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					                The Alphen Angle is an electronic publication of
  Managing      Alphen Asset Management
                22 January 2010                                                              Print Friendly
               MTN: Unloved and good value

               After six years of strongly outperforming the JSE All-Share index (by more than 400% since
               2002), the share price of Mobile Telephone Networks (MTN) has had a tough time of late. As
               seen in the chart below, the counter has underperformed its respective benchmark by 15.5% in
               2009 and 10% in the first few weeks of 2010. In today’s Alphen Angle we discuss some reasons
               for the share’s underperformance and how this affects our investment stance.
Philipp Wörz

               Source: I-NET, Alphen Asset Management

               Once the darling of South Africa’s investment world, Africa’s largest operator of wireless
               telecommunication services, which has 21 operations across Africa and the Middle East, is no
               longer in vogue. The days of market commentators shouting for a minimum takeout price of
               R200 per share, when M&A talks with Indian suitors first surfaced in 2008 are long gone and
               new realities stare investors in the face. Without going into detail, in our view, there are a few
               pertinent issues currently facing the company and hence its short to medium term earnings
               outlook and share price.

               First up is the negative impact the strong South African Rand is having on reported earnings. In
               2009 MTN will have earned 70% - 75% of EBITDA outside South Africa’s borders and the
               strong rand in 2009 will have, therefore, put a significant dent into 2009’s profitability levels. To
               illustrate, the chart below shows the performance of the Nigerian Naira versus the rand since
               2006. As MTN earns around 55% of its non-SA EBITDA in the Nigerian market, this exchange
               rate cross is of particular importance. As can be seen below, the rand appreciated by an
               average of 23.4% from 2008 to 2009.

22 January 2010

Source: I-NET, Alphen Asset Management

The second factor currently weighing in on the stock are developments at MTN’s Nigerian
operations, particularly the recently announced SIM registration requirement in Nigeria, which
if the South African experience with RICA is anything to go by – MTN SA lost 800,000
subscribers in the 3rd quarter of 2009 following the introduction of RICA - will impact short to
medium term subscriber growth in that market. In our view, however, the counter argument
would be that as MTN is the market leader in Nigeria with an unrivalled network and
distribution channel, it should be the biggest benefactor as it is best positioned to actually
register its existing, new and potentially competitors’ subscribers. SIM registration or not, the
Nigerian market, currently 36% penetrated, has the potential to grow from its current size of
around 50 million subscribers to around 90 million in three years time. For sure the new
legislation may delay subscriber uptake in the short term, but unless all our formal
investment/financial education and experience is fatally flawed, a company’s value is not
determined on a one year view.

Closely followed are the changes that will be made to Nigerian, South African and Ugandan
interconnect regimes putting pressure on margins in those markets, all else being equal. In
Nigeria’s case, the interconnect rate for existing players will be reduced from N12 to N8
while new entrants will receive N10.12 per minute. As MTN Nigeria is a net receiver of
interconnect this is a negative development.

An ever increasingly competitive environment in Ghana and South Africa, the possibility of
higher prolonged capital expenditure and political uncertainty in some of MTN’s operations
(Afghanistan, Yemen, Iran being prime examples) are other factors that scare the market and
currently cast a shadow over the share.

We are aware the market knows more than we do but are of a view that the current share
price has more than incorporated all the bad news and its underperformance is therefore
                          22 January 2010

                            A key driver of MTN’s future valuation and therefore share price performance will be the
                            company’s ability to substantially increase its free cash flow generation by reducing annual
                            capital expenditure on its network and thanks to its un-geared balance sheet, dividend
                            payouts. A 2008 dividend of R1.80 could easily grow to R8 - R10 in three years time. Whilst
                            a clear tangible catalyst is lacking to get the share price moving again, its valuation should

                            At Alphen, we currently have a preference for stocks such as MTN, which are trading at
                            attractive valuation levels (PE, EV/EBITDA, Price to Book, Dividend Yield) relative to their
                            own history and are already discounting “not so good times” ahead. This can hardly be said
                            about some of the resource and other “earnings leap of faith” companies on the JSE.

                       ADRIAN CLAYTON                                                     SHAUN LE ROUX                                            NEELS VAN SCHAIK
                       MARK SEYMOUR                                                       PHILIPP WÖRZ                                                    MARK CLIFF
Alphen                 GREG FLASH
Asset                If you have any queries regarding the above commentary please contact Mark Cliff on 021 799 8069 or 083 700 3600 or

is an authorised
                     PLEASE NOTE: While every effort has been made to ensure that the information contained herein is correct, Alphen Asset Management cannot be held
Financial services   responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of Alphen Asset Management. Views and
provider             opinions expressed herein may change with market conditions and should not be used in isolation.

                                                 Alphen Asset Management is a subsidiary of PSG Fund Management Holdings (Pty) Limited

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