Group Chief Executive Officer’s report
 OVERVIEW
Subscribers surged 48% to 23,2 million, revenue
increased to R27,2 billion and EBITDA margin was
maintained at 41,3%. Our expansion strategy has
borne fruit, yielding investments in five developing
markets and paving the way for continued organic
growth.
Throughout the African continent, mobile
penetration continues its rapid increase as
competition stiffens and the cost of entry for
subscribers decreases.
As one of the most dynamic and challenging sectors
worldwide, mobile telecommunications is an
industry inherently subject to rapid change on a
significant scale.
In South Africa, the telecommunications sector
is undergoing significant changes with rising
mobile penetration, increased regulatory
pressure and an increasingly competitive
market. Addressing these challenges
requires focus, flexibility and detailed
strategic planning. It also requires a
continuous focus on ways to lower
operational and capital expenditure
while maintaining revenue
streams.
KEY OBJECTIVES FOR THE PAST PERIOD
We set strategic Group objectives for the past period,
which included:
Continue identifying and exploring growth
opportunities – During the period, we acquired
operations in Côte d’Ivoire (51%), Zambia (100%),
Botswana (44%) and Republic of Congo (Brazzaville)
(100%). We concluded a 49% investment in Irancell – the second, greenfield GSM licence in that country
and our first investment outside the African continent.
On 2 May 2006 the Group announced an offer to
acquire the entire share capital of Investcom LLC,
which operates in ten countries in Africa and the
Middle East. This is subject to the fulfillment of certain
regulatory pre-conditions and conditions precedent
including MTN Group shareholder approval.
Maintain leadership position in innovation – In South Africa, we introduced MTN Banking in
partnership with leading financial services group,
Standard Bank of South Africa Limited. We remain
confident of the need for accessible, affordable
banking services that capitalise on technology.
Following extensive trials, MTN launched
commercial third-generation (3G) services to South
African customers. Innovative products and services
introduced in various markets – such as electronic
voucher distribution in Cameroon and mCharge in
South Africa, as well as GPRS and MMS in Nigeria
and Uganda have exceeded expectations, again
emphasising the importance of addressing real
market needs.
Focus on customer centricity – The vast majority
of our customers require basic, reliable and
affordable telephony. Accordingly, across the Group, programmes are in place to further enhance customer
service and performance is measured and monitored at
every level. The rapid increase in the provision of service
innovations such as low-denomination electronic
airtime recharge facilities, underscores the Group’s
commitment to continually improving customer service
and meeting customer needs. We have implemented
a customer management assessment tool to measure
and benchmark our effectiveness in customer centricity
against international best practice.
Maintain Group EBITDA margin above 40% – MTN
is a fully-fledged multinational with 43% of revenue
and 49% of adjusted headline earnings per share
(HEPS) being contributed by operations outside of
South Africa. Across the Group, efficiencies continued
to improve during the period, boosting the EBITDA
margin to 41,3% against 39,8% for the nine months
ending December 2004.
Improve operational efficiency – The Group
continuously benchmarks its productivity and
efficiency internally and against global peers. Targets
are set and integrated into performance measurement
and budgeting cycles.
MTN GROUP RESULTS
The MTN Group recorded a strong performance for the
nine months ended 31 December 2005, with HEPS of
338,2 cents compared to 366 cents for the previous
12-month period. Consolidated Group revenue of
R27,2 billion, EBITDA of R11,2 billion and profit after tax
of R6,7 billion were recorded, compared to revenue of
R29 billion (R21,5 billion December 2004), EBITDA of
R12 billion (R8,6 billion December 2004) and adjusted
profit after tax of R7,3 billion for the year ended March
2005.
Our international operations increased their
contribution to Group results during the period
and now account for 43% of revenue and 49% of
adjusted HEPS, up from 40% and 43% respectively
in the previous period. Given the portion of revenue
generated outside South Africa, Group results are
directly impacted by the fluctuation of the rand
against the reporting currencies of our international
operations. During the period, the average rand
exchange rate depreciated by between 1% and 11%
against the respective currencies of our operations.
Importantly, the average rand:Nigerian naira exchange
rate depreciated by 6%.
Group EBITDA rose by 31% compared to the nine
months ended 31 December 2004, to R11,2 billion,
of which 55% was generated from international
operations. All operations contributed positively to
EBITDA except for MTN Zambia.
Group total assets increased by 51% to R44,8 billion at
31 December 2005. Corporate activity during the year
changed a net cash position at 31 March 2005 to a net
debt position of R1 billion at the end of the period. The
financial performance is discussed in more detail in the Group Financial Director’s report.
OPERATIONAL OVERVIEW
Detailed results of our operations appear in the operational review. Some of the
significant factors were:
• Market conditions – Favourable market conditions
prevailed over the last nine months with the South
African economy experiencing prodigious consumer
spending led by low interest rates, a boom in
the property market, strong currency and low
inflation. In Nigeria, consumer spending has been encouraged by both a strong currency and record
global oil prices.
• Subscriber base – MTN has recorded a surge
in subscriber numbers during the period, with
subscribers increasing to 23,2 million from
15,6 million at March 2005. Subscriber numbers were
buoyed by increases of 50% and 28% in the Nigerian
and South African operations respectively. Operations
acquired during the nine months accounted for 8%
of total subscribers at the end of the period.
• Market share – Fluctuations in market share are
closely monitored in all operations and accordingly
addressed through innovation, competitive pricing
and customer service.
• Average revenue per user (ARPU) – ARPU in the
prepaid market segment has decreased as a result
of a redefinition of capable subscribers and deeper
mobile penetration. In Nigeria, it is pleasing to note
that although there was a 45% downturn in ARPU
on the previous financial year, settling at about
US$22 from June 2005 subscribers increased from
5,6 million to 8,4 million. Postpaid ARPU in South
Africa decreased only marginally.
• Capital expenditure – Capital expenditure for the
period was R6,7 billion, incurred largely by MTN
Nigeria for network capacity augmentation and
expansion. In South Africa R2 billion was spent, a
significant portion of which relates to the 3G roll out. Across our operations, investment in network
infrastructure is ongoing and funded internally from
strong cash flows. In 2006, the MTN Group expects
to invest R12,9 billion in the ongoing enhancement
of its networks.
• Regulatory pressures – As the global
telecommunications industry moves towards liberalisation and convergence, the industry in Africa
experiences similar, fundamental and structural
challenges. The regulatory environment in South
Africa is typical of this where a second fixed-line
network operator (SNO) has been licensed, Mobile
virtual network operators (MVNOs) are soon to enter
the market, mobile number portability is imminent
and a number of bills are to be tabled which may
affect the industry.
INVESTMENT AND EXPANSION
STRATEGY
Geographic expansion
During the period, the MTN Group concluded
acquisitions in Côte d’Ivoire, Zambia, Botswana, the
Republic of Congo and a licence agreement in Iran.
This is in line with our strategy of consolidating our
position as the leading provider of telecommunications
services in developing markets. This has increased
our geographic coverage by five countries with a
combined population of 105 million and a relatively
low combined mobile penetration of 9%.
• In Côte d’Ivoire, we acquired 51% of Telecel Côte
d’Ivoire for R1,4 billion and rebranded it as MTN Côte
d’Ivoire. This company had 1,1 million subscribers at
31 December 2005 and an estimated market share
of 47%.
• In Zambia, MTN acquired 100% of Telecel Zambia,
renamed MTN Zambia, for R347 million. In the near
future, 10% of the equity in this business will be
placed in the local market. MTN Zambia ended the
period with 97 000 subscribers and an estimated
market share of 19% in an underserved market.
• In Botswana, MTN indirectly acquired 44%
of Mascom Wireless Botswana Limited for
R846 million. The investment is accounted for as a joint venture. At 31 December 2005, this
company had 479 000 subscribers and a 67%
market share.
• In December 2005, MTN purchased 100% of the
second largest mobile operator (Libertis) in the
Republic of Congo (Brazzaville) for R656 million. This
company has an estimated 39% share of a market
with low penetration levels, and 210 000 subscribers
at 31 December 2005.
• On 21 November 2005 the Minister of
Communications and Information Technology
of Iran issued the second GSM licence to
Irancell; a company in which MTN has a 49%
shareholding. MTN advanced USD89 million to
outside shareholders for their share of Irancell’s
capitalisation in addition to providing EUR300
million for the licence through a long-term
commerical arrangement with Irancell. With an
estimated population of 69 million and current
mobile penetration at 11%, the Iranian market
presents a meaningful growth opportunity for
MTN and marks the Group’s entry into the
Middle East.
On 2 May 2006, subsequent to the year-end, the
MTN Group announced an offer to acquire the
entire share capital of Investcom LLC for a total
consideration of USD5,5 billion with between
USD3,5 billion and USD3,7 billion expected to be
settled in cash and the remainder in MTN Group
shares. Investcom’s largest shareholder, M1 Limited,
which owns approximately 70,6% of its shares has
given an irrevocable undertaking to accept the cash
and shares offer and become a shareholder in the
MTN Group.
Investcom currently has licences in 10 countries in
Africa and the Middle East, covering an estimated population of 147 million and a weighted mobile
penetration of about 9%. This transaction should
enable the MTN Group to enhance its growth profile,
diversify its financial profile and strengthen its
operational capabilities.
This transaction is subject to the fulfillment of
pre-conditions and conditions including the
approval of the transaction by the MTN Group
shareholders and regulatory approval in some of
the countries in which Investcom operates.
The MTN Group has, and will continue to
communicate developments regarding progress on
the transaction to investors and shareholders.
View the transaction website
for more detail>>
Mobile banking
August 2005 saw the launch of MTN Banking with
Standard Bank in South Africa. Capitalising on the
strength of the MTN brand, MTN Banking extends
banking services to an estimated 13 million people
classified as “unbanked” by using SMS technology.
Network solutions
During the period under review, MTN acquired the
remaining 40% in MTN Network Solutions, a firsttier
internet service provider, for R40 million. This
will enhance the Group’s position in a converged
telecommunications environment. Opportunities to
expand our investments into other complementary
businesses are ongoing.
Orbicom
MTN exited the non-core satellite broadcasting
business through the sale of Orbicom after being
granted regulatory and competition board approval
for its disposal.
EXTERNAL IMPACT REVIEW
Mobile telecommunications is, by its nature, closely
linked to quality of life. Our operations and business
conduct, therefore, are just as closely linked to a variety
of external factors predicated on improving quality
of life. These include initiatives to extend economic
prosperity to more citizens through empowerment
criteria and sectoral charters in South Africa, increasing
the percentage of local procurement in almost all
areas of operation and our role as a corporate citizen.
While these initiatives are detailed elsewhere in this
report, and highlighted in the operational review,
I believe the contribution MTN is making at industry
level in the development of appropriate regulations
in different regions is noteworthy. We support
liberalisation of the telecommunications sector,
believing that free-market principles best apply and
that corporate success depends largely on anticipating
changing market needs with affordable, competitive
services.
SUSTAINABLE DEVELOPMENT
Although MTN is relatively young in corporate
terms, sustainable development has always been a
cornerstone of our business and our approach. In the
past, we have reported separately on issues relating
to sustainable development. This year, however, these
are integrated into our annual report to underline our
belief that sustainable development and business
development are inextricable, interdependent
elements that determine our future. Currently the
Group has MTN Foundations funded from after tax
profits, in South Africa, Nigeria and Cameroon which
address relevant social and educational upliftment
initiatives in those countries. During January and February of this year, MTN sponsored the Africa Cup
of Nations in Egypt. The title sponsorship entrenched
MTN as the continental leader in football sponsorship
and the success of the event brought awareness of our
brand to the global community.
OUR PEOPLE
Since inception, MTN’s people have characterised
the Group – tenacity, expertise, enthusiasm and
commitment combine to enable the Group to meet
its operational and strategic objectives. MTN today employs 8 360 people of whom 4 036 are based in
South Africa. To attract, retain and strengthen this
team is an ongoing challenge that we address at
multiple levels through attractive remuneration, career
opportunities, succession planning and personal
development.
Management changes for the period saw Ron Allard
redeployed as CEO of MTN Côte d’Ivoire on 1 July 2005
from the position of CEO of MTN Cameroon. Mike
Blackburn was appointed CEO for MTN Zambia from
his position of CFO in Uganda as of September 2005.
Mounise Quala takes up his appointment as CEO of
MTN Congo Brazzaville in April 2006.
MTN has been restructured along regional lines with
three executive vice-presidents reporting to the COO
on West Africa, Southern Africa and Middle East, North
and East Africa (MENEA). The CEOs of the operations
will, in turn, report to these executive vice-presidents.
These management clusters reflect the need for
strategic, regional focus.
As much as our expansion strategy is founded on
efficient network infrastructure, innovation and service,
our business depends on people to implement
every element of this strategy. I would like to take this opportunity to thank the staff, management and
Board for their support and dedication during the
period under review.
LOOKING AHEAD
As a Group, we believe in setting and achieving
challenging targets. For 2006, our strategic priorities
include:
• Continue to identify and pursue value-enhancing
expansion opportunities to consolidate our position
and diversify earnings;
• Improve operational cost efficiency and expand
margins to take full advantage of scale across all our
operations;
• Manage ambitious network roll-out in Iran; and
• Increase capacity through the management
philosophy of “Just-in-time”.
Phuthuma Nhleko
Group Chief Executive Officer
22 March 2006
|
