Group chief financial officer's report
MTN's financial performance for the year reflects solid progress in growing revenue and EBITDA (earnings before interest, taxation, depreciation and amortisation). Revenue for the year increased 10,9% (8,5%*), with the majority of our operations delivering strong organic revenue growth. Nigeria experienced a challenging period following significant tariff declines amid heightened competition. However, the operation delivered consistent month-on-month growth in the last quarter of 2012, highlighting the strong underlying demand which we expect to continue in 2013.
EBITDA increased 8,2% to R57 978 million** with an EBITDA margin of 42,9%**. While Nigeria negatively impacted the Group's overall margin, encouragingly we saw margin improvement across the majority of our large opco cluster with year-on-year organic growth in EBITDA of 20,7%**.
We delivered on our commitment to accelerate our network investment, with R30 101 million capitalised for the year. In an effort to accelerate our 2013 capital expenditure (capex) programme, the reported capex for 2012 includes some equipment delivered for part of the 2013 rollout. We believe the strong momentum achieved in network expansion will be a key factor in securing our continued growth over the medium term.
Strategic considerations for the period
Currency movements continued to impact MTN Group results. During the year under review, the average Nigerian naira rate strengthened 10% against the rand, while the average Iranian rial weakened 14% against the rand. A new official trade rate for the Iranian rial was introduced in the fourth quarter of 2012 and hence the full impact of this effective devaluation will be felt in the 2013 financial year. The closing rate for the Iranian rial was IRR24 596 to the US$, 121% weaker than a year earlier.
Furthermore, in 2012, the average Ghanaian cedi was 10% softer against the rand and the average Syrian pound was 28% weaker against the rand. Where possible, entities in the Group use forward contracts to hedge their actual exposure to foreign currency and the Nigerian subsidiary places foreign currency on deposit as security against letters of credit when each order for imports is placed. Where possible, the Group manages foreign currency translation risks primarily through borrowings denominated in the relevant foreign currencies.
A number of once-off costs had a significant effect on earnings. These relate to the legal challenge by Turkcell and the Hoffmann Committee costs (approximately R300 million), Iran tax-related charges (approximately R250 million) and our new shared services initiative (approximately R200 million) - the latter is critical to our strategic objectives of innovation and best practice, as well as transforming our operating model.
Funding in challenging markets
Funding in select markets remains a challenge for the Group. We, however, continue to constructively engage with regulatory authorities and financial institutions and have made good progress in this regard.
Group revenue increased 10,9% to R135 112 million, supported by solid growth in South Africa (7,1%) and a number of operations which continued to record strong organic revenue growth: Iran (26,1%), Ghana (21,3%), Uganda (16,2%), Sudan (28,3%) and Ivory Coast (17,0%). The weakness in the average rand exchange rate during the year also supported the improvement in reported revenue.
Group data revenue increased 58,5%* and was an important driver of total revenue growth. Outgoing voice revenue for the Group increased by 7,0% to R85,1 billion, contributing 63% to revenue. This was driven by promising growth in South Africa, Ghana and Iran. Interconnect revenue for the Group increased by 0,2%, impacted mainly by a 16,9% decrease in MTN South Africa's interconnect revenue due to regulator-agreed decreases in mobile termination rates implemented on 1 March 2012.
Total operating costs increased by 13,4%. This was mainly due to higher direct network operating costs impacted by an increased number of sites and higher fuel costs. These costs are a result of efforts to remain competitive and expand the network significantly, which in turn are key to creating a distinct customer experience and driving sustainable growth.
Handset and accessories costs increased by 20,0%, driven largely by South Africa which sold 6,7 million pre-paid phones and 1,3 million post-paid phones during the year. Group employee costs represented 10,0% of operating expenditure, from 9,9% in 2011. High rates of wage inflation in some countries as well as competition for skills are putting upward pressure on employee costs. Although the total number of sites in Nigeria increased by 20% in the year, we were able to maintain the ratio of diesel costs to revenue because of efforts to ensure more sites use hybrid power. In 2012, in Nigeria we had 2 550 hybrid power sites, compared to 988 in 2011.
Group EBITDA increased 7,0% to R58 564 million, which includes R586 million related to the profit on tower deals. On a normalised basis, EBITDA was R57 978 million, with an EBITDA margin of 42,9%. The growth in EBITDA was supported by solid organic growth in South Africa (6,5%) and particularly strong results from Iran, Ghana, Uganda, Sudan and Ivory Coast where organic EBITDA growth was 30,8%, 22,6%, 22,4%, 58,5% and 13,2% respectively. After a challenging year, Nigeria reported a decline in EBITDA of 6,2% (organic). A number of once-off costs, referred to earlier, resulted in an approximate R1,0 billion reduction in head office EBITDA. The combined impact of these on the EBITDA margin was approximately 0,7%.
Capex increased by 69,9% to R30 101 million as we focused on capital investment across the Group, notably in South Africa and Nigeria, to deliver on our strategic objective of driving sustainable growth. During the year, South Africa rolled out 300 2G sites and 1 087 3G co-located sites and Nigeria rolled out 1 414 2G sites and 1 175 3G co-located sites. South African capex of R6,4 billion, a 56,3% increase on the prior year, was impacted by R749 million capitalised fibre leases previously treated as operating leases.
The pre-ordering of capital equipment for the 2013 rollout resulted in a R2,0 billion year-on-year increase in inventory and 'work in progress'. The weakening in the rand meant capex increased by R1 379 million. If there had been no change in currency rates during the year, capex would have been R28 722 million.
Interest and tax
Net finance costs were R4 157 million, an increase of R2 575 million on the previous year, due to the effects of net forex losses. The weakness in the Syrian pound, which declined 60% over the year to the US$, resulted in a loss of R1 507 million related to the dividend payable, while the dividend due from Iran resulted in a loss of R1 191 million with a further R243 million related to the revaluation of Iranian tax balances following the decline in the Iranian rial in the last quarter. Iran incurred additional forex losses of R567 million, while vendor financing and current accounts in Sudan resulted in a forex loss of R373 million.
The Group's taxation charge decreased by 6,8% to R12 913 million and the effective tax rate decreased 1,9 percentage points to 34,9%. The lower tax charge and effective tax rate was mainly due to a deferred tax credit movement, and the discontinuance of the secondary tax on companies (STC) in South Africa during the year, resulting in no STC on the 2012 interim dividend declared.
Earnings per share
Attributable earnings per share (EPS) increased 0,6% to 1 126,4 cents. Headline earnings per share (HEPS) increased 1,9% to 1 089,1 cents from 1 068,6 cents. The depreciation of the Syrian pound, Iranian rial and Sudanese pound impacted reported HEPS by 82,0 cents, 79,3 cents and 17,2 cents respectively.
Highlights of the statement of financial position
Assets and liabilities were negatively impacted by the depreciation in the Iranian rial, Syrian pound and Sudanese pound. Property, plant and equipment increased 8,2% due to the higher capital expenditure in the second half of 2012. Current assets decreased 10,8% mainly because of decreases in cash balances. Interest-bearing liabilities decreased by 4,4%.
Net cash decreased by 53,0% to R5 519 million from R11 817 million, largely a result of increased dividend payments, capex and share buy-backs. At year end, the Group had net cash of approximately R7 034 million in Iran and Syria. We continue to explore acceptable channels that are compliant with applicable sanctions for repatriation of these funds.
In line with our strategic objective to create and manage stakeholder value, the Group reviewed the dividend policy which was previously based on a payout ratio. In light of the ongoing exchange rate volatility and the impact of this on reported earnings, we took the decision to move to a dividend policy of absolute growth in dividends for the coming three-year period through to the end of 2015. While we aim to grow dividends in a range of 5% to 15%, these payments remain at the full discretion of the board of directors and will be considered by taking account of the growth needs of the business and the associated free cash generation. For 2012, our final dividend of 503 cents per share implies growth in the full year dividend for 2012 of 10%.
In the year, the Group spent R2,1 billion buying back shares in MTN on the open market. This brings the total repurchased shares since the buyback programme began in 2011 to 22 million shares.
We will continue to focus on managing our margins by offsetting declining voice revenue by increasing the contribution of data and ICT services, as well as focusing on optimising costs. We will also continue to evaluate opportunities to share both passive infrastructure as well as fibre.
Due to changes in International Financial Reporting Standards, from 2013 MTN's investments in joint ventures will be accounted for on the equity basis.
The negative impact of adverse movements in foreign exchange rates is anticipated to lessen in the year ahead and this, together with a lower tax rate, should support growth in reported earnings for 2013. We believe the acceleration in our network rollout during 2012 as well as the significant 2013 capex commitment, positions us well for sound growth in the medium term.