Revenue increased by 49% from the previous year and the EBITDA margin increased to 43,4%. Exceptional PAT of R12 billion was recorded

Group finance directors' report

Introduction

MTN Group achieved solid performance in the 12-month period ended 31 December 2006. Although the Group's profile changed significantly through acquisitions concluded during the year, strong organic growth in traditional markets underpinned the Group's performance. South Africa and Nigeria had revenue growth of 22% and 31% respectively in highly competitive markets compared to the prior 12 months.

Acquisitions had a significant impact on the Group's results during the year, notably through the Investcom transaction. Consolidated results include that of Investcom for the six months to December 2006. The Investcom transaction was dilutive to the Group's attributable earnings (R633 million) and decreased adjusted HEPS by approximately 6% in the reporting period owing to the impact of financing costs related to the acquisition (R1,1 billion) and the impact of IFRS 3-related amortisation adjustments to intangible assets (R482 million) after tax.

The Group changed its financial year-end to 31 December in line with its operational cycle and international peer group. Consequently, the Group's prior period audited results ended December 2005 cover a nine-month period. In certain instances, to provide meaningful comparatives, the unaudited 12-month period ended 31 December 2005 has been used.

The Group's revenue increased by 49% to R52 billion when compared to the prior 12-month period to 31 December 2005. The revenue increase was driven mainly by the acquisition of Investcom coupled with strong organic growth in traditional markets. Excluding the R6 billion revenue impact from Investcom, year-on-year growth in revenue would have been 32%. Regionally, SEA is the largest contributor at 52% followed by WECA and MENA at 41% and 7% respectively.

The Group's EBITDA increased by 53% to R22 billion compared to the prior 12-month period. Excluding the R2,3 billion impact of Investcom, year-on-year growth in EBITDA would have been 37%, 4% above the revenue increase, reflecting efficiency improvements. SEA contributed 41% which is lower than its revenue contribution given its lower EBITDA margins. WECA contributed 51% of total EBITDA. The start-up nature of many of the MENA operations has resulted in a relatively small contribution of 5% to Group EBITDA.

Adjusted PAT increased to R12 billion compared to R7 billion for the nine months to December 2005.

Basic HEPS rose to 606,5 cents for the period, 69% above the 359,8 cents for the nine months ended 31 December 2005.

The Group's balance sheet changed significantly as a result of the acquisition of Investcom. Goodwill of R23 billion and intangible assets of R8,1 billion have been recorded as a result of the transaction.

The Group's total assets have increased by 116% to R97,0 billion since the prior reported period. Excluding Investcom assets and the impact of goodwill and intangibles relating to this transaction, the increase in the Group's total assets would have been approximately 14%.

The Group had net debt at 31 December 2006 of R22,9 billion of which R18,8 billion relates to the Investcom transaction. The net debt to EBITDA ratio at December 2006 was 1,02 times and 0,92 times if Investcom EBITDA is included for the full 12 months.

Macro-economic environment

Economic conditions in the markets in which the Group operates were favourable with reasonably low interest rates. Most currencies remained stable against the US dollar, except for the rand which weakened significantly during the reported period but recovered somewhat towards the end of the financial year. The telecommunications sector in which the Group operates has remained extremely competitive and is expected to intensify over the next year as new entrants launch their networks.

The table "Current vs previous periods' exchange rates" sets out the movement in the closing and average exchange rates between the rand and the currencies of the Group's major international operations.

The strengthening of the closing exchange rates of foreign currencies against the rand has resulted in the rand value of the assets and liabilities increasing by between 9% and 21%. While the most significant is the strengthening of the naira (11%), the strengthening of various eurolinked West African currencies have also impacted the Group balance sheet.

MTN Group

Revenue

The increase in Group revenue of 49% (32% excluding Investcom) versus the comparable period in the prior year is primarily attributable to the large increase in subscribers in all operations.

The SEA region is the largest contributor to Group revenue, accounting for 52% of the total, followed by WECA at 41%. Revenues in the South and East Africa region are highly dependent on South Africa, which accounts for 92% of the region's total revenue. WECA revenues are more diversified with Nigeria contributing 70% of the region's total revenue. Ghana, the second-largest operation in the region, contributed 8% of the region's revenue. This contribution will, however, change significantly in the next financial year when revenues of the former Investcom operations are consolidated for the full year.

MENA region accounted for 7% of Group revenue. Revenues for this region are expected to grow substantially as subscriber acquisitions increase in both Iran and Sudan, as well as from the full-year consolidation of all operations in this region.

Organic revenue growth from MTN South Africa, MTN Nigeria, MTN Uganda, MTN Cameroon, MTN Swaziland and MTN Rwanda was strong with revenue increasing by 27% to R42,8 billion.

Acquisitions have contributed to the diversification of the Group's revenue base. Investcom operations contributed R6 billion or 12% of Group revenue to 31 December 2006 and 2005 acquisitions contributed 5% of total Group revenue for the current year.

EBITDA

MTN Group EBITDA increased by 53% from the comparative period in the prior year, driven by strong revenue growth as well as the contribution from acquisitions, particularly Investcom. Excluding Investcom as well as the effect of acquisitions made in the previous financial year, organic EBITDA growth was 35%. Some 9% of this was due to the weakening of the rand against the functional currencies of the operating companies.

The South and East Africa region contributed 41% of total Group EBITDA. The MTN South Africa EBITDA margin of 33,9% compares favourably to the nine months ended December 2005 (32,3%) but unfavourably to the 12 months ended December 2005 (34,3%) due to increased expenses for 3G leased lines and net interconnect as a percentage of revenue decreasing by more than 3%. The West and Central Africa region contributed 51% of the Group's total EBITDA. Nigeria EBITDA increased 41% year on year and the margin improved by four points to 57% versus the prior 12-month comparable period. The improved EBITDA performance in Nigeria was a result of savings in operating expenditure due to cost-control initiatives. Nigeria's EBITDA contribution to Group EBITDA at R8,5 billion was marginally above that of South Africa's EBITDA contribution (R8,3 billion) for the first time.

Depreciation and amortisation

Group depreciation increased by R1,8 billion to R5,0 billion compared to the 12 months to December 2005.

Nigeria's depreciation charge increased by R867 million, due to additional capital expenditure and, to a lesser extent, the strengthening of the naira against the rand.

The depreciation charge from operations acquired in 2005 (Côte d'Ivoire, Zambia, Botswana, Congo-Brazzaville and Iran) increased by R240 million, of which R165 million results from a 12-month depreciation charge in 2006 compared to the proportional depreciation in 2005.

Investcom operations incurred R562 million of depreciation for the six months to December 2006, accounting for 31% of the increase in the Group's depreciation charge for the year.

Amortisation of intangible assets for the Group increased by R1 billion compared to the nine months to December 2005. The amortisation of intangible assets related to the Investcom acquisition totalled R587 million for the six months, while 2005 acquisitions accounted for an additional R130 million. A further R72 million related to the increase in shareholding of equity in Uganda.

Net finance costs

Net finance costs for the Group increased by R1,2 billion compared to the 12 months to December 2005 mostly due to financing costs of R1,1 billion related to the acquisition of Investcom.

Net finance costs in South Africa were higher than last year by R424 million mainly due to increases in long-term borrowings in the current year. MTN Nigeria generated net finance income of R92 million, an increase of R312 million from last year as a result of higher cash balances.

MTN's share of the fair value adjustment of the put option in Nigeria was R270 million which has been included in finance charges, while functional currency gains of R452 million were recognised in finance income for the year.

Taxation

The Group's tax charge has increased by R1,2 billion from the nine months ended 31 December 2005 mainly due to the increase in profits as well as the additional tax charge of R233 million related to former Investcom operations.

The effective tax rate increased from 17,4% to 17,6% due to tax adjustments in Cameroon and Côte d'Ivoire.

The Group's effective tax rate would have been approximately 35% in the current year excluding the positive effect of deferred tax in Nigeria had the pioneer status tax exemption not been in place and assuming an effective tax rate of 33,5% in Nigeria.

According to IAS 12: Income Taxes, MTN Nigeria has been obliged to recognise a deferred tax asset representing the tax effect of the temporary timing differences due to depreciation having been recognised and capital allowances for tax purposes only being recognised in the future. To date the Group has recognised a deferred tax asset of R2,6 billion, of which R650 million (MTN's share) was recognised in the current year. The Group has adjusted its headline earnings to exclude this positive effect. It still needs to be determined whether the reversal of this deferred tax asset in future will also be reported as an adjustment to headline earnings.

From 1 April 2007, Nigeria's tax charge and cash tax payable will be significantly higher than the statutory tax rate of 30% as a result of:

• the commencement provision of Nigerian tax law which results in double taxation leading to a higher tax charge,
• a portion of the deferred tax asset to be used during the period.

It is currently estimated that Nigeria's effective tax rate to December 2007 will be 52% (refer graph on page 38). This is higher than the previously forecast 47% rate for 2007 due to the deferred tax effect of the revised depreciation charge.

A gain was made on the currency hedge for the Investcom transaction. This gain would have been subject to tax at 29%, were it not for the National Treasury having proposed legislation that treats gains and hedging costs as part of the base cost for capital gains tax purposes and relieves the gain from income tax. The amendment, once promulgated, will have an effective date of 31 December 2006. The legislation is expected to be tabled before parliament for approval in April/May 2007 and promulgated shortly after that.

 Headline earnings per share

Adjusted HEPS of 584,7 cents was achieved for the 12 months to December 2006. This compares favourably with adjusted HEPS of 338,2 cents for the nine months to December 2005.

The board continues to report adjusted headline earnings which have been adjusted for:

• The reversal of the Nigeria deferred tax credit. This decreased HEPS during the period by 37 cents.
• The implementation of IFRS requires the Group to account for a written put option held by a minority shareholder of one of the Group's subsidiaries, which gives the minority the right to require the subsidiary to acquire its shareholding at fair value. Prior to the implementation of IFRS, the shareholding was treated as a minority shareholder in the subsidiary as all risks and rewards associated with these shares, including dividends, accrued to the minority shareholder.

IAS 32 requires that under the circumstances described above: (a) the present value of the future redemption amount be classified from equity to financial liabilities and that the financial liability thus reclassified subsequently be measured in accordance with IAS 39; (b) in accordance with IAS 39, all subsequent changes in the fair value of the liability together with the related interest charges arising from present valuing the future liability, be recognised in the income statement and (c) the minority shareholder holding the put option no longer be regarded as a minority shareholder, but rather as a creditor from the date of entering into the put option.

The fair value movement on the financial instrument resulted in a decrease in HEPS of 6,8 cents per share. The finance charges reflected as a result of this treatment had a negative impact of 17,2 cents and the Group's increased share in the results of the subsidiary, as a consequence of the minority shareholder being accounted for as a creditor, was 8,7 cents. This resulted in a net negative impact of 15,3 cents which has been reversed in the adjusted HEPS.

The board believes that accounting for this put option as required by IAS 32 and IAS 39 does not adequately reflect the economic realities of the transaction in that the minority shareholder currently participates in the equity risks and rewards of the subsidiary. Accounting for changes in the fair value of the financial instruments in the income statement is misleading, because if the put option was exercised at fair value it stands to reason that these shares could be sold for the same price with no impact on profitability or cash flow. Inherently, a transaction at fair market value implies that one party receives an asset at fair value and the other party pays for it at fair value. To suggest that a profit or loss is made on this transaction is, in the opinion of the directors, inherently misleading.

Operations

MTN South Africa

Revenue

MTN SA revenue was 22% higher than the comparative period last year, driven by growth in the subscriber base. Excluding handsets and accessories, revenue increased by 23% compared to the prior 12-month period.

Postpaid subscribers increased by 29% while postpaid revenue grew by 9%. The correlation between the increase in postpaid connections and increased revenues is reduced significantly as connections were at lower-end packages. Postpaid ARPU declined by R54 to R487 as a result of the sales mix from MyChoice 75 TopUp, Xpress Message and MyCall 100. In addition, a portion of pre-paid subscribers migrated from pre-paid late in the year and has not contributed significantly to postpaid revenue.

The growth in pre-paid revenue by 42% is mainly attributable to the successful launch of the new pre-paid value proposition (lower denominations and rebalanced tariffs). The R10 and R15 airtime cards introduced in 2006 continued their successful penetration into the market and contributed to MTN South Africa achieving an ARPU of R94.

Interconnect revenue increased by 13% year on year as a result of increased minutes terminated from other mobile operators due to the growth of the mobile market. Fixed-line interconnect revenue remained relatively static.

Total handset and accessories revenue grew by 20% on significant growth in pre-paid volumes. Other revenue items were directly proportional to the increase in subscriber numbers.

EBITDA

MTN South Africa's EBITDA was 21% higher than the comparable period last year, driven mostly by higher revenues.

• Direct network operating costs were 38% higher mainly due to increased bandwidth requirements for the EDGE, 3G and HSDPA roll outs, as well as from the increased number of base stations that have been rolled out to expand coverage and capacity. Maintenance costs increased as focus shifted after an intensive 3G roll out in the previous financial year. Outsourcing and various other lower-cost solutions are being investigated to reverse this trend while actively promoting data traffic to further increase revenues.
• Selling, distribution and marketing costs increased by 25% mainly due to increased service provider commissions and discounts. These costs rose due to increased connections by independent service providers, as well as the changed commercial model compelling the payment of effectively higher discounts due to competitive pressures. Furthermore, increased TV and outdoor advertising relating to the Africa Cup of Nations held in Egypt during the first half of the year also contributed to higher costs. Focus continues to be applied to these cost areas.
• Costs of handsets and other accessories increased by 23% primarily due to an increase in volumes. Because of the competitive nature of the market, the increased handset costs have not resulted in similar increases in revenues.

MTN Nigeria

Revenue

Revenue growth in naira of 19% versus the prior year was achieved as a result of higher subscriber numbers. The strengthening of the naira against the rand resulted in revenue growth of 31% in rand terms.

The revenue growth was mainly driven by the 47% year-on-year increase in the subscriber base. MTN Nigeria achieved 3,9 million net connections for the period through aggressive promotions and incentives for distributors. It should be noted, however, that net connections are increasingly at the low-end of the market resulting in declining minutes of use.

New price plans were introduced in the third quarter of 2006 tailored to different customer segments. On-net call tariffs were also reduced leading to significant growth in the pre-paid subscriber base.

The 44% growth in interconnect revenue was mainly driven by growth in the mobile market.

MTN Nigeria has divested from the handset market, resulting in handset revenue being significantly lower than last year. Most handsets sold in December 2006 as part of the holiday promotion were sold at a very low mark-up.

EBITDA

It is pleasing to note that the percentage increase in revenue was higher than the percentage increase in operating expenditure due to tight control of operating costs. As a result MTN Nigeria's EBITDA was 41% higher than the prior year and achieved a 4% increase in EBITDA margin. The areas of significant expenditure growth were as follows:

• Direct network operating costs increased by 29% mainly due to increases in rent and utilities as well as maintenance related to the network roll out. Increases in fuel costs, driven by higher oil prices, as well as increased use of diesel due to network expansion, further contributed to higher costs. In addition, local and state taxes on BTS sites also continue to affect these costs.
• Sales, distribution and marketing expenses increased by 38% in line with the expansion of the subscriber base, mostly incurred in dealer commissions and discounts. The sales discount payable to dealers on starter kit purchases was increased significantly in March 2006.
• The 2005 general expense category included a charge of R150 million for impairment of fixed assets. This charge did not recur in 2006 resulting in reduced general expenses.

Irancell

The financial year ended December 2006 was the first full financial year for Irancell and there are therefore no prior year comparatives.

As the commercial launch only took place in October, MTN Irancell did not have a significant impact on Group results.

Ghana

MTN Ghana was consolidated into MTN Group effectively from 1 July 2006 and recorded revenue of R1,7 billion for the six months to December 2006. Ghana's EBITDA contribution, although somewhat lower due to increased competition, remained healthy at 52%. The main item of expenditure that contributed to the lower EBITDA margin was a 69% increase in staff expenses due to an increase in the number of employees.

Sudan

MTN Sudan increased its subscriber base by almost 800 000 from December 2005 to 1 million at December 2006. Over 70% of net connections were achieved in the second half of the year, as the network roll out accelerated.

MTN Sudan was consolidated into MTN Group effectively from 1 July 2006 recording revenue of R570 million for the six months to December 2006 and EBITDA of R99 million.

Balance sheet

MTN's balance sheet transformed substantially following the acquisition of 100% of Investcom as well as the acquisition of additional shares in MTN Uganda, MTN Nigeria and Côte d'Ivoire during the year. These acquisitions had a material impact on the balance sheet of the Group, with a cash outflow of R28,7 billion as well as the issue of more than 189 million new shares, and corresponding increases in tangible and intangible assets and long-term borrowings.

The total assets of the Group increased by R52 billion to R97 billion at 31 December 2006 compared to total assets of R45 billion at 31 December 2005.

The closing balance sheet has also been affected by the South African rand weakening by 11% against the Nigerian naira.

Property plant and equipment

Property, plant and equipment increased by R9,9 billion from the beginning of the financial year. Capital additions have resulted in cash outflows of R9,8 billion while the acquisition of Investcom has resulted in property, plant and equipment increasing by R3,8 billion. Exchange differences, mainly between the rand and naira, increased property, plant and equipment by R1,7 billion while depreciation decreased property, plant and equipment by R5 billion.

Intangible assets have increased by R33,3 billion comprising goodwill of R23,8 billion, licences of R5,3 billion and subscriber bases of R3,5 billion primarily as a result of the Investcom acquisition.

IFRS3: Business Combinations requires that all intangible assets be fair valued on acquisition. This has resulted in the recognition of subscriber bases of R4,4 billion (relating to all acquisitions to date) which are amortised over their estimated useful lives of three to five years. The licences of the Investcom operations have also been fair valued resulting in the recognition of intangible assets of R4,4 billion.

Goodwill of 23 billion, representing the difference between the purchase consideration and the fair value of net assets of Investcom LLC, has been recognised. The majority of this goodwill has been provisionally allocated to Ghana (R12,8 billion), Syria (R1,7 billion), Yemen (R3,5 billion) and Sudan (R2,3 billion). Goodwill was effectively reduced by a R2,5 billion gain from hedging the cash settlement of the Investcom transaction. In accordance with IFRS 3, the Group has opted to provisionally allocate the purchase price of business combinations to underlying tangible and intangible assets and liabilities. These provisional allocations will be finalised within 12 months of the acquisition and appropriate retrospective adjustments may be required upon finalisation. R0,6 billion represents goodwill on the acquisition of additional shares in MTN Uganda in July 2006, converting the joint venture operation into a fully consolidated subsidiary of the Group.

In accordance with IAS 38 Intangible Assets, goodwill is not amortised but tested annually for impairment and no impairment provision was considered necessary for the current financial year in respect of any of the Group's cash generating units. As the purchase price allocation in accordance with IFRS 3 has not yet been finalised for Investcom LLC, goodwill provisionally allocated to Investcom LLC cash-generating units has not been formally tested for impairment. High-level reviews have, however, not shown any indications of impairment.

In the previous year, Irancell capitalised the licence acquired in Iran at a value of EUR300 million. Certain minimum fees based on revenue are guaranteed and will be paid annually. MTN Irancell has not raised a liability in this regard as these future fees do not meet the definition of a liability as they only become an obligation in the year in which they are due and they are not at present nonexecutory unconditional obligations. The gross value of these fees guaranteed by MTN Irancell over 15 years is R39,2 billion at an exchange rate of 1 436 Iranian rials per rand. R7,1 billion will be due within five years while R32,1 billion has been guaranteed in the later 10 years of the licence. Discounting the guaranteed fees would result in a present obligation of R8,3 billion.

Deferred tax

The Group's deferred tax asset has increased from December 2005 due to timing differences in Nigeria of R0,8 billion while the movement in exchange rates increased deferred tax by a further R0,2 billion.

A deferred tax liability of R1 billion was raised on the intangible assets related to the Investcom acquisition. Of this amount, R104 million was released to the income statement in the current period.

Current assets

Current assets of the Group increased by R6,9 billion to R20,6 billion at 31 December 2006. The majority of the increase is due to Investcom contributing R5,6 billion to Group current assets, which include a cash balance of R3,6 billion.

Despite the cash outflow of R9,8 billion for capital expenditure, R1 billion for dividends and R4,1 billion for the additional shares in Côte d'Ivoire, Mascom, Uganda and Nigeria, the Group's cash balance has increased by R2,5 billion to R10,1 billion.

Interest-bearing liabilities

Gross interest-bearing debt of the Group increased by R24 billion to R33 billion. A significant portion of the increase relates to secured long-term borrowings obtained to fund the Investcom transaction. At yearend, this debt comprised:

• A four-year rand-denominated bond of R5 billion bearing effective interest at 10,01%
• An eight-year rand-denominated bond of R1,3 billion bearing effective interest at 10,19%
• Rand-denominated five-year term loan of R7 billion bearing effective interest of 8,9% repayable bi-annually from December 2007
• US dollar-denominated five-year term loan of R5,3 billion bearing effective interest of 6,25% repayable bi-annually from December 2007. The dollar exposure for this loan has been fully hedged
• A three-year revolving credit facility of US$1,25 billion of which US$862 million was drawn to settle Investcom shareholders and was repaid in full by February 2007. At 31 December 2006, the total amount outstanding was R0,3 billion.

MTN South Africa's debt increased by R3,2 billion primarily as a result of funding its network roll out and due to dividend payments. Investcom accounted for R1,6 billion of the Group's interest-bearing liabilities.

Net debt of R1 billion at 31 December 2005 increased to R22,9 billion due to the impact of acquisitions during the year. The Group's target is to reduce total net debt to 0,4 times EBITDA by the end of 2008.

Other liabilities

Other liabilities consisting of trade payables, accruals, taxation, provisions and unearned income, have increased by R4,7 billion. Investcom operations accounted for R2,8 billion of the Group's increase in other liabilities, while the impact of exchange rate fluctuations resulted in an increase in trade and other payables.

The discounted fair value of put options held by minority shareholders of certain subsidiaries have increased from R1,4 billion to R2 billion; and are included in non-current liabilities.

Cash flow

Cash flow from operating activities

Cash generated from operations improved strongly from R11,4 billion (nine months) in the prior period to R22,9 billion due to strong operating performance. The Group generated cash of R17,6 billion after paying a dividend of R1,0 billion and tax of R4,1 billion. R2,2 billion tax was paid in South Africa, of which R900 million was accrued at December 2005 but only paid in the current financial year.

Free cash flow

The Group's established operations reported positive free cash flows. Irancell, Sudan and Afghanistan incurred negative cash flows as these operations have only recently commenced commercial activities.

Cash flow from investing activities

The Group invested R9,8 billion in network infrastructure and other property, plant and equipment during the financial year, with Nigeria and South Africa incurring R3,6 billion and R2,4 billion respectively. The R23,8 billion spent on the acquisition of Investcom, as well as R4,8 billion for additional equity in MTN Côte d'Ivoire, Mascom, MTN Uganda and MTN Nigeria, contributed significantly to the increase in net cash used in investing activities.

Capital commitments

The Group expects to make significant additional investments in capital expenditure, mostly in network infrastructure, over the next financial year. Nigeria, South Africa and Iran have approved commitments of R5,3 bilion, R3,6 billion and R2,7 billion (49%) respectively. These commitments will be financed through cash flows from operations and raising appropriate debt facilities in operations where cash flows are insufficient.

Dividends

A dividend of 90 cents per share has been declared. The Group's dividend policy of five to six times adjusted earnings has not been altered.

Conclusion

The Group's performance for the year was positive with strong growth in revenue and profitability. The acquisition of Investcom, while dilutive to current-year earnings, will contribute increasingly to the diversification of the revenue and earnings base of the Group in future. Despite significant investments on new acquisitions (R28,7 billion) and on capital expenditure projects (R9,4 billion), the Group's net debt/ EBITDA criteria has been maintained.

RD Nisbet
28 March 2007