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MTN today - Contents

Group Finance Director’s report

for the nine months ended 31 December 2005

Rob NisbetINTRODUCTION

The MTN Group changed its financial year-end from 31 March to 31 December in line with its operating cycle and international peers. Consequently, the reported results cover a period of nine months and are not directly comparable to the audited results for the full year to 31 March 2005. To facilitate comparison and evaluation of the results for the period ended 31 December 2005, the unaudited operating results for the nine months ended 31 December 2004 are included for revenue, expenses and earnings before interest, tax, depreciation and amortisation (EBITDA), as the transition to IFRS did not have a significant impact on these.

The MTN Group recorded a strong performance for the period under review, driven mainly by mobile subscriber growth and improved customer focus in all the Group’s established operations. Consolidated revenue increased by 26% to R27,2 billion for the nine months ended December 2005 from R21,5 billion for the nine months to December 2004. Adjusted HEPS was 338,2 cents for the current period, which compares favourably with the previous 12-month adjusted HEPS of 366 cents. The Group EBITDA margin was 41,3%, up from 39,8% for the nine months to December 2004, and remained virtually flat compared to 41,4% at 31 March 2005.

The Group’s non-South African operations contributed 43% of revenue (March 2005: 40%), 55% of EBITDA (March 2005: 50%) and 55% of profit after tax (March 2005: 51%) (excluding MTN Nigeria’s deferred tax credit) to Group results, with MTN Nigeria being the most significant of the international operations.

The Group’s total asset base at 31 December 2005 was R44,8 billion, an increase of 51% on the total assets of R29,7 billion as adjusted for IFRS (previously disclosed as R29,3 billion) as at 31 March 2005. During the review period, the MTN Group successfully concluded acquisitions of MTN Côte d’Ivoire (51%), MTN Zambia (100%), Irancell (49%), MTN Congo Brazzaville (100%) and Mascom (44% indirect). These acquisitions have moved the Group’s net debt to equity ratio to 4,5% and reversed the March 2005 position when the Group was holding more cash than debt. While we are pleased with the progress of our expansion strategy we will continue to pursue value-enhancing expansion opportunities supported by the Group’s strong balance sheet.

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MACROECONOMIC ENVIRONMENT


Economic conditions in the markets in which the Group operates were favourable during the period with interest rates remaining relatively low and the functional currencies, except for the rand, remaining stable against the US dollar. The telecommunications sector in most of the countries in which the Group operates has remained competitive, with mobile competition in Nigeria increasing considerably.

Exchange rates

Table 1 sets out movements in the closing and average exchange rates between the rand and the currencies of the Group’s international operations.

Average exchange rates remained fairly stable during the period. While all the functional currencies of the Group’s international operations strengthened slightly against the rand, only the 4% strengthening of the Nigerian naira had a noteworthy positive effect on Group revenues. On a weighted basis, average exchange rate movements between the rand and the functional currencies of the Group’s international operations increased reported revenue by 2% compared to the nine months ended 31 December 2004.

Table 1: Current vs previous periods’ exchange rates

   
Average exchange rates
 
Closing exchange rates
Exchange rates per rand
April 2005 –
December
2005
April 2004 –
December
2004
April 2004 –
March
2005
December
2004 to 2005
%
 
December
2005
March
2005
%
change
USD
6,47
6,33
6,15
(2)
 
6,32
6,21
(2)
NGN (Nigeria)
20,23
21,04
21,44
4
 
20,42
21,38
5
CFA (Cameroon)
84,77
85,99
86,17
1
 
89,94
83,89
(7)
UGX (Uganda)
277,59
281,81
284,29
1
 
287,30
280,08
(3)
SZL (Swaziland)
1,00
1,00
1,00
 
1,00
1,00
RWF (Rwanda)
87,18
93,27
94,33
7
 
90,23
92,33
2
PUL (Botswana)*
0,86
 
0,86
XOF (Côte d’Ivoire)*
84,52
 
87,68
ZMK (Zambia)*
570,71
 
577,76
CFCB (Congo Brazzaville)*
89,24
 
88,02
IRR (Iran)*
1 420,80
 
1 436,49








*Operation acquired during the period

The effects of closing exchange rate movements on the consolidated balance sheet were minimal, as the 31 December 2005 rates were similar to those prevailing at 31 March 2005. The 5% strengthening of the naira increased the Group’s period-end assets by approximately 1,3%.

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SUBSCRIBERS


Table 2 shows double-digit subscriber growth rates across all MTN operations, with the total closing base (including acquisitions) reflecting more than 23 million subscribers. Since June 2005, ARPUs have remained relatively stable, with a marginal decline of USD1 in Nigeria, and South Africa remaining flat on the strength of good prepaid performance. ARPUs recorded for the current nine-month period are not directly comparable to those disclosed for 31 March 2005 as ARPUs for December 2005 are based on a 90-day activity subscriber definition. In the period up to March 2005 all ARPUs except MTN South Africa were based on 30-day activity.

Table 2: Subscriber growth per operation

         
Subscribers
   
Average revenue per user (ARPU)
Operation  
December
2005
   
March
2005
 
%
change
   
December
2005
September
2005
June
2005
South Africa  
10 235 000
   
8 001 000
 
28
   
R169
R168
R169
– Contract  
1 654 000
   
1 391 000
 
19
   
R541
R544
R555
– Prepaid  
8 581 000
   
6 610 000
 
30
   
R93
R90
R88
Nigeria  
8 370 000
   
5 574 000
 
50
   
$22
$23
$23
Cameroon  
1 248 000
   
919 000
 
36
   
$16
$17
$18
Uganda  
982 000
   
782 000
 
26
   
$15
$15
$15
Rwanda  
275 000
   
209 000
 
32
   
$17
$17
$17
Swaziland  
213 000
   
156 000
 
37
   
R149
R149
R152

 
   
 
   


Existing operations at 1 April 2005  
21 323 000
   
15 641 000
 
36
   
 
 
 

 
   
 
   


Côte d’Ivoire  
1 080 000
   
 
   
$20
$19
Mascom (Botswana)  
479 000
   
 
   
$21
$22
Congo Brazzaville  
210 000
   
 
   
$21
Zambia  
97 000
   
 
   
$20
$24

 
   
 
   


New operations  
1 866 000
   
 
   
 
 
 

 
   
 
   


TOTAL all operations  
23 189 000
   
15 641 000
 
48
   
 
 
 

 
   
 
   


Proportionate subscribers  
22 135 300
   
15 031 040
 
47
   
 
 
 

 
   
 
   


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INCOME STATEMENT


Group revenue

Revenue by operation

The 26% increase in the Group’s revenue compared to the nine-month period ended 31 December 2004 was primarily attributable to the growth in subscriber bases across all operations.

As indicated in table 3 MTN South Africa and MTN Nigeria remain the most substantial contributors to total Group revenue and account for 94% of revenue growth, excluding new operations.

Table 3: Analysis of MTN Group revenue by operation

 
9 months to
December
2005
Rm
*9 months to
December
2004
Rm
12 months to
March
2005
Rm
December
2004
to 2005
%
†December
2004
to 2005
%
% of
total
MTN South Africa
15 507
13 086
17 673
19
19
57
MTN Nigeria
9 034
6 967
9 310
30
25
33
MTN Cameroon
1 037
897
1 218
16
15
4
MTN Uganda
453
386
520
17
15
2
MTN Rwanda
99
74
100
34
26
MTN Swaziland
77
58
76
33
33







Existing operations at 1 April 2005
26 207
21 468
28 897
22
96







MTN Côte d’Ivoire (6 months)
768
3
MTN Zambia (5 months)
75
Mascom (Botswana) (3 months)
82
MTN Congo Brazzaville (1 month)
29
Irancell







New operations
954
4







TOTAL wireless operations
27 161
21 468
28 897
27
100







Other operations
36
68
80
(47)
(47)
Head office companies
15
12
17
25







TOTAL
27 212
21 548
28 994
26
100







* The revenue for the nine months ended December 2004 is for comparison purposes only and has not been audited.
** Less than 1%
† Local currency

Revenue composition

Table 4 shows that revenue composition for the MTN Group did not vary significantly from March 2005 to December 2005. At 89% wireless communications continued to dominate Group consolidated revenue. Connection fee revenue decreased by 70% mainly due to the substantial reduction in connection fees charged by MTN Nigeria. The increase in telephones and accessory revenue of 41% was due to a 47% increase in handset revenue in South Africa, which is the only operation with significant telephone and accessories revenue. Data revenue increased to 5,2% of Group revenue excluding handsets.

Table 4: MTN Group revenue composition

   
9 months to
December
2005
Rm
   
*9 months to
December
2004
Rm
   
12 months to
March
2005
Rm
   
December
2004
to 2005
%
 
% of
total at
December
2005
   
% of
total at
March
2005
Wireless telecommunications  
24 157
   
19 440
   
26 179
   
24
 
89
   
91
    Airtime and subscription  
18 608
   
14 553
   
19 623
   
28
 
68
   
68
    Interconnect  
5 403
   
4 406
   
6 036
   
23
 
20
   
21
    Connection fees  
146
   
481
   
520
   
(70)
 
1
   
2
Cellular telephones and accessories  
2 351
   
1 671
   
2 158
   
41
 
9
   
7
Satellite communications  
36
   
68
   
80
   
(47)
 
**
   
**
Other  
668
   
369
   
577
   
81
 
2
   
2

 
   
   
   
 
   
TOTAL  
27 212
   
21 548
   
28 994
   
26
 
100
   
100

 
   
   
   
 
   
* The results for the nine months ended December 2004 are for comparative purposes only and have not been audited.
** Less than 1%

Group EBITDA

Group EBITDA margin remained virtually unchanged at 41% since 31 March 2005. The EBITDA margin in MTN South Africa decreased by 1,8% to 32,3% compared to 31 March 2005 due to higher handset revenue during the nine-month period. Excluding acquisitions during the period, international operations contributed 49% of EBITDA. Of the acquisitions, MTN Zambia and Irancell reported negative EBITDA: MTN Zambia can be viewed as a startup, while Irancell is still to begin commercial operations. The most significant foreign exchange impact on EBITDA was the 2% strengthening of the naira.

Table 5: MTN Group EBITDA analysis by operation

 
9 months to
December
2005
Rm
*9 months to
December
2004
Rm
12 months to
March
2005
Rm
December
2004
to 2005
%
**December
2004
to 2005
%
9 months to
December
2005
9 months to
December
2004
EBITDA Margin %
†12 months
to March
2005
MTN South Africa
5 009
4 154
6 018
21
21
32
32
34
MTN Nigeria
4 727
3 557
4 883
33
24
52
51
52
MTN Cameroon
498
391
520
28
27
48
44
43
MTN Uganda
226
195
264
16
14
50
51
51
MTN Rwanda
52
34
48
51
42
53
47
48
MTN Swaziland
42
35
39
22
29
55
59
51









Existing operations at 1 April 2005
10 554
8 366
11 772
26
39
39
41









MTN Côte d’Ivoire (6 months)
361
47
MTN Zambia (5 months)
(6)
(8)
Mascom (Botswana) (3 months)
44
53
MTN Congo Brazzaville (1 month)
13
45
Irancell (1 month)
(6)
0









New operations
406
42









TOTAL wireless operations
10 960
8 366
11 772
31
40
39
41









Other operations
11
14
(100)
(100)
Head office companies
271
190
214
43
43









TOTAL
11 231
8 567
12 000
31
41
40
41









* The EBITDA for the nine months ended December 2004 is for comparison purposes only and has not been audited.
** Local currency
† Restated



Depreciation

The Group’s depreciation and amortisation of R2,8 billion for the 12 month ended 31 March is slightly lower than the R3 billion for the 12 months ended 31 March 2005. The implementation of IFRS has led to a decrease of depreciation of R270 million for the nine-month period due to a revision of the useful lives of property plant and equipment by MTN South Africa. Due to the increased network roll out by MTN Nigeria, depreciation in this operation was slightly higher for the nine months than for the previous 12 months.

Amortisation of intangible assets has increased to R256 million for the nine-month period compared to R189 million for the 12 months ended 31 March 2005. IFRS 3: Business Combinations requires that when new businesses are acquired, the fair value of intangibles including subscriber bases and licences are recognised as assets. The amortisation of R54 million of these intangibles has had a limited impact on the current period as MTN Côte d’Ivoire has only been amortised for six months and Mascom for three months. The impact of the other acquisitions has been negligible. In the next financial year, this amortisation will, however, be accounted for on all new acquisitions for the full financial year.

Finance costs

The Group’s EBITDA to net interest cover remains strong at 30 times.

The Group recorded net finance costs of R373 million for the nine months compared to R270 million for the previous 12 months. Net finance costs include non-cash charges of R330 million, mainly comprising fair value movements of minority put options of R124 million and unrealised foreign exchange losses of R181 million.

MTN South Africa continued to record net finance income due to strong cash flows and low average debt levels. Surplus cash decreased due to significant dividend payments to MTN Holdings during the latter part of the period. Net finance costs for MTN Nigeria decreased from the prior year as the operation moved from a net debt to a cash-positive position.

Taxation

Expected trends in effective tax ratesThe Group’s effective tax rate remains low at 17,4%, which is similar to the effective tax rate of 17% for the previous financial period. The Group’s effective tax rate would have been approximately 33,4% had MTN Nigeria been taxed at the Nigerian statutory tax rate of 30%. The tax charge includes STC of R135 million.

MTN Nigeria remains within its five-year tax holiday which expires on 1 April 2007. From 1 April 2007 onwards capital allowances on capital expenditure incurred during the five-year period may be claimed as deductions against taxable income.

According to IAS 12: Income Taxes, MTN Nigeria has been obliged to recognise a deferred tax asset representing the tax effect of the deductible temporary differences as depreciation has been recognised and capital allowances for tax purposes will only be recognised in the future. To date the Group has recognised a deferred tax asset of R1,1 billion in this regard, with R354 million of this recognised in the current year. The Group has adjusted its headline earnings to exclude this positive effect.

For the financial year ending 31 December 2007, MTN Nigeria will be required to pay tax as its Pioneer Status will have expired. As reflected in the graph below both the tax charge and cash tax payable will be significantly higher than Nigeria’s statutory tax rate of 30% as:

• The commencement provisions of Nigerian tax law results in double taxation which leads to a higher tax charge, and
• A portion of the deferred tax asset is utilised during the period.

Headline earnings per share

Adjusted HEPS of 338,2 cents was recorded for the nine months to 31 December 2005. This compares favourably with the adjusted HEPS of 366 cents for the 12 months to 31 March 2005.

The Board continues to report adjusted headline earnings in addition to basic headline earnings. Adjusted headline earnings have been adjusted for:
• The positive impact on earnings that the deferred tax credit had in Nigeria has been reversed. This decreased HEPS during the period by 20 cents.
• The implementation of IFRS requires the Group to account for a written put option held by a minority shareholder of one of the Group’s subsidiaries, which gives the minority the right to require the subsidiary to acquire its shareholding at fair value. Prior to the implementation of IFRS, the shareholding was treated as a minority shareholder in the subsidiary as all risks and rewards associated with these shares, including dividends, accrued to the minority shareholder.

IAS 32 requires that under the circumstances described above, (a) the present value of the future redemption amount be reclassified from equity to financial liabilities and that the financial liability thus reclassified subsequently be measured in accordance with IAS 39; (b) in accordance with IAS 39, all subsequent changes in the fair value of the liability together with the related interest charges arising from present valuing the future liability, be recognised in the income statement and (c) the minority shareholder holding the put option no longer be regarded as a minority shareholder, but rather as a creditor from the date of entering into the put option.

The fair value movement on the financial instrument resulted in an increase in HEPS of 1,1 cents per share. The finance charges reflected as a result of this treatment had a negative impact of 5,8 cents and the Group’s increased share in the results of the subsidiary, as a consequence of the minority shareholder being accounted for as a creditor, was 6,3 cents. This resulted in a net positive impact of 1,6 cents which has been reversed in the adjusted HEPS.

The Board believes that accounting for this put option as required by IAS 32 and IAS 39 does not adequately reflect the economic realities of the transaction in that the minority shareholder currently participates in the equity risks and rewards of the subsidiary. Accounting for changes in the fair value of the financial instrument in the income statement is misleading, because if the put option was excercised at fair value it stands to reason that these shares could be sold for the same price with no impact on profitability or cash flow. Inherently, a transaction at fair market value implies that one party receives an asset at fair value, and the other party pays for it at fair value. To suggest that a profit or loss is made on this transaction is, in the opinion of the directors, inherently misleading.

MTN South Africa

Revenue December 2004 vs 2005
MTN South Africa recorded revenues of R15,5 billion for the period, an increase of 19% driven by the 28% increase in subscribers and the 47% increase in handset revenue.

The 13% increase in airtime and subscription revenue and 16% increase in interconnect revenue was driven by the 19% and 30% respective increases in contract and prepaid subscriber bases. The contribution of prepaid subscribers to overall revenue continues to increase due to rapid growth in that segment.

The growth in interconnect revenue was as a result of increased minutes terminated from other mobile operators due to the growth of the mobile market while fixed-line interconnect revenue remained relatively static.

Handset revenue increased by 47% during the period, driven by high demand for more expensive handsets by both new and existing subscribers. The large increase in handset revenue had a positive impact on revenue growth as growth excluding handset revenue was 14%.

Data revenue amounted to 8,2% of total revenue excluding handsets, with SMS revenue still comprising the bulk of this. Data revenue now includes revenue relating to data and SMS included in bundled products. Previously this revenue was included in subscription revenue. Had this adjustment not been made, data as a percentage of revenue excluding handsets would have been 6,4%.

EBITDA and expenditure December 2004 vs 2005

MTN South Africa’s EBITDA was 21% higher during the period, fuelled by solid revenue growth of 14% (excluding handsets), tight cost controls and efficiency improvements. EBITDA margin excluding handset revenue has increased by 2% to 38%.

Sales, distribution and marketing costs increased due to the additional costs associated with securing new distribution channels, as well as incremental costs associated with higher subscriber acquisition activity.

Handset costs were significantly higher than the previous year due to the increase in the volume and price of handsets sold.

Direct network operating costs increased by only 5,7% due to maintenance as well as rent and utilitiesrelated efficiencies, while the limited increase in other expenses was due to the release of bad debt provisions during the period.

Table 6: MTN South Africa revenue and expense summary

   
9 months to
December
2005
Rm
   
*9 months to
December
2004
Rm
   
12 months
to March
2005
Rm
 
December
2005
vs 2004
%
Wireless telecommunications  
12 824
   
11 272
   
15 243
 
14
    Airtime and subscription fees  
9 003
   
7 956
   
10 781
 
13,2
    Interconnect fees  
3 781
   
3 259
   
4 427
 
16,0
    Connection fees  
40
   
57
   
35
 
(29,8)
Cellular telephones and accessories  
2 284
   
1 556
   
2 022
 
46,8
Other  
399
   
262
   
408
 
52,3

 
   
   
 
Total revenue  
15 507
   
13 090
   
17 673
 
18,5

 
   
   
 
Direct network operating costs  
(1 042)
   
(986)
   
(1 264)
 
5,7
Cost of handsets and other accessories  
(2 399)
   
(1 890)
   
(2 573)
 
27,0
Interconnect and roaming costs  
(2 341)
   
(2 020)
   
(2 713)
 
15,9
Employee benefit and consulting expenses  
(698)
   
(613)
   
(843)
 
14,0
Selling, distribution and marketing expenses  
(3 457)
   
(2 901)
   
(3 637)
 
19,2
Other expenses (general and administration)  
(561)
   
(526)
   
(625)
 
6,6

 
   
   
 
Total operating expenses  
(10 498)
   
(8 936)
   
(11 655)
 
17,5

 
   
   
 
EBITDA  
5 009
   
4 154
   
6 018
 
20,6

 
   
   
 
*The results for the nine months ended December 2004 are for comparison purposes only and have not been audited.



MTN Nigeria

Revenue December 2004 vs 2005

MTN Nigeria’s revenue grew by 30%, mainly driven by the strong increase in subscribers over the nine months despite competitive market conditions. MTN Nigeria’s subscriber base increased by 50% with connection fees dropping below 500 naira by the end of the period.

Revenue growth was lower than subscriber growth due to deeper penetration into the market. Furthermore, competitive pricing and attractive promotions by competitors have encouraged existing subscribers to subscribe to more than one mobile network thereby diminishing their average spend on the MTN network. ARPU of USD23 reported in June 2005 dropped slightly to USD22 for the nine-month period.

Connection fees decreased by 77% despite impressive growth in the subscriber base due to the highly competitive market resulting in much lower connection fees being charged to new subscribers. Connection fees now represent 1% of total revenue compared to 6% in the previous period.

Handset and accessories revenue decreased by 64% as MTN Nigeria exited the handset market and a similar decrease was experienced in related costs.

EBITDA and expenditure December 2004 vs 2005

MTN Nigeria’s EBITDA margin of 52% increased from 51%, while EBITDA has increased by 33% to R4,7 billion.

Direct network operating costs rose to R739 million as a result of significant increases in rent, utilities and maintenance, related to the increasing network roll out; the rent and utility increase was compounded by increasing fuel costs following higher oil prices.

Handset, accessories, SIM and scratch card costs did not show a similar decline to handset revenue as the reduction in handset costs was offset by increased SIM and scratch card cost.

The increase in interconnect and roaming costs was due to the larger subscriber bases of our competitors and booster card offerings increasing outgoing traffic to other networks.

Sales, distribution and marketing expenses, as well as employee and consulting costs, increased by 34% and 33% respectively due to the expansion of operations.

The increase in other expenses was low following decreased provisions for bad debts, as Private Telephone Operators paid outstanding Interconnect balances previously provided for.

Table 7: MTN Nigeria revenue and expense summmary

   
9 months to
December
2005
Rm
   
*9 months
to December
2004
Rm
   
12 months
to March
2005
Rm
 
December
2005 vs 2004
%
Wireless telecommunications  
8 798
   
6 811
   
9 090
 
29
    Airtime and subscription fees  
7 450
   
5 421
   
7 251
 
37
    Interconnect fees  
1 254
   
974
   
1 365
 
29
    Connection fees  
94
   
416
   
474
 
(77)
Cellular telephones and accessories  
31
   
86
   
95
 
(64)
Other  
205
   
70
   
125
 
193

 
   
   
 
Total revenue  
9 034
   
6 967
   
9 310
 
30

 
   
   
 
Direct network operating costs  
(739)
   
(484)
   
(759)
 
53
Cost of handsets, accessories, SIM and scratch cards  
(240)
   
(332)
   
(398)
 
(28)
Interconnect and roaming costs  
(1 052)
   
(625)
   
(771)
 
68
Employee benefit and consulting expenses  
(328)
   
(247)
   
(357)
 
33
Selling, distribution and marketing expenses  
(821)
   
(611)
   
(766)
 
34
Other expenses (general and administration)  
(1 127)
   
(1 111)
   
(1 376)
 
2

 
   
   
 
Total operating expenses  
(4 307)
   
(3 410)
   
(4 427)
 
26

 
   
   
 
EBITDA  
4 727
   
3 557
   
4 883
 
33

 
   
   
 
*The results for the nine months ended December 2004 are for comparison purposes only and have not been audited.

Rest of the operations

Revenue and EBITDA December 2004 vs 2005
MTN Cameroon’s revenue increased by 16%, driven by strong growth in the subscriber base.

EBITDA margin increased by 4% to 48% due to tight cost control and efficiency gains.

MTN Uganda maintained its EBITDA margin above 50%, while revenue and EBITDA increased by 17% and 16% respectively.

MTN Rwanda and MTN Swaziland recorded strong revenue growth of 34% and 33% respectively, based on similar increases in subscriber bases. This has translated into an improved EBITDA margin of 53% for MTN Rwanda, while Swaziland recorded an exceptional EBITDA margin of 55%. The new operations being MTN Côte d’Ivoire, MTN Zambia, Mascom (Botswana), MTN Congo Brazzaville and Irancell contributed a combined R954 million to Group revenue and R406 million to Group EBITDA, representing 3,5% and 3,6% of the Group’s revenue and EBITDA respectively.

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BALANCE SHEET


The total assets for the Group increased by R15 billion to R44,8 billion at 31 December 2005 from a balance of R29,7 billion at 31 March 2005, as adjusted for the implementation of IFRS. This increase is mainly due to acquisitions concluded during the nine-month period, explained below. The closing balance sheet has also been affected by the South Africa rand weakening by 5% against the Nigerian naira; the value of the assets and liabilities of MTN Nigeria reflected in South African rand weakening would have therefore increased by 5% during the period.

The MTN Group balance sheet has changed significantly during the period due to the acquisition of operations in Côte d’Ivoire, Zambia, Botswana, Iran and the Republic of Congo. These acquisitions have had a significant impact on the balance sheet of the Group, resulting in a cash outflow of R6,2 billion, significant increases in intangible assets and increases in long-term borrowings.

Irancell has acquired the second GSM licence in Iran of EUR 300 million. The licence has been capitalised by Irancell and is amortised over the initial expected licence period of 15 years. In addition, the licence conditions specify that certain minimum fees, based on revenues, are guaranteed and will be paid annually. We believe these future fees do not meet the definition of a liability as they are not at present nonexecutory unconditional obligations. They become an obligation in the year in which they are due, as specified in the licence agreement.

Accordingly, Irancell has not raised a liability in this regard, nor included these fees as part of intangible assets. The gross value of these fees guaranteed by Irancell over 15 years is R39,2 billion at an exchange rate of 1 436 Iranian rials per rand, of which R0,5 billion will be due in the first year of operation, R1,4 billon in the second year of operation, R5,2 billion from the third to the fifth years of operation and R32,1 billion in the following years. The discounted obligation is R8,3 billion.

The Irancell agreements specify that 21% of the equity in Irancell should be listed during 2008/09. It should be assumed that the Group’s shareholding will dilute proportionately to 38,7% when the listing occurs. Terms and conditions are still to be determined.

The conditions of the licence issued to MTN Zambia specify that 10% of the equity of MTN Zambia should be transferred to local shareholders. This is expected to be completed during the 2006 financial year.

Table 8: Balance sheet analysis

   
Total
31 December
2005
Rm
   
South Africa
31 December
2005
Rm
Nigeria
31 December
2005
Rm
Other operations
31 December
2005
Rm
   
Total
31 March
2005
Rm
 
% change
Non-current assets  
31 136
   
7 315
13 778
10 043
   
19 151
 
63
Tangible assets  
20 676
   
6 740
11 347
2 589
   
15 787
 
31
Intangible assets (including goodwill)  
6 707
   
362
1 188
5 157
   
1 879
 
257
Other non-current assets  
3 753
   
213
1 243
2 297
   
1 485
 
153
Current assets  
13 676
   
7 105
3 968
2 603
   
10 579
 
29
Bank balances and security cash deposits  
7 560
   
2 582
3 341
1 637
   
6 429
 
18
Other current assets  
6 116
   
4 523
627
966
   
4 150
 
47

 
   


   
 
Total assets  
44 812
   
14 420
17 746
12 646
   
29 730
 
51

 
   


   
 
Capital, reserves and minority interests  
23 096
   
5 788
11 284
6 024
   
18 416
 
25
Non-current liabilities  
9 765
   
2 152
3 860
3 753
   
3 715
 
163
Long-term liabilities  
8 912
   
1 453
3 860
3 599
   
3 019
 
195
Deferred taxation  
853
   
699
154
   
696
 
23
Current liabilities  
11 951
   
6 480
2 602
2 869
   
7 599
 
57
Other  
10 851
   
6 083
2 483
1 974
   
7 378
 
47
Interest-bearing  
1 100
   
397
119
895
   
221
 
398

 
   


   
 
Total equity and liabilities  
44 812
   
14 420
17 746
12 646
   
29 730
 
51

 
   


   
 

Table 9: Acquisition of new operations

Impact of new acquisitions  
Total
Rm
   
MTN
Côte d’Ivoire
Rm
   
MTN Zambia
Rm
   
Mascom
Rm
   
MTN Congo
Brazzaville
Rm
   
Irancell
Rm
Loans receivable  
1 748
   
   
   
   
   
1 748
Net asset value  
1 892
   
278
   
4
   
253
   
224
   
1 133
– Property, plant and equipment  
965
   
621
   
85
   
172
   
87
   
– Intangible assets  
1 964
   
602
   
14
   
93
   
122
   
1 133
– Other assets  
383
   
198
   
53
   
80
   
52
   
– Liabilities  
(1 430)
   
(1 143)
   
(148)
   
(92)
   
(47)
   
Goodwill  
2 662
   
1 256
   
343
   
593
   
470
   
Minorities  
136
   
136
   
   
   
   

 
   
   
   
   
   
Cash outflow  
6 166
   
1 398
   
347
   
846
   
694
   
2 881

 
   
   
   
   
   
Shareholding  
   
51%
   
100%
   
44%
   
100%
   
49%

 
   
   
   
   
   

Property, plant and equipment

Property, plant and equipment has increased by R4,9 billion during the nine months ended 31 December 2005. The acquisitions of MTN Côte d’Ivoire, MTN Zambia, Mascom and MTN Congo Brazzaville have resulted in property, plant and equipment at a fair value of R1 billion being added to the Group’s balance sheet. Capital expenditure for the nine months ended 31 December 2005 amounted to R6,7 billion compared to R7,6 billion for the period ended 31 March 2005, with 57% of the expenditure relating to continued network roll out in Nigeria. Capital expenditure in South Africa was R2,3 billion during the period with 3G roll out contributing to capital expenditure incurred.

Intangible assets

Intangible assets have increased by R4,8 billion due to the acquisition of operations.

IFRS 3: Business Combinations requires that all intangible assets be fair valued on acquisition. This has resulted in the recognition of subscriber bases of R351 million which are amortised over their estimated useful lives of three to five years. In addition, licences to the value of R1,6 billion have been recognised, including R1,1 billion representing 49% of the Irancell licence.

Goodwill of R2,7 billion, representing the difference between the purchase consideration and the fair value of the assets and liabilities of the operations acquired, has been recognised. R1,3 billion represents goodwill on the acquisition of the 51% interest in MTN Côte d’Ivoire while the investments in MTN Zambia, Mascom and MTN Congo Brazzaville comprise the balance. In accordance with IAS 38 Intangible Assets, goodwill is not amortised but tested annually for impairment and no impairment provision was considered necessary for the current financial period in respect of any of the Group’s cash generating units. Loans and other non-current receivables have increased by R1,7 billion due to loans to Irancell, shareholders in Irancell and Mascom. Deferred income tax assets have increased by R0,6 billion largely due to the further recognition of the deferred tax asset by MTN Nigeria.

Current assets

The majority of the increase in current assets is due to higher trade receivables in MTN South Africa of R1,3 billion from higher trading activity. The new acquisitions have had a limited impact of R0,2 billion on the increase in current assets.

Despite the cash outflow of R6,2 billion for the acquisition of new operations and capital expenditure of R6,7 billion the Group’s cash balance has increased by R1,1 billion to R7,6 billion. These balances include securitised cash deposits in MTN Nigeria of R0,3 billion.

Cash balances in MTN South Africa decreased by R1,8 billion to R2,4 billion due to cash outflows for dividends. This was offset by the strong cash generation of the operation. Cash in MTN Nigeria increased by R1,8 billion while our portion of the cash balance in Irancell is R0,5 billion.

Table 10: Analysis of capital expenditure (including software)

 
December
2005
Rm
March
2005
Rm
% change
Capital
commitment
December 2006
Rm
MTN South Africa
2 256
1 745
29
3 641
MTN Nigeria
3 849
5 518
(30)
5 321
MTN Cameroon
198
194
2
195
MTN Uganda
123
88
40
162
MTN Rwanda
34
11
209
37
MTN Swaziland
12
17
(29)
17





Existing operations at 1 April 2005
6 472
7 573
(15)
9 373





MTN Côte d’Ivoire (6 months)
180
353
MTN Zambia (5 months)
4
401
MTN Congo Brazzaville (1 month)
1
Irancell
2 764
Mascom (Botswana) (3 months)
68
50





New operations
253
3 568
Head office companies
7
3





Total
6 732
7 576
(11)
12 941





Interest-bearing liabilities

Interest-bearing debt in the Group increased by R5,4 billion with MTN South Africa’s debt increasing by R3,5 billion. MTN Nigeria’s interest-bearing borrowings increased by R0,8 billion to fund network expansion during the period.

Net cash of R3,2 billion at 31 March 2005 reversed to net debt of R1 billion at 31 December 2005 due to the impact of acquisitions, comprising long-term borrowings of R7,5 billion, short-term borrowings of R1 billion, cash and cash equivalents of R7,2 billion and securitised letters of credit of R0,3 billion.

Other liabilities

Other liabilities consist of trade payables, accruals, taxation, provisions and revenue received in advance. These liabilities have increased by R4,4 billion and include the discounted fair value of put options held by minority shareholders of certain subsidiaries of R1,4 billion. MTN South Africa’s tax liabilities have increased by R0,8 billion as R1billion of tax was only paid in January 2006. Trade creditors increased by R1,1 billion following heightened activity during the festive season in South Africa. Other current liabilities increased due to the inclusion of the new operations.

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CASH FLOW


Cash flow from operating activities

The MTN Group generated cash from operations of R11,4 billion for the nine months, a strong performance compared to R12,3 billion for the previous financial year. Payments of income tax decreased from R1,9 billion to R1,1 billion, the majority of which can be attributed to the South African operation where tax paid decreased by R0,9billion as the payment was only made in January 2006.

Free cash flow

All the Group’s established operations reported positive free cash flows. As Irancell is not yet operational, negative free cash flows, mainly representing the licence payment were reported. Merger and acquisition activity has resulted in cash outflows of R6,2 billion.

Financing activities

Cash of R5,4 billion was generated by financing activities. South Africa raised R2,4 billion.

Table 11: MTN Group cash flow

 
Total
December
2005
Rm
South Africa
December
2005
Rm
Nigeria
December
2005
Rm
Other operations
December
2005
Rm
Consolidation
December
2005
Rm
Total
March
2005
Rm
Cash generated from operations
11 369
4 129
5 008
2 232
12 303
Cash outflow for dividends paid
(1 081)
(5 088)
4 007
(680)
Cash outflow for interest and tax
(1 127)
(799)
(194)
(134)
(2 110)







Net cash/(used in) from operating activities
9 161
(1 758)
4 814
2 098
4 007
9 513







Cash flows from investing activities
*Cash outflows for property, plant and equipment
(6 732)
(2 261)
(3 849)
(622)
(7 562)
Other investing acitivities
(6 190)
(2 100)
86
(169)
(4 007)







Net cash used in investing activities
(12 922)
(4 361)
(3 763)
(791)
(4 007)
(7 562)







Net cash generated from financing activities
5 357
2 429
985
1 943
222







Net increase/(decrease) in cash and cash equivalents
1 596
(3 690)
2 036
3 250
2 173







*Including software

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CAPITAL COMMITMENTS


The Group is expected to spend significant amounts on capital expenditure in the next financial year. MTN Nigeria has approved commitments of R5,3 billion, MTN South Africa has approved commitments of R3,6 billion while our share of the commitments for Irancell’s network roll out is R2,8 billion. It is expected that MTN Nigeria and Irancell will only use between 80% and 85% of their respective commitments due to anticipated price reductions and project prioritisation. These commitments will be financed through cash flows from operations and raising debt facilities in greenfield operations where cash flows are not expected to be sufficient.

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ACCOUNTING POLICIES AND INTERNATIONAL FINANCIAL REPORTING STANDARDS


IFRS compliance

In terms of the JSE Listings Requirements, compliance with IFRS is required for the financial years beginning on or after 1 January 2005.

Accordingly, Group financial statements for the nine months ended 31 December 2005, are our first IFRS compliant financial statements.

However, MTN had in the previous years already complied with the following SA GAAP standards which have identical requirements to corresponding IFRS standards with effect from 17 July 2000:
• IFRS 3 (AC 140) (issued 2004) – Business Combinations
• IAS 36 (AC 128) (revised 2004) – Impairment of Assets
• IAS 38 (AC 129) (revised 2004) – Intangible Assets
• IAS 27 (AC 132) (revised 2004) – Consolidation and Separate Financial Statements

Effects of transition from SA GAAP to IFRS

The effect of the transition to IFRS has not been significant. The impact on disclosed profit before tax for the 12 months ended 31 March 2005 was a reduction of R70 million. This comprised:

• A reduction of R78 million for depreciation of property, plant and equipment due to the componentisation, review of residual values and useful lives, implementation of decommissioning provisions and correction of depreciation commencement dates.
• An increase of R26 million due to the change of the functional currency of MTN Mauritius and the resulting exchange gains and losses on the revaluation of its dollar-denominated assets and liabilities being accounted for in the income statement.
• A reduction of R17 million due to the adoption of IFRS 2 (Share-based payments).
• A reduction of R1 million for other differences, the most significant being adjustments to operating leases as these are now accounted for on the straight line basis.

The most significant adjustment to the balance sheet at 31 March 2005 was the reclassification of the foreign currency translation reserve (FCTR) from other reserves to retained earnings as the company elected to set the FCTR to zero as part of the transitional elections.

Early Adoption of IAS 21

The Group has elected to early adopt IAS 21 (revised). This has been changed to allow exchange gains and losses on shareholder loans which are considered part of the net investment in a foreign operation and are denominated in a third-party currency to be reflected directly in equity rather than the income statement.

This treatment is similar to the treatment of these loans when the functional currency of Mauritius was USD prior to the implementation of IFRS. As a result of this early adoption, a translation gain of R79 million, which was reflected in the first six months, was no longer recognised.

New accounting standards and IFRIC interpretations

The accounting standards and IFRIC interpretations below have been published and are mandatory for periods beginning on or after 1 January 2006. These standards are not expected to have an impact on Group’s results:

• IFRS 6: Exploration for and Evaluation of Mineral Resources
• IFRIC 5: Rights to interest arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
• IFRIC 6: Liabilities from participating in a Specific Market – Waste Electrical and Electronic Equipment
• IFRIC 7: Applying the restatement approach under the IAS 29: Financial Reporting in Hyperinflationery Economics
• Circular 2/2006, clarification of certain sections of the Financial Intelligence Centre Act

IFRIC 4: Determining whether an asset contains a lease, will be applicable. The Group will apply IFRIC 4 in the 2006 financial year and this is not expected to change the accounting of any of the Group’s current arrangements.

IFRS 7: Financial Instruments: Disclosure will be applied from January 2006. This is expected to result in additional disclosure regarding market risk as well as capital disclosures.

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DIVIDENDS

MTN building
A dividend of 65 cents per share, in line with the dividend declared in June 2005, has been declared. The conservative dividend cover policy of five to six times has not been altered as the Group continues to explore expansion opportunities.

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CONCLUSION


The Group’s performance over the nine months was positive relative to the comparable period in the previous financial year. The results were, however, impacted by the tariff pressure experienced in Nigeria while the weakening of the rand against certain functional currencies of the operations had a positive impact on results.

Despite significant cash outflows due to acquisitions during the period the Group’s net debt only increased by R4,2 billion. The net debt/equity ratio of 5% and net debt/EBITDA ratio annualised of 7% indicate that the Group still has significant capacity for further expansion. The acquisitions have positioned the Group well for additional growth in future.

IFRS impacted and will continue to impact the reported financial performance of the Group.

Rob Nisbet signature

Rob Nisbet
Group Finance Director
22 March 2006


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