E CONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES.T HIS REPORT WAS SUPERVISED BY

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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

s

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ASTERS IN

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INANCE

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ESEARCH

MTN

G

ROUP

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OMPANY

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EPORT

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ELECOMMUNICATIONS

6 J

ANUARY

2016

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TUDENT

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OMÁS

R

EALISTA

[email protected]

Recommendation: HOLD

Price Target FY17: ZAR 121.52

Price (as of 5-Jan-17) ZAR 126.17

Bloomberg: MTN:SJ

52-week range (ZAR) 103.94-146.68

Market Cap (ZARm) 242.358

Outstanding Shares (m) 1920.884

Source: Bloomberg

(Values in ZAR millions) 2015 2016E 2017F Revenues 147,063 147,532 148,558

EBITDA 59,125 47,594 56,972

EBITDA margin 40% 32% 38%

Net Profit 23,570 11,088 20,119

EPS 11 6 10

DPS 8.3 7 7

P/E 9.6 21.9 11.6

EV/EBITDA 4.6 6.0 5.1

EV/Sales 1.9 2.0 2.0

Net Debt to EBITDA 0.74 1.07 0.88

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.

 We suggest a HOLD recommendation for MTN Group’s

stock, with a target price of ZAR121.52 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 2015. 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 2016.

 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

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MTNGROUP 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

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Value of DFCF: 72 118; 25%

Terminal Value: 183 935; 64%

Joint Ventures: 33 063; 11%

Exhibit 1: Enterprise Value Decomposition (ms of Rands)

Source: Company Reports and Analyst's Estimates

South Africa 29%

Nigeria 35% Ghana

7% Cameroon

3% Ivory Coast

5% Uganda

2% Syria

0% Sudan

3% Small OPCO 16%

Exhibit 2: MTN Group Total Value Decomposition by Region

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 explicit forecast period is pending December 2022, 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 OPCO1_Cluster2_{. 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 ARPU3_.

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.}

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 companies5_{. From}_{Exhibit 1}_{, the sum of the several DFCF}

totalize 25% 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 ZAR233,430,094,408. 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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South Africa 25%

Nigeria 32% Ghana

5% Cameroon

4% Ivory Coast

4% Uganda

3% Syria

2% Sudan

2%

Small OPCO 14%

Joint Ventures

9%

Exhibit 4: MTN Revenue

Decomposition by Country (2015)

Source: Company Reports

Yemen 15%

Benin 16%

Afghanistan 12% Congo B

14% Rwanda

6% Zambia

14% Liberia 4% Conakry 5% Cyprus

6% Bissau

2%

South Sudan 6%

Exhibit 5: Small OPCO Cluster Revenue Decomposition (2015)

13% 12% 13% 13% 13% 13% 13% 13% 13% 12% 12%

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

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

14% 14% 14% 15% 15% 15% 15% 15% 15% 14% 14%

23% 21% 21% 21% 21% 21% 21% 21% 21% 21% 20%

2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F

Exhibit 6: MTN Subscriber's Base Weights by Region

Joint Ventures

Small OPCO Cluster

Large OPCO Cluster

Nigeria

South Africa

Source: Company Reports and Analyst's Estimates

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

Company overview

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 2015 (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.

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

Exhibit 2: Equity Value Decomposition (ms of Rands)

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MTNGROUP COMPANY REPORT Outgoing voice 58% Incoming voice 10% Data 23% SMS 3% Devices 5% Other 1%

Exhibit 9: MTN Group Revenue Analysis (2015)

Source: Company Reports 0 25 000 50 000 75 000 100 000 125 000 150 000 175 000 200 000 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F 2 0 1 9 F 2 0 2 0 F 2 0 2 1 F 2 0 2 2 F

Exhibit 7: MTN Group Total Revenue (ms of Rands)

189208

223 233238 247

257 266276 286

297 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F 2 0 1 9 F 2 0 2 0 F 2 0 2 1 F 2 0 2 2 F

Exhibit 8: MTN Group Total Susbcribers (000s)

“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 vastsubscribers’ base of 232,500 customers in the end of 20157

reflects group revenue – MTN is the biggest telecom operator based in Africa8_.

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 incoming9_{voice usage,}

data traffic which includes not only internet usage but also digital services (e-commerce, 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

According to MTN10_{, 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 2010, 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 conditions12_{. Both MTN Holdings and its}

directors also hold 0.58% and 0.10% 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 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 comp}_{rises 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.

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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)

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100 %

0 50 100 150 200 250 300 350 400 450 500

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

Exhibit 11: MSCI Indices Performances (USD)

MSCI World (Developed Markets) MSCI Emerging

Source: Bloomberg

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, 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 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.}

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1,3% 2,7% 0,0%

3,5% 5,9%

8,6%

5,0%

0,1%

-1,8%

4,0% 4,5% 4,9% 8,5%

5,3%

6,5% 10,4%

8,9% 15,7%

2,2% 2,1% 6,7%

-2% 0% 2% 4% 6% 8% 10% 12% 14% 16%

SA _NIG

IRAN

G

H

AN

A

C

AM

E

RO

ON

IV

.

C

OAST

UG

AN

D

A

Exhibit 12: Economic Overview

GDP Growth 2015 GDP Growth 2016F Inflation 2016F

Source: IMF and Company Reports

-3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7%

Exhibit 13: South African Real GDP Growth (%)

Quarterly GDP Growth (YoY) Yearly GDP Growth

Source: OECD and World Bank

0% 10% 20% 30% 40% 50% 60%

-2% -1% 0% 1% 2% 3% 4% 5% 6% 7%

07 08 09 10 11 12 13 14 15

Exhibit 14: South African major economic indicators (% of GDP)

Government Debt in the right axis

CA Deficit Government Deficit Net FDI Government Debt

Source: World Bank

small elites enrich by the cost of the majority16_{. 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 50%) 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 2008 and has experienced a slowdown until now (Exhibit 13). South Africa has a prominent current account deficit which has been slowly narrowing since 2013, but it can easily worsen due to current external conditions and further strikes17_{. 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 Povert}_{y", 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

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0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

5 7 9 11 13 15 17

07 08 09 10 11 12 13 14 15 Exhibit 15: USD/ZAR Exchange Rate and SA Inflation

SA Inflation in the right axis

USD/ZAR SA Inflation

Source: Bloomberg and StatsSA

10 30 50 70 90

-20 -10 0 10 20

Q1-09

Q4-09

Q

3-10

Q2-11

Q1-12

Q4-12

Q3-13

Q2-14

Q1-15

Q4-15

Exhibit 16: South African Confidence indicators

Business confidence index in the right axis

Consumer confidence index

Business confidence index (=50 is neutral)

Source: StatsSA

0 20 40 60 80 100 120 140 160

Jan

-04

Se

p

-05

Ma

y

-0

7

Jan

-09

Se

p

-10

Ma

y

-1

2

Jan

-14

Se

p

-15

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 30% in 2015 (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 Q1-2016, from 24.5% in Q4-201519_{). 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 shortages20_.

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 2016 of 0.8%21_{has positively surprised investors. Annual GDP growth is expected to}

continue improving in the future (around 2% by 202022_{). 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 Plan23_{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 2014 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}

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}

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MTNGROUP COMPANY REPORT -2% 0% 2% 4% 6% 8% 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 Q4 -1 2 Q2 -1 3 Q4 -1 3 Q2 -1 4 Q4 -1 4 Q2 -1 5 Q4 -1 5 Q2 -1 6

Exhibit 18: Nigerian Real GDP Growth (%)

Quarterly GDP Growth (YoY) Yearly GDP Growth Source: World Bank and Nigeria National Bureau of Statistics

5% 7% 9% 11% 13% 15% 17% 100 120 140 160 180 200 220

2007 2008 2009 2010 2011 2012 2013 2014 2015

Exhibit 19: USD/NGN exchange rate and NIG Inflation

Nigerian Inflation in the right axis

USD/NGN Nigerian Inflation Source: Bloomberg and Nigeria National Bureau of Statistics

8% 10% 12% 14% 16% 18% 20% 150 170 190 210 230 250 270 290 310 330

Exhibit 20: USD/NGN exchange rate and NIG Inflation (YoY during 2016) Nigerian Inflation in the right axis

USD/NGN Nigerian Inflation Source: Bloomberg and Nigeria National Bureau of Statistics

0% 2% 4% 6% 8% 10% 12% 14% 16% -5% 0% 5% 10% 15% 20%

07 08 09 10 11 12 13 14 15

Exhibit 21: Nigerian major economic indicators (% of GDP) Government Debt in the right axis

CA Surplus Government Deficit

Net FDI Government Debt

Source: World Bank and Nigeria Budget Office

in June by the Nigerian Central Bank (Exhibit 20). 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 2015 Nigeria ranked 136 out of 174 countries in the corruption index24_{. 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.

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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;

2% 3% 4%

6% 9%

13% 20%

27% 38%

0% 5% 10% 15% 20% 25% 30% 35% 40%

0 50 100 150 200 250 300 350

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

Exhibit 22: The Mobile Celular Boom

Worldwide Mobile Cellular Subscribers (ms)

As % of Fixed-Line Telephone Subscribers

Source: World Telecommunications Development Report 1999

0,5 0,7 0,9 1,1 1,3 1,5

2012 2013 2014 2015

Exhibit 24: Total Revenue as % of Subscribers

MTN Vodacom

Source: Companies Reports

Mobile Telecommunications Sector

The telecommunications sector has been one of the epicentres of growth (Exhibit 22) in the past, as the deregulation25 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 traffic26_.

Nevertheless, MTN and most telecoms face an extremely challenging operational environment in a very fast-paced industry. As previously seen, weak macro-economic 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}_.

Source: “The worldwide History of Telecommunications”, by Anthon A.

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63,2%

62,0%

58,1%

11,2% 10,2% 10%

14,9% 17,8% 23,1%

3,9% 3,1%

2,8%

5,5% 5,4%

4,8%

2013 2014 2015

Exhibit 27: MTN Revenue Breakdown (as % of total revenue)

Outgoing voice Incoming voice

Data SMS

Devices Other

Source: Company Reports 3%

6% 9% 12% 15% 18% 21% 24% 27% 30%

2012 2013 2014 2015

Exhibit 26: Return on Invested Capital of Telecom Companies

ROIC Developing ROIC Developed MTN

Source: Company Reports, Bloomberg and Analyst's Estimates -10%

-5% 0% 5% 10% 15% 20% 25%

2012 2013 2014 2015

Exhibit 25: Telecommunication Companies Analysis

Sales Growth Rate Developing Profit Margin Developed Sales Growth Rate Developed Profit Margin Developing Source: Bloomberg

MTN Group Business Analysis

Nigerian Regulatory Fine

In order to describe MTN performance it is necessary to first explain the Nigerian Regulatory Fine. During the second half of 2015, the Nigerian Communications Commission (NCC) imposed a NGN1.04 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 NGN50 billion (USD250 million) was made before hand by MTN on 24 February 2016. On 10 June 2016 a settlement was reached with a reduced fine of NGN330 billion (USD1.7 billion), leaving a NGN280 billion amount to be paid over 3 years27_{. MTN accrued the present value of this amount}

in 2015 and 2016, impacting EBITDA by ZAR9,287 and ZAR10,499 million, respectively28_{. 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 liquidity29_{. The Nigerian Fine}

caught the markets by surprise depressing MTN’s stock price, decreasing roughly 25% 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 2015 and 2016. By mid-2016 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_{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.}

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50,4%

47,2%

44,1%

8,5% 7% 4,7%

14,2% 17,4% 21,3%

4,9% 4,3% 4%

14,1% 16,7% 18,4%

7,8% 7,2% 7,4%

2013 2014 2015

Exhibit 28: Vodacom Revenue Breakdown (as % of total revenue)

Data SMS

Devices Other Source: Company Reports

0 2 4 6 8 10 12 14 16 18 0 5 10 15 20 25 30 35 40

2011 2012 2013 2014 2015

E PS ( R a n d s) E a rn in g s (b s o f R a n d s)

Exhibit 29: Earnings Analysis

MTN Earnings Vodacom Earnings MTN EPS Vodacom EPS

Excluding Nigerian Regulatory Fine

5% 15% 25% 35% 45% 55% 0 30 60 90 120 150 180

2011 2012 2013 2014 2015

E B IT D A m a rg in ( % ) R even u e (m s o f R a n d s)

Exhibit 30: 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 2016 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 2015, despite MTN’s reduction in tariffs of 25% resulting in

15% more billable minutes30_{. Nevertheless, MTN data revenue increased 30.2%}

contributing 23% to total revenue (previously 18%). There was indeed a 108.5% increase in data traffic even though data tariffs decreased about 45% during 201531_{. 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 EPS32_declining

51.4%33_{in 2015 (}_{Exhibit 29}_{presents both EPS and Earnings past values).}_Despite

the storm, MTN continued to benefit from its large subscriber base. Exhibit 30 concerns revenue and EBITDA margins and Exhibit 31 shows the evolution of MTN total subscribers34_.

MTN recognizes that 2015 was a problematic year impacted by challenges in the two biggest markets (Nigeria and South Africa), but is confident that 2016

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}

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164,5 189,3 207,8 223,4 232,5

36,8 46,9 50,5 57,9 61,6

2011 2012 2013 2014 2015 Exhibit 31: No. of Subscribers (millions)

MTN Subscribers Vodacom Subscribers Source: Companies Reports

0% 20% 40% 60% 80% 100%

2012 2013 2014 2015 2016

Exhibit 33: South African

Telecommunications Sector Market Shares (Q1 of each year)

Vodacom MTN Group

Cell C Telkom

45% 44% _42%

9%

6% _5%

21% 24% 32%

6% 5% 5%

17% 19% 15%

2013 2014 2015

Exhibit 34: MTN SA Revenue Breakdown (as % of total revenue)

Data SMS

Devices Other Source: Company Reports

20 25 30 35 40

30% 35% 40% 45% 50%

201

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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 Africa35_{, 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).

South 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 threattothem. Overall the market in South Africa is still very price competitive with most of the networks offering same things in differing packages.

During 2015, MTN South Africa (MTN SA) saw adecrease 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 2014). 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 30.6 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

35_{Source: Company Reports}

8% 4%

31%

19% 69%

53%

Middle East & North Africa Sub-Saharan Africa

Exhibit 32: Mobile broadband access in emerging markets

2011 2015 2020

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MTNGROUP COMPANY REPORT 50 70 90 110 130 150 170 201 2 201 3 201 4 201 5 201 6F 201 7F 201 8F 201 9F 202 0F 202 1F 202 2F

Exhibit 36: MTN SA ARPU (monthly Rands per user)

MTN SA ARPU Vodacom SA ARPU

0 50 100 150 200 250 300

2012 2013 2014 2015 Exhibit 37: MTN SA Pre-paid and Postpaid ARPU (monthly Rands per user)

Pre-paid ARPU Postpaid ARPU

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 2016 of 2.6% even though it is expected to increase 2% year-on-year (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 2016 compared to the previous period as well as increased network related costs. We predict MTN SA’s market 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 2003 has allowed new mobile operators to replace the unreliable fixed line services of NITEL36_{. 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.} 20 24 28 32 36 40 20 25 30 35 40 45 50 55 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F 2 0 1 9 F 2 0 2 0 F 2 0 2 1 F 2 0 2 2 F S u b sc ri b ers ( m s) R even u e (m s o f R a n d s)

Exhibit 38: MTN SA Subscribers and Revenue Forecast

MTN SA Revenue MTN SA Subscribers

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MTNGROUP COMPANY REPORT 15 30 45 60 75 30% 35% 40% 45% 50%

2012 2013 2014 2015

S u b sc ri b ers ( m s) M a rk et S h a re (% )

Exhibit 40: MTN Nigeria Market Share and Subscribers

MTN Nigeria Subscribers

MTN Nigeria Market Share

72% 71% _68%

9% 10% 11%

15% 16% 19%

2,4% 1,9% 1,6%

2013 2014 2015

Exhibit 41: MTN Nigeria Revenue Breakdown (as % of total revenue)

Data SMS

Devices and others

40 45 50 55 60 65 70 75 80 85 20 25 30 35 40 45 50 55 60 65 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F 2 0 1 9 F 2 0 2 0 F 2 0 2 1 F 2 0 2 2 F S u b sc ri b ers ( m s) R even u e (b s o f R a n d s)

Exhibit 42: MTN Nigeria Revenue and Subscribers Forecast

MTN Nigeria Revenue MTN Nigeria Subscribers

also characteristic and is precisely where MTN slipped in 2015, 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 2015 to 61.252 million, but this was not a final number regarding the loss of subscribers. By mid-2016 when the last batch was disconnected, Nigeria reported 58.978 million subscribers (62.813 million in mid-2015). 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 2015). Exhibit 40 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 2015), even with the regulatory requirements. Digital revenue keeps improving, contributing now with over 50% to data revenue (mainly due to music and lifestyle services). Exhibit 41 details MTN Nigeria revenue breakdown. During 2015 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 2016 for $220m which contributed with 568,000 new subscribers. This acquisition was strategic since technically it will allow MTN to use 4G LTE service in the 800Mhz 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

0% 20% 40% 60% 80% 100%

2013 2014 2015 2016

Exhibit 39: Nigerian

Telecommunications Sector Market Shares

MTN Globacom Airtel Etisalat

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MTNGROUP COMPANY REPORT 50 60 70 80 90 100 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F 2 0 1 9 F 2 0 2 0 F 2 0 2 1 F 2 0 2 2 F

Exhibit 43: MTN Nigeria ARPU (monthly Rands per user)

Source: Company Reports and Analyst's Estimates 0 20 40 60 80 100 0 10 20 30 40 50 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F 2 0 1 9 F 2 0 2 0 F 2 0 2 1 F 2 0 2 2 F S u b sc ri b ers ( m s) T o ta l R even u e (b s o f R a n d s)

Exhibit 44: Large OPCO Cluster Revenue and Subscribers

Total Revenue Subscribers

Source: Company Reports and Analyst's Estimates 10 20 30 40 50 60 70 80 90 201 2 201 3 201 4 201 5 201 6F 201 7F 201 8F 201 9F 202 0F 202 1F 202 2F

Exhibit 45: Large OPCO Cluster ARPUs (Rands)

Ghana Cameroon

Ivory Coast Uganda

Syria Sudan

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).

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 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. 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 2015. Total revenue is also increasing (10.55% in Rands during 2015) being partly offset by the Cedi currency depreciation. Data revenue is the main propellant of this growth, growing 80% in Rands and constituting now 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 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 2015. 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 2015. MTN Cameroon was also hurt by the deregistration process but it is

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Exhibit 46: Small OPCO Cluster Revenue and Subscribers

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

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Iran 91,38% Botswana

6,32%

Swaziland 2,30%

Exhibit 47: Joint Ventures Revenue (2015)

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. 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 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

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 2015 subscribers reached 46.1 million which represented a 5% increase year-on-year. Revenue increased 17% to R13,600 million, boosted by a more than 100% 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.

0 10 000 20 000 30 000 40 000 50 000 60 000

Exhibit 48: Joint Ventures Value (millions of Rands)

Source: Company Reports, Bloomberg and Analyst Estimates

0 10 20 30 40 50 60

0 5 000 10 000 15 000 20 000 25 000 30 000

2014 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F

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Exhibit 49: MTN Irancell Revenue and Subscribers

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-10 0 10 20 30 40 50 60 70

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Exhibit 50: MTN Group Net Capex (bs of Rands)

D&A

∆ PPE and Intangible Assets Net Capex

0 15 30 45 60 75

0 40 80 120 160 200

201

2

201

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Exhibit 51: Capex and Associated Assets (bs of Rands)

PPE and Intangible Assets Reported Capex

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 revenue growth. According to MTN, capex amounted to ZAR29,199 million in 2015, compared with ZAR25,406 million in 2014. 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 Capex37_{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 Capex38_{, 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 50 presents Net Capex values and inputs. Exhibit 51 shows PPE and Intangible Assets and Reported Capex figures.

37_{Provided by the company.}

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Net Working Capital

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 $1,000 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 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.

-60 -40 -20 0 20 40 60

201

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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

30 50 70 90 110 130 150 170 190

2012 2013 2014 2015 2016

Exhibit 53: MTN Stock Price Performance in different currencies

Rands US Dollars Euros

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[email protected]

Table of Contents

Executive summary ... 3

Valuation ... 4

Company overview ... 5

Macroeconomic Outlook ... 8

Mobile Telecommunications Sector ...12

MTN Group Business Analysis ...13

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

Executive Summary

Valuation

Company overview

Company description

Shareholder structure

Macroeconomic Outlook

South Africa

Nigeria

Mobile Telecommunications Sector

MTN Group Business Analysis

Nigerian Regulatory Fine

Consolidated Business Analysis

South Africa

Nigeria

Large OPCO Cluster

Small OPCO Cluster

Joint Ventures

Capex and Net Working Capital

Capex

Net Working Capital

Forex and other Risks