March 07, 2012

Overview

MTN Group Limited (MTN or the Group) delivered a satisfactory performance for the year growing its subscriber base by 16,2% and continuing to hold a strong market position despite increasing competition and a slower economic backdrop. Revenue was 9,7% higher on a *constant currency basis while earnings before tax, depreciation and amortisation (EBITDA) margin expanded 3,4 percentage points to 44,9%. The Group EBITDA margin includes the profit from the sale of the Ghana passive infrastructure, which if excluded, reduces the Group EBITDA margin to 43,9%. This is approximately the same level achieved in the prior year excluding the one time Zakhele charge of R2 973 million.

More details of the performance of MTN’s larger operations is provided later in the commentary. However for the other operations it is worth mentioning the improved performance of MTN Sudan, which added 2,5 million subscribers in the year, and MTN Côte d’Ivoire, which made a strong recovery in the second half of the year. MTN Uganda also performed well in a competitive market increasing its subscriber base by 18,0% to 7,6 million. Political unrest in the Middle East remains a concern. There has been an impact on the business environments in Yemen and Syria and MTN will continue to monitor both situations closely. Business in Iran remains buoyant, but MTN continues to be sensitive to the international issues relating to Iran whilst retaining its firm commitment to its operations there. In partnership with its legal advisors, MTN continues to ensure that it remains compliant with the various sanctions regimes in place. Following the SENS announcement on the 2 February 2012 of a potential claim by Turkcell and allegations made against MTN, the MTN Group Board has proactively responded by setting up the independent Hoffmann Committee. This has already started its work. Until it has concluded its deliberations, MTN will not comment further.

On the 14 February 2012, Moody’s upgraded MTN’s global local currency senior unsecured rating to Baa2 from Baa3 and its national scale issuer rating to A1.za from A2.za. The outlook on all ratings is positive.

The Group continued to prioritise various initiatives in line with its strategy to improve returns to shareholders, enhance new and existing revenue streams and focus on optimising cost.

During the last quarter of 2011 MTN Holdings Proprietary Limited acquired 6 764 412 MTN shares for a cost of R927,3 million, excluding securities transfer taxes and other costs. This is in line with MTN’s stated strategy of returning cash to shareholders. Buybacks will continue to be implemented as and when appropriate.

Provide competitive voice offerings aimed at maintaining market share as lower tariffs and Mobile Termination Rates (MTR), mainly in South Africa and Nigeria impact revenue growth.

Continued efforts on data and ICT offerings across the Group. South Africa contributes 57,4% and 35,2% to Group data and sms revenue respectively and remains the largest driver of growth in data services.

Key infrastructure investments to support voice quality, capacity and data growth. Infrastructure spend was lower in the first half of the year due to operational and supplier difficulties. However measures were put in place to address this issue and capital investments of R12 009 million or 67,8% of the year’s total capital spend were completed in the second half of the year. This momentum is expected to continue in 2012.

MTN’s mobile transfer service, Mobile Money, is now live in 12 countries with more than six million registered subscribers. This technology and user experience is to be enhanced in the future.

The South and East Africa IT hub became operational and is now servicing MTN Uganda and MTN Zambia. Rwanda and Swaziland are to be integrated during the first half of 2012.

The procurement transformation project, using a more centralised operating model, continued to gain traction with good progress on the reduction of equipment prices. The project has evolved considerably to include the centralisation of other support functions.

Further progress has been achieved in infrastructure sharing following the establishment of a new joint venture tower company with American Tower Corporation in Uganda. The tower company, in which MTN will hold 49%, will acquire all of the approximately 1 000 existing tower sites from MTN Uganda for an agreed upon purchase price of approximately $175 million. The sale of 1 856 towers in Ghana was concluded during the year.

* The constant currency reported numbers are those restated at the same average exchange rates that were applicable for the year ended 31 December 2010.

# 2011 margin includes the profit from the sale of the Ghana towers of R1 185 million and 2010 margin excludes the MTN Zakhele charge of R2 973 million.

Group financial review

Revenue

Table 1: Group revenue country split and contribution (Rm)

Group revenue increased by 6,3% to R 121 884 million due to sound growth in Nigeria, South Africa and Iran of 4,1%, 7,7% and 20,1% respectively. On a *constant currency basis, Group revenue increased 9,7%. This is meaningfully higher and more reflective of the group’s operating performance. Local currency revenue growth in Nigeria, Ghana and Iran increased a healthy 9,6%, 15,1% and 26,5% respectively. An increase in handset sales in South Africa resulted in a 36,7% increase in handset revenue year on year. Revenue growth excluding handset sales would have been 5,3%. The contribution of airtime and subscription revenue reduced to 65,5% from 68,4% for the prior year. Notwithstanding lower termination rates in some countries, total Group interconnect revenue increased by 8,9%. Data revenue (excluding sms) across the group remained strong, albeit offa low base, increasing 30,5%. SMS also continued to grow strongly increasing 14,2% when compared to the prior year.

Table 2: Group revenue analysis (Rm)

Operating costs

Table 3: Cost analysis (Rm)

Group operating costs remained relatively flat and meaningfully below the revenue growth rate. Total operating costs were R68 592 million, a 2,1% increase over the prior year. An 11,7% increase in direct operating costs and a 19,7% increase in handset costs were offset by a 34,4% reduction in other expenditure and a 0,4% increase in the overall cost of selling, distribution and marketing. The increase in direct costs was a result of the impact of the larger number of installed sites, higher diesel costs as well as increased transmission costs in South Africa. A rise in handset costs was driven by higher prepaid handset volumes and higher value handsets sold by MTN South Africa.

Other income

Other income includes the Group’s profit on the sale of the Ghana towers of R1 185 million as well as a deferred gain of R273 million.

EBITDA and EBITDA margin

Table 4: Group EBITDA (Rm) country split and contribution and EBITDA margin (%)

Group EBITDA, including the impact of the sale of the Ghana towers, increased by 15,2% to R54 750 million from R47 537 million in December 2010. Excluding the profit on the sale of the Ghana towers in 2011 and excluding the MTN Zakhele charge in 2010, EBITDA increased by 6,0% to R53 566 million. This adjusted EBITDA grew by 9,0% on a *constant currency basis. The growth in EBITDA is mainly due to strong organic growth in Nigeria, South Africa, and Iran. The EBITDA margin increased 3,4 percentage points to 44,9%. Excluding the Ghana tower sale profit, the EBITDA margin was 43,9%. EBITDA margins in Iran and South Africa increased to 42,5%, and 35,2%, respectively. MTN Nigeria EBITDA margin decreased marginally to 61,7% due to pricing pressure.

Depreciation and amortisation

Table 5: Depreciation and amortisation (Rm)

The Group’s depreciation and amortisation charge increased by 0,6% to R15 459 million as a result of continued investment in network infrastructure by the Group’s operations and the unwinding of some of the intangible assets recognised on the Investcom acquisition in 2006.

Net finance costs

Table 6: Net finance costs (Rm)

Net finance costs decreased by 61,4% to R1 582 million. Functional currency gains of R778 million were recorded, compared with a loss in the previous year of R1 223 million. Much of the functional currency gain of R778 million was attributable to the conversion of cash balances held in Mauritius (a functional currency rand entity).

Realised gains amounted to R418 million compared to prior realised losses of R1 440 million reported for 2010. Unrealised losses decreased 45,7% to R384 million in 2011. The realised gains were mainly due to the conversion of foreign denominated cash in Mauritius into rands.

Taxation

Table 7: Taxation (Rm)

The Group’s taxation charge increased by 22,9% to R13 853 million and the effective tax rate to 36,8%. The high effective tax rate is mainly due to increased secondary tax on companies (STC) on the higher Group dividend payout ratio as well as withholding taxes related to increased upstreaming of cash, specifically the dividend declared by MTN Ghana and MTN Nigeria.

Earnings

Headline earnings per share (HEPS) increased by 40,5% to 1 068,6 cents and adjusted HEPS by 43,2% to 1 070,0 cents. The increase in the current year’s adjusted HEPS is positively impacted by charges associated with the implementation of the MTN Zakhele scheme in the prior year. If these charges are excluded, prior year adjusted HEPS would have been 909,1 cents, reducing the current year’s growth in adjusted HEPS to 17,7%.

Cashflow

The combination of higher EBITDA and lower than planned capital expenditure (capex) spend resulted in an increase in approximate free cashflow by 15,5% to R35 849 million, excluding the profit on the sale of the Ghana towers. Cash generated by operations remained relatively unchanged while cash inflows from operating activities decreased by 19,7% principally due to an 85,7% increase in dividends paid. Expenditure on property, plant and equipment (excludingsoftware) of R14 035 million was 8,5% lower than the previous year. The result is a net outflow in cash and cash equivalents of R4 775 million and slightly lower cash and cash equivalents balance of R35 213 million. Investments in treasury bills, foreign currency deposits and bonds of R9 480 million in certain subsidiaries is not included in the year-end cash balance.

Capital expenditure

Table 8: Capital expenditure analysis (Rm)

*R13 618 million authorised for 18 months.

Capex reduced by 9,0% to R17 717 million due to delays in projects and open orders in the first half of the year. Second half capex spend picked up meaningfully following corrective action. A significant portion of the outstanding capex has been committed to the projects which are expected to be completed during the first half of 2012. The relatively strong rand had the effect of reducing the expenditure of the Group by R315 million. Had there been no change in currency rates during the year, capex would have been R18 032 million, compared to the approved budget for the period of R22 165 million.

Assets and liabilities

Assets and liabilities at 31 December 2011 were impacted by the movement in year-end foreign currency exchange rates, and in particular the weakening of the rand against the US dollar to a closing rate at the end of December 2011 of 8,07 versus 6,61 for the prior year.

Property, plant and equipment increased by 13,0% from December 2010 due to the impact of the translation of foreign currencies as well as capex additions of R17 717 million.

Net debt

Table 9: Net debt analysis (Rm)

Net cash increased meaningfully from R905 million to R11 890 million as cash balances in Nigeria and Syria increased meaningfully while gross interest bearing liabilities remained largely the same.

Changes in ownership

MTN South Africa

MTN South Africa performed well for the year increasing its subscriber base by 16,9% to 22,0 million. This was mainly due to growth of 17,6% in the prepaid segment to 18,2 million subscriber’s. The postpaid segment showed growth mainly in the second half of the year, increasing subscribers for the year by 14,0% to 3,8 million. Hybrid packages were the primary contributor to growth in this segment together with telemetry sims. SIM market share declined marginally in the first half of the year but recovered in H2, with signs of an upward trend.

Total revenue increased 7,7% due to strong growth in data revenue, which was up 27,7% (excluding sms), as well as growth in total airtime and subscriptions of 4,2%. Prepaid airtime and subscription revenue increased 14,0%. The strong growth in handset revenue of 45,3% was as a result of robust demand for both entry level handsets and demand for smartphones. Data revenue (excluding sms) now contributes 12,0% of total revenue. At the end of the year there were 5,5 million 3G devices on the network which included 3,6 million smartphones and 1,4 million dongles and other data devices. Interconnect revenue declined 9,8% following the reduction in mobile termination rates to 73 cents from 89 cents in March 2011. Average revenue per user per month (“ARPU”) reduced 12% primarily due to lower interconnect revenue.

MTN South Africa recorded a 1,1 percentage point increase in EBITDA margin to 35,2% for the year. This was mainly the result of cost savings in general expenses, professional and consulting fees as well as lower marketing and advertising costs.

Capital expenditure for the period was marginally ahead of the Group’s guidance at R4 105 million as MTN South Africa continued to modernise the network by introducing IP technology to improve network quality. There were 313 2G and 598 3G base transceiver stations (BTS’s) added during the year bringing the total BTS’s to 9 785. Fibre rollout remains a priority with the national long distance fibre project still underway. At the end of December, 89% of the Johannesburg to Durban route was trenched, as was 86% of the Johannesburg to Bloemfontein route and 58% of the Bloemfontein to Cape Town route. MTN South Africa has embarked on a pilot of 103 long term evolution (LTE) base stations in line with its future LTE deployment strategy. MTN has submitted comments to an invitation from ICASA for 2.6GHz and 800MHz frequency spectrum band needed to offer LTE services. The frequency decision has been delayed by ICASA.

MTN Nigeria

MTN Nigeria faced a challenging year as the entire market was negatively affected by the process of SIM registration. Aggressive price competition had a negative impact on gross connections and network quality again became a focus area for the regulator as higher elasticity from lower pricing impacted traffic demand across almost all of the major networks. Notwithstanding these challenges the company increased its subscriber base by 7,7% to 41,6 million and ended the year with a more stabilised market share of 50%. There is no clarity on the deadline for SIM registration although the regulator has initiated a process to form a central database of registration records. At the end of the year MTN Nigeria had registered 83% of the subscriber base.

Total naira revenue increased 9,6% mainly driven by a 54,5% increase in interconnect revenue. This was a result of continued changes in traffic patterns during the year as cheaper offnetwork prices were offered tactically by the competition. More competitive tariffs by MTN in the second half of the year have partially stabilised the traffic mix. Data revenue (excluding sms) grew 105% as more data packages were introduced to the market. MTN Nigeria has 1,7 million smartphones and 330 000 dongles on the network. Airtime and subscription revenue increased only 3,7% due to a reduction in effective tariffs which was not fully compensated by a proportionate increase in minutes of use. ARPU declined by 8,1% to $9,7 and by 5,3% in local currency terms.

MTN Nigeria’s EBITDA margin declined by 1,2 percentage points to 61,7% when compared to the prior year. Higher operating costs were mainly the result of a 25% increase in the average diesel price as well as increased site rental costs and professional fees.

The marginally weaker naira against the rand, negatively impacted rand reported revenue growth for the year resulting in only a 4,1% increase in revenue to R34 879 million. Reported EBITDA increased 2,2% to R21 536 million.

Network rollout improved in the second half of the year, with the company adding 529 2G and 453 3G BTS’s in the year bringing the total number of BTS’s to 9 131. Capital expenditure amounted to R6 331 million compared to R4 700 million at the end of 31 December 2010. Corrective action and measures have been put into place to ensure that capital expenditure programs moving forward are delivered more effectively. MTN Nigeria rolled out an additional 1 312km of fibre in the year and connected fibre to 90 sites to support its data strategy.

MTN Irancell

MTN Irancell delivered a sound performance increasing its subscriber base by 16,6% in a market where penetration is above 100%. The growth was mainly attributable to lower denomination vouchers and seasonal promotions, increasing market share to 45%. The improved distribution of airtime through ATM’s has also contributed to higher spend by subscribers.

Total rial revenue grew 26,5% for the year. Airtime and subscription revenue increased 22,8% while interconnect revenue increased 11,4% as the quality of the network improved. Data revenue (excluding SMS) gained momentum increasing 66,5% offa low base. Sms revenue growth remained robust at 47,0%. ARPU increased by 2,0% to $7,9 and by 5,6% in local currency terms.

EBITDA margin showed a healthy expansion of 1,2 points to 42,5% as MTN Irancell continues to maintain a low operating cost base. Distribution and commission costs also reduced as physical recharge vouchers were replaced by logical airtime distribution. These savings were partially reduced by a large increase in rent and utilities following the removal of government subsidies and the increase in fuel prices.

A weaker rial resulted in lower rand reported revenue growth of 20,1% to R11 050 million and EBITDA growth of 24,1% to R4 697 million.

MTN Irancell continued to invest in its network improving quality and capacity although rollout of some projects have been slower than anticipated because of delayed equipment delivery. Capital expenditure amounted to R1 168 million, lower than that guided at the interim results. Population and geographic coverage increased to 77% and 23%. 781 2G BTS’s were added in the year bringing the total to 7 640.

MTN Ghana

MTN Ghana delivered a solid performance as subscribers increased by 16,5% to 10,2 million. This was mainly attributable to attractive promotions including bonus on recharge offers which included “weekend super saver” and a “10 million subscriber promo”. Market share declined marginally to 52% from 53% but is considered highly satisfactory given the very competitive nature of the market.

Total cedi revenue increased 15,1% for the year. This was mainly due to a 13,9% increase in airtime and subscription revenue and a 35,1% increase in interconnect revenue. Data revenue (excluding sms) continued to gain traction, albeit offa low base, increasing 79,7%, while sms revenue decreased 43,4% due to regulatory requirements to change sms promotions. ARPU declined 2,8% to $7,0 while in local currency ARPU increased 3,5%.

MTN Ghana’s EBITDA margin, excluding the profit from the sale of the towers, decreased 6,2 percentage points to 38,1% as interconnect costs rose more than interconnect revenue due to competitive offnetwork tariffs. EBITDA margin was also negatively impacted by an increase in transmission and utility costs. Although there was an increase in lease costs, the full impact of the new tower arrangements will only be incurred in 2012.

A weaker cedi against the dollar resulted in a lower rand reported revenue growth of 5,1% to R5 941 million while EBITDA decreased 13,2% to R2 172, excluding the sale of the towers.

Capital expenditure for the period amounted to R851 million. The lower spend is mainly due to the change in structure following the establishment of the tower company. 430 2G and 125 3G BTS’s where rolled out for the period. The company continued to prioritise capacity and quality on the network as traffic increased, although quality of service remains a challenge.

MTN Syria

MTN Syria’s performance was dampened by the unrest in the country. The company increased its subscriber base by 16,7% to 5,7 million marginally decreasing market share to 45%.

Revenue in Syrian pounds remained flat as airtime and subscription revenue declined 1,2% as a result of the challenges of providing continuous network service. Data revenue (excluding sms) increased 17,0% while sms revenue increased 11,8%.

EBITDA margin increased 2,7 percentage points to 26,2%. This was mainly due to lower distribution and commission costs associated with reduced sales and tighter cost management.

Rand reported revenues showed a decline of 5,2% to R6 463 million while EBITDA grew 5,3% to R1 690 million. These results were also negatively impacted by a weaker Syrian pound against the rand. Capital expenditure for the period amounted to R442 million.

Prospects
MTN remains cautiously optimistic about the year ahead with macroeconomic conditions in key markets not expected to change significantly. The key focus areas over the year are to maintain and improve our market position and improve customer experience. There will be continued effort to strengthen our position in non-voice services in all markets. Increased efficiency in rolling out investments in infrastructure and cost optimisation initiatives are a priority in support of this strategy. Value accretive opportunities which fit within the parameters of MTN’s M&A strategy will still be considered. We will continue to manage the challenges brought about by sanctions and political instability in some of our markets. The MTN Group Board remains committed to improving shareholder returns.

Subscriber net additions guidance for 2012 is detailed below:

Total capital expenditure guidance for the year is R24 401 million.

Declaration of final ordinary dividend

Shareholders are advised that a final dividend of 476 cents per ordinary share in respect of the period to 31 December 2011 has been declared and is payable to shareholders recorded in the register of the MTN Group at the close of business on Friday, 30 March 2012.

In compliance with the requirements of Strate, the electronic settlement and custody system used by the JSE, the MTN Group has determined the following salient dates for the payment of the dividend:

Share certificates may not be dematerialised or rematerialised between Monday, 26 March 2012 and Friday, 30 March 2012, both days inclusive.

On Monday, 2 April 2012, the dividend will be transferred electronically to the bank accounts of certificated shareholders who make use of this facility.

In respect of those who do not use this facility, cheques dated Monday, 2 April 2012 will be posted on or about that date. Shareholders who hold dematerialised shares will have their accounts held by the Central Securities Depository Participant or broker credited on Monday, 2 April 2012.

For and behalf of the Board

MC Ramaphosa
Chairman

RS Dabengwa
Group President and CEO

Fairland
7 March 2012

Supplementary

Table 10: SEA operational data sheet

Table 11: WECA operational data sheet

Table 12: MENA operational data sheet

Table 13: Group data revenue analysis (Rm)

Table 14: Group SMS revenue analysis (Rm)

Table 15: Net interconnect analysis (Rm)

Source:http://www.mtn-investor.com/reporting/prelims_2011/commmentary.html