indicators (% of GDP) Government Debt in the right axis 2% 1 1% % % 14% 12% 1% 8% 6% 4% 2% % USD/NGN Nigerian Inflation Source: Bloomberg and Nigeria National Bureau of Statistics CA Surplus Net FDI Source: World Bank and Nigeria Budget Office Government Deficit Government Debt 24 Source: Transparency International PAGE 11/32

12 Mobile Telecommunications Sector Exhibit 22: The Mobile Celular Boom % 3% 4% 6% 13% 9% 2% 27% Worldwide Mobile Cellular Subscribers (ms) As % of Fixed-Line Telephone Subscribers Source: World Telecommunications Development Report % Exhibit 23: Four Milestones of the Deregulation Wave: 1. In the United States: divesture of the monolithic AT&T into the regional Bell operating companies (RBOC) in 1982; 2. In the U.K: change from monopoly to duopoly in 1982 and complete liberalization of telecoms in 1991; 3. In Japan: privatization of NTT in 1985; 4. In the EU: the end of voice service monopoly on January 1, 1998; Source: The worldwide History of Telecommunications, by Anthon A. Huurdeman (23) Exhibit 24: Total Revenue as % of Subscribers 1,5 1,3 1,1,9,7, MTN Source: Companies Reports Vodacom 4% 3 3% 2 2% 1 1% % The telecommunications sector has been one of the epicentres of growth (Exhibit 22) in the past, as the deregulation 25 government movements (Exhibit 23) along with the massive technological improvements and overall receptivity of capital markets allowed the industry to develop like never before. Having had the most significant telecom business growth in the past, emerging markets are still the ones with the greatest potential for the future. This is due to the young rising population, expanding mobile penetrations, increased economic growth, and fewer fixed-line infrastructures. This last phenomenon makes mobile communications especially relevant in Africa. However, one should be aware that traffic costs are also higher on a mobile network than on a fixed one, mainly due to bigger investments in infrastructures and costs associated with increased traffic 26. Nevertheless, MTN and most telecoms face an extremely challenging operational environment in a very fast-paced industry. As previously seen, weak macroeconomic conditions tend to harm business development due to low consumer spending. This exacerbates the biggest challenge transversal to both mature and developing markets, which is the fierce market competition among telecom companies. On the one hand, consumers seek a reliable service at the lowest possible price since there are several providers whose telecom services do not differ so much. Companies then need to practice lower prices in order to attract new and existent costumers, decreasing overall profitability by lowering revenue per user (Exhibit 24). On the other hand, users demand better and faster connections entailing substantial capital expenditures which are fundamental to prosper in the sector. Nowadays in developed markets telecoms success is linked with better quality, diversity and technology progresses while in emerging markets, differentiation is more related with rapid network rollout in order to face the continuously growing demand. Exhibit 25 and Exhibit 26 provide information regarding telecom comparables both from developed and emerging markets. Regarding revenues, phones calls are still the main source of mobile telecom revenue but technology advances are changing this situation. Mobile devices are becoming more about internet than voice. Not only was there a data explosion with the cost of the gigabyte reduced, social networking has also gained a lot of 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. PAGE 12/32

13 MTN Group Business Analysis Exhibit 25: Telecommunication Companies Analysis 2 2% 1 1% % - -1% Exhibit 26: Return on Invested Capital of Telecom Companies 3% 27% 24% 21% 18% 1 12% 9% 6% 3% Exhibit 27: MTN Revenue Breakdown (as % of total revenue) 63,2% 14,9% Sales Growth Rate Developing Profit Margin Developed Sales Growth Rate Developed Profit Margin Developing Source: Bloomberg ROIC Developing ROIC Developed MTN Source: Company Reports, Bloomberg and Analyst's Estimates 62,% 58,1% 17,8% 23,1% 5, 5,4% 3,1% 3,9% 11,2% 1,2% 1% 2,8% Outgoing voice Data Devices Source: Company Reports Incoming voice SMS Other 4,8% Nigerian Regulatory Fine In order to describe MTN performance it is necessary to first explain the Nigerian Regulatory Fine. During the second half of 215, the Nigerian Communications Commission (NCC) imposed a NGN1.4 trillion (USD5.2 billion) fine on MTN Nigeria for not meeting the deadline of disconnecting about 5.1 million unregistered SIM cards. Legal action was taken but MTN soon realized it should try to reach an amicable solution with the Nigerian authorities for its best interest. Thus, a without prejudice good faith payment of NGN5 billion (USD25 million) was made before hand by MTN on 24 February 216. On 1 June 216 a settlement was reached with a reduced fine of NGN33 billion (USD1.7 billion), leaving a NGN28 billion amount to be paid over 3 years 27. MTN accrued the present value of this amount in 215 and 216, impacting EBITDA by ZAR9,287 and ZAR1,499 million, respectively 28. We considered the impact on future cash flows according to the ZAR/NGN exchange rate at the time each cash flow deduction will be done. Furthermore, as part of the resolution deal reached with the NCC, in the future MTN will have to initiate the process of listing its shares on the Nigerian stock exchange, which all in all will increase the stock s liquidity 29. The Nigerian Fine caught the markets by surprise depressing MTN s stock price, decreasing roughly 2 during the conversations and lately increasing only 13% after the settlement. MTN made sure nothing similar would succeed, disconnecting both Nigerian and non-nigerian unregistered SIM cards throughout the end of 215 and 216. By mid-216 the disconnection process was completed and it was expected that around 18 million subscribers were disconnected to ensure full compliance across the group. This severely impacted cash flows and future projections for MTN Nigeria, as we will further see. Consolidated Business Analysis As previously said, MTN is operating in a difficult environment characterized by poor macro-economic conditions, fierce market competition and regulatory pressures from national authorities. Its strong brand and knowledge in the African/Middle East markets are the key for survival. Since it operates in many countries which have similar characteristics, the company can be said to be 27 NGN3 billion on 31 March 217, NGN55 billion on 31 March 218, 31 December 218, 31 March 219 and 31 May This impacted the FCF projections by the same amounts. 29 Nevertheless, current big-ask spreads don t indicate this to be a problem. PAGE 13/32

14 Revenue (ms of Rands) EBITDA margin (%) Earnings (bs of Rands) EPS (Rands) Exhibit 28: Vodacom Revenue Breakdown (as % of total revenue) 5,4% 47,2% 44,1% 14,2% 17,4% 21,3% 16,7% 18,4% 14,1% 4,3% 4% 4,9% 4,7% 8, 7,8% 7% 7,2% 7,4% Outgoing voice Data Devices Incoming voice SMS Other Source: Company Reports Exhibit 29: Earnings Analysis MTN Earnings Vodacom Earnings MTN EPS Vodacom EPS Excluding Nigerian Regulatory Fine Source: Companies Reports Exhibit 3: Revenue and EBITDA Margin Analysis MTN Revenue Vodacom Revenue MTN EBITDA Margin Vodacom EBITDA Margin Source: Company Reports enjoying synergies related with expertise in emerging markets. Regarding MTN s dispersion across Africa/Middle East, we don t believe it to be associated with a loss of focus and a spread to an endless list of countries. MTN is adding value with each new country, given the potential each market possesses. Currently, it is focusing in improving regional synergies in order to guarantee tactical area focus and organization during 216 MTN changed its operating structure, now grouping countries per region instead of size. Nevertheless, our separated analysis consists in the old format as historical data was available in that arrangement. The company has been following the market trend of increased data and less voice revenue, as can be seen in Exhibit 27. Voice revenue is currently under pressure and declined 6.2% in 215, despite MTN s reduction in tariffs of 2 resulting in 1 more billable minutes 3. Nevertheless, MTN data revenue increased 3.2% contributing 23% to total revenue (previously 18%). There was indeed a 18. increase in data traffic even though data tariffs decreased about 4 during The decrease in tariffs is related to the market competition typical in the industry. Hence, the decline in voice revenue has been somewhat offset by the growth in data revenue. Data revenue also include digital services i.e. e- commerce, digital media and mobile financial services, which have been recording a strong growth even though they still represent smaller amounts. Incoming voice revenue (interconnect) keep declining as mobile termination rates keep decreasing across the industry. SMS revenue has witnessed a decrease of about 3% per year as data also poses itself as a viable substitute for texting. Devices revenue which tend to increase as a result of more data usage, come mainly from smartphones, tablets and routers, allowing customers to navigate more, thus being strategically sold in bundles. Vodacom s values are presented in Exhibit 28 for comparison purposes. Overall performance was lower than expected with EPS 32 declining 51.4% 33 in 215 (Exhibit 29 presents both EPS and Earnings past values). Despite the storm, MTN continued to benefit from its large subscriber base. Exhibit 3 concerns revenue and EBITDA margins and Exhibit 31 shows the evolution of MTN total subscribers 34. MTN recognizes that 215 was a problematic year impacted by challenges in the two biggest markets (Nigeria and South Africa), but is confident that 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, to 61,4, during 215, but not all disconnections were completed yet. For 216 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. PAGE 14/32

15 F Market Share (%) Subscribers (ms) Exhibit 31: No. of Subscribers (millions) 164,5 189,3 27,8 223,4 232,5 36,8 46,9 5,5 57,9 61, MTN Subscribers Vodacom Subscribers Source: Companies Reports Exhibit 33: South African Telecommunications Sector Market Shares (Q1 of each year) 1% 8% 6% 4% 2% % Vodacom Cell C MTN Group Telkom Source: Companies Reports Exhibit 34: MTN SA Revenue Breakdown (as % of total revenue) 4 44% 42% 21% 24% 32% 17% 19% 1 9% 6% 6% Outgoing voice Data Devices Source: Company Reports 4 4% 3 3% Incoming voice SMS Other Exhibit 35: South African Market Shares and Subscribers MTN SA Subscribers Vodacom SA Subscribers MTN SA Market Share Vodacom SA Market Share Source: Companies Reports represents a turning point with a new operating structure and a new CEO, where improving network quality and capacity remains a priority. Increased data usage, more digital media content with MTN being the largest distributor of digital music in Africa 35, and mobile money presenting itself as a strong viable solution to payment problems in Africa, makes digital revenue the key for future growth. Exhibit 32 helps understand the potential of mobile broadband access (wireless internet connection). Exhibit 32: Mobile broadband access in emerging markets South Africa 69% 31% 8% 4% Middle East & North Africa South African mobile services arrived to offset the old low fixed-line coverage by Telkom presented in the country. Nowadays the market is mostly split by Vodacom, MTN and Cell C. Vodacom has traditionally been the higher quality one, with Cell C being a challenger trying to disrupt the market. MTN is the second largest operator, as can be seen in Exhibit 33. Lately the three have been evening up in perception and quality, with Telkom offering a poorer quality service with lower prices. MTN is also said to be slightly falling behind the price competitive deals in some user profiles put forward by the rest of the market with more confusing pricing packages and fees, making the clearer, cheaper offerings from competitors a threat to them. Overall the market in South Africa is still very price competitive with most of the networks offering same things in differing packages. During 215, 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 devices supplied (impairment of obsolete handsets of R592 million). Data revenue testified a 37.2% increase amplified by large capital expenditures (almost doubled from 214). Exhibit 34 presents MTN SA revenue breakdown as a percentage of total revenue. Total revenue managed to increase by 2.9%. Exhibit 35 shows information regarding market shares and subscribers. The subscribers base enlarged 9.3% to 3.6 million mainly due to a better client experience. EBITDA margin increased from 32.1% to 33,4% benefiting from less devices sales and a tighter cost control. ARPU has been declining as it is characteristic of the industry 19% 53% Sub-Saharan Africa Source: 215 State of the Industry Report, Mobile Money, GSMA Intelligence 35 Source: Company Reports PAGE 15/32

16 F 217F 218F 219F 22F 221F 222F Revenue (ms of Rands) Subscribers (ms) F 217F 218F 219F 22F 221F 222F Exhibit 36: MTN SA ARPU (monthly Rands per user) MTN SA ARPU Vodacom SA ARPU Source: Companies Reports Exhibit 37: MTN SA Pre-paid and Postpaid ARPU (monthly Rands per user) Pre-paid ARPU Postpaid ARPU Source: Company Reports Exhibit 38: MTN SA Subscribers and Revenue Forecast MTN SA Revenue MTN SA Subscribers Source: Company Reports and Analyst's Estimates 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 3.3% to 5.2 million (in part due to the lower disposal of handsets). It has been typical to witness sluggish movements in the post-paid subscriber base (more profitable but decreasing due to more complicated tariff schemes and less desirable offers for the average consumer) and an increase in the prepaid one (more desirable to the average consumer and tends to variate more with price movements, which have been downwards). Typically, a larger prepaid subscribers base translates into less Working Capital needs. Exhibit 37 compares South African prepaid and post-paid segments ARPU. 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 216 of 2.6% even though it is expected to increase 2% year-onyear (1.1 million net additions). Exhibit 38 contains information on our predicted subscribers and revenue for MTN SA. The key strategy to improve operational performance is to continue boosting data revenue and handsets sales, with smartphones playing a key role as their penetration rates keep increasing (Source: Statista). This is accomplished by improving offers and investments in network quality, with new spectrum frequencies already being added to enhance customers experience. EBITDA margin is likely to slightly decrease due to higher handsets sales in 216 compared to the previous period as well as increased network related costs. We predict MTN SA s mark et share to remain stable with a slight propensity to decline due to new possible competitive offerings from companies like Cell-C. Nigeria In Nigeria, deregulation of the telecommunications industry since 23 has allowed new mobile operators to replace the unreliable fixed line services of NITEL 36. The industry was then almost monopolised by MTN due to their wide quality coverage but the market has grown considerably and is nowadays much more evenly distributed by MTN, Globacom, Airtel and Etisalat (Exhibit 39), entailing vigorous competition (MTN is still the market leader). The sector is now particularly characterized by rapid adaptation and business flexibility, i.e. to survive companies 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. PAGE 16/32

17 F 217F 218F 219F 22F 221F 222F Revenue (bs of Rands) Subscribers (ms) Market Share (%) Subscribers (ms) Exhibit 39: Nigerian Telecommunications Sector Market Shares 1% 8% 6% 4% 2% % MTN Globacom Airtel Etisalat Source: Nigerian Communications Comissions Exhibit 4: MTN Nigeria Market Share and Subscribers 4 4% 3 3% MTN Nigeria Subscribers MTN Nigeria Market Share Source: Company Reports 72% 71% 68% Exhibit 41: MTN Nigeria Revenue Breakdown (as % of total revenue) 1 16% 19% 1% 9% 11% 2,4% 1,9% 1,6% Outgoing voice Data Devices and others Source: Company Reports Incoming voice SMS Exhibit 42: MTN Nigeria Revenue and Subscribers Forecast MTN Nigeria Revenue MTN Nigeria Subscribers Source: Company Reports and Analyst's Estimates also characteristic and is precisely where MTN slipped in 215, failing to disconnect 5.1 million unregistered subscribers on time which resulted on a heavy regulatory fine. Fortunately, the process is completed and one should not expect more surprises in the future. Nonetheless, MTN Nigeria was indeed negatively impacted by the NCC fine. First of all, because of the obvious substantial loss of subscribers MTN said it had to disconnect around 11.2 million subscribers in Nigeria, even though the number is not precise or not reflected in the company s reports due to subscribers rescued or acquired for the first time. The reported number of total subscribers in MTN Nigeria officially increased by 2.3% in 215 to million, but this was not a final number regarding the loss of subscribers. By mid-216 when the last batch was disconnected, Nigeria reported million subscribers ( million in mid-215). Second, the fine also entailed the suspension of regulatory services, i.e. NCC restricted MTN s new tariff plans and promotions to the market and eventually some were removed upon expiration. The situation lasted until MTN complied with the requirements. Nigeria s competitiveness was compromised and revenue kept declining (-2.1% in 215). Exhibit 4 presents information about the evolution of MTN Nigeria s market share and subscribers. Following the market s trend, voice revenue is declining and data revenue growing (18.8% in 215), even with the regulatory requirements. Digital revenue keeps improving, contributing now with over to data revenue (mainly due to music and lifestyle services). Exhibit 41 details MTN Nigeria revenue breakdown. During 215 the EBITDA margin declined 5.6% to 53% mainly due to lower revenue, higher leasing costs due to the sale of operating towers, Naira depreciation affecting expenses denominated in US Dollars and an increase in the stake of digital services which possess lower margins. We expect MTN Nigeria to slightly lose some market share due to operators taking advantage of MTN s drawback. However, the company will slowly recover from the 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 4G licenses, along with new improved digital services will allow for substantial data growth. MTN acquired Visafone Communications Ltd. in January 216 for $22m which contributed with 568, new subscribers. This acquisition was strategic since technically it will allow MTN to use 4G LTE service in the 8Mhz spectrum (better quality since it is not used by other operators). Overall MTN will try to take advantage of still being the dominant operator in Nigeria to further intensify its operations. Exhibit 42 presents forecasted values for subscribers and revenue. EBITDA margin will further decrease, for the same reasons stated above as well PAGE 17/32

18 F 217F 218F 219F 22F 221F 222F F 217F 218F 219F 22F 221F 222F Total Revenue (bs of Rands) Subscribers (ms) F 217F 218F 219F 22F 221F 222F as for costs of reconnecting subscribers. We believe ARPU will keep diminishing Exhibit 43: MTN Nigeria ARPU (monthly Rands per user) Source: Company Reports and Analyst's Estimates Exhibit 44: Large OPCO Cluster Revenue and Subscribers Total Revenue Source: Company Reports and Analyst's Estimates Subscribers Exhibit 45: Large OPCO Cluster ARPUs (Rands) Ghana Ivory Coast Syria Cameroon Uganda Sudan Source: Company Reports and Analyst's Estimates in 217 due to the effects of the Naira depreciation, slowly increasing later on (Exhibit 43). Large OPCO Cluster The Large OPCO Cluster is composed by some other important markets where MTN operates. It is constituted by Ghana, Cameroon, Ivory Coast, Uganda, Syria and Sudan. Mostly, it helps to make MTN s business more geographically diversified and possesses a strong growth potential due to lower mobile penetration rates. However, macro-economic conditions keep damaging these markets entailing lower than expected performances. The subscribers base enlarged.7% to 57.1 million in 215 and revenue in Rands barely increased (. in 215 vs 5. organically). Exhibit 44 summarizes these phenomena. Overall, data revenue remains the main driver behind revenue progresses. Exhibit 45 shows past and predicted ARPUs evolution for the several markets. MTN leads the market in Ghana (48% according to the National Communications Authority) and has been performing well notwithstanding the tough economic scenario the country currently lives, registering very high inflation levels. Subscribers are steadily increasing due to more appealing offers, reaching 16.2 million in the end of 215. Total revenue is also increasing (1.5 in Rands during 215) being partly offset by the Cedi currency depreciation. Data revenue is the main propellant of this growth, growing 8% in Rands and constituting now 3.6% 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 4. from 37.4% mainly due to lower costs and no fees paid to the group in the year. ARPU levels have remained somewhat steady. We can expect MTN Ghana to keep following the current positive trend for the future with increased subscribers, market share and revenue and improved quality due to further investments in the network. MTN Cameroon is also the market leader (56.2% according to MTN) but its performance has not been the best. Aggressive competition made MTN lose 3.2% of the market to Orange and Nexttel in 215. Revenue has been declining. Although it tends to follow the data trend, it is still not enough to offset diminishing voice revenue. Thus, MTN is making an effort to improve 3G and 4G network, increasing costs and harming EBITDA margin which decreased 6.6% to 36.2% in 215. MTN Cameroon was also hurt by the deregistration process but it is expected to slowly increase its subscribers base in the future, even though we predict revenue to keep decreasing in the short term. PAGE 18/32

19 F 217F 218F 219F 22F 221F 222F Total Revenue (bs of Rands) Subscribers (ms) 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 215. 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 215 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. decrease in its subscriber base to 8.5 million during 215. However, revenue increased 1 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 Revenue and Subscribers Total Revenue Subscribers Source: Company Reports and Analyst's Estimates Afghanistan, Congo B, Rwanda, Zambia, Liberia, Conakry, Cyprus, Bissau and South Sudan. Together they account for 14% of MTN s revenue and 1 of the subscribers. Total revenue increased by 4% in 215. In order to maintain data revenue flows (+34.1% in 215) and further growth, additional capital expenditures are required and MTN has said it will maintain the investment levels made in the previous years. Revenue is expected to keep increasing in the future nevertheless in slower levels which is related with challenging operating environments and weak macro-economic conditions. There is also not a lot of publicly available accurate information regarding these markets. Thus, we chose to assume a stable growth rate for future revenue taking into account South African inflation. Subscribers increased 7.3% in 215 reaching 37.4 million. Exhibit 46 has information regarding past and future predicted revenue and subscribers. PAGE 19/32

20 Total Revenue (ms of Rands) Subscribers (ms) Joint Ventures Exhibit 47: Joint Ventures Revenue (215) Botswana 6,32% Iran 91,38% Source: Company Reports Swaziland 2,3% Exhibit 48: Joint Ventures Value (millions of Rands) Source: Company Reports, Bloomberg and Analyst Estimates MTN is also involved in some joint ventures (Iran, Botswana and Swaziland) since it owns less than of the respective businesses, thus being equity accounted. Iran is the major one with 91% of the revenue (Exhibit 47) and 94% of the subscribers, representing around 8% of total revenue. We assume Iran totalizes around 9% 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 value based on EV/EBITDA and EV/Revenue multiples and extrapolated there onwards. Exhibit 48 shows our estimated total values of the joint ventures. 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 it carries. In 215 subscribers reached 46.1 million which represented a increase year-on-year. Revenue increased 17% to R13,6 million, boosted by a more than 1% growth in data revenue which in its turn was sustained by the increased adoption of 3G and 4G services due to enlarged smartphone penetration, high capital expenditures to improve the network and lower data charges, counterbalancing the decrease in voice revenue. EBITDA margin has been decreasing due to higher costs. Continued data growth is projected and 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 MTN to repatriate around R15.4 billion worth of funds from the country. Exhibit 49 presents total revenue and subscribers figures regarding MTN Irancell. Exhibit 49: MTN Irancell Revenue and Subscribers F 217F 218F 219F 22F 221F 222F Total Revenue Source: Company Reports, Bloomberg and Analyst s Estimates Subscribers PAGE 2/32

21 F 217F 218F 219F 22F 221F 222F PPE and Intangible Asssets Reported Capex F 217F 218F 219F 22F 221F 222F Exhibit 5: MTN Group Net Capex (bs of Rands) D&A PPE and Intangible Assets Net Capex Source: Company Reports and Analyst's Estimates Exhibit 51: Capex and Associated Assets (bs of Rands) PPE and Intangible Assets Reported Capex Source: Company Reports and Analyst's Estimates 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 215, 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 revenue growth. According to MTN, capex amounted to ZAR29,199 million in 215, compared with ZAR25,46 million in 214. One should note that there was a lack of information regarding how many sites MTN actually has, the type of antennas used in those sites, as well as capacity, utilization, maintenance and construction data. Thus, we tried to work with the information available since it would provide a more precise estimation than assuming more crude numbers. Regarding the DCF model, when we added reported values of Capex 37 for a given year to previous fixed assets, and took the respective year s depreciation and amortization (D&A) off, we would reach very imprecise values for the Net Capex levels of that same year when compared to the actual values calculated on the end of the period with actual fixed assets. This means Capex provided by the company cannot be directly applied as the Net Capex 38, to be used in the FCF estimates. Thus, we decided to estimate Net Capex the other way around by forecasting future fixed assets. In order to do that, we used total Capex values provided by MTN as a percentage of total subscribers in order to estimate future Capex according to our future subscribers forecast. From historical figures, we then assumed a reasonable estimate for that Capex as a percentage of PPE. According to this value and based on our future Capex estimates, we then calculated new PPE. Intangible assets were predicted based on the growth they have been demonstrating. After reaching future PPE and intangible assets values, we calculated Net Capex according to past figures and future D&A. We also cross-checked the calculations using Vodacom figures and the patterns found were similar. D&A in its turn was estimated based on future revenue s forecast. Exhibit 5 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. PAGE 21/32

22 F 217F 218F 219F 22F 221F 222F Net Working Capital Exhibit 52: MTN Group NWC decomposition (bs of Rands) Operating Cash Restricted Cash Trade and other Payables Trade and other Receivables NWC NWC Source: Company Reports and Analyst's Estimates Exhibit 53: MTN Stock Price Performance in different currencies Rands US Dollars Euros Source: Bloomberg Working Capital was calculated as the sum of Trade and other Receivables, plus restricted and operating cash, minus Trade and other Payables. Trade and other 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 leases and a small amount of inventories. Restricted and operating cash is cash required to keep operations going. Trade and other Payables relate with payments to equipment suppliers and also short-term financing deals as well as payments to 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 revenue. Furthermore, the prepaid trend will help decrease working capital needs. Handsets sales will tend to increase in the future as more people will acquire devices, specially smartphones. Exhibit 52 provides the decomposition of NWC for the entire group. Forex and other Risks Being present in emerging markets makes MTN subject to political, corruption, war, 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 account these currencies risks. The company is based in South Africa, thus the relative depreciation of the South African Rand against related group s currencies will provide better results since foreign operations will be translated at higher values. However, a foreign investor should take into account that a depreciation of the Rand against his currency will also diminish returns on the stock. Exhibit 53 presents the historical evolution of the stock price in Rands, US Dollars and Euros in order to provide an idea of this effect. The best and simplest solution is to individually hedge the risk. However, if the Rand depreciates significantly against the US Dollar, MTN can witness its most recent debt note of $1, million rise, thus incurring significant forex losses. Regarding other regions rather than South Africa, since payables are sometimes denominated in US Dollars, increased depreciations in the respective countries currencies against the Dollar will also 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 substantial 39. 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. PAGE 22/32

23 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 Dollars 4. 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, million debt issued at 5 and 1 years, it is known that USD/ZAR exchange rate is expected to stabilize due to lower South African inflation 41. Nevertheless, even if the Rand depreciates 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 3%). 4 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 PAGE 23/32

24 Capital Structure and Cost of Capital Exhibit 56: Capital Structures Analysis (215) 14% 12% 1% 8% 6% 4% 2% % Exhibit 57: MTN Leverage Analysis 3 3% 2 2% 1 1% % Debt/Equity Debt/Market Equity Debt/EV Source: Bloomberg and Company Reports Exhibit 58: Telecom Companies Dividend Yields Swisscom Deutsche Telecom AT&T Proximus BT Orange Tele2 KPN Safaricom Maroc Telecom Otel Telecom Zain Etisalat Saudi Telecom Vodacom MTN F MTN Debt-to-Enterprise Value Source: Company Reports, Bloomberg and Analyst's Estimates % 2% 4% 6% 8% 1% Source: Bloomberg Capital Structure Typically, telecommunication companies tend to have high debt-to-equity ratios due to the nature of their business which involves capital-intensive projects. However, the fact that MTN operates in emerging markets discourages very high leverage levels because of the uncertainty associated. Exhibit 56 provides information on the different capital structures across the industry. MTN book debtto-equity ratio was as of 215, while our emerging markets industry average was around 46% and the advanced economies industry average was 124%. Vodacom had a 126% book debt-to-equity ratio in the end of 215, even though it was closer to MTN a few years ago (7% in 213). Regarding market values, in 215 MTN had a Debt-to-Equity ratio of 31%, while Vodacom had 13%, being our emerging markets industry average 18% and the advanced economies one 51%. In the end of 215, Debt-to-Enterprise-Value was 28% versus 12% of Vodacom, while being 34% for developed markets. Nowadays Debt-to-Enterprise Value sits at 32%. Exhibit 57 shows the evolution of leverage levels in the last years. Although MTN suffered with the Nigerian fine (debt issues and depressed stock price), the situation is considered stable. It is still considered investment grade by credit rating companies and the amount of excess cash MTN usually keeps is considerable. For valuation purposes we assumed debt to grow such as Debt-to- Enterprise Value stabilizes around 32%. Since Debt-to-Enterprise Value is fixed, 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 2%. It is also expected that MTN keeps slowly increasing Debt-to-Equity (book) ratio due to further capital expenditures financed by debt, essential to enhance its network quality. On the 9 th September 216, MTN noticed its shareholders that it had entered into loan agreements (corporate bonds) totalizing $1, million ($5 million due in 5 years and the other $5 million due in 1 years) and R4,8 million with a 6.389% yield to maturity 42. This was done in order to more easily face the regulatory fine imposed in Nigeria during 215, and to improve debt maturity structure without harming the credit rating. Regarding dividends, the telecom industry is also known for distributing large amounts of dividends (Exhibit 58). MTN dividend yield was 6.77% in 215 and its payout ratio 7 (Exhibit 59). It is expected that due to the unfortunate recent 42 Source: Bloomberg and Company Announcements PAGE 24/32

25 Dividend Yield (%) Payout Ratio (%) Exhibit 59: MTN Dividend Yield and Payout Ratio 8% 7% 7% 6% 4% 4% 3% F Dividend Yield Payout Ratio Source: Company Reports, Bloomberg and Analyst's estimates 1% 9 9% 8 8% 7 7% 6 6% events like the Nigerian fine, MTN will pay a lower dividend of R7 per share in the upcoming years, contrasting with the last 3 years average of R1 per share. Cost of Capital In order to compute the cost of capital we used the WACC method. The cost of equity was based on the CAPM pricing model. For the South African risk-free rate, the US 1-year government bond adjusted to the expected long-term inflation 43 differential between the USA and South Africa was used 44. We estimated 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 Index 45, beta of debts 46, 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 Damodaran 47 (25-215) and added a country risk premium (CRP) of 2.. This is intended to reflect specific and systematic risks effect in the value of the company 48. 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 debt 49 we used an annual recovery rate of 6 5 and a debt yield of 9. 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 future 51 ) and the implied tax rate of 3%, we reached a WACC value of 11.6%. Exhibit 6 summarizes these calculations and Exhibit 61 contains a sensitivity analysis regarding WACC figures. 43 Source: IMF 44 R f SA = (1 + R f US ) (1+inflationSA ) (1+inflation US ) 45 Includes both developed markets and emerging markets; Source: Bloomberg 46 Source: Corporate Finance, by Jonathan Berk and Peter DeMarzo, Pearson, Third Edition (214) 47 Source: Damodaran, 48 Damodaran estimates 2.8 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.). 49 R d = Yield (P default (1 Recov. rate)) 5 Source: Moody s, Sovereign Default and Recovery Rates, 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 2%. PAGE 25/32

26 MTN Vodacom Saudi Telecom Etisalat Zain Otel Telecom Maroc Telecom Safaricom KPN Tele2 Orange BT Proximus AT&T Deutsche Telecom Swisscom F 217F 218F 219F 22F 221F 222F Exhibit 62: Return on Invested Capital of Telecom Companies 3% 2 2% 1 1% % ROIC Developing ROIC Developed MTN Source: Company Reports, Bloomberg and Analyst's Estimates Exhibit 63: MTN's ROIC vs. WACC 3% 2 2% 1 1% ROIC and Growth Figures Return on Invest Capital The Return on Invest Capital (ROIC) is of utmost importance since when compared to the WACC, provides us with an idea of how a company is using its capital to 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 Nigerian Fine more recently. The company is predicted to have a lower ROIC in 216 because of the accrued present value of the Nigerian Fine and due to the operational consequences of the situation (as well as high levels of invested capital the company usually has). Forecasted ROIC also falls short in the following years, even though we expect it to slowly recover (Exhibit 63). Exhibit 64 provides information about ROIC values between the industry for 215. % Growth Exhibit 64: Return on Invested Capital in the Industry (215) 4% 3 3% 2 2% 1 1% % ROIC WACC Source: Bloomberg, Company Reports and Analyst's estimates Source: Bloomberg and Company Reports The terminal growth rate is crucial in a valuation exercise, determining many times the overall recommendation. Taking into account the very large time horizon, one must be careful when dealing with perpetuity calculations. In order to be the most precise we would have to consider growth levels of each country s telecommunications sector taking into account each country s weight on MTN operations. Even surpassing the lack of information problems by using crude GDP forecasted growth numbers, we would still reach an unrealistic number for the nominal growth rate. There are many countries having high levels of growth and inflation, in markets with a lot of volatility associated. For example, using the long-term growth rate of South Africa plus inflation would generate very high levels of growth (7 to 8%) which does not reflect MTN s business growth in the long-run. Thus, we opted to follow a more conservative approach and use a nominal longterm growth rate resulting from the product of long term ROIC (average of last 3 PAGE 26/32

27 F 217F 218F 219F 22F 221F 222F Exhibit 65: MTN Sustainable Growth Rate Analysis 14% 12% 1% 8% 6% 4% 2% % Sustainable Growth Rate Growth Rate Source: Bloomberg, Company Reports and Analyst's estimates ROIC s calculated, from 219 to 222) and the reinvestment rate (1 long term payout ratio of 7 for MTN). The resulting value was 2.83%. Nevertheless, a sensitivity analysis was performed in order to have an idea of the impact of the different growth rates in the target share price (Exhibit 61). Exhibit 65 provides with information regarding the sustainable growth rate MTN has been following. In the past MTN was growing a lot, but our estimated growth is now sustainable, meaning the company is not forecasted to face financing issues to keep growing in the future. 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-217) and with the closing stock price of ZAR in 216, but also with the closing price of ZAR in 215. The fact is that, due to the Nigerian Fine imposed on MTN during the second half of 215, its stock price witnessed a massive crash (ZAR in the end of 215 from ZAR25.55 as of Jul-215). 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. PAGE 27/32

28 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. PAGE 28/32

29 Appendices PAGE 29/32

30 PAGE 3/32

31 PAGE 31/32