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CommentaryREVIEW OF RESULTS MTN Group Limited (MTN Group) continued to deliver a solid performance in the six months to 30 June 2007. The results of the comparative period to 30 June 2006 do not include the results of the Investcom acquisition, which was concluded in July 2006. MTN Group reports operational performance by region, namely South and East Africa (“SEA”), West and Central Africa (“WECA”) and Middle East and North Africa (“MENA”). The Group recorded revenue growth of 69% to R34,2 billion (30 June 2006: R20,2 billion). Excluding the positive eff ect of foreign currencies strengthening against the Rand, Group revenue growth would have been 60%. At 30 June 2007, Investcom contributed 21% to Group revenue and accounted for 35% of the revenue growth. Nigeria and South Africa were also key contributors recording increases of 51% and 15% respectively for the six-month period to 30 June 2007. Nigeria’s growth in local currency was 33% and the strengthening of the Naira against the Rand contributing 18%. Nigeria reported high revenue growth due to increased subscriber numbers and newly introduced competitive off ers in the last quarter of 2006. The Group’s earnings before interest, tax, depreciation and amortisation (“EBITDA”) increased by 75% to R15,2 billion when compared to the six-month period ended 30 June 2006. Excluding the positive eff ect of foreign currencies strengthening against the Rand, Group EBITDA growth would have been 64%. The SEA region contributed 34% to Group EBITDA growth and WECA contributed 54%, with Nigeria contributing 70% of the WECA region’s EBITDA. The MENA region contributed 8% of total EBITDA, up 3% from 31 December 2006. Profi t after tax (“PAT’) increased 16,8% to R6,3 billion compared to the R5,4 billion for the six months to 30 June 2006, notwithstanding the unfavourable impact of the expiry of the pioneer tax holiday status of the Nigeria operation. Basic headline earnings per share (“EPS”) rose to 304,2 cents for the period, 5% above the 289,1 cents for the six months ended 30 June 2006. Adjusted headline earnings per share increased to 324,7 cents for the period from 278,5 for the six months ended 30 June 2006. The Group recorded 48,2 million subscribers at the end of June 2007, a 20% increase from 31 December 2006. This refl ects the strong growth opportunity in the expanded footprint. The former Investcom operations recorded subscriber growth of 28% to 10,8 million from 31 December 2006, contributing 22% of Group total subscribers at 30 June 2007. Subscribers in the SEA region increased by 9% to 17 million, the WECA region by 18% to 23,2 million subscribers and the MENA region recorded a 63% increase to 8 million subscribers. Income statement analysis Group consolidated revenue increased by 69% to R34, 2 billion (30 June 2006: R20,2 billion) largely due to strong subscriber growth. The acquisition of Investcom accounted for 35% of this growth. Other key contributors were Nigeria which increased by 51% to R9,7 billion and South Africa, which increased by 15% to R13,1 billion. Ghana and Syria generated revenue of R2 billion each. The Investcom operations revenue increased by 98% to R7,5 billion compared to the six months to 30 June 2006 (unaudited). These operations contributed R2,8 billion (18,9%) to WECA revenue and R4,7 billion (92%) to the MENA revenue for the period under review. Group EBITDA increased by 75% from 30 June 2006 to R15,2 billion (30 June 2006: R8,7 billion). 20% of this is a result of the Investcom acquisition, while revenue growth, positive exchange rate movement and initiatives to improve operational efficiencies were positive contributors . The EBITDA contribution by Investcom was R1,4 billion and R1,3 billion to the WECA and MENA regions respectively. Excluding results from Investcom, organic EBITDA growth was 40% to R12,1 billion. Group EBITDA margin improved to 44,4% from 42,9% for the six-month period ended 30 June 2006. This was underpinned by the inclusion of Investcom’s high margin operations as well as strong margins in Nigeria of 59% (30 June 2006: 56%). South Africa, Ghana, Sudan and Syria margins for the six months ended 30 June 2007 were 34%, 52%, 37% and 32% respectively. Group depreciation increased by R1,2 billion to R3,2 billion for the period ended 30 June 2007. Excluding former Investcom operations and MTN Irancell, depreciation amounted to R2,5 billion. This was driven mainly by additional capital expenditure for the network capacity expansion in Nigeria where depreciation increased by 26% to R1,5 billion compared to the six-month period to 30 June 2006. The depreciation charge has also been unfavourably impacted by the depreciation of the South African Rand against foreign currencies. The depreciation relating to Investcom operations was R611 million with Ghana, Syria and Sudan at R151 million, R247 million and R83 million respectively. Group amortisation of intangible assets increased by R867 million when compared to the six months to 30 June 2006. The amortisation relating to the acquisition of Investcom was R568 million for the six months to 30 June 2007, while MTN Irancell contributed R67 million to this total. Net finance costs totalled R1,5 billion, which primarily relates to the fi nancing of the Investcom acquisition. The Group taxation charge increased by R1,8 billion compared to the six months ended 30 June 2006. This mostly relates to the end of the pioneer status tax holiday in Nigeria (R1 billion). The former Investcom operations contributed R264 million and the balance of the increase is due to the increased profi tability of the rest of the operations. MTN Group’s eff ective tax rate increased from 20% to 33% mainly due to the end of the tax holiday in Nigeria, non-deductible interest relating to the acquisition of Investcom and amortisation of intangibles. The Group Board continues to report adjusted headline EPS in addition to basic headline EPS. The adjustments are in respect of:
Adjusted headline EPS of 324,7 cents for the period compares favourably to adjusted headline EPS of 278,5 cents for the six months ended 30 June 2006. Balance sheet and cash flow The Group’s total assets increased by 9% to R106 billion compared to R97 billion at 31 December 2006. The Group balance sheet has been positively impacted by the depreciation of the South African Rand against foreign currencies of non-South African operations within the Group. The foreign currency translation reserve increased by R217 million. Property, plant and equipment increased by R3,3 billion from 31 December 2006. This included acquisitions of R6,1 billion across the Group with R1,8 billion in Nigeria, R1,3 billion in South Africa and R714 million in Iran. Exchange rate diff erences increased values by R385 million, while depreciation decreased values by R3,2 billion. Goodwill and other intangible assets have increased by 1% to R40,5 billion from 31 December 2006. The increase was as a result of capitalisation of the 3G licence and 7,5 MHz frequency spectrum band licence awarded to MTN Nigeria from December 2006, off set by amortisation of R1,1 billion. Current assets increased by R5,9 billion to R26,6 billion. The increase was mainly due to the increase in other current assets by R2,7 billion to R13,2 billion and cash balances by R3,3 billion to R13,4 billion. The movement in trade and other receivables is driven mainly by Nigeria, which increased by R209 million to R1 billion (interconnect receivables and prepayments) and Ghana, which increased by R358 million to R671 million. The increase in the Group’s cash balances was after cash outfl ows of R6,1 billion for capital expenditure, R2,7 billion for dividends and R51,9 million additional equity purchase in Botswana. Of the total borrowings of R34 billion, approximately R19 billion remained unproductive. The remaining balance of the US$1,25 billion revolving credit facility, totalling R300 million, was repaid in full by February 2007. R2 billion of the unproductive debt was repaid during July and August 2007. The Group’s target is to reduce total debt to 0,4 times EBITDA by the end of 2008. OPERATIONAL REVIEW South Africa MTN South Africa delivered a stable performance in a very competitive market increasing its total subscriber base by 7% from 31 December 2006 to 13,4 million at 30 June 2007. The postpaid subscriber base grew by 3% to 2,4 million subscribers and the prepaid base increased by 7% to 11,0 million over the six-month period. Lowdenomination vouchers have been a key driver in stimulating usage. During the period there was an unwinding of an agreement with a specific on-biller which resulted in the migration of approximately 46% of the 326 000 postpaid subscribers linked to this on-biller being migrated back to prepaid. Most of the remaining subscribers will be migrated before year-end. Average revenue per user (“ARPU”) in the postpaid segment decreased to R435 from R487 at 31 December 2006 and prepaid ARPU decreased to R87 from R94, both decreases owing to continued penetration into lower-usage segments. As expected, blended ARPU decreased 9% to R149 from R164 at December 2006 as the operation penetrated deeper into the lower-usage segment. Network enhancement during the review period included the commissioning of 134 new 2G base transceiver stations (“BTSs”) and 359 3G BTSs. Going forward there will be increased focus on investing in the 2G, 3G and transmission network. The second quarter of 2007 saw the launch of the brand revitalisation campaign “Go” which has been successful in increasing brand awareness. The MTN data proposition is gaining momentum with a 58% increase in data revenue to R1,2 billion. This was due to competitive pricing and an increased 3G rollout. Nigeria MTN Nigeria increased its subscriber base by 14% to 14 million since 31 December 2006. Subscriber growth slowed in the second quarter due to capacity and quality constraints. The capacity and quality is being addressed with a ramp-up in infrastructure rollout. During the period, ARPU declined from US$18 to US$16, which is consistent with increased penetration into the lower segment of the market. The strong EBITDA margin was due to the sustainability of the cost structure achieved over the last year. MTN Nigeria maintained its leading market position due to a strong brand preference and an eff ective value proposition. During the period, a number of products and innovations were launched, such as the Blackberry service for both prepaid and postpaid customers. By the end of June 2007, 84 BTSs were rolled out. 111 BTSs were integrated during the month of July. The installation of the Lagos Metro and Niger-Delta’s fi bre optic cabling is nearing completion and will be commissioned in the second half of the year. The integration and commissioning of IP/MPLS backbone to service corporate customers has significantly increased capacity. A select 3G rollout will commence before year-end. MTN Nigeria was awarded a 15-year 2 GHz spectrum licence on 1 May 2007 for US$150 million for the delivery of 3G services. Eff ective 31 December 2006, the operation acquired a 100% shareholding in a cabling and radio telephone services provider, VGC Telecommunications. Iran MTN Irancell soft launched commercial operations with postpaid services on 21 October 2006. Prepaid services were launched in January 2007. The period under review is the fi rst full six months of operation. During the period, MTN Irancell recorded net additions of 1,8 million subscribers with 1,98 million subscribers at 30 June 2007. Growth in subscriber numbers is stabilising with 3,2 million active subscribers recorded at 20 August 2007. ARPU increased from US$9 in December 2006 to US$10 resulting from improvements in the quality and capacity of the network, thereby stimulating usage. During the period, MTN Irancell has increased its brand awareness and launched a number of new products. These included the prepaid product, IRR50 000 airtime voucher, GPRS, MMS and customer care over the internet and via the call centre. The operation has significantly increased its distribution channels in all 30 provinces of Iran, with over 3 900 dealers and service centres in 180 cities. Following a slow network rollout in 2006, the network has been significantly enhanced and now has sufficient capacity to service 6,5 million subscribers. There were 1 109 live sites at 30 June 2007 compared with 361 sites as at 31 December 2006 and coverage of 191 cities and 26 of the 30 provincial capitals. The population coverage was at approximately 40% compared to 16% as at 31 December 2006. Ghana MTN Ghana recorded an exceptional increase in subscriber numbers for the period from 2,6 million in December 2006 to 3,4 million. This was underpinned by strong operational execution of the network rollout, distribution, promotional campaigns and new product off erings. This has resulted in market share increasing from 52% at 31 December 2006 to 54% at 30 June 2007. ARPU decreased from US$17 for the six-month to 31 December 2006 to US$16 for the six months to 30 June 2007, primarily due to the acquisition of lower-end customers. Network enhancement continued during the review period with the installation of 328 new BTSs, bringing the total to 1 270. At 30 June 2007, geographical coverage was 31% and population coverage was 71%. MTN Ghana made further progress in expanding its distribution channel. Three major distributors have been added to the network and the decentralisation of distribution points from head office is progressing well. There has also been a significant increase in Electronic Voucher Distribution (“EVD”) vendors to 31 451 vendors from 12 808 in December 2006. The operation introduced new products and innovations, which included the launch of Me2U, international call-back and international top-up services, which increased international call traffic. Sudan MTN Sudan increased its subscriber base by 43% from 31 December 2006, recording 457 000 net connections to 1,5 million subscribers at 30 June 2007. MTN Sudan increased its market share marginally to 27% from 25% as at 31 December 2006. Subscriber acquisitions in the fi rst quarter of 2007 were slightly hindered due to technical challenges experienced during the migration to the new billing system. In June 2007, the Sudan operation was successfully rebranded MTN Sudan. A number of products were also launched in the second quarter of 2007, which included a prepaid per second billing campaign. ARPU decreased from US$16 for the six months to 31 December 2006 to US$15 for the six months to 30 June 2007. During the period, the operation rolled out 372 additional BTSs. Population and geographical coverage increased from 36% to 42% and 2% to 3% respectively when compared to December 2006. Syria MTN Syria delivered a stable performance, recording a 16% increase in subscriber numbers to 2,6 million from 2,2 million in December 2006. ARPU declined from US$22 for the six months to December 2006 to US$20 in the period under review. This was due to an increase in mobile penetration from 26% at 31 December 2006 to 30% at 30 June 2007. MTN Syria continued to focus on improving the coverage in the major cities and providing coverage in the rural and coastal areas. 124 BTSs were rolled out in the six months to 30 June 2007. PROSPECTS A consolidation of earnings is still expected in 2007 due to MTN Nigeria being taxed from 1 April 2007 following the expiration of its pioneer status and the initial dilutionary impact of the Investcom acquisition. The Group’s leadership position in mostly high-growth emerging markets, provides a solid platform to grow our subscriber base. The provision of appropriate products and excellent service to our customers remains a priority. We remain focused on enhancing the quality of our network and ensuring that we are well placed to benefi t from a rapidly converging telecommunications market. We will also continue driving operational synergies, improving the Group’s cost base and pursuing strategic expansion opportunities. For and on behalf of the Board
Fairland Registration number: 1994/009584/06 ISIN code: ZAE 0000 42164 Share code: MTN Directorate: MC Ramaphosa (Chairman), PF Nhleko* (Group President and CEO), DDB Band, RS Dabengwa*, KP Kalyan, AT Mikati, RD Nisbet*, MJN Njeke, MA Ramphele, ARH Sharbatly, JHN Strydom, AF van Biljon, J van Rooyen, P Woicke *Executive Company Secretary: SB Mtshali, 216 – 14th Avenue, Fairland, 2195. Private Bag 9955, Cresta, 2118 Registered office: 216 – 14th Avenue, Fairland, 2195 American Depository Receipt (ADR) programme: Cusip No. 62474M108 ADR to ordinary share 1:1 Depository: The Bank of New York, 101 Barclay Street, New York NY 10286, USA Office of the South African registrars: Computershare Investor Services 2004 (Proprietary) Limited (Registration number: 2004/003647/07). 70 Marshall Street, Johannesburg, 2001. PO Box 61051, Marshalltown, 2107 Joint auditors: PricewaterhouseCoopers Inc., 2 Eglin Road, Sunninghill, 2157 Private Bag X36, Sunninghill, 2157 and SizweNtsaluba VSP, 20 Morris Street, Woodmead East, 2146. PO Box 2939, Saxonwold, 2132 E-mail: investor_relations@mtn.com |