South Africa: MTN to Jack Up Networks as Congestion Bites

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Business Day (Johannesburg)

29 August 2008
Posted to the web 29 August 2008

Lesley Stones
Johannesburg

CELLULAR operator MTN is making heavy investment in its networks a top priority, aiming to sink almost R25bn into its infrastructure by the end of this year.

Congestion on its networks in Nigeria has cost it market share, and its operations in other countries also risk losing ground because they are unable to keep pace with demand, CEO Phuthuma Nhleko said yesterday.

Since its subscribers have soared 53% to 74,1-million compared with 43,3-million a year ago, its operations are taking strain.

MTN has approved capital expenditure of R30,5bn for the year, with R7bn earmarked for jacking up its network in SA and R13bn for Nigeria. So far it has commissioned various projects costing R24,5bn, but it must step up its pace as it has only spent R10,3bn in the six months to June 30.

MTN's interim results issued yesterday showed no slowdown in its growth. Revenue of R46bn was up 35% from R34,2m a year ago, although profit after tax rose a more modest 10,5% from R6,3bn to R6,7bn. That was largely because the end of a tax holiday in Nigeria saw its overall tax rate spike to a hefty 44%. That should stabilise to somewhere under 40%, Nhleko said.

Diluted earnings a share rose 14,1% from 286,cc to 326,6c.

One analyst said the results were "great" and the future looked even better. "The important thing is that they are well positioned for growth because they are investing ahead of their competitors, so they will gain market share while their competitors will sit with congestion." The slow growth in profit after tax was not a serious worry, he said, as the tax spike was an anomaly for the year.

Nhleko said little about MTN's abortive effort to tie up with India's Bharti or Reliance Telecoms earlier this year, and said fresh speculation that it was considering entering South America was the result of "fertile imaginations."

Mergers or acquisitions were important to diversify its earnings and risks, and to gain economies of scale, he said, and MTN was always looking for opportunities. "We haven't looked at South America. Africa, the Middle East and most probably further east is the most logical expansion area for us."

Not all existing cellular operators would survive, and MTN intended to be on the acquisitive end of the inevitable mergers, he said.

One analyst said MTN would continue to expand in Africa by picking up small operators.

In SA, profit margin on earnings before interest, tax, depreciation and amortisation (Ebitda) fell from 35,5% to 33,5% as it made amends for a previous lack of investment in network capacity. Nigeria remains its more vigorous growth market, with a revenue of R13,4bn for the interim period generated by 18,5-million users. Yet its activities were stifled by network congestion serious enough for the regulatory authority to fine it $20m and ban it from advertising until it increased its call-carrying capacity.

MTN's operation in Iran produced its first after-tax profit, posting Ebitda of R563m, up from a loss of R181m.

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