Commentary

Overview

MTN Group revenues increased by 9,2% to R111,9  billion and earnings before interest, tax and depreciation (“EBITDA”) by 6,7% to R46,1 billion based on a sound operational performance for the year ended 31  December 2009. Movements in exchange rates in the year, mainly in the South African Rand (“ZAR”) and Nigerian Naira (“NGN”), had a substantially negative impact on the Group’s financial results. To illustrate this, had there been no change in currency rates during the year, reported revenues at year end would have been 11  percentage points higher, and EBITDA 12 percentage points above that reported. Adjusted headline earnings per share (“EPS”) decreased by 16,6% to 754.3 cents and, excluding the impact of the functional currency losses, increased by 8,5% to 878.9 cents. The solid performance of MTN operations in most of the countries in which the Group has a presence was achieved despite economic challenges, increased regulatory changes and growing competition.

Continued delivery in accordance with an aggressive network rollout strategy remained key throughout 2009, enabling MTN to maintain or improve its market share in most of its operations. Better distribution and a focus on segmental product offerings were other contributory factors. As a result, subscribers increased by 28,0% to 116,0  million for the period under review, indicating a continuing demand for mobile services in countries where mobile penetration is still relatively low.

MTN initiated several Group projects during 2009 which are being rolled out through most operations. Although many of these projects are still in progress, this Group-wide approach allows MTN to differentiate itself from the competition, thereby ensuring a stronger brand and product preference whilst leveraging its regional footprint. These projects include the following:

• A coordinated effort to improve operational efficiencies through centralised procurement, best practice guidelines for site build, network management, safety and activity based costing.
• Continued investments in Internet Service Providers (“ISP”) across all regions have been made to ensure that MTN is favourably positioned. MTN South Africa acquired Verizon Business South Africa (Pty) Ltd in early 2009 and successfully integrated the company with Network Solutions. The combined entity was launched in September 2009 with a key focus on converged services to the corporate segment. It is envisaged that MTN Business, although South African based, will provide a Pan-African opportunity to service the corporate sector across and beyond MTN’s footprint.
• MTN has committed in excess of USD191 million in various submarine cables to ensure high-speed connectivity and improved quality and capacity of voice and data offerings. These include the East Africa submarine cable (“EASSy”); the Europe India gateway (“EIG”); SAT-3/SAFE; the East Africa Marine system (“TEAMs”) and the West Africa Cable System (“WACS”).
• With an initial focus on money transfers, Mobile Money has been launched to date in South Africa, Uganda, Rwanda, Ghana, Côte d’Ivoire, Benin and Yemen. The success of MTN Uganda, which was first to launch the new service in March 2009, is indicative of the scale of the opportunity: to date, Uganda has more than 680,000 Mobile Money subscribers.

There have been many regulatory changes within the telecommunications industry over the past year, particularly focused on SIM registration and reductions in Mobile Termination Rates (“MTR”). Constructive and early engagement with regulatory authorities by management teams have ensured that MTN’s operations have been generally well prepared for compliance with the regulatory changes implemented in 2009, and will be for those to follow in 2010.

Group financial review

Income statement

MTN Grouprevenues increased by 9, 2% to R111,9 billion, largely driven by subscriber growth. The movements in foreign currencies, when compared to December 2008, had a negative impact on reported revenue of R10, 9 billion or 11 percentage points, as a strong ZAR eroded foreign earnings.

The Group’s EBITDA increased by 6, 7% to R46,1 billion for the year. When compared to December 2008, the fluctuation in foreign exchange rates had a negative impact on reported EBITDA of R5,1 billion, or 12 percentage points. The one percentage point reduction in EBITDA margin was mainly due to an increase in the revenue share costs in Syria, as well as the impact of reducing fixed to mobile interconnect tra›c and the integration and outsourcing costs in South Africa.

Currency movements affect the income statement through translated earnings, functional currency adjustments and the effect of the written put option held by a minority shareholder in MTN’s Nigerian subsidiary. The ZAR closed 21% stronger at R7,39 to the USD on the 31 December 2009, compared to the closing rate of R9,35 the year before, R9,49 in March 2009 and R7,72 in June 2009. Translation of earnings affected by movements in the various local currencies to the USD was compounded in the second half of the year by the strong ZAR.

Net finance costs increased by 203% to R5, 8 billion for the year. This was mainly due to the ZAR/USD exchange rate which, as explained above, significantly affects a large proportion of MTN’s assets and liabilities denominated in a currency other than the entities’ reporting currency. These foreign-denominated assets and liabilities resulted in a functional currency loss for the period of R3,2 billion compared to the R2,4 billion foreign currency gain at the end of December 2008 – a swing of R5,6 billion. Much of the loss is attributable to foreign currency denominated loans, receivables and cash balances in Mauritius (a ZAR reporting entity). In addition, the put option effect on the income statement was a credit of R701 million (June billion2009: R1 billion credit and December 2008: R1,2 debit), mainly as a result of the depreciation in the NGN/USD exchange rate.

The depreciation charge increased by 18, 8% to R11,8 billion mainly as a result of an increase in the Group’s depreciable infrastructure assets.

Minority interests increased by 38% to R2,5 billion, compared to R1,8 billion at 31 December 2008.

The Group’s effective taxation charge for the year reduced from 39,9% to 33,4%, for the comparable period. This was mainly due to the end of the commencement period following the tax holiday in Nigeria in 2008 and the financial effect of the put option.

The 24% reduction in tax and the resultant reduction in the effective tax rate were not sufficient to offset an 18, 8% increase in depreciation, a 203% increase in net finance costs and a 38% increase in minority interests, and the overall result was a decrease in the Group’s attributable EPS of 3,6% and adjusted headline EPS of 16,6% to 791,4 and 754,3 cents respectively, when compared to the prior year.

The impact of the reversal of the put option on adjusted headline EPS was a debit of 48,9 cents, while functional currency losses on the revaluation of assets and liabilities due to the strong ZAR was a debit of 124,6 cents. Adjusted headline EPS excluding the impact of the functional currency losses of 124,6cents increased by 8,5% to 878.9 cents for the year.

The Groupcontinues to report adjusted headline earnings per share in addition to the attributable headline EPS. The adjustment is in respect of the IFRS requirement that the Groupaccounts for a written put option held by a minority shareholder of one of the Group’s subsidiaries, which gives the minority shareholder the right to require the subsidiary or its holding company to acquire this shareholding at fair value. Although the Group has complied with the IFRS requirements, the board of directors (the board) has reservations about the appropriateness of this interpretation and hence the adjustment.

Balance sheet and cashflow analysis

MTN’s extensive network expansion and investment strategy resulted in capital expenditure for the year of R31,2 billion, a 10,6% increase on 2008. The final amount spent was lower than the R42 billion approved during the year due to a R7,2 billion expenditure rollover into 2010 and the stronger rand, which led to a R3,5  billion saving on capital expenditure. We expect 2009 to have been our peak year for capital expenditure. The approved budget for 2010 is R23,6 billion (including rollover capex), 44% lower than the 2009 amount.

Cash generated from operating activities increased to R36, 3 billion from R34, 2 billion, reflecting another strong operational performance. MTN continued to reduce its borrowings, with net debt down marginally from R12,9 billion in 2008 to R12,2 billion in 2009, resulting in lower cash balances. The lower borrowings and cash balances were also partially due to the impact of foreign currency translation.

During the year, MTN Group concluded the acquisition of 100% of Verizon South Africa (Pty) Ltd (in February 2009) and 59% of iTalk Cellular (Pty) Ltd (in January 2009), increased its stake in MTN Uganda from 95% to 97% (in October 2009) and acquired a 20% stake in Belgacom International Carrier Services (in November 2009) in exchange for selling 100% of its own international carrier service business. The Group also completed a private placement of 2,2% of MTN Zambia (in January 2009) and the sale of its 50% stake in DMTV Africa (in January 2009). The unwinding of black empowerment vehicle Newshelf resulted in a 1,6% reduction in the number of shares in issue.

Operational review

South Africa

MTN’s South African operations had a challenging 2009. External challenges as the country went through a recession in the first half of the year, combined with maturing market conditions and increased regulation of the industry were compounded by difficulties experienced with the outsourcing of various critical IT functions. High churn and lower gross connections in the prepaid segment resulted in a 6,4% reduction in subscriber numbers to 16,1 million at 31 December 2009. The lower gross connections were a consequence of the implementation of new industry regulations (RICA). In line with RICA, mobile operators have to register subscribers’ personal details and to date MTN has collected the details of 5,5 million prepaid customers. The postpaid segment was not affected to the same degree by the RICA requirements, and showed subscriber growth of 9,8%, mainly because of the increasing use of hybrid packages.

MTN South Africa’s revenue increased modestly by 3,1% to R33,1  billion for the year to 31 December 2009, indicating that those prepaid subscribers lost during the RICA process were not as meaningful to revenue. Consequently, prepaid Average Revenue per User per month (“ARPU”) increased by R3 to R100 at December 2009, despite the disconnection of 1,4 million prepaid subscribers, as customers who remained on the network continued to spend. Lower post-paid ARPU, which decreased by R38 to R365, was mainly due to lower out-of-bundle usage and migrations to lower-value packages, reflecting slowing consumer spending within the more formal economy.

The EBITDA margin decrease of 1,7 percentage points to 31,4% at 31 December 2009 was mainly a result of increased distribution costs, following the integration of i-Talk Cellular and Cell Place as well as the impact of lower fixed to mobile traffic.

MTN South Africa continued to make substantial investments in its network to improve capacity and increase 3G coverage. Capacity increased by 12% on 2G and 22% on 3G networks with the integration of 496 2G and 659 3G base transceiver stations (“BTS’s”), while the 3G population coverage increased from 35% in December 2008 to 48% in December 2009. The deployment of 5 000 km of national fibre continued throughout 2009 with 245 km completed along the Gauteng-Durban route. The southern and northern rings of the Gauteng fibre projects are expected to be completed by July 2010.

Although some progress has been made on improving the various IT functions, further improvements are required. Increased management attention is also being given to support systems, including customer care and call centres, in order to cope with the challenges.

Nigeria

MTN Nigeria performed well for the period under review. The large capital investment made to improve network quality and capacity together with the efficient restructure of the sales and distribution channel have allowed MTN Nigeria to grow subscribers by 34% to 30,8 million at the end of December 2009, and increase its market share to 49, 6%.

Although local currency revenue increased by 30,0% for the period, in line with subscriber growth, this translated into a much smaller 5,6% growth in rand terms to R33,3 billion at December 2009, due to ZAR strength in the second half of the year compounding NGN weakness in the first half. ARPU in local currency reduced by 9,6%. This translated into a USD4 decline from December 2008 to USD12, which was unchanged from the figure reported for June 2009 as the NGN stabilised in the second half of the year. The decline in ARPU from December 2008 to June 2009 was mostly the result of the depreciation of the NGN against the USD. Local currency ARPU declined in line with increased penetration into lower-usage segments and – to a lesser extent – pressure on consumer spending.

The EBITDA margin increased by 1,5 percentage points to 59,3% at December 2009, mainly due to strong overall cost savings and in particular an 18% decline in the price of fuel.

High network rollout and investments made to improve the quality and capacity of the network continued throughout 2009. MTN Nigeria added 1,220 BTS’s during the period, bringing the total BTS count to 5,996 at December 2009. 561 3G sites were rolled out during the year, completing phase 2 of the 3G rollout plan. MTN’s data propositions gained momentum, with 25,363 active Blackberry© subscribers at the end of December 2009 and 78,331 data modems being sold during the year. Some 1,562 km of new backbone and 110 km of metro fibre were introduced during the year. The WACS submarine cable consortium, of which MTN is a member, has been granted a landing licence in Nigeria.

Ghana

MTN Ghana increased its subscribers by 24% to 8 million for the year ended 31 December 2009. Improvements in network quality and capacity, enhanced value propositions, the MTN Zone offering as well as loyalty programmes have enabled MTN Ghana to maintain its market share of 55%, despite fierce competition. An increased distribution footprint also contributed to the maintenance of market share.

Although local currency revenue increased by 25,1% for the period, significantly ahead of subscriber growth, this translated into a 6,3% decline in revenue in rand terms to R5,7 billion at December 2009 due to the combination of ZAR strength in the second half of the year and weakness in the Ghanaian cedi (“GHC”), particularly in the first half of the year.

ARPU in local currency was stable from June 2009. This translated to a decrease to USD8 at the end of December following the stabilisation of the GHC against the USD in the second half of the year.

MTN Ghana showed a 0,1 percentage point decline in its EBITDA margin to 45,3%, mainly as a result of the increase in site rentals in line with network expansion.

MTN Ghana rolled out 729 2G and 531 3G additional BTS’s for the year. 3G mobile broadband services, including the internet SIM launch and MTN Loaded, have been introduced to both the consumer and corporate segments. At the end of December 2009, there were approximately 1 million unique hits on MTN Loaded.

Iran

MTN Irancell recorded strong subscriber growth of 45% to 23,3 million in 2009, increasing its market share to 40%. This was a result of continued attractive acquisition promotions such as a reduction in the price of SIM starter packs, as well as loyalty programmes and bonus discount products.

Revenue in local currency increased by 60% for the period, significantly ahead of subscriber growth, and this translated into a 54,5% increase in revenue in rand terms. MTN’s 49% share of MTN Irancell’s revenue was R7,6 billion at December 2009. ARPU declined by USD1 to USD8 at December 2009, in line with deeper mobile penetration.

MTN Irancell’s EBITDA margin increased by 4,7  percentage points to 34,9% for the year. This was attributable to cost optimisation from using single-vendor maintenance, locally manufactured recharge vouchers, as well as a focus on general cost control and scale efficiencies.

Aggressive rollout continued during 2009, increasing the operation’s coverage of Iranian cities and roads. A total of 1 429 towns and cities and an additional 4  996 km of roads were covered during 2009, although network quality still remains a priority in Tehran, Tabriz and Esfahan. WiMax was successfully launched in December 2009, with a coverage centred on high-density areas, mainly Tehran and Esfahan. A total of 328 WiMax sites have been integrated.

Syria

MTN Syria increased its subscribers by 20% to 4,2  million at December 2009. The uptake in subscribers gained momentum in the second half of the year, owing to the success of various promotions which included MTN Gold, per-second billing, as well as segmental product offerings to the youth. These value propositions enabled MTN Syria to increase market share from June to 45% at December 2009.

Local currency revenue increased by 8, 2% for the period, slower than subscriber growth, and this translated into a 7,4% increase in revenue in rand terms to R7, 0 billion at December 2009. ARPU decreased by USD1 over the period to USD18. The EBITDA margin decreased by 8,5 percentage points to 19,7% as a result of the full year impact of the revenue share increase in June 2008.

Network expansion and upgrades continued throughout the year, but remain constrained by the Build, Operate and Transfer (BOT) contract under which the business operates. Completed network achievements and efficiencies include the outsourcing of site maintenance, the implementation of a new network management system and transmission expansion and optimisation.

Succession

Phuthuma Nhleko will not be renewing his long term contract as Group President and CEO which ends on 30  June 2010. He has, however, agreed to continue in his current role up to March 2011 focusing on certain key objectives including the seamless transition to a successor over this period. A board process is underway to appoint his successor.

The board particularly wishes to record its admiration and appreciation for Phuthuma’s outstanding leadership role in building MTN into a major global telecommunications company in his tenure with the Group.

Prospects

Competition across MTN’s footprint is likely to continue to increase and whilst economies remain fragile, there are tentative signs of a recovery in economic activity. MTN remains focused on:

• Actively seeking value-accretive expansion opportunities in emerging markets to reduce concentration risk and leverage economies of scale;
• Monitoring infrastructure investments to ensure appropriate levels of capacity and quality of service. The continued investment in fibre and cable requirements to service evolving voice and data requirements;
• Optimising efficiencies including infrastructure sharing, standardisation of systems and processes, rationalisation of suppliers, cost management and cash optimisation;
• Continued engagement with regulatory authorities in the development and refinement of the telecommunications sector; and
• The implementation of MTN’s BEE transaction.

Dividends

Shareholders are advised that a cash dividend of 192  cents per ordinary share in respect of the period 31  December 2009 has been declared, in line with the board’s belief that some relaxation in its dividend policy is appropriate. The dividend is payable to shareholders recorded in the register of the MTN Group at the close of business on Friday, 9 April 2010. In compliance with the requirements of Strate, the electronic settlement and custody system used by the JSE, the MTN Group has determined the following salient dates for the payment of the dividend:

Share certificates may not be dematerialised or rematerialised between Thursday, 1 April 2010 and Friday, 9 April 2010, both days inclusive.

On Monday, 12 April 2010, the dividend will be transferred electronically to the bank accounts of certificated shareholders who make use of this facility. In respect of those who do not use this facility, cheques dated Monday, 12 April 2010 will be posted on or about that date. Shareholders who hold dematerialised shares will have their accounts held by the Central Securities Depository Participant or broker credited on Monday, 12 April 2010.

For and on behalf of the Board

Fairland
10 March 2010