Anchor Capital (Pty) Ltd, FSP number 39834. www.anchorcapital.co.za 1

MTN—Follow the Y’ello Brick Road?

R214.00 Company Update; Ant Turner

Company stats

Share price: 21400c

Market cap: R397bn

Net debt: R352mn

Avg trade per month: R20.69bn

12-month low: 16178c

12-month high: 21925c

EBITDA: R58.82bn

6th May 2014

MTN sells what is essentially a commodity (cell phone airtime and data). This generates very high margins and returns for the market leader in respect to geographies, but with a result that competition is attracted into the market and this therefore ulti-mately pushes down pricing, margins and returns. This makes the risk of a deterioration in fundamentals of the Group relatively high. We do not see MTN as an especially attractive asset. The ra-tionale for this being that the incremental return on new sub-scribers is showing signs of slowing which will have a material effect on both earnings growth and margins going forward. This equation makes investing in additional capacity steadily less attractive, evident in management’s decision to dramatically in-crease dividend pay-outs and other capital-management initia-tives (eg. share buy-backs) over recent years. However, as capex falls and EBITDA continues to grow, a healthy FCF outlook should transpire. We expect low double digit growth in the underlying operational performance of the company in the medium term and believe the group doesn’t deserve a rating materially better than currently applied by the market. The implication is that MTN has entered into the ex-growth phase of its life cycle and should not be viewed as a growth stock. Capital expenditure peaked in FY2013 and management have guided that capex will trend down over the next few years due to the difficulty in deploying expansionary capex profitably. From a valuation perspective, MTN looks reasonable value at a 13.4x P/E multiple to December 2014 and we think the healthy forward dividend yield of 5.4% should prove a share price un-derpin, but given 8-11% long term EPS growth prospects, we think total return prospects are no better than average: We are NEUTRAL on the stock but would see more compelling value at the R 200 level.

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Subscribers ('000) ARPU (Rands)

Figure 2: South Africa Subscribers and ARPU (Rands)

Figure 1: Nigeria Subscriber and ARPU (US$)

MTN Group

December y/e FY13(A) FY14(E) FY15(E) FY16(E)

Diluted HEPS (cps) 1379 1530 1736 1857

% growth 11% 13% 7%

DPS 1035 1150 1305 1396

PE 15.5x 14.0x 12.3x 11.5x

DY 4.8% 5.4% 6.1% 6.5%

Share price 21400

12-mnth fwd PE 13.4x

Figure 3: Valuation

Source: Company data, Anchor Capital estimates

Source: Company data, Anchor Capital estimates

Source: Company data

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Results summary... Revenues are slowing for the group, up only 3.1% on a constant currency basis for FY2013. Whilst subscribers grew at a strong rate of 10% in FY2013, the revenue effect to this is diluted by a reduction in the average revenue per user (ARPU). This revenue trend will most likely remain subdued in 2014 as the Group strate-gically positions itself from a pricing perspective in its mature markets, Nigeria and South Africa. In our view, the net subscriber additions guidance for 2014 of 16.75 million subscribers (8% of current base) is fairly ambitious given the recent pullback in sub-scriber growth.

The groups EBITDA and EBITDA margin for FY2013 both increased by 1,6% and 0.4% on a constant currency basis, respectively. Whilst the margin increased marginally on a constant currency basis in FY2013, the rate at which margins are growing is slowing dramatically and we expect them to stagnate and possibly de-cline. In Q3 of 2012, aggressive tariff cuts (40%) were implement-ed in Nigeria, which had a detrimental effect on EBITDA margin, down 3.4% to 58.3% for FY2012. FY2013 brought signs of an im-provement as floors have subsequently been placed on tariffs – the local regulator is now more concerned with quality than price and feels tariffs have fallen enough. The point is, the South Afri-can telecoms arena appears to be following suit in the form of increased price cutting by competitors and introduction of the controversial mobile termination rate (MTR) cuts by ICASA. Over the last 18 months, trading conditions have been tough for MTN in South Africa, which makes up 21% of group EBITDA. The group has been aggressively undercut by its major competitors from a pricing perspective and in our view, has been late to react. As a result of the ineffective response to the competition, there were 279K net adds in FY2013 (1.1% of the total subscriber base in South Africa). Hoping to grow volume and regain lost market share, MTN has recently launched a new promotion, offering a flat rate of 79c per minute on its Pay per Second service, billed per second to any local network at any time. Management indi-cated that their blended (includes free minutes) per minute pre-

paid revenue will fall sharply from the current level of 80c. As part of this strategy, management clearly expect an uplift in subscriber numbers to compensate. With 50% of revenue coming from MTN pre-paid services in SA, one can expect a sharp initial decline in revenues following the introduction of this new package. In ad-dition, the MTR cuts that came into effect on 1 April 2014 will prove a drag on results - group EBITDA margin expected to fall by approximately 1.3% going forward. Management expressed their commitment to seeking a permanent resolution to the MTR glide path and asymmetry, scheduled to be re-visited in September 2014.

Forecast 11% growth in EPS for FY2014… Management believe a reasonable longer-term growth outlook for Nigeria is in the region of 8-12% turnover growth in constant currency, with stable EBITDA margins in a 55-57% range for the next few years. In South Africa, we believe the long term sustaina-ble picture is less than 5% turnover growth, but with some margin improvement due to cost saving initiatives (SA opex reduced by 12.5% in H2 FY2013) and by squeezing more value from the distri-bution value chain. We interpret the prospect for South Africa as being a business that can grow 5% p.a at an EBITDA level. From the large and small opco clusters (Ghana, Cameroon, Ivory Coast, Uganda, Syria and Sudan), one can expect combined EBITDA growth in the region of 13-18% in constant currency, with stable margins. The net result of the above is likely to be Group EPS growth of about 11% in constant currency. The picture we are painting above assumes no further price wars and assumes that MTN SA can gain market share in the local market, so could be seen as best case.

Driving data growth… As traditional voice revenue remains under pressure, data and mobile money remain key areas of focus for the Group going for-ward. Data bolstered revenue growth in FY 2013, up 32.6% on a constant currency basis and makes up 15% of total revenue. It is worth mentioning the data opportunity in Africa, more specifically in the mobile banking space. Management guided that mobile banking should be 10% of group revenue, excluding South Africa, on a 5-year view (currently very low single digits). If this is achieved, it could add an additional 1.1% to group revenue per annum for the next 5 years.

Free Cash flow generation the key attraction... Capex peaked in FY2013 at R 30.164bn. Authorised capex for 2014 is 15% lower than that in FY2013 and will settle at 14-15% of group revenues by 2016. Coupled with this, EBITDA is expected to grow 7-8%. The net result is that we anticipate a positive FCF out-look for the group, specifically in 2015. Based on our model, the Group could be generating surplus cash (net of on-going capex and ordinary dividends at 1.3x cover) in the region of R 6.8bn in FY2015. This additional cash creates a number of opportunities for the group and could be the catalyst for an improvement in earnings growth for the Group. These include:

South Africa21%

Nigeria45%

Iran6%

Ghana5%

Cameroon4%

Ivory Coast4%

Uganda3%

Syria1% Sudan

1%

Small Opco cluster10%

Figure 4: Divisional EBITDA split

Source: Company data, Anchor Capital estimates

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Share buy-backs –1.2% (R3bn) of issued capital has been re-purchased by the group since 2011, which is not particularly aggressive. Management made the point of not using a big bang approach when it comes to share buy-backs and are taking a more conservative approach in this regard. With in-flated cash generation on the horizon, we could see a 1% dilution in the number of issued share capital in 2015 – a pos-itive sign for investors from an EPS perspective.

Corporate activity – the Group often sees opportunities to acquire smaller telco operators, licenses and assets however, valuation is the major stumbling block when it comes to putting pen to paper. The Group is likely to see more “in country” consolidation. Management still view greenfield deals as the most value accretive – eg a license in Ethiopia would be the ideal transaction with a population of 70 million and low penetration. A license fee of this nature would cost the Group US$ 3bn – easy to stomach given the group gener-ates R60bn EBITDA and only spends R2bn on interest.

Dividends – the company is in cash cow mode, returning cash to shareholders in the form of growing dividends, up 26% for FY 2013. This was in-line with earnings growth however, earnings growth was heavily flatted by a weak Rand. Adopting a progressive dividend policy, MTN is yielding 5.4% to December 2014. A cash-swollen balance sheet could result in dividend growth ahead of earnings (the Groups official guidance is a progressive policy of 5-15% earnings growth).

Conclusion…

MTN currently makes up approximately 8.2% of the SWIX. It is our view that many of the big funds both in South Africa and abroad hold MTN due to the benchmark risk associated with not holding the stock. Based on a reasonable expectation of earnings growth, one can expect 15% total return (10% EPS plus 5% DIV). Under the assumptions, 15% is a reasonable return but is probably the best case scenario. The downside risk to earnings are a lack of volume response to the groups tariff cuts and further potential price wars in other major markets. This could prompt a possibly re-rating/de-rating to the current share price. We don’t view the stock as espe-cially expensive or cheap, however MTN appears to be trading at a premium when compared to the average of its major peers (FWD PE of 13.4x versus global average of 11.7x) and lags from a dividend yield prospective (FWD DY of 5.4% versus global average of 6%). On weighing the risks of further price wars in major mar-kets and the dilutive effect this will have on the underlying opera-tions of the Group against the optionality created from the healthy FCF outlook for the Group, we do not see compelling val-ue in MTN at these levels. NEUTRAL—buying into any share price weakness at the R 200 level.

FY12 FY13 FY14 FY15

EBITDA 52 637 59 788 64 642 71 930

less: net interest -1 051 -2 300 -1 500 -1 500 less: capex -28 827 -30 164 -26 151 -24 983 less: taxation -11 835 -12 307 -13 145 -14 740 less: dividends -14 919 -16 210 -21 188 -23 828

Net cash flows -3 995 -1 193 2 658 6 879

Figure 5: Free Cash Flow Outlook (Rands in Millions)

Source: Company data, Anchor Capital estimates