Sub Saharan Africa Telecoms_11 February 2014 Research

Asset Management | Corporate Finance | Securities | Trust Services

IMARAINVESTINGIN AFRICA

SSA Telecoms Sector Report | February 2014Banking on Mobility

Table of Contents

Executive Summary................................................................................... 1

Sector overview........................................................................................ 2

Voice penetration, urbanisation and income levels.............................................. 2

MOUs, tariffs and MTRs................................................................................. 3

Data revenue growth in SSA markets................................................................ 3

Mobile Money............................................................................................. 4

Sector outlook.......................................................................................... 4

Voice subscriber growth................................................................................. 4

Smartphone penetration and growth................................................................. 4

Valuation & Comparatives........................................................................... 6

SSA, MENA, EM and Developing telecoms universe................................................. 6

Historical PER trend....................................................................................... 7

Operator exposure to growth indicators.............................................................. 7

Company coverage.................................................................................... 9

Airtel Zambia............................................................................................... 9

Econet Wireless Zimbabwe............................................................................... 13

MTN Group................................................................................................... 17

Onatel Burkina Faso....................................................................................... 21

Safaricom Ltd............................................................................................... 25

Sonatel....................................................................................................... 30

TNM........................................................................................................... 34

Vodacom Group............................................................................................ 38

Analysts:

Kudakwashe Kadungure [email protected] Addmore Chakurira [email protected] Christopher Kisyombe [email protected] Loyiso Hoza [email protected]

1

SSA mobile and data penetration remains relatively low when compared to that in global and emerging markets, implying that our SSA Telecoms (Airtel Zambia, Econet, MTN, Onatel BF, Safaricom, Sonatel, TNM and Vodacom) still have some upside in voice and more significantly in data. However, closer inspection shows that some of our SSA operators may struggle to extract value from the untapped market. Given that our SSA sector currently trades at a TTM PER multiple of 15.0x vs. 13.1x globally, we feel it is in our interest to explore our universes ability to sustainably achieve +100% mobile sim penetration. Upside in voice higher and data higher than generally indicated. Mobile voice and data penetration are estimated at 67% and 18% of the population, respectively and which compares to 93% and 37% globally, this already indicates some level of upside. For the sector as a whole, we believe there is still room for significant growth in voice usage. According to GSMA, a unique (person/individual) subscriber carries two active sim cards on average. Ultimately, unique subscriber penetration is estimated at 31% in SSA against 50% globally and 80% in developed markets. From this point of view, we upgrade our upside on subscriber growth by a factor of 1.5x. Given that a survey carried out by GSMA also showed mobile handsets were the main point of data access for 80% of the respondents, we see similar adjustment in our outlook on data subscriber penetration and usage. Looking at our universe, we see that TNM (28%), Onatel BF (56%) and Vodacom (65%) operate in markets that have relatively lower voice penetration than the rest of SSA. From a data point of view, we find that our universe bar MTN and Safaricom, operates in markets with penetration below the SSA average. The lowest are Onatel BF (3%), TNM (4%) and Sonatel (7%). Amongst others, socio-economic factors are key to determining a markets ability to increase penetration. There is strong correlation between mobile penetration against both GDP per capita and Urbanisation rates. We find that higher GDP per capita and a higher percentage of the population residing in an urban area equates to higher voice penetration, which in turn enables higher data penetration. We look at the growth in the factors and find that Onatel BF, Airtel Zambia, TNM and Safaricom operate in markets which have exhibited a relatively high combination of urbanisation and GDP per capita growth rates. Whilst some of the markets are at relatively low per capita incomes and urbanisation rates, we expect the growth in factors to translate to a more rapid increase in penetration within those markets.

Mobile money improves rural area value-proposition. Mobile Money has not only given access to financial services to a wider spectrum of the population, but has also generated significant revenue and increased customer loyalty for their operators. More specifically, M-Pesa in Kenya, the most successful of the platforms, was driven by urban-to-rural area, person-to-person (P2P) remittances as the service allowed income earners in the city to transfer cash to dependants in rural locations for a fee. By doing so, the service essentially increased the revenue that operators could generate indirectly from subscribers in the rural area. Given that financial inclusion in SSA is estimated at 19% against 36% globally and 58% in high income economies, demand for financial services is expected to increase as incomes rise. We expect operators in markets with low financial inclusion like Sonatel, Onatel BF and TNM to leverage off such platforms and reach deeper into rural coverage. Top picks. Whilst we find our whole universe investable, we especially like Econet, Sonatel and Safaricom as we believe that they have significant exposure to high growth markets, particularly in data and mobile money. Econet, with a strangle-hold of its majority share in a market which harbours strong data and mobile money prospects, is also the cheapest telecoms company in our universe. We believe its prospects outweigh the political risks, corporate governance issues and its exposure to a highly troubled banking sector. Sonatel will remain a steady growth, high dividend yielding opportunity in the short to medium term but offering some upside in the event data and Mobile Money take off in the region over the medium to long term. Aside for it being at a significant premium to its peers, Safaricoms potential to surprise is undeniable. We see this as the ideal long-term opportunity, particularly from data and its M-Pesa platform. Target Price Up / downside (%)

2.9

3.2

3.5

10.0

10.6

23.0

50.0

114.5

Safaricom Ltd

Vodacom Group

Sonatel

MTN Group

Onatel BF

Econet Wireless

Airtel Zambia

TNM

Equity Research SSA February 2014 SSA Telecoms EXECUTIVE SUMMARY

2

Sector Overview Penetration remains low in SSA. Given that the region still exhibits relatively lower voice and data penetration, and is forecast to achieve higher growth in per capita incomes, SSA markets generally harbour higher growth prospects than in the rest of the world. Africa as a whole is reported to have mobile and data penetration rates of 67% and 18%, which compares to 93% and 37% globally, respectively. Figure 1: Penetration significantly low in Africa

0%

20%

40%

60%

80%

100%

120%

140%

160%

C&

EE

W.E

uro

pe

S.Am

erica ME

SEA

N.A

merica

Oce

ania

World

E.Asia

C.A

sia

C.A

merica

S.Asia

Afric

a

Voice Internet Urbanisation rate

Source: Global Digital Statistics 2014

Reasons for the low penetration remain the lag in the development of the sectors drivers such as i) low per capita incomes, ii) low urbanisation rates and iii) inadequate or lack of reliable power and road infrastructure. Whilst low per capita incomes limit demand for the service, the latter reasons make it more expensive for operators to service the whole market. Given that a survey carried out by GSMA showed that 87% of the respondents accessed the internet mainly through a mobile device, we also find that the aforementioned factors hold true for internet penetration. We observe that nearly every urban resident in developed markets such as Western Europe (UK, France, Germany), North America (USA, Canada), Oceania (Australia, New Zealand) and East Asia (Japan) is an internet subscriber. The reality behind mobile penetration. In its 2013 edition, GSMA reported unique and SIM subscriber penetration trends which indicated that SSA mobile subscribers carried two SIM cards on average. Ultimately, GSMA reported that unique mobile penetration across 40 SSA countries was 31%, or 253m unique subscribers against 502m active sim cards. This compares to 50% worldwide and 80% in developed markets. In this regard, the upside increases 1.6x when compared to the global average and 2.0x to the developed market average.

Socio-economic factors remain the key challenge. Looking at SSA countries against developed and emerging markets, we see that a strong correlation (R2 = 0.74x) between voice penetration and GDP per capita (USD), the latter being a proxy for disposable incomes. Our view that higher per capita incomes will drive penetration therefore remains intact. Lower handset costs will also aid penetration. Figure 2: Voice penetration shows strong correlation with GDP per capita and Urbanisation rate

R = 0.7404

R = 0.6543

GDP per capita % Urban

Source: Global Digital Statistics 2014 / IAS

However, with only c.39% of Africas population living in urban areas, the vast majority, (generally with significantly lower per capita incomes) live in the relatively sparsely populated rural areas. This poses a challenge for operators who look to maximise revenues per installed base station. From a metric perspective, this alone will lead to high capex intensity, and therefore generate diminished free cash flow returns from the expansion. As such, we currently observe rural mobile penetration being about half of what it is in the urban areas in the more developed African markets. Figure 3: Voice penetration & urbanised population vs. GDP per capita (USD)

100

1 000

10 000

100 000

0

20

40

60

80

100

120

140

160

180

200

Russ

ia

Bots

wana

Germ

any

Bra

zil

RSA

UK

JAPAN

US

Ghana

Senegal

Chin

a

Congo

Zim

babw

e

Mali

India

Zam

bia

Kenya

Sw

aziland

Nig

eri

a

Guin

ea-B

issa

u

Leso

tho

Cam

ero

on

Tanzania

Rw

anda

Conakry

Burk

ina F

aso

Uganda

Mozam

biq

ue

DRC

Mala

wi

Voice % Urban GDP per capita

Source: Global Digital Statistics 2014 / World Bank

3

We note that the USA and Japan, which are the markets with the highest per capita incomes charted above, have lower penetration rates than some markets like RSA, Russia, Botswana and Brazil. We suspect that a larger proportion of the subscribers in Japan and the USA have post-paid plans which generally lock-in a device to a single network. Furthermore, we suspect that the level of competition within these markets is quite advanced in that the variation in the quality of service and pricing is marginal, and therefore reducing the need for customers to subscribe to multiple networks. MOUs, pricing and regulatory risk. A cross-sectional comparative of SSA MOUs and rates shows that they vary significantly but generally hint to a trade-off in which a higher combination of tariffs and MTRs is associated with lower MOU. As shown in Figure 4 below, the relationship is not quite as obvious as factors unique to a particular market (market share dominance, on-net/off-net ratio and disposable incomes) play a major factor in determining the affordability of the overall service. Figure 4: Tariffs, MTRs vs. MOUs (LHS)

-

0.10

0.20

0.30

0.40

0.50

0.60

0

20

40

60

80

100

120

140

Gh

an

a

Ta

nz

an

ia

Ke

ny

a

Co

na

kry

Nig

eria

Mo

za

mb

iqu

e

Bo

tsw

an

a

Ug

an

da

RS

A

Ca

me

ro

on

Co

ng

o

Rw

an

da

Za

mb

ia

Sw

az

ila

nd

DR

C

Le

so

tho

Bu

rk

ina

Fa

so

Zim

ba

bw

e

Gu

ine

a-B

issa

u

Se

ne

ga

l

Ma

li

Ma

law

i

Tariffs (USD) MTR (USD) MOU

Source: Company fillings, Research ICT & IAS estimates

In 2012, the global MOU average was c.280min, or more than double the 132min observed in Ghana. To the detriment of operators, regulators have in particular targeted MTRs in a bid to make call rates more affordable and increase the coverage and welfare of the consumer and economy. This has been dominating headlines in RSA as the regulator moves to cut MTRs by a further 50% to ZAR 0.20 (USD 0.018) per minute.

Figure 5: MTR outlook

01-Mar-11 01-Mar-12 01-Mar-13 01-Mar-14 01-Mar-15 01-Mar-16

RSA (ZAR) Peak 0.73 0.56 0.40 0.20 0.15 0.10

Off peak 0.65 0.52 0.40 0.20 0.15 0.10

Mkt share < 20% 0.73 0.56 0.40 0.44 0.42 0.40

0.65 0.52 0.40 0.44 0.42 0.40

01-Jul-11 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-15 01-Jul-16

Kenya (KES) Peak 2.21 1.44 1.15 0.99 0.99 0.99

Off peak 2.21 1.44 1.15 0.99 0.99 0.99

Source: CCK, ICASA

The cut will be asymmetrical, allowing operators with market share less than 20% to charge dominant players Vodacom and MTN higher MTRs. In Kenya, MTRs are currently KES 1.15 (USD 0.013), which is already significantly below that of RSA and the rest of SSA, and are scheduled to decline further to KES 0.99 (USD 0.011) by 1 July 2014. We currently see limited downside risk on Kenyan MTRs and see any further cuts as being marginal. Data to carry growth into the long term. The decline in data prices, followed by the widespread deployment of mobile broadband networks and the advent of the smartphones and less expensive feature phones, has led to an explosion of mobile data services globally. Figure 6: Data penetration vs. driving factors

100

1 000

10 000

100 000

0

10

20

30

40

50

60

70

80

90

100

UK

Ge

rm

an

y

US

JA

PA

N

Ru

ssia

Brazil

Ch

ina

RSA

Nig

eria

Ke

nya

Sw

azilan

d

Se

ne

gal

Zim

bab

we

Gh

an

a

Ugan

da

Bo

tsw

an

a

Tan

zan

ia

Ind

ia

Zam

bia

Rw

an

da

Co

ngo

Cam

ero

on

Mala

wi

Le

so

tho

Mo

zam

biq

ue

Bu

rkin

a F

aso

Gu

ine

a-B

issau

Mali

Co

nakry

DR

C

Internet % Urban GDP per capita

Source: Global Digital Statistics 2014 / World Bank

Looking at Figure 6, data penetration remains low in Africa relative to the rest of the world for reasons similar to those for voice. For that very reason, the observed rise in per capita incomes and associated increase in urbanisation rates combined with the continuous decline in device and data prices have seen see data penetration increase exponentially. As such, SSAs operators have been enjoying high growth in the provision of the service.

4

Figure 7: Latest filings show high data revenue growth of MTN, Vodacom and Safaricom

18.1%

36.0% 37.4%41.0%

45.0%

56.0% 58.0%

RSA

Nig

eri

a

Ke

nya

Ivo

ry C

oas

t

Cam

ero

on

Gh

ana

Uga

nd

a

Source: Company fillings

Mobile money (MM) does more than just to improve financial inclusion. Mobile money has been an unprecedented success in Kenya, Tanzania and now Zimbabwe. These services have not only given access to financial services to a wider spectrum of the population, but have also generated significant revenue and increased customer loyalty for their operators. Figure 8: Bank penetration (%) vs. GDP per capita (USD)

100

1 000

10 000

100 000

0

20

40

60

80

100

120

Ge

rm

an

y

UK

JA

PA

N

US

Ch

ina

Bra

zil

RS

A

Ru

ssia

Ke

nya

Mo

za

mb

iqu

e

Zim

ba

bw

e

Ind

ia

Rw

an

da

Bo

tsw

an

a

Nig

eria

Gh

an

a

Sw

azila

nd

Za

mb

ia

Ug

an

da

Le

so

tho

Ta

nza

nia

Ma

law

i

Ca

me

ro

on

Bu

rk

ina

Fa

so

Co

ng

o

Ma

li

Se

ne

ga

l

DR

C

Co

na

kry

Gu

ine

a-B

issa

u

Bank penetration GDP per capita

Source: World Bank

In Kenya, Safaricoms M-pesa was initially driven by urban-to-rural area, person-to-person (P2P) remittances as the service allowed income earners in the city to transfer cash to dependants in rural locations, which typically lack or at the very least, have inadequate traditional banking infrastructure. Safaricom with its expansive network that covered such areas, whilst other networks focused only on the coverage of high-density centers, was able to facilitate transactions into the rural areas. MM essentially increased the value proposition for operators to extend coverage to the rural areas. Growing

rapidly has also been person-to-business (P2B) and business-to-person (B2P) transactions as users were able to pay for goods and services using the platform.

Sector Outlook Going forward, GSMA expects mobile subscribers to grow at a CAGR of c.8% to 2017, slowing down from the 18% achieved over the five years to 2012. Mobile penetration is therefore expected to rise from the current 67% to c.84% by 2017. Figure 9: GDP CAGR (%) to 2016 vs. historical urbanisation rate (%)

-

2.0

4.0

6.0

8.0

10.0

12.0

Sudan

Mozam

biq

ue

Cote

d'Iv

ore

Lib

eri

a

Tanzania

DRC

Rw

anda

Burk

ina F

aso

Ghana

Uganda

Nig

eri

a

Zam

bia

Congo

Conakry

Mala

wi

Kenya

Bots

wana

Cam

ero

on

Mali

Senegal

Leso

tho

Benin

Zim

babw

e

RSA

Sw

aziland

Guin

ea-B

issa

u

GDP Outlook Urbanisation rate

Source: World bank

Key factors underpinning the growth in subscribers will be the rise in per capita incomes and the urbanisation rate. Though our chart shows the historaical urbanisation rate to 2011, we use the data mainly for comparative purposes. We are also of the view that economic growth drives urbanisation rates. Increased smartphone penetration to drive usage. According to GSMA, penetration of the more advanced and data hungry smartphone averages 17% globally compared to 4% in Africa. In RSA, the most advanced market in Africa, smartphone penetration per mobile subscriber is estimated at c.22% and is expected to exceed 45% by 2017.

5

Figure 10: Smartphone penetration outlook

0%

10%

20%

30%

40%

50%

2010 2011 2012 2013 2014 2015 2016 2017

RSA Kenya Nigeria Tanzania

Source: GSMA

Continent-wide, smartphone penetration is forecast to reach c.20% by 2017, representing a rapid CAGR of c.61% given that mobile voice subscribers will also be growing at a CAGR of 8% over that period. But even then, smartphone penetration in SSA will still be below half the global average of 43% by then, implying robust growth in usage beyond then. The increase in the constitution of smartphones alone, will certainly have a significant impact on data revenue growth. For Vodacom in RSA, average monthly usage increased 78.9% to 220MB per device y-o-y whilst the average price of data declined 16.3% over the companys interim to H1 14. Behind the surge in consumption was a 24.0% growth in smartphones to 6.6m devices over that period. SSA operators to remain more profitable than global peers in the near term. SSA operators have been more profitable from an EBITDA basis, achieving EBITDA margins of 39.0% over 2013 against 32.4% for global peers. Furthermore, SSA margins have been on a rising trajectory, gaining 90bp since 2010 whereas margins for global peers have been on a downward trend, shedding 120bp over the same period. Figure 11: EBITDA margins stabilising at higher level than global peers

25%

30%

35%

40%

45%

50%

Dec-03 Dec-05 Dec-07 Dec-09 Dec-11

Universe SSA

Source: Bloomberg

We see the expansion into data helping SSA operators expand or buoy EBITDA margins in the short to medium term amidst the rising competition in voice. Operators in more developed markets face a tougher regulatory environment and intense competition which has lowered ARPUs dramatically. Where SSA operations see growth prospects, particularly in data, developed market operations are competing fiercely to protect market share. Capex intensity to stabilises around current levels? Capex intensity of our SSA operators has been higher than the global average from 2005 to 2010 as the operators catered to strong growth in the sector, and more recently addressed the issue of improving quality and extending coverage to the rural areas. Globally, capex intensity stabilised around the 14% level, and trended higher as competition and investment in data accelerated. We see SSA operators substituting capex in voice for that in data. Figure 12: Capex intensity converging with globals

5%

10%

15%

20%

25%

30%


Universe SSA

Source: Bloomberg

In the short to medium term, we expect operators in SSA ex. RSA to upgrade their data networks as it is still too early to spend on LTE capex and license costs. For example, Safaricom management would rather upgrade 3G to +3.5G to increase bandwidth significantly enough to satisfy current consumption. Looking into the long term, capex intensity is likely to be slightly higher, as operators look to extend coverage into more remote areas, as well as to build out new LTE networks. In RSA and Kenya there is spectrum being freed up and if utilised by the operators, this would increase wireless data transmission capacity on the existing infrastructure. This would significantly reduce the capex burden from having to install more base stations in order to increase network capacity.

6

Valuation & Comparatives

Coumpany Country

Mkt Cap

(USDm) TTM PE Fwd PE

EV /

EBITDA

Div

Yield

EV /

Sales

MTN Group South Africa 33 781 16.5x 13.1x 6.4x 4.4 2.7x

Vodacom Group South Africa 16 146 13.1x 12.1x 7.4x 6.9 2.7x

Safaricom Ltd Kenya 5 518 22.6x 16.9x 6.1x 2.6 2.5x

Sonatel Senegal 4 901 15.0x 13.3x 5.3x 6.3 2.8x

Econet Wireless Zimbabwe 1 000 7.0x 7.0x 4.2x - 1.3x

Airtel Zambia Zambia 483 15.8x 13.8x 4.7x 3.8 1.8x

Onatel BF Burkina Faso 434 13.0x 11.6x 5.6x 8.5 2.2x

TNM Malawi 50 31.9x 7.9x 2.7x 4.2 0.4x

SSA 62 313 15.3x 12.9x 6.4x 5.0 2.6x

Etisalat UAE 25 292 14.3x 11.4x 7.3x - 2.4x

Etihad Etisalat Saudi Arabia 18 222 10.2x 9.4x 8.2x - 3.0x

Ooredoo Qsc Qatar 13 036 18.0x 12.8x 5.2x - 2.2x

Maroc Telecom Morocco 10 332 12.0x 12.0x 6.4x - 3.5x

Mobile Telecommu Kuwait 10 065 11.8x 9.9x 6.6x - 2.8x

Vodafone Egypt Egypt 3 143 9.0x 4.9x - 2.9x

MENA 76 946 12.9x 10.5x 6.6x - 2.6x

America Movil-L Mexico 74 249 14.2x 11.1x 5.4x 1.8x

Bharti Airtel India 20 218 53.0x 21.3x 7.5x 2.4x

Megafon Russia 19 648 7.8x 11.4x 5.7x 2.7x

Mobile Telesyst Russia 17 825 7.3x 7.4x 4.8x 2.1x

Sk Telecom South Korea 15 415 11.5x 5.0x 1.6x

Tim Part Brazil 13 144 20.7x 19.5x 5.1x 1.3x

Sistema Jsfc Russia 12 138 4.9x 6.7x 2.8x 0.7x

Idea Cellular India 7 346 45.2x 18.0x 8.5x 0.2 2.3x

Bharti Infratel India 5 058 29.7x 18.9x 8.7x 3.3 3.2x

Lg Uplus Corp South Korea 4 208 20.6x 4.9x 0.8x

Reliance Communi India 4 150 21.7x 18.2x 10.9x 3.4x

EM 193 401 12.3x 11.5x 5.8x 0.1 1.8x

Vodafone Group Britain 66 025 6.0x 19.5x 10.3x 4.7 3.1x

Softbank Corp Japan 86 719 16.9x 20.7x 9.6x 3.5x

Deutsche Telekom Germany 38 517 20.6x 17.0x 5.6x 1.6x

Ntt Docomo Inc Japan 68 653 13.1x 12.6x

Kddi Corp Japan 49 904 13.7x 11.5x 5.7x 1.6x

T-Mobile Us Inc United States 24 011 108.4x 70.5x 7.9x - 1.5x

Crown Castle Int United States 23 599 156.4x 43.0x 18.3x - 10.9x

Telefonica Deuts Germany 4 923 32.7x 130.2x 6.2x 1.5x

Inmarsat Plc Britain 1 916 29.9x 26.0x 11.4x 4.0 4.8x

Hikari Tsushin Japan 3 811 13.4x 15.2x 10.4x 1.4 0.6x

Freenet Ag Germany 2 125 13.0x 11.6x 7.8x 0.9x

Drillisch Ag Germany 906 7.3x 19.8x 12.1x 2.7x

Atlantic Tele-Ne United States 927 119.5x 25.9x 1.8x 1.7 0.5x

Shenandoah Telec United States 574 15.9x 21.3x 6.4x 1.4 2.6x

Amcom Telecom Australia 554 23.8x 17.5x 12.4x 2.7 3.2x

Ntelos Holdings United States 345 15.3x 13.3x 5.3x 10.5 1.6x

Bigair Group Ltd Australia 147 26.1x 14.5x 8.4x 1.3 3.2x

Developed 373 657 13.3x 17.6x 8.1x 0.9 2.7x

Global 706 318 13.1x 14.6x 7.4x 0.9 2.4x

7

Safaricom rerates ahead of global and regional peers. Over 2013, the sector rerated as the result of the increase in liquidity following QEIII and historical PERs hiked c.48% to 17.6x in 2013 from 14.2x in 2012. Figure 13: Historical PER (normalized) history

-

5.0

10.0

15.0

20.0

25.0

30.0


Universe MTN Sonatel Vodacom

Onatel BF Econet Safaricom

Source: Bloomberg

On account of a drastic improvement in fundamentals, Safaricoms historical PER increased by 115% from 11.5x in 2012 to 24.7x in 2013. On a TTM basis, the company now trades a PER of 21.0x as robust earnings growth has continued over H1 14 whilst the global sector is at 15.0x. From this point of view, Safaricom is relatively pricing at a PER premium of 28.3% above MTN which harbours significant earnings growth prospects, especially given that Nigeria alone contributes about c.50% of the groups EBITDA. The other SSA ex. RSA operators contribute a further c.27% to the groups EBITDA. We do think that Safaricom has significant scope for further growth in earnings in the short and long term given that 1) M-Pesa stands to enjoy growth from usage by subscribers from all income categories and 2) data will also enjoy high growth from the middle to upper income earners in the short to medium term. Price discovery from IAM sale to Etisalat. More recently, Vivendi agreed to sell its 53% holding in Maroc Telecoms for c.USD 5.7bn, which is a 4.6% premium above where the company is trading. This transaction prices IAM at an EV / Sales of 3.6x. Applying that multiple to our SSA peers, implies a premium of 36.9% for our peers above where they are currently trading.

Exposure to growth indicators To review the pricing that our SSA universe trades relative to each other, we compare their exposure to key indicators for growth potential, primarily GDP per capita,

current penetration and urbanisation rates and growth rates. Figure 14: Operator exposure to voice drivers

TNM

ONTBF

SNTS SCOM

ECOZ

ATEL

VOD

MTN

-

500

1 000

1 500

2 000

2 500

3 000

3 500

- 20 40 60 80 100 120

GD

P p

er

capit

a (

USD

)

Mobile penetration (%)

Source: IAS

From a voice perspective, we see that Econet (ECOZ) has the least prospects when it comes to expanding its customer base. Other factors aside, this would justify the companys low PER. On the other hand, this implies that ECOZ now faces reduced capex requirements going forward and this would in turn attract a higher price multiple as it implies enhanced cash flows going forward. We also see also that Safaricom (SCOM) and Sonatel (SNTS) have similar prospects in this regard whilst TNM and Onatel BF (ONTBF) have quite a bit of upside should per capita incomes rise adequately. Figure 15: Operator exposure to data drivers

TNM

ONTBF

SNTS

SCOM

ECOZ ATEL

VOD

MTN

-

10

20

30

40

50

60

- 5 10 15 20 25 30 35

Urb

anis

ed p

opula

tion (%

)

Data penetration (%)

Source: IAS

From a data perspective, the SSA sector also still has significant upside for subscriber growth given that the world averages 37% whilst developed (UK, Japan, Germany, USA) and emerging markets (BRICS) are 63.6% and 30.6%, respectively. MTN and SCOMs exposure to the more advanced frontier markets sees them exhibit a

8

penetration profile similar to that of the BRICS markets. Sonatel, and to a lesser extent, Onatel BFs markets offer significant growth upside given that only c.23% and c.11% of their urbanised population is a data subscriber. Given that the level of per capita incomes (sphere area) remains low, the recent arrival of fibre optic undersea cables should boost penetration further. Figure 16: Operator exposure to mobile-money drivers

TNM

ONTBF

SNTS

SCOM

ECOZ

ATEL

VOD

MTN

-

10

20

30

40

50

60

0 10 20 30 40 50

Urb

an

ise

d p

op

ula

tio

n (

%)

Financial inclusion (%)

Source: IAS

We see that through their highly successful mobile money platforms, Safaricom and Econets markets lead financial inclusion when compared to their SSA peers. Kenyas 42% is generally in line with the worldwide average of c.44%. With about a fifth of the urbanised population in Sonatels markets holding bank accounts, there is significant upside for MM for the operator as the remainder will surely seek access to financial services as disposable incomes rise and propensity to save increases. To a lesser extent, the same can be said for the peers, especially Onatel, TNM, Vodacom and Airtel Zambia. Mobile money to remain a key value driver in SSA. Unlike their developed and emerging market peers operating in economies with relatively higher bank penetration, SSA operators have a third revenue stream which will allow them to generate higher ARPUs from their existing infrastructure. In some cases, SSA operators will also be able to leverage off this revenue stream and expand coverage to areas that have lower voice ARPUs. Overall exposure to determinant factors. Refering to Figure 17 below, we observe that Onatel BFs market scores well with regards to benefitting from economic growth and urbanisation rates. Whilst high voice subscriber growth is expected, the income levels are still

relatively low and this will likely hamper data growth in the short to medium term. Figure 17: Overall exposure to economic growth outlook, urbanization rate and income levels (sphere size)

TNM

ONTBF

SNTS

SCOM

ECOZ ATEL

VOD

MTN

1

2

3

4

5

6

7

3.0 4.0 5.0 6.0 7.0 8.0

GD

P g

rwo

th (

%)

Urbanisation growth rate (%)

Source: IAS

Airtel Zambia and Safaricom show relatively balanced position with the latter being in a slightly higher income environment.

Top picks. Whilst we find our whole universe investable, we especially like Econet, Sonatel and Safaricom as we believe that they have significant exposure to high growth markets, be it voice, data or Mobile Money. Econet, with a strangle-hold of its majority share in a market which harbours strong data and mobile money prospects, is also the cheapest telecoms company in our universe. We believe its prospects outweigh the political risks, corporate governance issues and its exposure to a highly troubled banking sector. Sonatel will remain a steady growth, high dividend yielding opportunity in the short to medium term but offering some upside in the event data and mobile money take off in the region over the medium to long term. Aside for it being at a significant premium to its peers, Safaricoms potential to surprise is undeniable. We see significant potential in the long term, particularly from data and its M-Pesa platform.

9

Airtel Networks Zambia PLC, formerly Celtel Zambia, is part of the Bharti Airtel Group and is the largest mobile phone operator in Zambia with 5.1 million customers as of 3rd Quarter 2013.The Principal activity of the company is the provision of cellular radio telecommunication services across the country and it now provides coverage in all 72 districts of Zambia. Its full range of services includes voice, international roaming, pre and post-paid subscriptions, SMS, 3.5G/EDGE, Blackberry and mobile internet to individual, corporate and SME customers.

Margins slightly under pressure - EBITDA margins may experience downward pressure caused by a rise in advertising expenses which are a result of increasing competition. Airtel launched two cheaper promotional packages to bring affordability to customers.

Increases in excise duty the excise duty on airtime vouchers has been increased by 50% to ZMW 15. All network providers are expected to increase their airtime tariffs to compensate for the tax increase.

An intensified focus on the rural population -All network providers are redirecting their focus on the rural majority to help increase their subscriber numbers. The MSPs have been upgrading base stations, rolling out coverage towers and launching high broadband network systems. Along with the traditional offerings, the aim is to also provide services such as mobile money to the rural unbanked.

Valuation. Using a DCF valuation, we arrive at a fair valuation for Airtel Zambia of ZMW 38.99, which implies an upside of 50.0% from its current price of ZMW 26.00. It currently trades as PER of 15.8x PBV of 1.9 and a dividend yield of 3.8%. The stock is highly illiquid trading at 4% free float, we recommend a Buy, provided there is availability.

Equity Research South Africa February 2014 Telecoms

Recommendation

Bloomberg Code ATEL:ZL

Current Price (ZMW) 26.00

Current Price (USc) 4.66

Target Price (ZMW) 38.99

Target Price (Usc) 6.99

Upside (%) 50.0%

Liquidity

Market Cap (ZMW m) 2 704

Market Cap (USD m) 485

Shares (m) 104

Ave. daily vol - 1 yr. ('000s) 20

Price Performance

Price, 12 months ago (ZMW) 28.00

Change (%) -7%

Price, 6 months ago (ZMW) 29.00

Change (%) -10%

Financials (ZMW m) 31 Dec F2012 2013F 2014F

Turnover 1 824 2 134 2 497

EBITDA 766 1 079 949

Net Finance Income (11) (21) (19)

Attributable Earnings 196 232 273

Per share data (ZMW)

EPS 3.06 4.40 7.09

DPS 1.00 1.13 1.19

NAV/Share 13.84 15.72 17.95

Ratios

RoaA (%) 15% 19% 28%

RoaE (%) 22% 28% 40%

EBITDA Margin (%) 38% 42% 51%

Valuation Ratios Current 2013F 2014F

Earnings Yield (%)* 12% 17% 27%

Dividend Yield (%) 3.8% 4.4% 4.6%

PE (x)* 15.8 13.8 11.7

PBV (x) 1.9 1.7 1.4

EV/EBITDA (x)* 4.7 3.6 2.6

EV/Subscribers (USD) 118.3 103.9 96.0

BUY

STRENGTHS

Still maintains largest market share,

Strong parent company with experience in competitive, low margin market.

Product innovation

WEAKNESSES

Slowly losing market share to MTN and Zamtel

Slow maturing

OPPORTUNITIES

Mobile money

Higher per capita incomes

Data to take off

THREATS

Loss of subscribers owing to poor customer service

80

100

120

May-13 Jul-13 Sep-13 Nov-13

Share price vs. S&P Africa Frontier Index

ATEL ZL (USD) S&P Africa Frontier Index

10

Airtel changed its reporting period to 31 December and thus its previous financial results accounted for the 9 month period ending 31 December 2012. The financials were adjusted for a 12-month period for analysis purposes. Revenue for FY 12 decreased by 1.6% to an annualised ZMW 1.6bn due to declining ARPUs which fell to ZMW 27.00 from ZMW 30.00 due to promotional special deals for customers. In the beginning of 2012 the introduction of the more affordable club Zed and 5X promotions increased the minutes of use per subscriber but also reducing the effective rate of tariffs which impacted on revenue.

Figure 1: Revenue analysis

Source: Company filings

Operating expenses of ZMW 468m were stable y-o-y at 33% of revenue. Selling and general admin expenses declined by 1.6% to ZMW 499m as a result of implemented effective cost management. The decline in revenues reflected in weaker EBITDA margins of 37%, a 1.0% decline y-o-y. Based on the companys strategy of increasing its rural subscribers, as competition intensifies, vigorous advertising and cheaper customer package deals could increase which will depress margins in the long run. PBT eased 4% to an annualised ZMW 432m for the same period. The effective tax rate of 30% yielded a charge of ZMW 114m, lower than the statutory rate of 40% due to deferred tax adjustments, and this resulted in PAT increasing by 7% to ZMW 318m. Total assets as at 31 December 2012 were ZMW 2.2bn, of which 77% were non-current assets, with PPE of ZMW 1.7bn. Net assets yielded a return of 14.8% for the year. In the long run there will be an intensified need to invest in expensive infrastructure to increase penetration levels in other parts of the country

On equity, share capital and share premium were ZMW 1.0m and ZMW 24.9m, respectively which has remained flat. Retained earnings weighting 98% of equity at ZMW 1.14bn boosted by retained earnings as the dividend payout ratio was a modest of 33%. ROE was therefore 22% from 26% previously and the dividend yielding of 3.8% for the year. Airtel has excperienced drastic market share loses over the years from a market share of 80% in 2008 to a current level of 46.1%. Competition has become rife from the likes of MTN, its biggest rival which holds 40.4% market share, whilst the rest is held by Zamtel.

Figure 2:


Having the largest voice and data network in Zambia Airtel has expanded its 3.5G network system over 200 base stations, and recently embarked on gold-plating of over 1,000 of its towers to enhance coverage. The quality of network connections has been one of the major issues that the regulator has been advocating for. MTN and Zamtel have also taken the decision to increase their broadband network with their 4G/LTE networks. However this is not a big threat as it will take a while for the LTE systems to have a notable effect since they are mostly relaint on the capabilty of the underlying smartphone devices, the affordability of which is still a ristrictive factor for the average customer

FY 12 Financial & Operational Review

11

Outlook

The company is intensifying its drive to gain more customers from the rural areas which has a population of 8.4m. This provides Airtel with an opportunity to increase its subscribers in the mobile money transfer segment up and above their current 1.9m subscribers. Airtel has erected 171 towers and constructed more than 350 shareable base stations as infrastructure spend to be able to maintain its dominant market share in the rural areas. There has been a call by the public for the regulator to reduce MTRs and to regulate mobile tariffs to make the cost of communication more affordable. On the other hand excise duty on airtime increased from 10% to 15%, and because of this all three MSPs have increased their tariffs as means to compensate for the hike. Internet data use is relatively low at penetration levels of 19.6% compared to South Africa, Nigeria and Kenya at 50%, 32% and 28% respectively. With an increase in smartphone usage, mobile data use by the younger generation who use mobile devices for social networking, and other downloads such as music and games will most likely boost ARPUs. In the long run with the maturation of the market growth levels will start to increase at a decreasing rate and MSPs will have to start diversifying their services from their conventional services, and provide other added services that will encourage customers to spend more money on their mobile phones. Zambias economy according to the WB is growing at a rate of 9%, it has the right platform to see increased mobile activity to the levels seen in other developing countries. Improving GDP per capita levels, longer life expectancy levels and a lower dependency ratio of the population are among the positive growth factors for the industry. Valuation Using a DCF valuation, we arrive at a fair valuation for Airtel Zambia of ZMW 38.99, which implies an upside of 50.0% from its current price of ZMW 26.00. It currently trades as PER of 15.8x, PBV of 1.9x and a dividend yield of 3.8%. We therefore recommend a BUY. The current trading price has discounted stock liquidity since its only trading at a free float of 4%, which may prove the stock very difficult to acquire.

Source: BMI

CHEAPEST PREPAID PRUDUCT BY NETWORK (ZMW)

Source: Research ICT Africa.net

12

Financial Summary

Valuation metrics 2008 A 2009 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E

PER 20.3 31.9 9.8 15.8 13.8 11.7 9.9 8.3 7.1

EV / EBITDA 5.7 5.8 4.6 4.7 3.6 2.6 2.9 2.5 2.4

P / Book 7.3 7.6 2.4 1.9 1.7 1.4 1.3 1.1 1.0

Dividend Yield (%) - 1.5% 3.8% 3.8% 4.4% 4.6% 5.0% 5.3% 5.6%

EV / Sales 2.3 2.0 1.8 1.8 1.5 1.3 1.11 0.95 0.8

Key Statistics 2008 A 2009 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E

Subscribers Base (m) 2.7 3.2 3.7 4.3 4.9 5.3 5.7 6.1 6.6

Blended ARPU (ZMW) 33 32 30 27 26 24 23 22 21

Income Statement 2008 A 2009 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E

Revenue 1 217 1 383 1 584 1 559 1 824 2 134 2 497 2 921 3 418

Y-o-Y Growth 0% 14% 8% -2% 17% 17% 17% 17% 17%

EBITDA 486 476 602 592 766 1 079 949 1 110 1 299

Y-o-Y Growth 0% -2% 18% -2% 29% 41% -12% 17% 17%

EBIT 402 457 464 443 608 911 771 922 1 099

Y-o-Y Growth 0% 14% -4% -4% 37% 50% -15% 20% 19%

Net finance costs (80) (47) (14) (11) (21) (19) (19) (14) (15)

PBT 322 409 382 285 326 386 456 541 634

Income tax (113) (143) (153) (114) (130) (155) (182) (216) (254)

Effective tax rate 35% 35% 40% 30% 40% 40% 40% 40% 40%

PAT 289 234 297 318 457 738 570 692 830

Y-o-Y Growth 0% -19% 8% 7% 44% 61% -23% 21% 20%

Basic EPS 1.38 0.88 2.86 3.06 4.40 7.09 5.48 6.65 7.98

Y-o-Y Growth 0% -36% 209% 7% 44% 61% -23% 21% 20%

DPS - 0.39 1.00 1.00 1.13 1.19 1.30 1.37 1.46

Y-o-Y Growth 0% 0% 186% 0% 13% 5% 9% 5% 7%

Dividend payout ratio 0% 44% 35% 33% 26% 17% 24% 21% 18%

Ratio Analysis 2008 A 2009 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E

EBITDA margin 39.9% 34.4% 38.0% 37.0% 42.0% 50.6% 38.0% 38.0% 38.0%

EBIT margin 33.0% 33.0% 29.3% 28.4% 33.3% 42.7% 30.9% 31.6% 32.1%

ROaE 38.6% 25.5% 26.7% 22.1% 28.0% 39.5% 26.6% 28.1% 29.2%

RoAA 18.0% 13.6% 13.4% 14.8% 19.0% 27.5% 19.1% 20.7% 22.3%

Debt / Equity 0.58% 0.00% 5.59% 8.34% 4.84% 3.91% 3.38% 2.19% 2.06%

Net debt / EBITDA 0.89% 0.01% -10.33% 20.27% 10.32% 6.77% 7.62% 4.87% 4.51%

Interest cover n/a 5.7 33.1 40.6 29.6 48.0 41.0 65.6 72.2

Balance sheet 2008 A 2009 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E

Non-current assets 1 248 1 391 1 741 1 656 1 825 2 011 2 215 2 439 2 686

PPE 1 248 1 391 1 738 1 654 1 820 2 002 2 202 2 422 2 664

Intangiable assets - - 3 2 5 9 13 17 22

Current assets 358 321 480 500 576 667 767 894 1 036

Cash balances 196 118 49 48 49 52 50 56 58

Total assets 1 606 1 712 2 221 2 156 2 401 2 677 2 982 3 333 3 722

Current liabilities 223 217 603 709 671 713 822 934 1 088

Non-current liabilities 218 276 232 277 283 283 283 283 283

Shareholder funds 749 916 1 112 1 440 1 635 1 867 2 140 2 465 2 845

M inority interest - - - - - - - - -

Net debt (cash) (93) (21) (49) (48) (49) (52) (50) (56) (58)

13

Econet is the dominant player in the domestic

telecoms market, commanding a value share of 74%

with a subscriber base of 8.5m. In our view, Econet

has a head start over other players, in terms of

penetration in data, which is expected to be the next

growth avenue. To us, this secures high revenue

visibility. Furthermore, the relatively weak

competition increases our confidence in Econets

ability to maximise returns from its prospects.

Strong cash generation. Although cash generation remained strong in H1 14, (net cash generated from operations up 77.1%, representing a cash interest cover of 12x), cash flows were strained on payment of licence renewal fees (USD 52.5m), increased finance costs and repayment of borrowings.

Healthy margins and ARPUs. Although EBITDA

margins eased to 43.9% from 45%, negatively impacted by increased network and marketing costs, they remain healthy. ARPUs declined 10% to USD 8.00 due to the dilutive effect of lower value subscribers and new services that are still to realise their full potential. Although promotional activity saw tariffs decline by up to 30%, this was offset by a 60% increase in MOU.

Solid infrastructure to support future growth. In our view, Econet has a robust transmission backbone given its access to optic fibre. The company has invested approximately USD 650.0m in capex since 2009. The introduction of new products should continue to attract revenues for the company as well as increasing its subscriber base.

Valuation remains compelling. At current levels, Econet prices at a TTM PER of 7.5x, EV/subscriber of USD 147 and EV/EBITDA 4.0x, which are at discounts of c.40% to its SSA ex SA peers. Our DCF valuation ascribes a fair value of US 77c. We rate the share LT

Buy.

Equity Research Zimbabwe February 2014

Telecoms

-

50

100

150

200

250

21-Feb-13 12-May-13 31-Jul-13 19-Oct-13 21-Jan-14

Econet Price vs. S&P Africa Frontier (Rebased)

Econet (USc) S&P AF

Bloomberg Code: ECWH:ZH

Recommendation LT BUY

Current Price (USc) 61.0

Target Price (USc) 75.0

Upside (%) 23.0

Liquidity

Market Cap (USD m) 1,000

Shares (m) 1,640.0

Free Float (%) 52.0

Ave. daily vol ('000) 1,058.1

Price Performance

Price, 12 months ago (USc) 52.0

Change (%) 17.3

Price, 6 months ago (USc) 64.0

Change (%) (4.7)

Financials (USD '000) 31 Feb F2013 2014F 2015F

Turnover 694,844 759,343 778,398

EBITDA 303,805 310,959 321,161

Net Finance Income (25,947) (38,720) (37,979)

Attributable Earnings 139,938 137,888 138,775

Per share data (USc)

EPS 8.8 8.7 8.5

DPS - 1.3 1.4

NAV/Share 30.8 35.2 38.8

Ratios

RoaA (%) 14.4 13.1 13.4

RoaE (%) 28.4 24.6 21.8

EBITDA Margin (%) 43.7 41.0 41.3


Subscribers' 000 8,000 8,615 8,664

PER (x) 7.0 7.0 7.2

PBV (x) 2.0 1.7 1.6

RoaA (%) 14.4 13.1 13.4

RoaE (%) 28.4 24.6 21.8

Earnings Yield (%) 14.4 14.2 13.9

Dividend Yield (%) 0.0 2.1 2.2

EV/sub (USD) 159 147 146

EV/EBITDA 4.2 4.1 3.9

ARPU (USD) 5.9 6.0 6.1

STRENGTHS WEAKNESSES

Market leader Low disposable incomes

Strong brand Energy disruptions

Economies of scale High gearing

4G/LTE network in place High NPLs for banking subsidiary

OPPORTUNITIES THREATS

New products/services Entery of stronger players eg. MTN

Weak competition: Telecel/NetOne Price wars

Mobile banking Resurgence of beer market

Expansion of data services as a percent of wallet

Economic recovery

14

Zimbabwes telecoms giant, Econet, reported another set of mixed interim results showing solid (+11% y-o-y) topline growth but muted attributable income, down 10% y-o-y to USD 70.5m for EPS of US 4.5c. The lower bottom-line can be attributed to higher net finance costs (+75.4%) and a higher effective tax rate (33.5% versus 30.5%) as margins were generally maintained. The cellular network operations profits grew 8.4% to USD 83.0m while other businesses posted a loss of USD 12.4m versus a profit of USD 1.4m at H1 13. The loss from other businesses was on account of the USD 22.0m loss from the banking subsidiary. No interim dividend was declared. Revenue growth was underpinned by a 22% jump in subscribers to 8.5m. Econet maintained its dominance, commanding 74% of the market. Contribution of voice revenue declined to 60% from 66% as other overlay services contribution increased. ARPUs declined by 10% to approximately USD 8.00 from USD 8.90 due to the dilutive effect of lower value subscribers and new services that are still to realise their full potential. Although promotional activity saw tariffs decline by up to 30%, this was offset by a 60% increase in MOU. EcoCash contributed USD 13.0m to revenue as the number of subscribers registered for EcoCash increased 76% to 3.0m. EcoCash handled over 50.0m transactions valued at approximately USD 1.2bn during the six months period. EBITDA grew 8.2% to USD 165.3m registering an EBITDA margin of 43.9%, some 110bp lower than the prior period. Cost pressures emanated from network costs (+7.4%), marketing (+13.6%), EcoCash (+11.4%), licence fees, staff costs and customer service costs. The number of EcoCash agents increased by 338% to over 7,000 resulting in increased EcoCash agent commission. The depreciation charge surged 40.6% to USD 45.7m and the mobile operator achieved an operating profit of USD 119.5m (-0.6% y-o-y) for the period. The jump in depreciation relates to a 34.7% increase in capex to USD 85.0m. Capex to revenue increased to 22.6% from 19%. Although cash generation remained strong, (net cash generated from operations up 77.1%, representing a cash interest cover of 12x), cash flows were strained on payment of licence renewal fees (USD 52.5m), increased finance costs and repayment of borrowings. Finance costs grew 75.4% as the vendor financing was replaced by a syndicated loan at a weighted average rate of approximately 7.3% p.a. in addition to the 6% p.a. guarantee fee paid to Econet Wireless Global (as explained in the notes of the 2013 Annual report). Total gearing improved to 40% from 54% at year end.

Figure 1: H1 2014 Results Income Statement (USD '000) H1 2013 H1 2014 % change

Turnover 339,469 376,558 10.9

EBITDA 152,797 165,254 8.2

Net finance income (10,381) (18,212) 75.4

Associates profit 1,708 3,836 124.6

PBT 112,279 106,074 (5.5)

Attributable earnings 77,941 70,506 (9.5)

EPS (USc) 4.60 4.50 (2.2)

Balance Sheet (USD '000) FY 2013

Total Assets 1,015,110 1,135,144 11.8

NAV 489,405 563,969 15.2

Current Assets 275,158 224,087 (18.6)

Current Liabilities 233,933 290,441 24.2

Current ratio 1.2 0.8 (34.4)

Cash flow (USD '000) H1 2013

Operating activities 123,659 219,020 77.1

Investing activities (78,752) (206,753) 162.5

Financing activities (37,576) (50,557) 34.5

Ratios

EBITDA margin (%) 45.0 43.9

PBT margin (%) 33.1 28.2

Effective tax rate (%) 30.5 33.5

PAT margin (%) 23.0 18.7

RoaE (%) 25.1

RoaA (%) 12.3 Source: IAS, Company reports

Figure 2: Opex split

Marketing 12%

Network 34% Interconnet & roaming 13%

General Admin 22%

Employee 18%

Source: IAS, Company reports

Figure 3: ARPU declined on subscriber growth

5.0

5.5

6.0

6.5

7.0

7.5

0

100

200

300

400

500

600

700

800

900

2010 2011 2012 2013 2014F 2015F 2016F

ARPU, USDSales, USDm

Sales USDm Monthly ARPU

Source: IAS, Company reports

H1 14 Financial & Operational Review

15

Outlook The demand for group products remains strong especially given the weak competition. In our view, price and quality of service will be a key differentiator in the telecoms market. Management states that the future of

the company lies in innovation and providing value added services to its subscribers. Econet harbours significant growth potential from its broadband and overlay services, more particularly in the latter especially, the EcoCash segment. Given the higher subscriber base, the companys incoming MoU are significantly higher than outgoing with on-net traffic comprising approximately 80% of the total. Nonetheless, we believe that ARPUs are likely to be under pressure on an expanded subscriber base compounded by the effects of multiple SIM card ownership. Data presents significant opportunities for the company. Econet has three data revenue streams: internet services, SMS (text messaging) and EcoCash. Econet has a head start over other players, in terms of penetration in data which is expected to be the next growth avenue. We believe that Econets margins are likely to ease and settle around 42%, in line with African peers. The reasons being the roll out of the retail units, network costs (use of generators), increased competition, roll out of EcoCash agents and the high base the company is coming from. In addition the banking units contribution is likely to remain negative at least in the short term given the need to clean up the balance sheet as well as the adoption of a new business model. We also note that Econets revenue from international roaming is likely to ease given the high termination rates charged by Econet as compared to its competitors. Nonetheless, higher margin revenue items include the likely growth in contribution from data traffic. The Zimbabwean mobile telephony market is almost saturated with an estimated penetration rate of 103.5% as at December 2013. Due to the near saturation we expect to see Econets subscriber base increase modestly beyond FY 2014. The company is post its peak funding period having rolled out the network countrywide. We forecast that capex to revenue will probably recede to between 15% and 20% by FY 2014 as the company focuses on sweating the existing assets. We expect Econet to generate higher cash flows from operations over the next few years. Over 99% of the companys customers are on the prepaid package, thus mitigating the companys receivables

position. Once past its peak capex funding, we expect Econet to increase its dividend payout (after passing a dividend over the last year) as the banking unit was recapitalised. Econet is focusing on growth and returns through a viable subscriber base, improved network efficiencies and a pipeline of new products. Product innovation has been key to the companys profitable growth in volume and market share gains. The introduction of new products (e.g. Eco-Farmer) should continue to attract revenues for the company as well as increasing its subscriber base.

Risks

Exposure to non telecom business - The acquisition of the bank, Steward Bank, places an additional burden on management. Nonetheless, management maintains that the banking unit offers synergies with other units although it is not yet profitable. Cost pressures - Industry wide cost pressures, especially network related, could have a negative impact on our earnings expectations. Competition a major threat to viability The mobile telephone industry is highly competitive Econet currently competes with two main rivals, Telecel (60% owned by Orascom) and Net-One (government owned). An aggressive network roll out by any of the competitors could potentially harm Econets market position, sales and margins. Although competition is set to intensify, we expect Econet to continue to do well. Our expectations are based on the solid infrastructure base and aggressive marketing initiatives. Given the higher costs for fixed lines, we do not foresee any aggressive growth in subscribers in the near term. Shrinking economy We think that the biggest risk is not specific to Econet but rather endemic to the consumer industry in general. A protracted or worsening economy would clearly negatively impact Econets sales, margins and profits as consumers cut back on spending. The current economic environment may result in increased pricing pressure.

Valuation and Recommendation At current levels, Econet prices at a TTM PER of 7.5x, EV/subscriber of USD 147 and EV/EBITDA 4.0x, discounts of almost 40% to its SSA ex SA peers. Our DCF valuation ascribes a fair value of US 77c. We rate

the share LT Buy.

16

Financial Summary

Valuation metrics 2010 A 2011 A 2012 A 2013 A 2014 E 2015 E 2016 E

PER 0.9 0.7 0.6 7.0 7.0 7.2 6.7

EV / EBITDA 7.4 5.3 4.6 4.2 4.1 3.9 3.8

P / Book 0.6 0.4 2.6 1.9 1.8 1.6 1.3

Dividend Yield (%) - 1.9 3.9 - 2.1 2.2 2.5

FCF Yield (%) (38.8) (46.0) 5.1 1.3 6.6 7.3 10.0

EV / Sales 3.5 2.6 2.1 1.8 1.7 1.6 1.6

Key Statistics 2010 A 2011 A 2012 A 2013 A 2014 E 2015 E 2016 E

Subscribers Base ('000) 3,551.0 5,510.0 7,000.0 8,000.0 8,615.4 8,663.7 8,786.0

Blended ARPU (USD) 7.0 6.1 6.0 5.9 6.0 6.1 6.1

Income Statement 2010 A 2011 A 2012 A 2013 A 2014 E 2015 E 2016 E

Revenue 362,777 493,471 611,116 694,844 759,343 778,398 795,617

Y-o-Y Growth NA 36% 24% 14% 9% 3% 2%

EBITDA 171,789 240,948 274,678 303,805 310,959 321,161 331,707

Y-o-Y Growth NA 40% 14% 11% 2% 3% 3%

EBIT 150,679 200,692 228,181 232,241 235,614 235,985 248,535

Y-o-Y Growth NA 33% 14% 2% 1% 0% 5%

Net finance costs - (2,557) (8,097) (25,947) (38,720) (37,979) (35,167)

PBT 150,679 198,136 220,083 206,295 196,894 198,006 213,368

Income tax (34,912) (55,502) (73,389) (64,965) (59,095) (59,475) (64,203)

Effective tax rate 23% 28% 33% 31% 30% 30% 30%

PAT 113,210 137,949 165,741 139,938 137,888 138,775 149,808

Y-o-Y Growth NA 22% 20% -16% -1% 1% 8%

Basic EPS 64.99 81.80 98.27 8.75 8.66 8.46 9.13

Y-o-Y Growth NA 26% 20% -91% -1% -2% 8%

DPS - 1.19 2.37 - 1.30 1.35 1.55

Y-o-Y Growth NA NA 100% -100% NA 4% 15%

Dividend payout ratio 0% 1% 2% 0% 15% 16% 17%

NAVps 94.99 172.24 23.18 31.90 34.15 38.82 46.40

Y-o-Y Growth NA 81% -87% 38% 7% 14% 20%

FCFps (0.30) (0.36) 0.04 0.01 0.05 0.06 0.08

Y-o-Y Growth NA 19% -111% -74% 392% 11% 37%

Ratio Analysis 2010 A 2011 A 2012 A 2013 A 2014 E 2015 E 2016 E

EBITDA margin 47.4% 48.8% 44.9% 43.7% 41.0% 41.3% 41.7%

EBIT margin 41.5% 40.7% 37.3% 33.4% 31.0% 30.3% 31.2%

ROaE 92.4% 62.3% 49.7% 32.1% 26.3% 23.3% 21.5%

RoAA 39.4% 26.8% 22.9% 15.7% 13.6% 13.3% 13.8%

Debt / Equity 0.64 0.80 0.53 0.57 0.52 0.35 0.35

Net debt / EBITDA 0.53 0.82 0.38 0.67 0.63 0.58 0.50

Interest cover 67.2 33.3 52.2 10.5 7.7 8.2 9.2

Capex intensity 44.1% 54.7% 30.0% 21.2% 16.0% 15.0% 15.0%

Balance sheet 2010 A 2011 A 2012 A 2013 A 2014 E 2015 E 2016 E

Non-current assets 296,875 536,440 600,572 695,761 748,318 780,561 816,713

PPE 267,537 498,861 561,656 646,615 694,130 727,484 765,582

Intangiable assets 1,573 1,309 7,991 15,583 18,665 18,451 18,115

Current assets 95,794 101,074 211,854 275,158 305,491 251,743 317,468

Cash balances 13,924 34,691 100,793 78,230 94,574 34,264 99,998

Total assets 392,669 637,514 812,427 970,919 1,053,808 1,032,304 1,134,181

Current liabilities 99,723 102,997 255,629 233,933 452,238 356,951 356,681

Non-current liabilities 127,461 244,039 174,005 288,293 280,181 272,394 250,199

Shareholder funds 163,169 287,637 379,946 489,405 556,610 633,181 757,522

M inority interest 2,317 2,840 2,847 3,478 3,478 3,478 3,478

Net debt (cash) 91,763 198,520 103,338 202,800 194,688 186,900 164,706

17

With its leading market positions in 16 African

countries covering 43% of Sub-Sahara Africas

population, c.40% of EBITDA earned from Nigeria with

mobile penetration still at c.54%, MTN Group (MTN)

gives investors one of the best exposures to Africas

growing consumer class.

MTNs footprint can enable the mobile operator to achieve higher top and bottom line growth than its peers. MTN over the past five years managed to grow its customer base at a CAGR of 25.2% to 188.6m subscribers in FY 12. Revenue, EBITDA and NPAT have grown at a CAGR of 13.1%, 12.8% and 14.3% to ZAR 135.1bn, ZAR 58.6bn and ZAR 20.7bn (before IFRS), respectively. Looking forward, MTN with its significant exposure to Nigeria, harbours the most attractive growth prospects within SSA.

Growth in data offsetting contraction in

interconnect revenue and downward pressure from competition. The sub-theme remains intact, particularly as we observed data drive top line growth in both of MTNs key markets. Whilst interconnect revenue is inevitably on the decline (a CAGR of -2.6% since FY 09) as regulators cut MTRs, the high growth in data (55.9% over that period) has been the chief driver of top-line growth, contributing to 48% of the increase in revenue since FY 09. Voice contributed to 30.6% of the growth in revenue whilst SMS and equipment sales accounted for 20.8% and 17.6%, respectively. We expect inbound revenue to decline a further 7% to ZAR 15.0bn in FY 13. Meanwhile, we expect data revenues to grow 28% to ZAR 20.4bn.

FY 13 HEPS to grow 20.7%. We forecasts FY HEPS and annualised DPS of ZAR 13.50 and ZAR 9.60, respectively. With a target price of ZAR 210.00, the recommendation on MTN is ACCUMULATE.

Equity Research South Africa February 2014 Telecoms

60

80

100

120

140

Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14


MTN SJ (USD) S&P Africa Frontier Index

Recommendation ACCUMULATE

Bloomberg Code MTN:SJ

Current Price (ZAR) 200.07

Current Price (Usc) 1 771

Target Price (ZAR) 210.52

Target Price (Usc) 1 863

Upside (%) 5.2

Liquidity

Market Cap (ZAR m) 369 118

Market Cap (USD m) 32 665

Shares (m) 1 845

Free Float (%) 65.2

Ave. daily vol - 1 yr. ('000s) 5 723

Price Performance

Price, 12 months ago (ZAR) 177.14

Change (%) 12.9

Price, 6 months ago (ZAR) 191.00

Change (%) 4.7

Financials (ZAR m) 31 Dec F2012 2013F 2014F

Turnover 121 867 138 561 158 323

EBITDA 52 637 58 802 72 028

Net Finance Income (4 157) (226) (3 143)

Attributable Earnings 20 688 25 068 29 381

Per share data (ZAR)

EPS 11.19 13.50 15.82

DPS 6.34 9.60 11.62

NAV/Share 48.13 56.34 60.54

Ratios

RoaA (%) 13.8 16.0 16.6

RoaE (%) 23.7 25.8 27.1

EBITDA Margin (%) 43.2 42.4 45.5


Earnings Yield (%)* 6.2 6.7 7.9

Dividend Yield (%) 3.2 4.8 5.8

PE (x)* 16.2 14.8 12.6

PBV (x) 4.2 3.6 3.3

EV/EBITDA (x)* 7.2 6.6 5.4

EV/Subscribers (USD) 171 167 155

* TTM

STRENGTHS

Best exposure to Africas growth markets

Diversified markets;

Strong cash position

WEAKNESSES

Operates in a politically volatile regions

Rand weakness

OPPORTUNITIES

Ready to acquire new positions

Data to take off in other markets

THREATS

Turkcell litigation

Iran and Syria conflicts

18

Nigeria offsets underperformance in home market. MTN at H1 13 grew revenue by 9.8% to ZAR 65.3bn (USD 7.1bn) driven by a 6.5% growth in the customer base to 201.5m subscribers accompanied by a 4.2% decline in blended ARPU. Figure 1: Nigeria driving top-line growth

59.42

65.25

(0.28)

3.04 0.76

0.49

0.55 0.43

(1.07) 0.07

1.80 0.05

H1 1

2

RSA

Nig

eri

a

Ghana

Cam

ero

on

Ivory

Coast

Uganda

Syri

a

Sudan

SO

C

HO

Ce

H1 1

3


Revenue growth was generally driven by Nigeria as South Africa (RSA), at a mobile penetration rate of c.133%, succumbed to increased competition, lower tariffs and MTRs. The home market only managed to grow subscribers by 6.2% to 25.0m whilst Nigeria, now at a mobile penetration rate of 68.1%, grew its customer base by 27.9% to 55.2m. Figure 2: Revenue (ZAR m) performance of key markets RSA H1 12 H1 13 % Change

Out-voice 10 227 9 686 -5.3%

In-voice 2 485 1 911 -23.1%

Data 3 502 4 016 14.7%

SMS 1 349 1 239 -8.2%

Devices 2 605 3 023 16.0%

Other 262 271 3.4%

20 430 20 146 -1.4%

Nigeria H1 12 H1 13 % Change

Out-voice 13 981 15 906 13.8%

In-voice 2 408 2 101 -12.7%

Data 2 166 3 472 60.3%

SMS 536 588 9.7%

Devices 65 53 -18.5%

Other 106 183 72.6%

19 262 22 303 15.8% Source: Company filings

Voice ARPUs in both markets came under significant pressure, declining 18.9% in Nigeria and 12.3% in RSA. MTR cuts saw interconnect revenue (in-voice) decline 23.1% and 12.7% in RSA and Nigeria, respectively. Growth of voice in Nigeria was achieved inspite of the promotional ban being lifted at the start of Q2 13. In both markets, data continued to drive growth as usage increased 62.8% in RSA and 48.5% in Nigeria.

EBITDA growth underpinned by Nigeria. EBITDA margins contracted 100bp to 43.8% and EBITDA grew 7.4% to ZAR 28.9bn. This included ZAR 856m profit earned from the sale of towers. From normal operations, EBITDA grew 6.4% to ZAR 27.7bn. Figure 3: Nigeria also driving EBITDA growth

26.07

27.74

(0.52)

3.12 0.34 0.20

0.12 0.14

(0.37)

0.05

0.50

(1.91)

H1 1

2

RSA

Nig

eri

a

Ghana

Cam

ero

on

Ivory

Coast

Uganda

Syri

a

Sudan

SOC

HO

Ce

H1 1

3


Whilst RSA EBITDA margins came under pressure from higher device costs, on account of a weaker rand, and contracted 210bp to 32.3%, Nigeria margins expanded 570bp to 66.2%. This was mostly due to a higher contribution from data and cost management. EBITDA in Nigeria therefore grew 26.8% to ZAR 14.8bn and contributed to 53% of the groups EBITDA from operations. Group capex increased by 32.7% to ZAR 12.8bn over the period as capex rollout in Nigeria accelerated (+48.6% to ZAR 6.6bn), adding 1,083 2G and 499 3G sites. Capex also increased aggressively in Ghana (+150.9%), Cameroon (+92.7%), Ivory Coast (+100.0%) and Sudan (+247.2%). Capex for this cluster of companies increased 93.8% to ZAR 2.7bn. In RSA, capex typically increased by a modest 8.6% to ZAR 2.2bn and the operation expanded its mobile data

network by a further 213 2G and 527 3G sites.

Group depreciation and amortisation were in turn 19.0% higher to ZAR 9.0bn and EBIT grew 7.4% to ZAR 19.6bn. Net finance costs declined to ZAR 88m from ZAR 1.7bn in H1 12 owing to favourable FX gains on Syrian receivables. After income from JVs and associates of ZAR 1.7bn, PBT grew 10.9% to ZAR 21.2bn.

H1 13 NPAT attributable to shareholders rises 19.9% to ZAR 12.5bn. The discontinuation of the STC in RSA and a reduction in WHT saw the effective tax rate decline by 510bp to 31.3%. This resulted in NPAT and

EPS growing 20.4% and 20.7%, respectively.

H1 13 Financial & Operational Review

19

Outlook

Capex intensity to decline in FY 13. With capex of ZAR 32.0bn have been spent over H2 12 and H1 13 by the group, management guides to c.ZAR 14.0bn over H2 13. In order to close the 3G gap to Vodacom, higher capex spend in RSA is expected over the latter half of the year. Overall, capex intensity in FY 13 is forecast to be c.20%, down from 24% in FY 12. Smaller markets to drive subscriber growth. The Q3 13 trading statement showed that MTN managed to add a further 2.2m subscribers over that quarter. We maintain this run-rate and see the operator conclude FY 13 with c.206m subscribers. About 40% of the new additions came from MTNs cluster of small operations which average market penetration of 56%. Figure 4: Mobile voice subscriber CAGR to FY 17

12%

10%9%

6%

3%

2%

Syria Nigeria Other Ghana RSA Iran

Source: IAS

Looking into the long term we see voice subscribers achieving a CAGR of 7.6% to 270m in FY 17 as handsets become more affordable and penetration rates increase in our base case scenario. However, given that the junior markets have lower per capita incomes than those of the more advanced markets, we generally expect voice ARPU dilution. Data revenue to support ARPUs. According to GSMA Intelligence, current smartphone penetration is estimated to sit at 22% and 6% of mobile subscribers in South Africa and Nigeria but is expected to reach 47% and 29% by FY 17, respectively, as the devices become more affordable whilst per capita incomes rise. Given this trend, we see significant upside for data usage as smartphones grow at a CAGR of 22% in RSA and 54% in Nigeria.

Figure 5: Growth in smartphone subscribers (m) to drive data usage

-

5

10

15

20

25

30

FY 13 FY 14 FY 15 FY 16 FY 17

RSA Nigeria

Source: IAS

ZAR weakness to boost Nigeria contribution in FY 13. With the Naira having been fairly stable over the latter half of FY 13 whilst the ZAR depreciated c.16% y-o-y, and 8.5% h-o-h, we see this enhancing Nigerias contribution to the group relative to RSA. Given Nigerias superior EBITDA margins, we also expect this to have a larger impact on the groups profitability. EPS CAGR of 14.6% to FY 17 to ensure dividend quality is maintained. We forecast FY 13 revenue, EBITDA and basic EPS to grow at CAGR of 11%, 13.3% and 14.5% to ZAR 205bn, ZAR 98bn and ZAR 21.90, respectively.

Valuation and Recommendation

We forecast FY HEPS and annualised DPS of ZAR 13.50 and ZAR 9.60, respectively. We currently have a

target price of ZAR 210.58. ACCUMULATE.

20

Financial Summary

Valuation metrics 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 A 2014 A 2015 A 2016 A 2017 A 2018 APER 35.2 24.4 25.1 26.4 18.2 17.9 14.8 12.6 11.4 10.2 8.8 7.8

EV / EBITDA 12.2 9.0 8.5 8.2 7.1 7.4 6.6 5.4 5.0 4.7 4.2 3.8

P / Book 7.89 4.89 5.26 5.25 4.32 4.16 3.55 3.30 3.07 2.84 2.61 2.39

Dividend Yield (%) 0.4 0.7 0.9 1.7 3.1 3.2 4.8 5.8 6.5 7.2 8.3 9.4

FCF Yield (%) 3.6 2.6 3.0 5.5 5.1 2.7 7.3 8.3 10.5 11.6 13.3 15.1

EV / Sales 5.3 3.8 3.5 3.4 3.2 3.2 2.8 2.5 2.3 2.1 2.0 1.8

Key Statistics 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E 2018 E

Subscribers (m) 61.40 90.70 116.07 141.60 164.59 188.69 206.80 223.46 240.80 258.18 275.68 290.82

Blended ARPU (ZAR) 99 112 90 74 66 57 58 61 61 62 62 62

Income Statement 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E 2018 E

Revenue 73 145 102 526 111 947 114 684 121 884 121 867 138 561 158 323 170 677 184 131 197 679 211 412

Y-o-Y Growth 40.2% 9.2% 2.4% 6.3% 0.0% 13.7% 14.3% 7.8% 7.9% 7.4% 6.9%

EBITDA 32 057 43 391 46 063 47 537 54 750 52 637 58 802 72 028 77 795 83 557 93 194 101 700

Y-o-Y Growth 35.4% 6.2% 3.2% 15.2% -3.9% 11.7% 22.5% 8.0% 7.4% 11.5% 9.1%

EBIT 22 872 30 407 31 588 32 137 39 260 36 685 40 010 51 737 56 870 62 082 71 241 79 443

Y-o-Y Growth 32.9% 3.9% 1.7% 22.2% -6.6% 9.1% 29.3% 9.9% 9.2% 14.8% 11.5%

Net finance costs (3 173) (1 917) (5 815) (4 042) (1 582) (4 157) (226) (3 143) (2 665) (1 792) (765) 481

PBT 19 707 28 490 25 773 28 095 37 640 35 903 43 100 52 407 58 591 65 333 76 276 86 594

Income tax (7 791) (11 355) (8 612) (11 268) (13 853) (11 835) (12 432) (16 325) (18 192) (20 221) (23 531) (26 628)

Effective tax rate 39.5% 39.9% 33.4% 40.1% 36.8% 33.0% 28.8% 31.2% 31.1% 31.0% 30.9% 30.8%

NPAT 11 916 17 135 17 161 16 827 23 787 24 068 30 667 36 082 40 398 45 113 52 745 59 966

Y-o-Y Growth 43.8% 0.2% -1.9% 41.4% 1.2% 27.4% 17.7% 12.0% 11.7% 16.9% 13.7%

Attr. NPAT 10 608 15 315 14 650 14 300 20 772 20 688 25 068 29 381 32 736 36 348 42 307 47 909

Y-o-Y Growth 44.4% -4.3% -2.4% 45.3% -0.4% 21.2% 17.2% 11.4% 11.0% 16.4% 13.2%

Basic EPS 5.69 8.20 7.96 7.59 11.02 11.19 13.50 15.82 17.63 19.57 22.78 25.80

Y-o-Y Growth 44.1% -2.9% -4.6% 45.2% 1.5% 20.7% 17.2% 11.4% 11.0% 16.4% 13.2%

DPS 0.90 1.36 1.84 3.35 6.16 6.34 9.60 11.62 12.93 14.33 16.65 18.83

Y-o-Y Growth 51.2% 35.3% 82.5% 83.8% 3.0% 51.4% 21.0% 11.2% 10.8% 16.2% 13.1%

Dividend payout ratio 15.8% 16.6% 23.1% 44.1% 55.9% 56.7% 71.2% 73.5% 73.4% 73.2% 73.1% 73.0%

Ratio Analysis 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E 2018 E

EBITDA margin 43.8% 42.3% 41.1% 41.5% 44.9% 43.2% 42.4% 45.5% 45.6% 45.4% 47.1% 48.1%

EBIT margin 31.3% 29.7% 28.2% 28.0% 32.2% 30.1% 28.9% 32.7% 33.3% 33.7% 36.0% 37.6%

ROaE 22.4% 24.7% 20.2% 19.9% 26.1% 23.7% 25.8% 27.1% 28.0% 28.8% 31.0% 32.2%

RoAA 10.3% 12.0% 10.5% 10.8% 14.5% 13.8% 16.0% 16.6% 17.1% 17.7% 19.0% 19.7%

Debt / Equity 0.65 0.52 0.51 0.48 0.36 0.35 0.38 0.33 0.30 0.26 0.23 0.20

Net debt / EBITDA 0.52 0.34 0.28 (0.01) (0.10) 0.19 0.20 0.05 (0.14) (0.33) (0.52) (0.72)

Interest cover 10.1 22.6 7.9 11.8 34.6 12.7 260.5 22.9 29.2 46.6 121.8 na

Capex intensity 19.8% 26.2% 24.8% 13.4% 18.2% 23.7% 19.5% 17.7% 13.7% 12.8% 12.0% 11.0%

Balance sheet 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E 2018 E

Non-current assets 82 085 115 319 110 213 100 552 110 084 121 530 137 250 144 817 147 290 149 387 151 152 152 057

PPE 39 463 64 193 67 541 63 361 72 678 73 905 89 652 98 868 102 703 106 072 109 023 111 035

Intangible assets 38 797 45 786 36 064 30 266 30 897 32 552 35 120 33 661 32 299 31 027 29 841 28 733

Current assets 33 501 54 787 46 024 54 234 62 717 54 502 71 089 81 521 97 624 116 413 138 871 165 404

Cash balances 16 868 26 961 23 999 35 947 36 439 22 708 30 868 38 830 53 389 70 497 91 262 116 078

Total assets 115 586 170 106 156 237 154 786 172 801 176 032 208 339 226 338 244 914 265 801 290 023 317 461

Current liabilities 34 970 54 591 54 945 46 717 46 673 50 474 51 472 54 976 57 166 59 552 61 954 64 388

Non-current liabilities 29 114 34 973 28 426 33 995 34 710 32 713 43 950 43 950 43 950 43 950 43 950 43 950

Shareholder funds 47 315 76 386 70 011 71 855 87 324 89 006 104 633 112 427 121 150 130 887 142 269 155 215

Minority interest 4 187 4 156 2 855 2 219 (979) 3 881 8 326 15 027 22 690 31 454 41 892 53 949

Net debt (cash) 16 789 14 629 12 918 (619) (5 647) 9 795 11 699 3 737 (10 822) (27 930) (48 695) (73 511)

21

Whilst Onatel BF has majority market share of c.41%

in an economy with a mobile penetration of c.56%, it

is faced with notably low per capita income

challenges. Thus growth prospects are limited, and

are set to shrink further as a fourth operator (Viettel)

looks to join the fray. However, we look at long term

GDP growth of 6.4% to boost incomes and the change

of ownership to Etisalat to reinvigorate its pursuit of

growth.

Profitability on the up over 9M 13. Whilst revenue for the period grew 6.3%, likely as a result of competition from Zain (Bharti) and Telecel, EBIT and NPAT grew 28.3% and 35.5%, respectively, as EBIT and NPAT margins expanded by a further 390bp and 360bp, to a still relatively low 22.7% and 16.7%, respectively. Our take away from the results was an indication of a fairly positive development in voice given that fixed line services diluted top line growth.

Etisalat direction a boost for long term growth

prospects. Vivendi will sell its 53% stake in Maroc Telecom, which in turn holds 51% in Onatel BF, for an estimated USD 5.7bn. Given that Vivendi, with a strategy focusing more on media, had been driven to simultaneously service its debts and support its share price through dividends, we think it would have been relatively conservative with regards to growing its African telecoms business. Etisalat on the other hand, is more of a voice and data focused operator and is actively seeking growth prospects in Africa. We think the shift in direction at the parent level will place Onatel BF in a better position to challenge for market share in voice and data.

We rerate to ACCUMULATE. We arrive at a target price of XOF 6,830 implying upside of 10.2%. With a forward dividend yield of 6.0% to look forward to. However, dividends are at risk as Etisalalt may be more aggressive in with. We downgrade our recommendation from a BUY to ACCUMULATE.

Equity Research Burkina Faso February 2014

Telecoms

80

100

120

140

160

Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14


ONTBF BC (USD) S&P Africa Frontier Index

Recommendation ACCUMULATE

Bloomberg Code ONTBF:BC

Current Price (XOF) 6 200

Current Price (Usc) 1 272

Target Price (XOF) 6 855

Target Price (Usc) 1 407

Upside (%) 10.6

Liquidity

Market Cap (XOF m) 210 800

Market Cap (USD m) 433

Shares (m) 34

Free Float (%) 26

Ave. daily vol - 1 yr. 12 397

Sub Saharan Africa Telecoms_11 February 2014 Research

Documents

Transcript of Sub Saharan Africa Telecoms_11 February 2014 Research