Africa and the Middle East Region MTN Group Ltd

Stock Pitch

MTN:SJ 25.11.14

MTN Group Ltd

COMPANY OVERVIEW Domicile: South Africa MCAP: 406,176M ZAR (1 ZAR=0.091 USD) Founded in 1994, MTN Group Ltd (MTN) is a telecommunications company offering mobile communication and related products and services to individuals and businesses across Africa and the Middle East. MTN has a workforce of 25,424 employees, approximately 210 million subscribers and is market leader in 15 of the 22 countries it operates in. In 2013, MTN registered revenues of 136,495M Rand (= 12,480M USD), from which 75% are attributable to revenues in voice services. MTN also provides data, internet and messaging services, sells mobile devices and holds significant investments in telecommunication tower management companies. INVESTMENT RATIONALE The rapidly expanding middle class in Africa and the Middle East brings with it growing expenditures and, more specifically, increased demand for telecommunication and connectivity, making Africa the world’s fastest growing mobile phone market. MTN is already well established in frontier markets with high mobile penetration rates, such as South Africa (137%), Nigeria (75%), and Iran (111%), whilst also possessing the financial ability to further expand into less penetrated areas with enormous growth potential. MTN shows solid and continuously improving financials: they boast superior efficiency, liquidity, profitability and debt coverage as compared to their main competitors, Bharti Airtel and Vodacom. Moreover, MTN is committed to a dividend policy of absolute growth, having increased their dividend per share by 26% in 2013, to 1,035 cents. MTN’s focus on improving operational efficiency is reflected in the upward trend of the EBIT and Profit margins. Finally, MTN have and continue to reposition themselves in markets where they are the price leaders, by focussing on consolidating their market power in less competitive sectors, such as data services, thereby increasing their growth potential further. MARKET POSITION MTN currently operates in 22 countries in Africa and the Middle East. Furthermore, it has a leading position in most of the markets with an average market share around 45%. In the following markets MTN ranks second: South Africa, Iran, Zambia, Syria, Cameroon, Sudan and Cyprus. The only country where MTN has the third spot is South Sudan, in all other market it is in a strong leader position. The company had approximately 207 082 million subscribers as of December 31, 2013 and is considered as Africa’s largest telecoms provider. Additionally, it acquired Verizon SA, gaining 23% of the lucrative data market in South Africa. MTN is also one of Africa's largest internet providers, however losing out in the fibre optic market to Liquid Telecoms, which is compensated by targeted investments, such as building a network of 120MB fibre optic cables throughout Nigeria. MANAGEMENT STRUCTURE & INTEGRITY MTN Group has a regionally centralised management structure, with Sifiso Dabengwa as CEO. The ‘Group Board’ heads the entire organisation, with each director heading a sector of the Group. However, by organising individual boards for each country, efficiency is increased and a more targeted approach adopted. MTN has a uniting philosophy which underpins the much-lauded growth of the brand and the business -“We are a community, not a company”. The company has a zero tolerance approach to fraud, bribery and © University of St Andrews Investment Society

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MTN:SJ 25.11.14

MTN Group Ltd

corruption, was ranked the second most trusted company in South Africa (2009) and voted the most trusted telecommunications operator in Zambia (2014). MTN has been an integral part in efforts to tackle the spread of Ebola in countries where the company operates and has recently unveiled the “United against Ebola” initiative, towards which it has committed US$10M and is now inviting customers to participate in an SMS campaign to donate a minimum of US$1. GROWTH PROSPECTS AND RISK With high population growth and an increasing middle class, MTN has a guaranteed and increasing client base for its services. This coupled with the opportunity to move into further regions in Africa (there are 33 countries in Africa where it does not have a presence) and increase market share in regions where it operates such as the Yemen and Zambia where market share is lower (43% and 42% respectively) proposes a path for continued future increases in revenue for the company. Additionally, MTN is currently moving into the data market. The voice market is highly competitive and saturated, and so profit margins are low here. The market for data is less contested in the region. Moving into this market and becoming a key player here is a key and potentially very lucrative strategy for the company. A key risk currently faced in the Africa region relates to threats to the client base. Ebola has had a stifling effect on markets (World Bank issued a report this past week that says the outbreak could cost Sierra Leone, Liberia and Guinea more than $800 million by the end of 2015). And there is risk arising from high political uncertainty in regions in which MTN operates such as the Congo and Sudan, which are in states of civil unrest. However, telecoms services have uniquely stable demand, especially MTN, which operates at a Beta of 0.75, critical in crisis situation, e.g. mobile phones provide vital data to health workers and text messaging can help streamline humanitarian aid delivery and allow individuals to call helplines. Thus, MTN’s client bases will not fall away in the face of Ebola or crisis as substantially as for e.g. companies in the furnishing industry. FINANCIAL POSITION MTN’s commitment to increasing the shareholder dividend has been demonstrated by its constant growth in share price and constant dividend yield. Dividend yields have remained at approximately 4%, while the share price has increased by 60% over the past three years. Strong price performance has been the result of healthy free cash flow, which has allowed MTN to expand in the region. With regards to the stability of its financial structure, MTN boasts a current ratio that is far higher than its competitors at 1.30:1 and is able to cover interest payments more than five times over. The latter puts MTN in a safe position given the instability of the region. MTN is financed by approximately 50% equity and 50% debt. This level of debt is indicative of MTN’s ability to raise funds in the market and of the stability of its core business in South Africa. In M ZAR Revenue EBITDA EBIT Net Profit

2009 111.947 46.063 31.588 17.161

2010 114.684 47.537 31.906 16.827

2011 121.884 54.750 37.802 23.787

2012 121.867 52.637 40.424 20.704

2013 139.495 59.788 39.183 26.289

Growth 21.93% 29.80% 24.04% 53.19%

SHAREHOLDER STRUCTURE The number of issued shares at the end on FY2013 amounted to 1,873,278,848 and distributed across 144,595 shareholdings. 67.81% of MTN’s shares are owned by the public. Out of the 32.19% of remaining shares, the only shareholders possessing more that 5% of total shares are Lombard Odier Darier Hentsch & Cie (9.78%) and the Government Employees Pension Fund (17.02%).

© University of St Andrews Investment Society

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MTN:SJ 25.11.14

MTN Group Ltd

CLOSING POSITION The stock is expected to have reached the 28,000 cents mark by the end of 2015 (+25%, as compared to the current share price). The position should be closed if the process of restructuring turns out to be more of a burden than a benefit to the company, which will be reflected in the company financials, e.g. decreasing debt coverage abilities and contracting margins. Alternatively, if profit margins in the data sector contract, the position should be reconsidered. Equally, if political instability as well as Ebola get out of hand, the position should be reconsidered as well, however, this holds for all investments in the region in general.

© University of St Andrews Investment Society

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