Telecommunications

The Company

MTN is a multi-national telecommunications company headquartered in South Africa, with operations in 22 countries across Africa and the Middle East. MTN’s offerings include voice services through 2G or GSM networks and data services through 3G networks. Incorporated in 1994 under the name M-Cell, the company was awarded the second national licence in South Africa, commencing commercial operations in June 1994. Having already established itself in South Africa, M-Cell expanded its operations by obtaining licences in Swaziland, Uganda and Rwanda in 1998. In 2000 M-Cell commenced operations in Cameroon, following the acquisition of Camtel. M-Cell also acquired a licence in Nigeria in 2001 and started building its radio transmission backbone in 2002. Nigeria has since become the company’s growth engine, contributing 39% to group EBITDA in the year ended December 31, 2011. The company rebranded to MTN in October 2002.

Phuthuma Nhleko joined the company in 2001 as chairman before being elevated to group president and CEO a year later, where he served for nine years. A civil engineer by training, Nhleko was a senior member of the Standard Corporate and Merchant Bank corporate finance team. Before his tenure, the company was only present in six countries. Under Nhleko’s leadership, MTN expanded across Africa and the Middle East through a series of acquisitions. In 2005 MTN acquired interests in operators in the Republic of Congo, Iran, Botswana, Zambia and Côte d’Ivoire. The company acquired the entire share capital of Investcom in 2006 for R33.5bn ($3.2bn), expanding to an additional 10 countries (Benin, Cyprus, Ghana, Guinea-Bissau, Liberia, Sudan, Syria, Yemen, Afghanistan and Guinea) and growing the group to become one of the world’s largest emerging markets telecommunications players.

As of the end of March 2014 MTN recorded 210m subscribers across its operations. This makes it the largest operator in Africa by some margin. With this scale has come profitability, as MTN reported EBITDA of R59.6bn ($5.6bn) in 2013, having almost doubled this metric in six years. The company maintains a sector-leading organic revenue profile, driven by its Nigerian operation, which makes up almost 40% of group revenues and whose market growth is being supported by a de-risked voice price environment. From a cash-returns perspective the company has committed to 5-15% dividend per share growth over the medium term, paying out around 75% of its earnings.

Development Strategy

Nhleko stepped down as CEO of MTN in March 2011, a decision that was closely followed by two failed merger attempts with India’s Bharti Airtel. Sifiso Dabengwa was appointed as the group’s new CEO, having been with the group for 11 years prior to this appointment and previously managing both the Nigerian and South African units. MTN has a clear policy of promoting internal candidates into leadership roles. This change in leadership has seen the focus of the company steered away from mergers and acquisitions (M&A); however, MTN has communicated that M&A opportunities will still be considered.

In terms of the outlook for the near term, the company is guiding towards group subscriber growth of 8% in 2014, following on 10% growth in 2013. We estimate that MTN will generate R14 ($1.33) per share in equity free cash flow in 2014. This, along with the company’s net cash position, means that MTN will be able to comfortably deliver on shareholder returns.

MTN’s medium-term strategy is centred on five pillars, which have been shaped to deliver strong financial performance in a new digital world. The company’s digital adjustment was confirmed by its investment in Rocket Internet’s Africa Internet Holding, one of Africa’s largest e-commerce players. From a financial perspective, we believe MTN’s growth profile will continue to benefit from its strong market positions. We see material opportunities from services like mobile money, with the vast majority of the company’s subscriber base unbanked. We note that an operator like Safaricom already generates 20% of services revenues from mobile-money. For MTN this revenue stream is still nascent.