mtn group company report · 2017. 11. 28. · mtn group company report page 5/32 south africa 25%...

THIS REPORT WAS PREPARED BY TOMÁS REALISTA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND

ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE

VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

See more information at WWW.NOVASBE.PT /32

s MASTERS IN FINANCE

EQUITY RESEARCH

MTN GROUP COMPANY REPORT

TELECOMMUNICATIONS 6 JANUARY 2016

STUDENT: TOMÁS REALISTA [email protected]

Recommendation: HOLD

Price Target FY17: ZAR 121.52

Price (as of 5-Jan-17) ZAR 126.17

Bloomberg: MTN:SJ

52-week range (ZAR) 103.94-146.68

Market Cap (ZARm) 242.358

Outstanding Shares (m) 1920.884

Source: Bloomberg

Source: Bloomberg

(Values in ZAR millions) 2015 2016E 2017F

Revenues 147,063 147,532 148,558

EBITDA 59,125 47,594 56,972

EBITDA margin 40% 32% 38%

Net Profit 23,570 11,088 20,119

EPS 11 6 10

DPS 8.3 7 7

P/E 9.6 21.9 11.6

EV/EBITDA 4.6 6.0 5.1

EV/Sales 1.9 2.0 2.0

Net Debt to EBITDA 0.74 1.07 0.88

Dividend Yield 6.8% 5.5% 5.8%

Source: Company Reports, Bloomberg and Analyst’s Estimates

Company description

MTN Group Limited is a South-African based multinational telecommunications company, operating in several countries in Africa and the Middle East. It provides wireless communication services, being a market leader in most of the markets it operates in.

We suggest a HOLD recommendation for MTN Group’s

stock, with a target price of ZAR121.52 per share and an upside

potential of 1.9%.

Regulatory pressures have hit MTN, with the Nigerian

Communications Commission imposing a regulatory fine of USD1.7

Billion on MTN Nigeria for not meeting the deadline of disconnecting

5.1 million unregistered subscribers, knocking the company during

the second half of 2015. Subscribers and cash flows were highly

affected and as a result the stock price plummeted. However, a

resolution for the problem has been accomplished during the year

of 2016.

The macro-economic scenario remains a big challenge

related with high inflation levels, currencies’ depreciation, corruption

and deteriorated external conditions. Accessible risks are in the

major part related with foreign exchange currency fluctuations.

MTN has to remain competitive and keep investing in its

network rollout. The company levered up in order to keep operating

successfully while facing the Nigerian Fine. Debt levels have

increased substantially but are now expected to stabilize.

We expect MTN’s growth to improve more in the medium to

long term, as a result of the challenges faced in the recent past.

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Table of Contents

Executive summary ................................................................................ 3

Valuation .................................................................................................. 4

Company overview ................................................................................. 5

Company description ......................................................................................... 5

Shareholder structure ........................................................................................ 6

Macroeconomic Outlook ........................................................................ 8

South Africa ......................................................................................................... 9

Nigeria ................................................................................................................ 10

Mobile Telecommunications Sector .....................................................12

MTN Group Business Analysis .............................................................13

Nigerian Regulatory Fine ................................................................................ 13

Business Analysis ............................................................................................ 13

South Africa ....................................................................................................... 15

Nigeria ................................................................................................................ 16

Large OPCO Cluster ........................................................................................ 18

Small OPCO Cluster ........................................................................................ 19

Joint Ventures ................................................................................................... 20

Capex and Net Working Capital ............................................................21

Forex and other Risks ...........................................................................22

Capital Structure and Cost of Capital ...................................................24

ROIC and Growth Figures .....................................................................26

Comparables ..........................................................................................27

Final Considerations ..............................................................................28

Appendices ............................................................................................29

Disclosures and Disclaimer ..................................................................32


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Executive Summary

MTN is a leading telecommunications company operating in 22 developing

countries across Africa and the Middle East. The most significant markets are

South Africa and Nigeria, representing 63% of EBITDA and 57% of Revenue as of

2015. Total revenue totalized ZAR147,063 million.

Since the company is present in emerging markets, it is subject to macro-economic

challenges of the respective regions. In times of global uncertainty, external

conditions slow down developing countries’ growth prospects. In general, these

countries are characterized by sluggish growth, excessive inflation, currency

depreciation, commodities dependency and corruptive systems, posing challenges

for companies operating in such conditions. Major direct risks relate with foreign

exchange currency fluctuations.

The telecom industry has grown a lot in the past and emerging markets still have

a good potential for further growth. The sector is characterized by fierce market

competition due to the services offered which tend to be similar between operators.

Thus, price wars are common, even though companies need to invest in their

network in order to ensure good quality to its subscribers. There has also been a

clear trend related with the shift of voice revenue to data revenue.

In 2015, MTN Nigeria was imposed a fine of USD1.7 billion by the Nigerian

Communications Commission for not meeting the deadline of disconnecting 5.1

million unregistered SIM cards. This impacted cash flows in all units due to

decreased subscribers and restricted tariff plans, depressing the stock price.

Nevertheless, MTN possesses a strong recognizable brand and knowledge in

emerging markets which enabled it to overcome the fine problems.

MTN is expected to keep investing in its infrastructures and further success will be

dependent on further network rollout and how the company deals with price tariffs

managing subscribers’ retention and acquirement.

The company has levered up in the past years and we believe it will not require

further significant debt issues. Its current market Debt-to-Equity ratio is 32%. ROIC

was affected by the fine but is expected to stabilize.

Bad performance has haunted MTN’s stock behaviour but we expect the situation

to improve. We provide a HOLD recommendation for the stock with a target share

price of ZAR121.52.


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Value of DFCF: 72 118; 25%

Terminal Value: 183 935; 64%

Joint Ventures:

33 063; 11%

Exhibit 1: Enterprise Value Decomposition (ms of Rands)

Source: Company Reports and Analyst's Estimates

South Africa29%

Nigeria35%Ghana

7%

Cameroon3%

Ivory Coast5%

Uganda2%

Syria0%

Sudan3%

Small OPCO16%

Exhibit 2: MTN Group Total Value Decomposition by Region


Valuation

The valuation method was carried out using nominal South African Rands (Rands

or ZAR), hence comprising the South African inflation rate. A Free Cash Flow to

the Firm technique was used, discounted to December 2017 (DCF model). The

explicit forecast period is pending December 2022, after which a terminal value

applies.

A sum of the parts approach was followed in order to value the different segments

corresponding to the several geographies in which MTN operates: South Africa,

Nigeria, Ghana, Cameroon, Ivory Coast, Uganda, Syria, Sudan and the Small

OPCO1 Cluster2. The revenue model used for each geography (when information

was available) consists of estimations of market size based on each country’s

population and market penetration, MTN’s market share and subsequent number

of subscribers, as well as ARPU3.

Both cash flows and terminal values for the several segments were discounted at

a South African WACC4, as all of them were also estimated in South African Rands.

Regarding the Joint Ventures (Iran in the major part), a multiples analysis

(EV/EBITDA and EV/Revenue) was performed according to some of the most

relevant Arab telecom companies5. From Exhibit 1, the sum of the several DFCF

totalize 25% of the enterprise value, while the terminal value is roughly 64%. The

Joint Ventures represent 11% and were considered in the enterprise value

calculation as they are part of MTN’s core business. Exhibit 2 decomposes each

region’s total value (DCF + Terminal Value) as a percentage of the aggregate.

Book value of debt was used as a proxy for the market value since the company

does not provide debt information and considering a residual risk of default for the

future. Excess cash is expected and was considered.

Exhibit 3 presents the several components of the equity estimate which totalize

ZAR233,430,094,408. MTN has 1,920,884,000 shares implying a target price of

ZAR121.52, a 3.7% capital loss excluding yearly expected dividends, and a 1.9%

overall expected return (including dividends of R7 per share). This scenario

suggests a HOLD recommendation for the stock, which is reasonably in line with

other analysts and overall market sentiment. Furthermore, one can analyse and

1 OPCO stands for “Operating Company”. 2 Yemen, Benin, Afghanistan, Congo B, Rwanda, Zambia, Liberia, Conakry, Cyprus, Bissau and South Sudan. 3 Average Revenue Per User (average monthly service revenue divided by average monthly active customers). 4 Weigthed Average Cost of Capital. 5 OOREDOO, Zain, TCell and Etisalat.

Enterprise Value: 289,116; 100%


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South Africa25%

Nigeria32%

Ghana5%

Cameroon4%

Ivory Coast4%

Uganda3%

Syria2%

Sudan2%

Small OPCO14%

Joint Ventures

9%

Exhibit 4: MTN Revenue Decomposition by Country (2015)

Source: Company Reports

Yemen15%

Benin16%

Afghanistan12%

Congo B14%

Rwanda6%

Zambia14%

Liberia4%

Conakry5%

Cyprus6%

Bissau2%

South Sudan6%

Exhibit 5: Small OPCO Cluster Revenue Decomposition (2015)


13% 12% 13% 13% 13% 13% 13% 13% 13% 12% 12%

25% 27% 27% 26% 25% 25% 25% 26% 26% 26% 27%

25% 25% 25% 25% 25% 26% 26% 26% 26% 26% 27%

14% 14% 14% 15% 15% 15% 15% 15% 15% 14% 14%

23% 21% 21% 21% 21% 21% 21% 21% 21% 21% 20%

2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F

Exhibit 6: MTN Subscriber's Base Weights by Region

Joint Ventures

Small OPCO Cluster

Large OPCO Cluster

Nigeria

South Africa


consider our estimated cost of equity of 11.06%, which technically would entail a

SELL recommendation.

Company overview

Company description

MTN Group Limited (MTN) is a leading multinational profitable mobile

telecommunications group currently operating in 22 countries across Africa and

the Middle East. Based in South Africa, MTN is listed in the Johannesburg Stock

Exchange. The majority of its subscribers are based in South Africa and Nigeria,

contributing with 57% for total revenue in 2015 (Exhibit 4). Nonetheless, it is also

present in other countries: the Large OPCO Cluster group is constituted by Ghana,

Cameroon, Ivory Coast, Uganda, Syria and Sudan; the Small OPCO Cluster group

is composed by Yemen, Benin, Afghanistan, Congo B, Rwanda, Zambia, Liberia,

Conakry, Cyprus, Bissau and South Sudan (Exhibit 5); there are also some Joint

Ventures comprised by Iran, Botswana and Swaziland, being Iran the largest one

with over 94% of the subscribers. Exhibit 6 presents information about MTN

subscribers’ base weights by region.

030 00060 00090 000

120 000150 000180 000210 000240 000270 000300 000

Exhibit 2: Equity Value Decomposition (ms of Rands)



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Outgoing voice58%

Incoming voice10%

Data23%

SMS3%

Devices5%

Other1%

Exhibit 9: MTN Group Revenue Analysis (2015)


0

25 000

50 000

75 000

100 000

125 000

150 000

175 000

200 000

20

12

20

13

20

14

20

15

20

16

F

20

17

F

20

18

F

20

19

F

20

20

F

20

21

F

20

22

F

Exhibit 7: MTN Group Total Revenue (ms of Rands)


189208 223 233 238 247 257 266 276 286 297

201

2

201

3

201

4

201

5

201

6F

201

7F

201

8F

201

9F

202

0F

202

1F

202

2F

Exhibit 8: MTN Group Total Susbcribers (000s)


“Committed to leading the delivery of a bold new digital world to its customers”6,

MTN operates solely in the mobile communications business for both particular

and business groups. The company’s value derives from its very strong brand and

visibility, and being such a big telecom company it is a leader in most of the markets

it operates in. The vast subscribers’ base of 232,500 customers in the end of 20157

reflects group revenue – MTN is the biggest telecom operator based in Africa8.

Exhibit 7 shows information about MTN’s past and estimated total revenue, and

Exhibit 8 about subscribers.

As expected, service revenue comes from outgoing and incoming9 voice usage,

data traffic which includes not only internet usage but also digital services (e-

commerce, digital media and MTN Mobile Money financial services), and SMS

usage. Regarding product revenue, equipment devices such as phones and

tablets also play a relevant role (Exhibit 9).

Shareholder structure

According to MTN10, 15.91% of its equity is owned by the Government Employees

Pension Fund (GEPF) which is managed by the Public Investment Corporation

(PIC)11. The Swiss private bank Lombard Odier Darier Hentsch & Cie (M1 Limited)

owns 9.92% of MTN Group. MTN Zakhele, a special purpose vehicle created in a

Broad-Based Black Economic Empowerment (BBBEE) transaction in 2010, owns

4.16% of MTN. BBBEE is a South African Government programme aimed to

allocate wealth by enabling certain disadvantaged South Africans to own and

manage companies’ equity in privileged conditions12. Both MTN Holdings and its

directors also hold 0.58% and 0.10% of MTN, respectively. The remaining 69.33%

are public. There is no evidence indicating a future change to the current

shareholders’ structure configuration. It should be noted that MTN Zakhele expired

6 MTN’s official motto and strategy for the future. 7 Vodacom, MTN’s major competitor operating in Africa, mostly concentrated in South Africa, had 61,648

subscribers in the end of 2015; Maroc Telecom, a big competitor operating in Morocco and other African countries registered 51,000 subscribers; Safaricom, based in Kenya and present in other markets had 23,300; Etisalat, another competitor based in the United Arab Emirates had 167,000 subcribers; Ooredoo, based in Qatar had 117,000 customers. 8 MTN registered ZAR147,063 million of revenue in 2015 vs. ZAR77,333 million of Vodacom; ZAR53,257 million of Maroc Telecom; ZAR24,704 million of Safaricom; Etisalat, not based in Africa but in the United Arab Emirates registered ZAR217,840 million in revenue; Ooredoo (Qatar) cashed ZAR136,680 million. 9 Incoming voice comprises interconnect revenue, i.e. ”what mobile operators charge each other to accept competitor traffic on their networks”, Source: MTN 10 Source: MTN’s official information on shareholders (Dec-15), available on the website. 11 PIC is an asset management unit that provides financial services and is owned by the South African Government. 12 Is is intended to balance the effects of the discrimination of black people during the Apartheid.


PAGE 7/32

on November 24th 2016, but a new vehicle named MTN Zakhele Fughi was

created owning reasonably the same amount of shares the previous entity did.

There is not a fixed organized group holding the majority of the company (>50%),

as MTN typically has diverse minor shareholders over the world. PIC owns the

major part of it and there is no indication of the South African Government having

a negative influence on shareholding decisions. Typically, the board of directors

takes some of the decisions which have been seen, such as the appointment of

the new CEO initiating functions in 2017.

MTN Group owns several legal entities in a vertical scheme in which all of them

hold diverse shareholdings in the several countries MTN is present in. The entire

structure is detailed in Exhibit 10.

Exhibit 10: MTN Group Structure (2015)



PAGE 8/32

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100 %

050

100150200250300350400450500

20

032

004

20

052

006

20

072

008

20

092

010

20

112

012

20

132

014

20

152

016

Exhibit 11: MSCI Indices Performances (USD)

MSCI World (Developed Markets)

MSCI Emerging

Source: Bloomberg

Macroeconomic Outlook

When assessing the business state of any company it is necessary to analyse the

involved countries, since their performance will certainly pilot cash flow projections

and influence operations. Although most of the literature relates with the impact of

telecommunications in economic growth, the opposite is also true. A more stable

country will attract investment, produce more richness and channel it wisely,

boosting wealth and improving consumption, granting better opportunities for

companies in general. MTN is present in emerging markets which tend to have an

increased level of uncertainty associated, related both with external and internal

challenges. Regarding external influences, Exhibit 11 shows the cumulative

performance of MSCI World Index (developed markets) vs. MSCI Emerging

Markets Index. In times of global uncertainty, a worldwide economic slowdown is

clear, posing a deteriorated outlook on the world economy and unfavourable

external conditions. Accordingly, emerging markets are testifying downward

pressures on growth prospects due to the uncertainty of more developed market

economies. This fragility is associated with the dependency of emerging markets

on stronger economies, being that related either to international trade (large

dependency on commodities’ prices, with low oil prices clearly having a negative

impact), international financing, international aid and guidance or simply general

market sentiment13. In general, when more developed economies struggle, it

affects developing ones even more. This relationship is generally known and

accepted. Furthermore, it makes investors channel their money to developed

markets, which act almost as safe harbours. Another thing worth mentioning is that

a stronger US Dollar also translates into less investment in emerging economies.

Concerning internal challenges, developing markets still have much to pursue.

Although expected to grow more than developed ones, African economies are not

prone to develop to the extent of the Asian tigers14 for instance. In a more

theoretical matter, the true development of a country relies in the ability to depose

their rulers’ corrupt methods of controlling power and to craft a nation where the

government faithfully and evenly works for its citizens, with uniform political rights

and independent institutions, enabling and promoting decent and fair opportunities

for the majority, eventually bringing prosperity to ordinary citizens15. Nowadays,

most emerging economies still swim in corruption, inequality and repression while

13 General attitude and behavior of investors concerning financial markets. 14 Hong Kong, Singapore, South Korea and Taiwan. 15 The Asian Tigers followed this type of ruling, allowing them to focus in their competitive advantages.


PAGE 9/32

1,3%

2,7%

0,0%

3,5%

5,9%

8,6%

5,0%

0,1%

-1,8%

4,0%4,5% 4,9%

8,5%

5,3%

6,5%

10,4%

8,9%

15,7%

2,2% 2,1%

6,7%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

SA NIG

IRA

N

GH

AN

A

CA

MER

OO

N

IV. C

OA

ST

UG

AN

DA

Exhibit 12: Economic Overview

GDP Growth 2015 GDP Growth 2016F

Inflation 2016F

Source: IMF and Company Reports

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Exhibit 13: South African Real GDP Growth (%)

Quarterly GDP Growth (YoY)

Yearly GDP Growth

Source: OECD and World Bank

0%

10%

20%

30%

40%

50%

60%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

07 08 09 10 11 12 13 14 15

Exhibit 14: South African major economic indicators (% of GDP)Government Debt in the right axis

CA Deficit Government Deficit

Net FDI Government Debt

Source: World Bank

small elites enrich by the cost of the majority16. This is the main reason why so

many economies fail in achieving the levels of prosperity of the most developed

ones. Government structural reforms are essential and the lack of commitment in

that sphere threatens growth. It is also true that improvements have been done,

but they simply have not been enough. Even though in a smaller scale, many

African and Middle East emerging economies are still a mirror of oppressed

systems of the past under the influence of a more modern world.

Hence, these countries face economic problems which are inevitably inter

connected with their systems. MTN operates in 22 developing countries. Exhibit

12 provides an idea of the macroeconomic scenario in key MTN markets. One

should be conscious that the overall types of problems affecting developing

countries are somewhat similar in between them, being sluggish growth, corruptive

systems, excessive inflation, currency depreciation and commodities dependency

the common topics. Thus, we decided to provide a more detailed analysis just for

South Africa and Nigeria, the most significant markets for MTN.

South Africa

South Africa (SA) is currently facing several challenges. A weak economic growth

and high inflation have marked its path. The South African economy relies mostly

on financial services, tourism, manufacturing and wholesale/retail, with the

government also playing an important role. Exports heavily affect the country’s

GDP and its core sectors are the mining and minerals industry (around 50%) and

the automotive segment. Thus, South Africa is highly dependent on international

demand mostly from China, Africa, Europe and the US.

Real GDP growth was highly impacted during the financial crisis of 2008 and has

experienced a slowdown until now (Exhibit 13). South Africa has a prominent

current account deficit which has been slowly narrowing since 2013, but it can

easily worsen due to current external conditions and further strikes17. To finance

this discrepancy in the current account, South Africa relies in part on Foreign Direct

Investment (FDI)18. Government deficit is also slowly decreasing since the crisis,

but keeps forcing government debt upwards. Exhibit 14 summarizes these

economic indicators. Devaluation is a temptation to the monetary authorities as it

offsets poor GDP performances due to the weaker rand positive effect on the

current account. The rand has been following a depreciation against the US Dollar

16 Source: “Why Nations Fail: The Origins of Power, Prosperity and Poverty", by Acemoglu, Daron, and James A Robinson, First Edition (2012), New York: Crown, 529 17 South African strikes are recurrent even though “platinum producers recently settled for a modest pay” (3 years from Nov-14). Source: BBC 18 Financial services help catalyze FDI, mostly towards the mining sector.


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0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

5

7

9

11

13

15

17

07 08 09 10 11 12 13 14 15

Exhibit 15: USD/ZAR Exchange Rate and SA InflationSA Inflation in the right axis

USD/ZAR SA Inflation

Source: Bloomberg and StatsSA

10

30

50

70

90

-20

-10

0

10

20

Q1

-09

Q4

-09

Q3

-10

Q2

-11

Q1

-12

Q4

-12

Q3

-13

Q2

-14

Q1

-15

Q4

-15

Exhibit 16: South African Confidence indicatorsBusiness confidence index in the right axis

Consumer confidence index

Business confidence index (=50 isneutral)

Source: StatsSA

020406080

100120140160

Jan

-04

Sep

-05

May

-07

Jan

-09

Sep

-10

May

-12

Jan

-14

Sep

-15

Exhibit 17: Crude Oil Prices (Global price of WTI Crude, Dollars per barrel)

Source: FRED of St. Louis (US Energy Information Administration)

in the last few years, reaching almost 30% in 2015 (Exhibit 15). This creates

inflationary pressures for the economy which affects companies as labour costs

tend to grow more than revenue, with the unemployment rate registering

increasing large values (26.7% in Q1-2016, from 24.5% in Q4-201519). Political

turmoil and corruption scandals are still present which discourages confidence and

harms investment. Consumer and business confidence indicators are low (Exhibit

16). Besides, the country is suffering a severe drought and electricity shortages20.

Furthermore, social inequality and poverty have decreased in the last decade but

still remain major challenges. Accordingly, financial conditions tightened with

higher borrowing costs as South Africa was in the verge of being downgraded to

junk status this year.

South African future is uncertain, yet South Africa is now very slowly recovering. It

does have a very developed financial system, and most of its other sectors are

currently growing. A real GDP quarterly growth (QoQ) in the 2nd quarter of 2016

of 0.8%21 has positively surprised investors. Annual GDP growth is expected to

continue improving in the future (around 2% by 202022). The government has

announced a restrictive fiscal policy to offset fiscal discrepancies and a prudent

control of monetary policy should keep inflation steady (between 3% and 6%). The

South African economy remains one of the most robust in Africa and the National

Development Plan23 promises to implement some structural reforms that are vital

to its further development.

Nigeria

With an economy highly dependent on its vital oil industry, Nigeria has been largely

affected by crude oil prices (Exhibit 17) which have largely decreased since the

fourth quarter of 2014 when global supply largely exceeded demand. Since then,

GDP growth has weakened and recently stumbled into negative values posing a

recession scenario (Exhibit 18). Agriculture is another key industry which has

witnessed a sluggish increase in output as a consequence of dry seasons.

Wholesale, retail trade and manufacturing also play important roles and have been

declining. One of the reasons is the Nigerian Naira (NGN or Naira) (Exhibit 19)

depreciation which increased imported inputs’ costs. The Naira has abruptly

devalued after the abandonment of a fixed exchange rate regime (US Dollar peg)

19 Source: Statistics of South Africa 20 Constant power cuts pose a problem as the public monopolist entity Eskom is unable to serve all the country’s demand, raising electricity prices. 21 Source: OECD 22 Source: Government of South Africa 23 South African Government long-term development plan (2030).


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-2%

0%

2%

4%

6%

8%

20

07

20

08

20

09

20

10

20

11

Q4

-12

Q2

-13

Q4

-13

Q2

-14

Q4

-14

Q2

-15

Q4

-15

Q2

-16

Exhibit 18: Nigerian Real GDP Growth (%)

Quarterly GDP Growth (YoY)

Yearly GDP Growth

Source: World Bank and NigeriaNational Bureau of Statistics

5%

7%

9%

11%

13%

15%

17%

100

120

140

160

180

200

220

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Exhibit 19: USD/NGN exchange rate and NIG InflationNigerian Inflation in the right axis

USD/NGN Nigerian Inflation

Source: Bloomberg and Nigeria National Bureau of Statistics

8%

10%

12%

14%

16%

18%

20%

150

170

190

210

230

250

270

290

310

330

Exhibit 20: USD/NGN exchange rate and NIG Inflation (YoY during 2016)Nigerian Inflation in the right axis

USD/NGN Nigerian Inflation

Source: Bloomberg and Nigeria National Bureau of Statistics

0%

2%

4%

6%

8%

10%

12%

14%

16%

-5%

0%

5%

10%

15%

20%

07 08 09 10 11 12 13 14 15

Exhibit 21: Nigerian major economic indicators (% of GDP)Government Debt in the right axis

CA Surplus Government Deficit

Net FDI Government Debt

Source: World Bank and Nigeria Budget Office

in June by the Nigerian Central Bank (Exhibit 20). The idea of stabilizing the

exchange rate was abandoned as foreign reserves became scarce and low oil

prices did not allow for its continuation. The exchange rate keeps falling as capital

flows out of the country, increasing pressure on US Dollar liquidity. Inflation clearly

intensified which raises more economic instability. The current account surplus has

diminished over the years and has become negative with less oil exports.

Government deficit is controlled and expected to increase as an expansionary

budget was announced in order to stimulate the economy. Government debt is

also stable but is prone to increase in the next few years. Exhibit 21 summarizes

this information. Corruption is unfortunately still one of the major problems in

Nigeria being present in most of the political and economic sectors. In 2015 Nigeria

ranked 136 out of 174 countries in the corruption index24. Furthermore, the country

is also far from good in what safety concerns, with terrorism groups and crimes

being recurrent.

With an economy not well diversified, the near term future of Nigeria is strongly

linked with the evolution of crude oil prices. While those prices have bounced back

recently, they still are very low compared to previous levels. OPEC meetings have

tried to arrange a cut in production but one should be aware that the US could

offset that strategy again. One should also have in mind that oil prices suffer from

the fact that bull investors have had big losses in the past 2 years – eager of profits,

they will now try to cash in small amounts by desperately selling if oil prices rise a

small bit, which additionally pushes its level down in the short-term. The Naira is

expected to stabilize. In the next few years, GDP growth rate is predicted to turn

positive yet still low.

24 Source: Transparency International


PAGE 12/32

Exhibit 23: Four Milestones of the Deregulation Wave:

1. In the United States: divesture of the monolithic AT&T into the regional Bell operating companies (RBOC) in 1982;

2. In the U.K: change from monopoly to duopoly in 1982 and complete liberalization of telecoms in 1991;

3. In Japan: privatization of NTT in 1985; 4. In the EU: the end of voice service

monopoly on January 1, 1998;

2% 3% 4%6%

9%

13%

20%

27%

38%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

50

100

150

200

250

300

350

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98Exhibit 22: The Mobile Celular Boom

Worldwide Mobile CellularSubscribers (ms)

As % of Fixed-Line TelephoneSubscribers

Source: World Telecommunications Development Report 1999

0,5

0,7

0,9

1,1

1,3

1,5

2012 2013 2014 2015

Exhibit 24: Total Revenue as % of Subscribers

MTN Vodacom

Source: Companies Reports

Mobile Telecommunications Sector

The telecommunications sector has been one of the epicentres of growth (Exhibit

22) in the past, as the deregulation25 government movements (Exhibit 23) along

with the massive technological improvements and overall receptivity of capital

markets allowed the industry to develop like never before. Having had the most

significant telecom business growth in the past, emerging markets are still the ones

with the greatest potential for the future. This is due to the young rising population,

expanding mobile penetrations, increased economic growth, and fewer fixed-line

infrastructures. This last phenomenon makes mobile communications especially

relevant in Africa. However, one should be aware that traffic costs are also higher

on a mobile network than on a fixed one, mainly due to bigger investments in

infrastructures and costs associated with increased traffic26.

Nevertheless, MTN and most telecoms face an extremely challenging operational

environment in a very fast-paced industry. As previously seen, weak macro-

economic conditions tend to harm business development due to low consumer

spending. This exacerbates the biggest challenge transversal to both mature and

developing markets, which is the fierce market competition among telecom

companies. On the one hand, consumers seek a reliable service at the lowest

possible price since there are several providers whose telecom services do not

differ so much. Companies then need to practice lower prices in order to attract

new and existent costumers, decreasing overall profitability by lowering revenue

per user (Exhibit 24). On the other hand, users demand better and faster

connections entailing substantial capital expenditures which are fundamental to

prosper in the sector. Nowadays in developed markets telecoms’ success is linked

with better quality, diversity and technology progresses while in emerging markets,

differentiation is more related with rapid network rollout in order to face the

continuously growing demand. Exhibit 25 and Exhibit 26 provide information

regarding telecom comparables both from developed and emerging markets.

Regarding revenues, phones calls are still the main source of mobile telecom

revenue but technology advances are changing this situation. Mobile devices are

becoming more about internet than voice. Not only was there a data explosion with

the cost of the gigabyte reduced, social networking has also gained a lot of

notoriety. This phenomenon is transversal to all telecoms.

25 Deregulation meaning the untying of public monopoly telecom operators and respective governments. 26 Source: Comparison of fixed and mobile cost structures, GSMA and PwC.

Source: “The worldwide History of Telecommunications”, by Anthon A. Huurdeman (2003)


PAGE 13/32

63,2% 62,0%58,1%

11,2% 10,2% 10%

14,9% 17,8% 23,1%

3,9%3,1%

2,8%5,5% 5,4%4,8%

2013 2014 2015

Exhibit 27: MTN Revenue Breakdown (as % of total revenue)

Outgoing voice Incoming voice

Data SMS

Devices Other


3%6%9%

12%15%18%21%24%27%30%

2012 2013 2014 2015

Exhibit 26: Return on Invested Capital of Telecom Companies

ROIC DevelopingROIC DevelopedMTN

Source: Company Reports, Bloomberg and Analyst's Estimates

-10%

-5%

0%

5%

10%

15%

20%

25%

2012 2013 2014 2015

Exhibit 25: Telecommunication Companies Analysis

Sales Growth Rate Developing

Profit Margin Developed

Sales Growth Rate Developed

Profit Margin Developing

Source: Bloomberg

MTN Group Business Analysis

Nigerian Regulatory Fine

In order to describe MTN performance it is necessary to first explain the Nigerian

Regulatory Fine. During the second half of 2015, the Nigerian Communications

Commission (NCC) imposed a NGN1.04 trillion (USD5.2 billion) fine on MTN

Nigeria for not meeting the deadline of disconnecting about 5.1 million unregistered

SIM cards. Legal action was taken but MTN soon realized it should try to reach an

amicable solution with the Nigerian authorities for its best interest. Thus, a “without

prejudice good faith payment” of NGN50 billion (USD250 million) was made before

hand by MTN on 24 February 2016. On 10 June 2016 a settlement was reached

with a reduced fine of NGN330 billion (USD1.7 billion), leaving a NGN280 billion

amount to be paid over 3 years27. MTN accrued the present value of this amount

in 2015 and 2016, impacting EBITDA by ZAR9,287 and ZAR10,499 million,

respectively28. We considered the impact on future cash flows according to the

ZAR/NGN exchange rate at the time each cash flow deduction will be done.

Furthermore, as part of the resolution deal reached with the NCC, in the future

MTN will have to initiate the process of listing its shares on the Nigerian stock

exchange, which all in all will increase the stock’s liquidity29. The Nigerian Fine

caught the markets by surprise depressing MTN’s stock price, decreasing roughly

25% during the conversations and lately increasing only 13% after the settlement.

MTN made sure nothing similar would succeed, disconnecting both Nigerian and

non-Nigerian unregistered SIM cards throughout the end of 2015 and 2016. By

mid-2016 the disconnection process was completed and it was expected that

around 18 million subscribers were disconnected to ensure full compliance across

the group. This severely impacted cash flows and future projections for MTN

Nigeria, as we will further see.

Consolidated Business Analysis

As previously said, MTN is operating in a difficult environment characterized by

poor macro-economic conditions, fierce market competition and regulatory

pressures from national authorities. Its strong brand and knowledge in the

African/Middle East markets are the key for survival. Since it operates in many

countries which have similar characteristics, the company can be said to be

27 NGN30 billion on 31 March 2017, NGN55 billion on 31 March 2018, 31 December 2018, 31 March 2019 and 31 May 2019. 28 This impacted the FCF projections by the same amounts. 29 Nevertheless, current big-ask spreads don’t indicate this to be a problem.


PAGE 14/32

50,4%47,2%

44,1%

8,5% 7%4,7%

14,2% 17,4% 21,3%

4,9%4,3% 4%

14,1%16,7% 18,4%

7,8% 7,2% 7,4%

2013 2014 2015

Exhibit 28: Vodacom Revenue Breakdown (as % of total revenue)


Data SMS

Devices Other


024681012141618

0

5

10

15

20

25

30

35

40

2011 2012 2013 2014 2015

EPS

(Ran

ds)

Earn

ings

(b

s o

f R

and

s)

Exhibit 29: Earnings Analysis

MTN Earnings

Vodacom Earnings

MTN EPS

Vodacom EPS

Excluding Nigerian Regulatory Fine


5%

15%

25%

35%

45%

55%

0

30

60

90

120

150

180

2011 2012 2013 2014 2015

EBIT

DA

mar

gin

(%

)

Rev

enu

e (m

s o

f R

and

s)

Exhibit 30: Revenue and EBITDA Margin Analysis

MTN Revenue

Vodacom Revenue

MTN EBITDA Margin

Vodacom EBITDA Margin


enjoying synergies related with expertise in emerging markets. Regarding MTN’s

dispersion across Africa/Middle East, we don’t believe it to be associated with a

loss of focus and a spread to an endless list of countries. MTN is adding value with

each new country, given the potential each market possesses. Currently, it is

focusing in improving regional synergies in order to guarantee tactical area focus

and organization – during 2016 MTN changed its operating structure, now

grouping countries per region instead of size. Nevertheless, our separated analysis

consists in the old format as historical data was available in that arrangement.

The company has been following the market trend of increased data and less voice

revenue, as can be seen in Exhibit 27. Voice revenue is currently under pressure

and declined 6.2% in 2015, despite MTN’s reduction in tariffs of 25% resulting in

15% more billable minutes30. Nevertheless, MTN data revenue increased 30.2%

contributing 23% to total revenue (previously 18%). There was indeed a 108.5%

increase in data traffic even though data tariffs decreased about 45% during

201531. The decrease in tariffs is related to the market competition typical in the

industry. Hence, the decline in voice revenue has been somewhat offset by the

growth in data revenue. Data revenue also include digital services i.e. e-

commerce, digital media and mobile financial services, which have been recording

a strong growth even though they still represent smaller amounts. Incoming voice

revenue (interconnect) keep declining as mobile termination rates keep decreasing

across the industry. SMS revenue has witnessed a decrease of about 3% per year

as data also poses itself as a viable substitute for texting. Devices revenue which

tend to increase as a result of more data usage, come mainly from smartphones,

tablets and routers, allowing customers to navigate more, thus being strategically

sold in bundles. Vodacom’s values are presented in Exhibit 28 for comparison

purposes. Overall performance was lower than expected with EPS32 declining

51.4%33 in 2015 (Exhibit 29 presents both EPS and Earnings past values). Despite

the storm, MTN continued to benefit from its large subscriber base. Exhibit 30

concerns revenue and EBITDA margins and Exhibit 31 shows the evolution of

MTN total subscribers34.

MTN recognizes that 2015 was a problematic year impacted by challenges in the

two biggest markets (Nigeria and South Africa), but is confident that 2016

30 Source: Company Reports 31 Source: Company Reports 32 Earnings Per Share 33 EPS declined 25.3% excluding the Nigerian Regulatory Fine Impairment. 34 According to MTN, MTN Nigeria witnessed a decline in its subscribers’ base from 61,252,000 to 61,004,000 during 2015, but not all disconnections were completed yet. For 2016 projections we used the final number of subscribers provided during the year which takes into account both new subscribers and all deregistration batches in all countries.


PAGE 15/32

164,5 189,3 207,8 223,4 232,5

36,8 46,9 50,5 57,9 61,6

2011 2012 2013 2014 2015

Exhibit 31: No. of Subscribers (millions)

MTN Subscribers

Vodacom Subscribers


0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 2016

Exhibit 33: South African Telecommunications Sector Market Shares (Q1 of each year)

Vodacom MTN Group

Cell C Telkom


45% 44% 42%

9%6% 5%

21% 24% 32%

6%5%

5%

17% 19% 15%

2013 2014 2015

Exhibit 34: MTN SA Revenue Breakdown (as % of total revenue)


Data SMS

Devices Other


20

25

30

35

40

30%

35%

40%

45%

50%

20

12

20

13

20

14

20

15

20

16F

Sub

scri

ber

s (m

s)

Mar

ket

Shar

e (

%)

Exhibit 35: South African Market Shares and Subscribers

MTN SA SubscribersVodacom SA SubscribersMTN SA Market ShareVodacom SA Market Share


represents a turning point with a new operating structure and a new CEO, “where

improving network quality and capacity remains a priority”. Increased data usage,

more digital media content with MTN being the largest distributor of digital music

in Africa35, and mobile money presenting itself as a strong viable solution to

payment problems in Africa, makes digital revenue the key for future growth.

Exhibit 32 helps understand the potential of mobile broadband access (wireless

internet connection).

South Africa

South African mobile services arrived to offset the old low fixed-line coverage by

Telkom presented in the country. Nowadays the market is mostly split by Vodacom,

MTN and Cell C. Vodacom has traditionally been the higher quality one, with Cell

C being a challenger trying to disrupt the market. MTN is the second largest

operator, as can be seen in Exhibit 33. Lately the three have been evening up in

perception and quality, with Telkom offering a poorer quality service with lower

prices. MTN is also said to be slightly falling behind the price competitive deals in

some user profiles put forward by the rest of the market with more confusing pricing

packages and fees, making the clearer, cheaper offerings from competitors a

threat to them. Overall the market in South Africa is still very price competitive with

most of the networks offering same things in differing packages.

During 2015, MTN South Africa (MTN SA) saw a decrease in handset revenue due

to the “exceptional industrial action” in the first half of the year leading to less

devices supplied (impairment of obsolete handsets of R592 million). Data revenue

testified a 37.2% increase amplified by large capital expenditures (almost doubled

from 2014). Exhibit 34 presents MTN SA revenue breakdown as a percentage of

total revenue. Total revenue managed to increase by 2.9%. Exhibit 35 shows

information regarding market shares and subscribers. The subscribers’ base

enlarged 9.3% to 30.6 million mainly due to a better client experience. EBITDA

margin increased from 32.1% to 33,4% benefiting from less devices sales and a

tighter cost control. ARPU has been declining as it is characteristic of the industry

35 Source: Company Reports

8% 4%31% 19%

69%53%

Middle East & North Africa Sub-Saharan Africa

Exhibit 32: Mobile broadband access in emerging markets

2011 2015 2020

Source: 2015 State of the Industry Report, Mobile Money, GSMA Intelligence


PAGE 16/32

507090

110130150170

20

12

20

13

20

14

20

15

20

16F

20

17F

20

18F

20

19F

20

20F

20

21F

20

22F

Exhibit 36: MTN SA ARPU (monthly Rands per user)

MTN SA ARPU

Vodacom SA ARPU


050

100150200250300

2012 2013 2014 2015

Exhibit 37: MTN SA Pre-paid and Postpaid ARPU (monthly Rands per user)

Pre-paid ARPU

Postpaid ARPU


and it is assumed to stabilize in the foreseeable future (Exhibit 36). Cheaper and

better offers attracted more customers, with the pre-paid segment growing by

12,3% to 25.3 million subscribers, even though the post-paid segment declined by

3.3% to 5.2 million (in part due to the lower disposal of handsets). It has been

typical to witness sluggish movements in the post-paid subscriber base (more

profitable but decreasing due to more complicated tariff schemes and less

desirable offers for the average consumer) and an increase in the prepaid one

(more desirable to the average consumer and tends to variate more with price

movements, which have been downwards). Typically, a larger prepaid subscribers’

base translates into less Working Capital needs. Exhibit 37 compares South

African prepaid and post-paid segments’ ARPU.

For the future, aggressive price competition poses itself as a serious threat to MTN

SA, which risks a poor performance in a highly penetrated market of an already

sluggish economy. In fact, MTN SA saw a weakening in its subscriber base during

the first half of 2016 of 2.6% even though it is expected to increase 2% year-on-

year (1.1 million net additions). Exhibit 38 contains information on our predicted

subscribers and revenue for MTN SA. The key strategy to improve operational

performance is to continue boosting data revenue and handsets sales, with

smartphones playing a key role as their penetration rates keep increasing (Source:

Statista). This is accomplished by improving offers and investments in network

quality, with new spectrum frequencies already being added to enhance

customers’ experience. EBITDA margin is likely to slightly decrease due to higher

handsets’ sales in 2016 compared to the previous period as well as increased

network related costs. We predict MTN SA’s mark et share to remain stable with a

slight propensity to decline due to new possible competitive offerings from

companies like Cell-C.

Nigeria

In Nigeria, deregulation of the telecommunications industry since 2003 has allowed

new mobile operators to replace the unreliable fixed line services of NITEL36. The

industry was then almost monopolised by MTN due to their wide quality coverage

but the market has grown considerably and is nowadays much more evenly

distributed by MTN, Globacom, Airtel and Etisalat (Exhibit 39), entailing vigorous

competition (MTN is still the market leader). The sector is now particularly

characterized by rapid adaptation and business flexibility, i.e. to survive companies

must quickly recreate tariff plans, engaging in price wars in order to expand their

business and secure current customers. The challenging regulatory landscape is

36 Main wired telecommunications company which was owned by the government of Nigeria.

20

24

28

32

36

40

2025303540455055

20

12

20

13

20

14

20

15

201

6F

201

7F

201

8F

201

9F

202

0F

202

1F

202

2F

Sub

scri

ber

s (m

s)

Rev

enu

e (m

s o

f R

and

s)

Exhibit 38: MTN SA Subscribers and Revenue Forecast

MTN SA Revenue

MTN SA Subscribers



PAGE 17/32

15

30

45

60

75

30%

35%

40%

45%

50%

2012 2013 2014 2015

Sub

scri

ber

s (m

s)

Mar

ket

Shar

e (%

)

Exhibit 40: MTN Nigeria Market Share and Subscribers

MTN Nigeria Subscribers

MTN Nigeria Market Share


72% 71% 68%

9%10% 11%

15% 16% 19%

2,4% 1,9% 1,6%

2013 2014 2015

Exhibit 41: MTN Nigeria Revenue Breakdown (as % of total revenue)


Data SMS

Devices and others


40455055606570758085

20253035404550556065

201

2

201

3

201

4

201

5

201

6F

201

7F

201

8F

201

9F

202

0F

202

1F

202

2F

Sub

scri

ber

s (m

s)

Rev

enu

e (b

s o

f R

and

s)

Exhibit 42: MTN Nigeria Revenue and Subscribers Forecast

MTN Nigeria Revenue

MTN Nigeria Subscribers


also characteristic and is precisely where MTN slipped in 2015, failing to

disconnect 5.1 million unregistered subscribers on time which resulted on a heavy

regulatory fine. Fortunately, the process is completed and one should not expect

more surprises in the future.

Nonetheless, MTN Nigeria was indeed negatively impacted by the NCC fine. First

of all, because of the obvious substantial loss of subscribers – MTN said it had to

disconnect around 11.2 million subscribers in Nigeria, even though the number is

not precise or not reflected in the company’s reports due to subscribers “rescued”

or acquired for the first time. The reported number of total subscribers in MTN

Nigeria officially increased by 2.3% in 2015 to 61.252 million, but this was not a

final number regarding the loss of subscribers. By mid-2016 when the last batch

was disconnected, Nigeria reported 58.978 million subscribers (62.813 million in

mid-2015). Second, the fine also entailed the suspension of regulatory services,

i.e. NCC restricted MTN’s new tariff plans and promotions to the market and

eventually some were removed upon expiration. The situation lasted until MTN

complied with the requirements. Nigeria’s competitiveness was compromised and

revenue kept declining (-2.1% in 2015). Exhibit 40 presents information about the

evolution of MTN Nigeria’s market share and subscribers. Following the market’s

trend, voice revenue is declining and data revenue growing (18.8% in 2015), even

with the regulatory requirements. Digital revenue keeps improving, contributing

now with over 50% to data revenue (mainly due to music and lifestyle services).

Exhibit 41 details MTN Nigeria revenue breakdown. During 2015 the EBITDA

margin declined 5.6% to 53% mainly due to lower revenue, higher leasing costs

due to the sale of operating towers, Naira depreciation affecting expenses

denominated in US Dollars and an increase in the stake of digital services which

possess lower margins.

We expect MTN Nigeria to slightly lose some market share due to operators taking

advantage of MTN’s drawback. However, the company will slowly recover from the

loss in its subscriber’s base. Improved competitive offers will return since NCC

regulations are now in order. More intensive capex rollout with new spectrums and

4G licenses, along with new improved digital services will allow for substantial data

growth. MTN acquired Visafone Communications Ltd. in January 2016 for $220m

which contributed with 568,000 new subscribers. This acquisition was strategic

since technically it will allow MTN to use 4G LTE service in the 800Mhz spectrum

(better quality since it is not used by other operators). Overall MTN will try to take

advantage of still being the dominant operator in Nigeria to further intensify its

operations. Exhibit 42 presents forecasted values for subscribers and revenue.

EBITDA margin will further decrease, for the same reasons stated above as well

0%

20%

40%

60%

80%

100%

2013 2014 2015 2016

Exhibit 39: Nigerian Telecommunications Sector Market Shares

MTN Globacom Airtel Etisalat

Source: Nigerian CommunicationsComissions


PAGE 18/32

50

60

70

80

90

100

20

12

20

13

20

14

20

15

20

16

F

20

17

F

20

18

F

20

19

F

20

20

F

20

21

F

20

22

F

Exhibit 43: MTN Nigeria ARPU (monthly Rands per user)


0

20

40

60

80

100

0

10

20

30

40

50

201

2

201

3

201

4

201

5

201

6F

201

7F

201

8F

201

9F

202

0F

202

1F

202

2F

Sub

scri

ber

s (m

s)

Tota

l Rev

enu

e (b

s o

f R

and

s)

Exhibit 44: Large OPCO Cluster Revenue and Subscribers

Total Revenue Subscribers


1020

304050

60708090

20

12

20

13

20

14

20

15

20

16F

20

17F

20

18F

20

19F

20

20F

20

21F

20

22F

Exhibit 45: Large OPCO Cluster ARPUs (Rands)

Ghana Cameroon

Ivory Coast Uganda

Syria Sudan

Source: Company Reports and Analyst'sEstimates

as for costs of reconnecting subscribers. We believe ARPU will keep diminishing

in 2017 due to the effects of the Naira depreciation, slowly increasing later on

(Exhibit 43).

Large OPCO Cluster

The Large OPCO Cluster is composed by some other important markets where

MTN operates. It is constituted by Ghana, Cameroon, Ivory Coast, Uganda, Syria

and Sudan. Mostly, it helps to make MTN’s business more geographically

diversified and possesses a strong growth potential due to lower mobile

penetration rates. However, macro-economic conditions keep damaging these

markets entailing lower than expected performances. The subscribers’ base

enlarged 0.7% to 57.1 million in 2015 and revenue in Rands barely increased

(0.5% in 2015 vs 5.5% organically). Exhibit 44 summarizes these phenomena.

Overall, data revenue remains the main driver behind revenue progresses. Exhibit

45 shows past and predicted ARPUs evolution for the several markets.

MTN leads the market in Ghana (48% according to the National Communications

Authority) and has been performing well notwithstanding the tough economic

scenario the country currently lives, registering very high inflation levels.

Subscribers are steadily increasing due to more appealing offers, reaching 16.2

million in the end of 2015. Total revenue is also increasing (10.55% in Rands

during 2015) being partly offset by the Cedi currency depreciation. Data revenue

is the main propellant of this growth, growing 80% in Rands and constituting now

30.6% of total revenue. This was a result of substantive network rollout, increased

smartphone penetration and more attractive offers, with financial services also

providing their contribution. EBITDA margin increased to 40.5% from 37.4% mainly

due to lower costs and no fees paid to the group in the year. ARPU levels have

remained somewhat steady. We can expect MTN Ghana to keep following the

current positive trend for the future with increased subscribers, market share and

revenue and improved quality due to further investments in the network.

MTN Cameroon is also the market leader (56.2% according to MTN) but its

performance has not been the best. Aggressive competition made MTN lose 3.2%

of the market to Orange and Nexttel in 2015. Revenue has been declining.

Although it tends to follow the data trend, it is still not enough to offset diminishing

voice revenue. Thus, MTN is making an effort to improve 3G and 4G network,

increasing costs and harming EBITDA margin which decreased 6.6% to 36.2% in

2015. MTN Cameroon was also hurt by the deregistration process but it is

expected to slowly increase its subscribers’ base in the future, even though we

predict revenue to keep decreasing in the short term.


PAGE 19/32

0

8

16

24

32

40

48

56

05

101520253035

201

2

201

3

201

4

201

5

201

6F

201

7F

201

8F

201

9F

202

0F

202

1F

202

2F

Sub

scri

ber

s (m

s)

Tota

l Rev

enu

e (b

s o

f R

and

s)

Exhibit 46: Small OPCO Cluster Revenue and Subscribers



The Ivory Coast telecom market is dominated by MTN which provides the best

network quality, owning around 34% of the highly competitive market. Thanks to

better offers in general, subscribers grew by 4.1% to 8.3 million in 2015. Data

growth has been boosting total revenue growth mostly due to network rollout and

mobile money surges. MTN Ivory Coast is expected to keep gradually growing in

the future with more innovative products and services offerings.

MTN Uganda is also a market leader and its subscriber base decreased 14.1% to

8.9 million in 2015 due to regulatory demands. However, it is expected that it will

regain those customers in the short term. Data revenue has been following

identical trends and the future is dependent upon further capital expenditures to

boost revenue. Mobile money services are also a key part of the Ugandan

business.

Regarding Syria, in spite of the country’s critical situation, MTN managed to grow

the number of subscribers by 1.9% to 5.9 million. Thanks to data growth, revenue

increased organically by 4,7%, even though it decreased in Rands. This is a major

problem as the country faces high inflation levels. Organic revenue is expected to

slowly increase but the growth in Rands will ultimately depend upon the outcome

of Syrian conflicts.

MTN Sudan is another segment that suffered due to regulatory deregistrations,

having a 5.5% decrease in its subscriber base to 8.5 million during 2015. However,

revenue increased 15% organically speaking, again supported by data revenue.

We expect Sudan to regain its subscribers’ increasing momentum in the future. As

for revenue, it is expected to keep slowly increasing.

Small OPCO Cluster

The Small OPCO Cluster in its turn comprises smaller markets: Yemen, Benin,

Afghanistan, Congo B, Rwanda, Zambia, Liberia, Conakry, Cyprus, Bissau and

South Sudan. Together they account for 14% of MTN’s revenue and 15% of the

subscribers. Total revenue increased by 4% in 2015. In order to maintain data

revenue flows (+34.1% in 2015) and further growth, additional capital expenditures

are required and MTN has said it will maintain the investment levels made in the

previous years. Revenue is expected to keep increasing in the future nevertheless

in slower levels which is related with challenging operating environments and weak

macro-economic conditions. There is also not a lot of publicly available accurate

information regarding these markets. Thus, we chose to assume a stable growth

rate for future revenue taking into account South African inflation. Subscribers

increased 7.3% in 2015 reaching 37.4 million. Exhibit 46 has information

regarding past and future predicted revenue and subscribers.


PAGE 20/32

Iran91,38%

Botswana6,32%

Swaziland2,30%

Exhibit 47: Joint Ventures Revenue (2015)


Joint Ventures

MTN is also involved in some joint ventures (Iran, Botswana and Swaziland) since

it owns less than 50% of the respective businesses, thus being equity accounted.

Iran is the major one with 91% of the revenue (Exhibit 47) and 94% of the

subscribers, representing around 8% of total revenue. We assume Iran totalizes

around 90% of the joint ventures since there are also some smaller partnerships

involving digital services. Thus, in order to value joint ventures, we calculated Iran’s

value based on EV/EBITDA and EV/Revenue multiples and extrapolated there

onwards. Exhibit 48 shows our estimated total values of the joint ventures.

Even though MTN Irancell is measured as a joint venture, it possesses a great

value derived from the high subscribers’ numbers it has and strong performances

it carries. In 2015 subscribers reached 46.1 million which represented a 5%

increase year-on-year. Revenue increased 17% to R13,600 million, boosted by a

more than 100% growth in data revenue which in its turn was sustained by the

increased adoption of 3G and 4G services due to enlarged smartphone

penetration, high capital expenditures to improve the network and lower data

charges, counterbalancing the decrease in voice revenue. EBITDA margin has

been decreasing due to higher costs. Continued data growth is projected and

MTN’s position (market leader with 47% market share) allows it to compete in the

highly penetrated market. Furthermore, the easing of sanctions in Iran will allow

MTN to repatriate around R15.4 billion worth of funds from the country. Exhibit 49

presents total revenue and subscribers’ figures regarding MTN Irancell.

0

10 000

20 000

30 000

40 000

50 000

60 000

Exhibit 48: Joint Ventures Value (millions of Rands)

Source: Company Reports, Bloomberg and Analyst Estimates

0

10

20

30

40

50

60

0

5 000

10 000

15 000

20 000

25 000

30 000

2014 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F

Sub

scri

ber

s (m

s)

Tota

l Rev

enu

e (m

s o

f R

and

s)

Exhibit 49: MTN Irancell Revenue and Subscribers


Source: Company Reports, Bloomberg and Analyst’s Estimates


PAGE 21/32

-10

0

10

20

30

4050

60

70

20

13

20

14

20

15

20

16F

20

17F

20

18F

20

19F

20

20F

20

21F

20

22F

Exhibit 50: MTN Group Net Capex (bs of Rands)

D&A

∆ PPE and Intangible Assets

Net Capex


0

15

30

45

60

75

0

40

80

120

160

200

20

12

20

13

20

14

20

15

20

16F

20

17F

20

18F

20

19F

20

20F

20

21F

20

22F

Report

ed C

apex

PP

E a

nd I

nta

ngib

le A

sssets

Exhibit 51: Capex and Associated Assets (bs of Rands)

PPE and Intangible Assets

Reported Capex


Capex and Net Working Capital

Capex

Capital expenditures are related with investments in the network in order to provide

better quality and improved speeds. During 2015, the Group rolled out: 3,116 2G

sites; 7,891 3G sites; 5,241 LTE sites. Since major countries possess good

network coverage the key strategy continues to involve providing better data

access, with 3G and LTE rollout having a very important role in what regards

revenue growth. According to MTN, capex amounted to ZAR29,199 million in

2015, compared with ZAR25,406 million in 2014. One should note that there was

a lack of information regarding how many sites MTN actually has, the type of

antennas used in those sites, as well as capacity, utilization, maintenance and

construction data. Thus, we tried to work with the information available since it

would provide a more precise estimation than assuming more crude numbers.

Regarding the DCF model, when we added reported values of Capex37 for a given

year to previous fixed assets, and took the respective year’s depreciation and

amortization (D&A) off, we would reach very imprecise values for the Net Capex

levels of that same year when compared to the actual values calculated on the end

of the period with actual fixed assets. This means Capex provided by the company

cannot be directly applied as the Net Capex38, to be used in the FCF estimates.

Thus, we decided to estimate Net Capex the other way around – by forecasting

future fixed assets.

In order to do that, we used total Capex values provided by MTN as a percentage

of total subscribers in order to estimate future Capex according to our future

subscribers’ forecast. From historical figures, we then assumed a reasonable

estimate for that Capex as a percentage of PPE. According to this value and based

on our future Capex estimates, we then calculated new PPE. Intangible assets

were predicted based on the growth they have been demonstrating. After reaching

future PPE and intangible assets’ values, we calculated Net Capex according to

past figures and future D&A. We also cross-checked the calculations using

Vodacom figures and the patterns found were similar.

D&A in its turn was estimated based on future revenue’s forecast. Exhibit 50

presents Net Capex values and inputs. Exhibit 51 shows PPE and Intangible

Assets and Reported Capex figures.

37 Provided by the company. 38 Since it is not representative of the company’s actual growth in fixed assets.


PAGE 22/32

Net Working Capital

Working Capital was calculated as the sum of Trade and other Receivables, plus

restricted and operating cash, minus Trade and other Payables. Trade and other

Receivables relate not only with revenue from services billed both by telecom

service providers and third-parties acting on behalf of MTN, but also by financing

leases and a small amount of inventories. Restricted and operating cash is cash

required to keep operations going. Trade and other Payables relate with payments

to equipment suppliers and also short-term financing deals as well as payments to

other telecom service providers. Net working capital has remained positive over

the years and is assumed to keep growing at constant rates according to future

revenue. Furthermore, the prepaid trend will help decrease working capital needs.

Handsets’ sales will tend to increase in the future as more people will acquire

devices, specially smartphones. Exhibit 52 provides the decomposition of NWC

for the entire group.

Forex and other Risks

Being present in emerging markets makes MTN subject to political, corruption, war,

revolution and other types of risks. Nevertheless, foreign exchange risk is the one

posing the biggest threat. When assessing a company present in several

developing markets with different currencies, it becomes crucial to take into

account these currencies’ risks. The company is based in South Africa, thus the

relative depreciation of the South African Rand against related group’s currencies

will provide better results since foreign operations will be translated at higher

values. However, a foreign investor should take into account that a depreciation of

the Rand against his currency will also diminish returns on the stock. Exhibit 53

presents the historical evolution of the stock price in Rands, US Dollars and Euros

in order to provide an idea of this effect. The best and simplest solution is to

individually hedge the risk. However, if the Rand depreciates significantly against

the US Dollar, MTN can witness its most recent debt note of $1,000 million rise,

thus incurring significant forex losses. Regarding other regions rather than South

Africa, since payables are sometimes denominated in US Dollars, increased

depreciations in the respective countries’ currencies against the Dollar will also

translate into forex losses due to higher repayment values, which can impact

EBITDA margins. This is the case in Nigeria, where some costs (like leasings) are

denominated in Dollars and where the Naira inflation has been substantial39. MTN

39 Since MTN does not discriminate which costs are in USD, we cannot analyze the impact of further unexpected depreciation in NGN and other currencies.

-60

-40

-20

0

20

40

60

20

14

20

15

20

16F

20

17F

20

18F

20

19F

20

20F

20

21F

20

22F

Exhibit 52: MTN Group NWC decomposition (bs of Rands)

Operating Cash

Restricted Cash

Trade and other Payables

Trade and other Receivables

NWC

∆ NWC


30

50

70

90

110

130

150

170

190

2012 2013 2014 2015 2016

Exhibit 53: MTN Stock Price Performance in different currencies

Rands

US Dollars

Euros

Source: Bloomberg


PAGE 23/32

informed that it is taking the necessary precautions regarding the limited US Dollar

liquidity in Nigeria. One should also consider that although the same Nigerian

inflation and consequent depreciation of the Naira has a potential to harm

operations when translated into Rands, the regulatory fine which was originally

denominated in Nairas witnessed a significantly decreased amount when

considered in Rands or Dollars40. Appendix 11 presents exchange rate trends.

In what the future concerns, we assume that the evolution of the ARPUs in local

currencies (which take into account their real growth and respective local

inflations), when translated into Rands at future expected exchange rates match

the evolution of the same ARPUs in Rands (which include their real growth and

the South African inflation), thus indirectly taking into account future currency

deviations. This implicitly assumes that the ARPU is a function of a country’s

inflation and its real growth, and that a sharp currency devaluation goes along with

high inflation levels.

Regarding the $1,000 million debt issued at 5 and 10 years, it is known that

USD/ZAR exchange rate is expected to stabilize due to lower South African

inflation41. Nevertheless, even if the Rand depreciates 50% losing half the value it

has in relation to the Dollar, MTN would have enough cash to pay off the debt

without running into liquidity problems. Exhibit 54 shows such impact on the target

share price.

Another risk present in emerging markets is the fact that governments can impact

big companies’ businesses that are “swimming” in cash. This can be done through

regulatory requirements (MTN is now making a great effort to comply with every

request regulatory authorities have, thus decreasing the risk) and significant tax

increases. Exhibit 55 summarizes effects on the target share price due to

increased tax rates, even though such increases are not expected in the foreseable

future (current value is 30%).

40 The exchange rate was around 12 NGN per 1 ZAR and after the abandonment of the peg it reached 22 NGN per 1 ZAR, prompting to stabilize afterwards. 41 Source: Statistics of South Africa


PAGE 24/32

0% 2% 4% 6% 8% 10%

MTN

Vodacom

Saudi Telecom

Etisalat

Zain

Otel Telecom

Maroc Telecom

Safaricom

KPN

Tele2

Orange

BT

Proximus

AT&T

Deutsche Telecom

Swisscom

Exhibit 58: Telecom Companies Dividend Yields

Source: Bloomberg

0%

5%

10%

15%

20%

25%

30%

35%

2012 2013 2014 2015 2016F

Exhibit 57: MTN Leverage Analysis

MTN Debt-to-Enterprise Value


Capital Structure and Cost of Capital

Capital Structure

Typically, telecommunication companies tend to have high debt-to-equity ratios

due to the nature of their business which involves capital-intensive projects.

However, the fact that MTN operates in emerging markets discourages very high

leverage levels because of the uncertainty associated. Exhibit 56 provides

information on the different capital structures across the industry. MTN book debt-

to-equity ratio was 50% as of 2015, while our emerging markets industry average

was around 46% and the advanced economies’ industry average was 124%.

Vodacom had a 126% book debt-to-equity ratio in the end of 2015, even though it

was closer to MTN a few years ago (70% in 2013). Regarding market values, in

2015 MTN had a Debt-to-Equity ratio of 31%, while Vodacom had 13%, being our

emerging markets industry average 18% and the advanced economies one 51%.

In the end of 2015, Debt-to-Enterprise-Value was 28% versus 12% of Vodacom,

while being 34% for developed markets. Nowadays Debt-to-Enterprise Value sits

at 32%. Exhibit 57 shows the evolution of leverage levels in the last years.

Although MTN suffered with the Nigerian fine (debt issues and depressed stock

price), the situation is considered stable. It is still considered investment grade by

credit rating companies and the amount of excess cash MTN usually keeps is

considerable. For valuation purposes we assumed debt to grow such as Debt-to-

Enterprise Value stabilizes around 32%. Since Debt-to-Enterprise Value is fixed,

Net Debt-to-Enterprise Value variates according to the scheduled payments for the

Nigerian Fine. It is currently 18% but is estimated to stabilize at 20%. It is also

expected that MTN keeps slowly increasing Debt-to-Equity (book) ratio due to

further capital expenditures financed by debt, essential to enhance its network

quality.

On the 9th September 2016, MTN noticed its shareholders that it had entered into

loan agreements (corporate bonds) totalizing $1,000 million ($500 million due in 5

years and the other $500 million due in 10 years) and R4,800 million with a 6.389%

yield to maturity42. This was done in order to more easily face the regulatory fine

imposed in Nigeria during 2015, and to improve debt maturity structure without

harming the credit rating.

Regarding dividends, the telecom industry is also known for distributing large

amounts of dividends (Exhibit 58). MTN dividend yield was 6.77% in 2015 and its

payout ratio 75% (Exhibit 59). It is expected that due to the unfortunate recent

42 Source: Bloomberg and Company Announcements

0%20%40%60%80%

100%120%140%

Exhibit 56: Capital Structures Analysis (2015)

Debt/Equity

Debt/Market Equity

Debt/EV

Source: Bloomberg and Company Reports


PAGE 25/32

60%

65%

70%

75%

80%

85%

90%

95%

100%

3%

4%

4%

5%

5%

6%

7%

7%

8%

2012 2013 2014 2015 2016F

Pay

ou

t R

atio

(%

)

Div

iden

d Y

ield

(%

)

Exhibit 59: MTN Dividend Yield and Payout Ratio

Dividend Yield

Payout Ratio

Source: Company Reports, Bloomberg and Analyst's estimates

events like the Nigerian fine, MTN will pay a lower dividend of R7 per share in the

upcoming years, contrasting with the last 3 years average of R10 per share.

Cost of Capital

In order to compute the cost of capital we used the WACC method.

The cost of equity was based on the CAPM pricing model. For the South African

risk-free rate, the US 10-year government bond adjusted to the expected long-term

inflation43 differential between the USA and South Africa was used44. We estimated

the unlevered beta according to the median of MTN and Vodacom unlevered

betas, which in turn were calculated based on their raw betas against the MSCI

ACWI Index45, beta of debts46, and estimated Net Debt-to-Enterprise Value. We

then relevered the unlevered beta according to MTN’s expected Net Debt-to-

Enterprise Value. We used 5.2% as the market risk premium, according to

Damodaran47 (2005-2015) and added a country risk premium (CRP) of 2.5%. This

is intended to reflect specific and systematic risks’ effect in the value of the

company48.

Regarding the cost of debt, we took into account the average probability of default

between MTN (according to the credit rating Baa3) and the industry in general,

resulting in a value of 1.7%. Next, in order to calculate the cost of debt49 we used

an annual recovery rate of 65%50 and a debt yield of 9.5% related with the last

corporate bond MTN recently issued.

According to the cost of equity, the cost of debt, the Net Debt-to-Enterprise Value

(current expected value as a proxy for the future51) and the implied tax rate of 30%,

we reached a WACC value of 11.06%. Exhibit 60 summarizes these calculations

and Exhibit 61 contains a sensitivity analysis regarding WACC figures.

43 Source: IMF

44 𝑅𝑓𝑆𝐴 = (1 + 𝑅𝑓

𝑈𝑆) × (1+𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛𝑆𝐴)

(1+𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛𝑈𝑆)

45 Includes both developed markets and emerging markets; Source: Bloomberg 46 Source: “Corporate Finance,” by Jonathan Berk and Peter DeMarzo, Pearson, Third Edition (2014) 47 Source: Damodaran, http://pages.stern.nyu.edu/~adamodar/ 48 Damodaran estimates 2.85% country risk premium for South Africa. However, since MTN is a telecom, we consider it is not subject to the several risks present in the same extent as companies in other businesses. Thus we opted to calculate the difference between South Africa and US risk-free rates for the CRP (2.5%). 49 𝑅𝑑 = 𝑌𝑖𝑒𝑙𝑑 − (𝑃𝑑𝑒𝑓𝑎𝑢𝑙𝑡 × (1 − 𝑅𝑒𝑐𝑜𝑣. 𝑟𝑎𝑡𝑒)) 50 Source: Moody’s, “Sovereign Default and Recovery Rates, 1983-2015” 51 Debt-to-Enterprise Value ratio is fixed, thus Net Debt-to-Enterprise Value variates according to the scheduled payments for the Nigerian Fine. It is currently 18% but is estimated to stabilize at 20%.


PAGE 26/32

0%5%

10%15%20%25%30%

2012 2013 2014 2015

Exhibit 62: Return on Invested Capital of Telecom Companies

ROIC Developing

ROIC Developed

MTN


0%5%

10%15%20%25%30%35%40%

MTN

Vo

dac

om

Sau

di T

elec

om

Etis

alat

Zain

Ote

l Tel

eco

mM

aro

c Te

leco

mSa

fari

com

KP

NTe

le2

Ora

nge B

TP

roxi

mu

sA

T&T

Deu

tsch

e Te

leco

mSw

issc

om

Exhibit 64: Return on Invested Capital in the Industry (2015)

Source: Bloomberg and Company Reports

ROIC and Growth Figures

Return on Invest Capital

The Return on Invest Capital (ROIC) is of utmost importance since when compared

to the WACC, provides us with an idea of how a company is using its capital to

actually create value. In the past MTN has delivered very strong returns compared

to our industry’s average (Exhibit 62). Unfortunately, MTN was affected by the

Nigerian Fine more recently. The company is predicted to have a lower ROIC in

2016 because of the accrued present value of the Nigerian Fine and due to the

operational consequences of the situation (as well as high levels of invested capital

the company usually has). Forecasted ROIC also falls short in the following years,

even though we expect it to slowly recover (Exhibit 63). Exhibit 64 provides

information about ROIC values between the industry for 2015.

Growth

The terminal growth rate is crucial in a valuation exercise, determining many times

the overall recommendation. Taking into account the very large time horizon, one

must be careful when dealing with perpetuity calculations.

In order to be the most precise we would have to consider growth levels of each

country’s telecommunications sector taking into account each country’s weight on

MTN operations. Even surpassing the lack of information problems by using crude

GDP forecasted growth numbers, we would still reach an unrealistic number for

the nominal growth rate. There are many countries having high levels of growth

and inflation, in markets with a lot of volatility associated. For example, using the

long-term growth rate of South Africa plus inflation would generate very high levels

of growth (7 to 8%) which does not reflect MTN’s business growth in the long-run.

Thus, we opted to follow a more conservative approach and use a nominal long-

term growth rate resulting from the product of long term ROIC (average of last 3

0%

5%

10%

15%

20%

25%

30%

20

12

20

13

20

14

20

15

20

16F

20

17F

20

18F

20

19F

20

20F

20

21F

20

22F

Exhibit 63: MTN's ROIC vs. WACC

ROIC WACC

Source: Bloomberg, Company Reports and Analyst's estimates


PAGE 27/32

0%

2%

4%

6%

8%

10%

12%

14%

20

12

20

13

20

14

20

15

20

16

F

20

17

F

20

18

F

20

19

F

20

20

F

20

21

F

20

22

F

Exhibit 65: MTN Sustainable Growth Rate Analysis

Sustainable Growth Rate

Growth Rate

Source: Bloomberg, Company Reports and Analyst's estimates

ROIC’s calculated, from 2019 to 2022) and the reinvestment rate (1 – long term

payout ratio of 75% for MTN). The resulting value was 2.83%. Nevertheless, a

sensitivity analysis was performed in order to have an idea of the impact of the

different growth rates in the target share price (Exhibit 61).

Exhibit 65 provides with information regarding the sustainable growth rate MTN

has been following. In the past MTN was growing a lot, but our estimated growth

is now sustainable, meaning the company is not forecasted to face financing issues

to keep growing in the future.

Comparables

In order to deliver a better assessment on MTN’s stock, we also provide a valuation

exercise based on multiples of comparable companies (Exhibit 66). The multiples

used were P/E, EV/EBITDA and EV/Sales. Since MTN operates in emerging

markets, we decided to do a valuation only with emerging markets telecoms

(Exhibit 67) and another adding developed economies telecoms (Exhibit 68).

Based on the multiples approach it can be seen that the share prices found for

MTN stock are very high comparing not only with the analyst estimate (Dec-2017)

and with the closing stock price of ZAR126.17 in 2016, but also with the closing

price of ZAR132.89 in 2015. The fact is that, due to the Nigerian Fine imposed on

MTN during the second half of 2015, its stock price witnessed a massive crash

(ZAR122.64 in the end of 2015 from ZAR205.55 as of Jul-2015). Hence, MTN

cannot simply be compared in this particular time period given the distinctiveness

nature of the situation dwelt. Not only were MTN’s cash flows harmed because of

the fine, market sentiments also influenced and still keep swaying the price of the

stock.


PAGE 28/32

One of the main conclusions that can be taken from this is that when the markets

considers MTN has successfully recovered from most the Nigerian Fine effects, its

stock can be perceived to be undervalued comparing with its peers. Even if its cash

flows don’t necessarily reflect this, in case the market assimilates the difference,

MTN’s stock price is likely to upsurge. And this can happen anytime in the future.

Final Considerations

It is clear that MTN is presently living a very challenging period. Despite all the

trouble, MTN Group’s value is still substantial. It is extremely well placed in Africa,

having a very recognizable brand and quite a following in the lower income

segments. Its main advantage is the Africa competency, the good branch network

and established brand it has. Its subscribers’ base speaks for itself, placing MTN

as the biggest telecom in Africa. Nevertheless, in order to excel in this sector and

especially in emerging markets which tend to have an increased level of

uncertainty associated, companies have to constantly aim for simplicity, remaining

organized and efficient in order to correctly face competitive threats and regulatory

changes.

MTN has clearly failed in what regulatory demands respect, being essential to

overcome these problems. The company has made the necessary adjustments

being now much more cautious and aware. We believe the Nigerian Fine will be a

topic of the past in 3 to 4 years. Nevertheless, the fact is that MTN is currently hurt

and competitors are trying to take advantage from it. Its success will depend on

how well it is going to face the constant competitive threats not only now, bouncing

back from the Nigerian Fine problems, but further in the future. Operational

performance will be contingent on enhanced competitive price offers and additional

network coverage.


PAGE 29/32

Appendices


PAGE 30/32


PAGE 31/32


PAGE 32/32

Disclosures and Disclaimer

Research Recommendations

Buy Expected total return (including dividends) of more than 15% over a 12-month period.

Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.

Sell Expected negative total return (including dividends) over a 12-month period.

This report was prepared by Tomás Realista, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.

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