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Telecom Egypt Valuation Update 1Q2014..

Ahmed Ramadan
Ahmed Ramadan

The document provides an analyst report on Telecom Egypt (TE) that upgrades the recommendation to Strong Buy based on an expected total return of 37% including a 10% expected dividend yield. It summarizes TE's financial results for FY2013 and 1Q2014, noting revenues increased 10% in FY2013 driven by wholesale revenues but declined 6% in 1Q2014 mainly due to decreases in international carriers revenues. It also discusses TE being offered an integrated telecom license for EGP 2.5 billion and potential opportunities and threats from providing mobile services.

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Valuation Update1 Valuation Update Telecom Egypt (TE) (ETEL.CA) June 19th 2014 Fair Value: EGP 17.29 Recommendation: Strong BuyCurrent Price EGP 13.54 Ahmed Ramadan Ext: 441 Analyst We slightly upgraded our LTFV for TE to EGP 17.29/share from EGP 17.26/share in our last update. Based on an expected total return of 37% including an expected dividend yield of 10%, we revised our recommendation from Buy to Strong Buy. Financial Analysis FY2013 TEs consolidated bottom line increased 13% to record EGP 2,958.6mn in FY2013 compared to EGP 2,619.8mn in FY2012, almost inline with our forecast. The companys consolidated revenues rose 10% to reach EGP 11,293mn in FY2013, 1% lower than our forecast. The increase in the companys top line was driven by a 21% rise in wholesale revenues that reached EGP 6,384.5mn in FY2013. The rise in wholesale revenues in FY2013 was mainly due higher revenues from the international carriers affairs and the international customers & networks business units. International carriers affairs revenues rose 26% to reach EGP 3,142.5mn in FY2013 supported by TEs extensive footprint, customer variety and consistent approach of securing special traffic segments, creating a healthy win-win global environment with the company having bilateral agreements with over 70 international telecom operators, covering 55 countries in five continents. International carriers affairs revenues thus benefited from inbound traffic and associated revenues due to TEs international gateway, geographical footprint and consumer focused approach. International customers & networks revenues increased 45% to EGP 971mn in FY2013 driven by effectively expanding services to almost 100% of all IP traffic from Asia to Europe with the international customers & networks becoming a bigger and more diversified business unit with a growing component of recurring revenues. It is noteworthy that in December 2013, TE signed a USD 12.5mn settlement agreement relating to damages to two submarine cables cut by the B-Elephant tankship earlier during the year. Finally, domestic wholesale business unit revenues rose 8% to reach EGP 2,271.1mn in FY2013 driven by the increase in infrastructure services and international transmission revenues due to a rise in internet utilization. DCF EGP 17.29 Valuation Egyptian Government 80% Free Float 20% Shareholder Structure 2013A 2014E GPM 57.2% 56.7% NPM 26.2% 26.0% Debt/Equity - - ROA 9.1% 8.7% ROE 10.4% 10.0% Ratios Reuters code ETEL.CA Sector Telecom Financial Year December Par Value EGP 10 52-week High/Low EGP 17.98/10.90 Avg. Daily Volume 880,298 Avg. Daily Turnover EGP 12,439,731 Paid in Capital EGP 17,070.7mn # of Shares 1,707.1mn Share Data EGX30 Vs. Share Performance 0 2 4 6 8 10 12 14 16 18 Jun 13 Jul13Aug13Sep 13 Oct13 Nov13Dec13 Jan 14Feb14 M ar14Apr14M ay14 EGP - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 ETEL EGX30 Index Share Performance Income Statement (EGP mn) 2012A 2013A 2013E Change Variance Revenues 10,311.2 11,293.0 11,418.4 10% -1% Operating Cost -3,957.3 -4,831.1 -4,885.2 22% -1% Gross Profit 6,353.9 6,461.9 6,533.2 2% -1% SG&A Expenses -2,342.3 -2,623.1 -2,442.6 12% 7% Depreciation & Amortization -1,982.0 -1,694.6 -1,863.5 -15% -9% Other Income/Expenses 1,083.8 1,566.6 1,261.3 45% 24% Net Interest 52.9 42.3 220.2 -20% -81% Net Profit Before Tax 3,166.3 3,753.0 3,708.6 19% 1% Net Taxes -544.5 -792.4 -741.7 46% 7% Minority Interest -2.0 -1.9 -2.2 -2% -14% Net Profit 2,619.8 2,958.6 2,964.6 13% 0% Source: TE & OKAZ Research
Valuation Update2 On the other hand, TEs retail revenues remained more or less flat recording EGP 4,750mn in FY2013. This came as a natural outcome of a 1% decline in home services business unit revenues that reached EGP 2,985.1mn in FY2013 backed by the continuous mobile substitution and the ongoing decline in fixed line call numbers as well as the decrease in home fixed line subscribers that reached 5.72mn, 8% below FY2012. However, home ADSL subscribers rose 23% to reach 1.558mn in FY2013. On the other hand, enterprise solutions business unit revenues grew 2%, reaching EGP 1,764.8mn in FY2013 with enterprise fixed line subscribers inching down 2% to record 1.06mn and enterprise ADSL subscribers rising 12% to 110k. In general, while total fixed line subscribers fell 7% to 6.78mn in FY2013, demand for high quality ADSL internet connections continued to strengthen as TE Datas total ADSL subscribers rose 22% to reach 1.668mn in FY2013, giving TE Data a 63.3% market share. TEs operating costs increased 22% to reach EGP 4,831.1mn in FY2013, representing 43% of consolidated revenues up from 38% in FY2012. This increase came as a result of higher interconnection and infrastructure leasing costs as a result of the 3-year commercial agreements with Vodafone Egypt & Mobinil for the provision of international voice communication and infrastructure services as well as discounts on fixed to mobile calls and international gateway offers in addition to higher wages and salaries due to the annual increase in salaries and the newly structured incentive rewards program with both coming into effect in 1Q2013. The companys gross profit thus rose 2% to EGP 6,461.9mn in FY2013 with the GPM falling from 62% in FY2012 to 57% in FY2013. SG&A expenses increased 12% to reach EGP 2,623.1mn due to the salary restructuring program and the increase in promotional activities while depreciation and amortization expenses fell 15% to EGP 1,694.6mn in FY2013. Investment income from Vodafone Egypt rose by 11% to record EGP 968.6mn in FY2013 compared to EGP 875.5mn in FY2012. Net interest income declined 20% to EGP 42.3mn while net taxes rose 46% to EGP 792.4mn in FY2013. Finally, TEs NPM rose to 26% in FY2013 up from 25% in FY2012. 1Q2014 TEs consolidated bottom line fell 36% to record EGP 549.3mn in 1Q2014 compared to EGP 857.7mn in 1Q2013. The companys consolidated revenues declined 6% to reach EGP 2,609.3mn in 1Q2014 mainly due to a 12% decrease in wholesale revenues that reached EGP 1,372.9mn. The decline in wholesale revenues was driven mainly by an 18% decrease in international Income Statement (EGP mn) 1Q2013 1Q2014 Change Revenues 2,763.3 2,609.3 -6% Operating Cost -1,213.4 -1,156.9 -5% Gross Profit 1,549.9 1,452.3 -6% SG&A Expenses -557.6 -603.3 8% Depreciation & Amortization -439.6 -397.2 -10% Other Income/Expenses 207.2 148.1 -29% Net Finance Income 318.4 100.2 -69% Net Profit Before Tax 1,078.4 700.1 -35% Net Taxes -220.0 -150.1 -32% Minority Interest -0.7 -0.8 12% Net Profit 857.7 549.3 -36% Source: TE & OKAZ Research
Valuation Update3 carriers affairs business unit revenues that recorded EGP 731.3mn in 1Q2014 as a result of the decline in international incoming minutes and international settlement revenue, pricing pressures from regional operators suffering from intensified competition in their own local markets and the effects of illegal traffic. Domestic wholesale business unit revenues decreased by 5% to EGP 544.1mn in 1Q2014 as a result of a continued decline in outgoing international traffic as tourism and business levels remained depressed and slow economic growth reduced business activity related traffic. However, international customers & networks business unit revenues rose 5% to EGP 97.5mn in 1Q2014. On the other hand, TEs retail revenues increased 3% to reach EGP 1,191.2mn in 1Q2014. Home services business unit revenues rose 6% to reach EGP 764.5mn in 1Q2014 as a result of higher growth in home data revenue due to the increase in home ADSL subscribers that rose 25% over 1Q2013 to reach 1.645mn, compensating for the 6% decline in home fixed line subscribers that reached 5.73mn and the corresponding lower home voice revenue. However, enterprise solutions business unit revenues fell 3% to reach EGP 426.8mn in 1Q2014 as slower growth in enterprise data revenue could not offset the decline in enterprise voice revenue. Enterprise fixed line subscribers declined 2% from 1Q2013 to reach 1.06mn in 1Q2014 while enterprise ADSL subscribers rose 12% to reach 112k. TE is currently utilizing fiber models supporting applications and services provided to enterprise subscribers which come into effect with the country beginning to stabilize. In general, while total fixed line subscribers fell 6% from 1Q2013 to 6.79mn in 1Q2014, demand for high quality ADSL internet connections continued to strengthen as TE Datas total ADSL subscribers rose 24% to reach 1.757mn in 1Q2014, giving TE Data a 63.4% market share. TEs operating costs declined 5% to reach EGP 1,156.9mn in 1Q2014 and continued to represent 44% of consolidated revenues. This decline was driven by the decrease in interconnection costs as a result of a decline in the interconnection price with the mobile operators. The companys gross profit thus fell 6% to reach EGP 1,452.3mn in 1Q2014 with the GPM remaining stable at 56%. SG&A expenses increased 8% to reach EGP 603.3mn due to the annual salary increase and the restructured incentive rewards program while depreciation and amortization expenses fell 10% to EGP 397.2mn in 1Q2014. Investment income from Vodafone Egypt declined 32% to record EGP 154.2mn in 1Q2014 compared to EGP 227mn in 1Q2013. Net finance income fell 69% to reach EGP 100.2mn and net taxes declined by 32% to record EGP 150.1mn in 1Q2014. Finally, TEs NPM declined significantly to 21% in 1Q2014 down from 31% in 1Q2013. Integrated Telecom License The Ministry of Communications & Information Technology (MCIT) has offered TE the integrated telecom license without new frequencies to be able to provide mobile services at EGP 2.5bn. TE will depend on local roaming through leasing networks from the mobile operators until offering 4G frequencies in 2016 and there are current negotiations to determine the leasing rate under the supervision of NTRA. According to TE, there is no official obligation on the company to divest its 45% stake in Vodafone Egypt; however TE might sell its stake after acquiring the 4G frequencies in 2016 in order to avoid asset duplication. TE decided to pay the EGP 2.5bn integrated license cost using part of its excess cash which recorded EGP 6.76bn at the end of 1Q2014 and expects to start providing mobile services as early as 3Q2014 targeting to attract 5mn subscribers in the first year.
Valuation Update4 CAPEX reached EGP 226.1mn in 1Q2014 compared to EGP 151mn in 1Q2013 with TE successfully signing a number of network upgrade contracts which are to come into effect in 2Q2014, such CAPEX figures are expected to skyrocket especially if TE is required to pay the EGP 2.5bn integrated license cost as a lump sum this year. Although the cost of a mobile license is usually paid on installments, there is no official agreement that illustrates the payment method until now. 4G Frequencies As mentioned before, and according to NTRA, the 4G frequencies license shall be offered to TE after 2 years from the integrated license offering date, supposedly in 2016. Due to the uncertainty behind such license where there is no exact date or terms for the offering, we did not include it in our forecast. However, we believe that by acquiring the new frequencies, TE will be able to operate its mobile business unit more efficiently through reducing operating costs on the long-run by saving funds it would otherwise pay for leasing networks from mobile operators, in addition to the higher anticipated demand on mobile broadband, which will have the effect of increasing mobile revenues. Finally, it is important to note that we did not include the scenario of selling TEs stake in Vodafone Egypt in our valuation since it is a general assembly decision that will depend on acquiring 4G frequencies. Integrated License SWOT Analysis from TEs Perspective Strengths TE owns the backbone of communications and IT infrastructure in Egypt. TE has a solid client base in voice and data services part of which can be potentially converted to mobile clients. TE can offer a variety of packages and bundles including an integrated package that comprises fixed line, home or enterprise ADSL and mobile services (voice & data). Weaknesses TE does not have its own mobile network and will temporarily depend on mobile operators until offering 4G frequencies. The cost of local roaming may be a subject of dispute between TE and the mobile operators. Opportunities A large and growing population of over 85mn makes Egypt an attractive market for mobile services. Egypt has a young population which ensures better adoption of the latest technologies and value added services. The Egyptian market is evolving both in terms of volume and value added services thus providing telecom players with many growth opportunities.
Valuation Update5 Potential economic growth coinciding with the expected upcoming political stability gives room for heavier mobile usage. Adding 4G frequencies will result in higher demand on mobile broadband. Threats Mobile subscribers in Egypt already exceed 100mn leaving little room for additions thus TE will have to attract subscribers of other mobile operators either through persuading them to convert to TE or through selling them additional lines with the first option being a very difficult task and often results in price wars that significantly reduces profitability and the second option resulting in lower usage per line especially for the additional line. According to the integrated license, mobile operators have the right to provide fixed line services (in return for a cost of EGP 100mn per license) in addition to having their own international gateways (in the case of Mobinil and Vodafone Egypt as Etisalat Misr already has its own international gateway) which will have a negative effect on TEs retail & wholesale revenues if mobile operators decide to acquire such license. The delay in offering 4G frequencies will extend the period of leasing networks from the mobile operators which will be a cost burden on TE with the leasing rate to remain a matter of potential dispute. Financial Forecasts We expect TEs consolidated revenues to grow at a 5-year CAGR of 9% during the forecasted period FY2014-FY2018. Consolidated revenues are expected to decline by 1.5% to record EGP 11,127.6mn in FY2014 affected by the aforementioned decrease in 1Q2014 wholesale revenues. The top line is then expected to increase by a considerable 21% to reach EGP 13,469.9mn in FY2015 backed by the forecasted mobile services revenues. Finally, TEs consolidated revenues are then expected to increase at a declining rate starting FY2016 to reach EGP 17,233.1mn by FY2018. Retail Segment Retail segment revenues are expected to grow at a 5-year CAGR of 12% during the forecasted period FY2014-FY2018, due to the expected addition of the mobile services business unit to the retail segment. While total revenue generated from the home services and enterprise solutions business units together is expected to decline slightly during most of the forecasted period, the mobile services business unit is expected to be the growth driver of retail segment revenues. Due to the expected addition of mobile services, retail segment revenues are expected to account for 49% of TEs top line (excluding other operating revenues) by FY2018 up from 43% in FY2013. By FY2018, mobile services revenues alone are expected to account for 22% of TEs total consolidated revenues (excluding other operating revenues). Wholesale Segment Wholesale segment revenues are expected to grow at a 5-year CAGR of 6% during the forecasted period FY2014-FY2018 with the international carriers affairs business unit revenues expected to rebound from its decline in 1Q2014 starting FY2015. International
Valuation Update6 customers and networks business unit revenues are expected to witness growth during the forecasted period albeit at a much slower rate than FY2013 while domestic wholesale business unit revenues are expected to decline in FY2014 then rebound starting FY2015. Wholesale segment revenues are expected to account for 51% of TEs top line (excluding other operating revenues) by FY2018 down from 57% in FY2013 with international carriers affairs to remain the highest revenue generating business unit almost throughout the forecasted period accounting for 28% of TEs total consolidated revenues (excluding other operating revenues) in FY2018. Investor Table Valuation Our DCF valuation was based on the companys projected free cash flow to firm (FCFF) during the period from FY2014 to FY2018. FCFF during that period was discounted at multiple WACCs that range between 18.38% and 18.53%, using a of 0.77 and a terminal growth rate of 3%. The DCF method led to a fair value of EGP 17.29/share. Based on the shares estimated total return of 37% including an expected dividend yield of 10%, we revised our recommendation from Buy to Strong Buy. Sensitivity Analysis Investor Analysis 2013A 2014E 2015F 2016F Revenues (EGP mn) 11,293.0 11,127.6 13,469.9 15,000.4 Revenue Growth 10% -1% 21% 11% Net Profit (EGP mn) 2,958.6 2,895.0 3,219.5 3,711.7 Net Profit Growth 13% -2% 11% 15% EPS (EGP) 1.73 1.70 1.89 2.17 DPS (EGP) 1.00 1.30 1.40 1.50 Dividend Yield 7.4% 9.6% 10.3% 11.1% P/E 7.8 8.0 7.2 6.2 P/BV 0.8 0.8 0.8 0.7 Source: TE & OKAZ Research TerminalGrowth Cost of Equity 17% 18% 19% 20% 21% 1% 19.00 17.97 17.04 16.20 15.45 2% 19.18 18.11 17.16 16.31 15.54 3% 19.36 18.26 17.29 16.42 15.63 4% 19.56 18.43 17.43 16.53 15.73 5% 19.78 18.61 17.58 16.66 15.84 Source: OKAZ Research
Valuation Update7 Financials & Ratios Income Statement (EGP mn) 2013A 2014E 2015F 2016F Revenues 11,293.0 11,127.6 13,469.9 15,000.4 Operating Cost -4,831.1 -4,822.9 -6,248.7 -6,815.8 Gross Profit 6,461.9 6,304.7 7,221.2 8,184.6 SG&A Expenses -2,623.1 -2,630.7 -3,190.8 -3,556.1 Depreciation & Amortization -1,694.6 -1,697.8 -1,698.4 -1,720.1 Other Income/Expenses 1,566.6 1,651.6 1,738.7 1,772.4 Net Interest 42.3 45.7 14.8 29.0 Net Profit Before Tax 3,753.0 3,673.5 4,085.3 4,709.8 Net Taxes -792.4 -775.6 -862.6 -994.4 Minority Interest -1.9 -2.9 -3.2 -3.7 Net Profit 2,958.6 2,895.0 3,219.5 3,711.7 Balance Sheet (EGP mn) 2013A 2014E 2015F 2016F Cash & Equivalents 5,761.6 2,564.3 3,887.9 5,701.0 Accounts Receivable 3,386.0 3,343.2 4,055.0 4,519.2 Inventories 458.6 438.4 531.8 592.7 Other Current Assets 1,424.1 1,425.0 1,728.4 1,926.2 Total Current Assets 11,030.4 7,770.9 10,203.1 12,739.0 Net Fixed Assets 11,243.4 12,045.7 11,097.2 10,127.2 Other Long Term Assets 10,364.5 13,414.0 13,394.0 13,379.0 Total Assets 32,638.3 33,230.5 34,694.3 36,245.1 Short Term Debt 107.2 82.2 62.2 52.2 Accounts Payable 636.2 657.7 797.7 889.0 Other Current Liabilities 2,604.3 2,630.7 3,190.8 3,556.1 Total Current Liabilities 3,347.7 3,370.6 4,050.8 4,497.3 Long Term Debt 475.3 425.3 375.3 325.3 Other Long Term Liabilities 499.0 439.7 439.7 439.7 Total Liabilities 4,322.0 4,235.6 4,865.8 5,262.3 Total Common Equity Including Minority 28,316.3 28,995.0 29,828.5 30,982.9 Total Liabilities and Equity 32,638.3 33,230.5 34,694.3 36,245.1 Ratios 2013A 2014E 2015F 2016F Liquidity Current Ratio 3.3 2.3 2.5 2.8 Quick Ratio 3.2 2.2 2.4 2.7 Efficiency Accounts Receivable Turnover 3.3 3.3 3.3 3.3 Average Collection Period 109 110 110 110 Fixed Assets Turnover 1.0 0.9 1.2 1.5 Debt Debt Ratio 0.1 0.1 0.1 0.1 Profitability Revenue Growth 9.5% -1.5% 21.0% 11.4% GPM 57.2% 56.7% 53.6% 54.6% Net Profit Growth 12.9% -2.2% 11.2% 15.3% NPM 26.2% 26.0% 23.9% 24.7% ROA 9.1% 8.7% 9.3% 10.2% ROE 10.4% 10.0% 10.8% 12.0% Source: TE & OKAZ Research
Valuation Update8 Recommendation Guidelines The Fair Value calculation is mainly based upon absolute valuation methodologies; DCF, WEV and/or NAV, it can sometimes include relative valuation methodologies (multiples). Fair Value Recommendation Sell < 020% > Hold 035% > Buy 20%Strong Buy 35% Our rating system is based on estimated total return which is calculated using expected price appreciation/depreciation as well as expected cash dividend distributions during the coming 12-months. Rating
Valuation Update9 OKAZ Stockbrokers & Investments on behalf of itself has prepared this publication, solely for its internal use and for the information of its clients. This publication is not intended for use as an invitation, offer or solicitation for the purchase and/or sale of any financial instrument/tool. The information contained herein was presented on a best effort basis regarding its accuracy and completeness and is subject to change without notice. Accordingly OKAZ Stockbrokers and Investments along with any member of its staff DOES NOT accept any liability whatsoever for any direct and or indirect loss resulting from the use of this publication or its content. Copyright OKAZ Stockbrokers & Investments. All rights reserved. No part of this publication may be transmitted in any form or means without prior consent. Disclaimer Sales Maher Farahat maher@okazinvest.com Walid Abd-El-Maguid walid@okazinvest.com Samar Soliman samar@okazinvest.com Nesma El Sebaay nelsebaay@okazinvest.com OKAZ Stockbrokers & Investments Head Office 35, Emad El-Din St., Cairo Tel: 202-25914741 / 25918955 / 25895321 Fax: 202-25891499 www.okazinvest.com Enas Mohamed Senior Financial Analyst enas@okazinvest.com Nirvana Haggagy, CPM Administrator research@okazinvest.com Research Sherif El Essaily, MBA Head of Research selessaily@okazinvest.com Ahmed Ramadan Financial Analyst asayed@okazinvest.com

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Telecom Egypt Valuation Update 1Q2014..

  • 1. Valuation Update1 Valuation Update Telecom Egypt (TE) (ETEL.CA) June 19th 2014 Fair Value: EGP 17.29 Recommendation: Strong BuyCurrent Price EGP 13.54 Ahmed Ramadan Ext: 441 Analyst We slightly upgraded our LTFV for TE to EGP 17.29/share from EGP 17.26/share in our last update. Based on an expected total return of 37% including an expected dividend yield of 10%, we revised our recommendation from Buy to Strong Buy. Financial Analysis FY2013 TEs consolidated bottom line increased 13% to record EGP 2,958.6mn in FY2013 compared to EGP 2,619.8mn in FY2012, almost inline with our forecast. The companys consolidated revenues rose 10% to reach EGP 11,293mn in FY2013, 1% lower than our forecast. The increase in the companys top line was driven by a 21% rise in wholesale revenues that reached EGP 6,384.5mn in FY2013. The rise in wholesale revenues in FY2013 was mainly due higher revenues from the international carriers affairs and the international customers & networks business units. International carriers affairs revenues rose 26% to reach EGP 3,142.5mn in FY2013 supported by TEs extensive footprint, customer variety and consistent approach of securing special traffic segments, creating a healthy win-win global environment with the company having bilateral agreements with over 70 international telecom operators, covering 55 countries in five continents. International carriers affairs revenues thus benefited from inbound traffic and associated revenues due to TEs international gateway, geographical footprint and consumer focused approach. International customers & networks revenues increased 45% to EGP 971mn in FY2013 driven by effectively expanding services to almost 100% of all IP traffic from Asia to Europe with the international customers & networks becoming a bigger and more diversified business unit with a growing component of recurring revenues. It is noteworthy that in December 2013, TE signed a USD 12.5mn settlement agreement relating to damages to two submarine cables cut by the B-Elephant tankship earlier during the year. Finally, domestic wholesale business unit revenues rose 8% to reach EGP 2,271.1mn in FY2013 driven by the increase in infrastructure services and international transmission revenues due to a rise in internet utilization. DCF EGP 17.29 Valuation Egyptian Government 80% Free Float 20% Shareholder Structure 2013A 2014E GPM 57.2% 56.7% NPM 26.2% 26.0% Debt/Equity - - ROA 9.1% 8.7% ROE 10.4% 10.0% Ratios Reuters code ETEL.CA Sector Telecom Financial Year December Par Value EGP 10 52-week High/Low EGP 17.98/10.90 Avg. Daily Volume 880,298 Avg. Daily Turnover EGP 12,439,731 Paid in Capital EGP 17,070.7mn # of Shares 1,707.1mn Share Data EGX30 Vs. Share Performance 0 2 4 6 8 10 12 14 16 18 Jun 13 Jul13Aug13Sep 13 Oct13 Nov13Dec13 Jan 14Feb14 M ar14Apr14M ay14 EGP - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 ETEL EGX30 Index Share Performance Income Statement (EGP mn) 2012A 2013A 2013E Change Variance Revenues 10,311.2 11,293.0 11,418.4 10% -1% Operating Cost -3,957.3 -4,831.1 -4,885.2 22% -1% Gross Profit 6,353.9 6,461.9 6,533.2 2% -1% SG&A Expenses -2,342.3 -2,623.1 -2,442.6 12% 7% Depreciation & Amortization -1,982.0 -1,694.6 -1,863.5 -15% -9% Other Income/Expenses 1,083.8 1,566.6 1,261.3 45% 24% Net Interest 52.9 42.3 220.2 -20% -81% Net Profit Before Tax 3,166.3 3,753.0 3,708.6 19% 1% Net Taxes -544.5 -792.4 -741.7 46% 7% Minority Interest -2.0 -1.9 -2.2 -2% -14% Net Profit 2,619.8 2,958.6 2,964.6 13% 0% Source: TE & OKAZ Research
  • 2. Valuation Update2 On the other hand, TEs retail revenues remained more or less flat recording EGP 4,750mn in FY2013. This came as a natural outcome of a 1% decline in home services business unit revenues that reached EGP 2,985.1mn in FY2013 backed by the continuous mobile substitution and the ongoing decline in fixed line call numbers as well as the decrease in home fixed line subscribers that reached 5.72mn, 8% below FY2012. However, home ADSL subscribers rose 23% to reach 1.558mn in FY2013. On the other hand, enterprise solutions business unit revenues grew 2%, reaching EGP 1,764.8mn in FY2013 with enterprise fixed line subscribers inching down 2% to record 1.06mn and enterprise ADSL subscribers rising 12% to 110k. In general, while total fixed line subscribers fell 7% to 6.78mn in FY2013, demand for high quality ADSL internet connections continued to strengthen as TE Datas total ADSL subscribers rose 22% to reach 1.668mn in FY2013, giving TE Data a 63.3% market share. TEs operating costs increased 22% to reach EGP 4,831.1mn in FY2013, representing 43% of consolidated revenues up from 38% in FY2012. This increase came as a result of higher interconnection and infrastructure leasing costs as a result of the 3-year commercial agreements with Vodafone Egypt & Mobinil for the provision of international voice communication and infrastructure services as well as discounts on fixed to mobile calls and international gateway offers in addition to higher wages and salaries due to the annual increase in salaries and the newly structured incentive rewards program with both coming into effect in 1Q2013. The companys gross profit thus rose 2% to EGP 6,461.9mn in FY2013 with the GPM falling from 62% in FY2012 to 57% in FY2013. SG&A expenses increased 12% to reach EGP 2,623.1mn due to the salary restructuring program and the increase in promotional activities while depreciation and amortization expenses fell 15% to EGP 1,694.6mn in FY2013. Investment income from Vodafone Egypt rose by 11% to record EGP 968.6mn in FY2013 compared to EGP 875.5mn in FY2012. Net interest income declined 20% to EGP 42.3mn while net taxes rose 46% to EGP 792.4mn in FY2013. Finally, TEs NPM rose to 26% in FY2013 up from 25% in FY2012. 1Q2014 TEs consolidated bottom line fell 36% to record EGP 549.3mn in 1Q2014 compared to EGP 857.7mn in 1Q2013. The companys consolidated revenues declined 6% to reach EGP 2,609.3mn in 1Q2014 mainly due to a 12% decrease in wholesale revenues that reached EGP 1,372.9mn. The decline in wholesale revenues was driven mainly by an 18% decrease in international Income Statement (EGP mn) 1Q2013 1Q2014 Change Revenues 2,763.3 2,609.3 -6% Operating Cost -1,213.4 -1,156.9 -5% Gross Profit 1,549.9 1,452.3 -6% SG&A Expenses -557.6 -603.3 8% Depreciation & Amortization -439.6 -397.2 -10% Other Income/Expenses 207.2 148.1 -29% Net Finance Income 318.4 100.2 -69% Net Profit Before Tax 1,078.4 700.1 -35% Net Taxes -220.0 -150.1 -32% Minority Interest -0.7 -0.8 12% Net Profit 857.7 549.3 -36% Source: TE & OKAZ Research
  • 3. Valuation Update3 carriers affairs business unit revenues that recorded EGP 731.3mn in 1Q2014 as a result of the decline in international incoming minutes and international settlement revenue, pricing pressures from regional operators suffering from intensified competition in their own local markets and the effects of illegal traffic. Domestic wholesale business unit revenues decreased by 5% to EGP 544.1mn in 1Q2014 as a result of a continued decline in outgoing international traffic as tourism and business levels remained depressed and slow economic growth reduced business activity related traffic. However, international customers & networks business unit revenues rose 5% to EGP 97.5mn in 1Q2014. On the other hand, TEs retail revenues increased 3% to reach EGP 1,191.2mn in 1Q2014. Home services business unit revenues rose 6% to reach EGP 764.5mn in 1Q2014 as a result of higher growth in home data revenue due to the increase in home ADSL subscribers that rose 25% over 1Q2013 to reach 1.645mn, compensating for the 6% decline in home fixed line subscribers that reached 5.73mn and the corresponding lower home voice revenue. However, enterprise solutions business unit revenues fell 3% to reach EGP 426.8mn in 1Q2014 as slower growth in enterprise data revenue could not offset the decline in enterprise voice revenue. Enterprise fixed line subscribers declined 2% from 1Q2013 to reach 1.06mn in 1Q2014 while enterprise ADSL subscribers rose 12% to reach 112k. TE is currently utilizing fiber models supporting applications and services provided to enterprise subscribers which come into effect with the country beginning to stabilize. In general, while total fixed line subscribers fell 6% from 1Q2013 to 6.79mn in 1Q2014, demand for high quality ADSL internet connections continued to strengthen as TE Datas total ADSL subscribers rose 24% to reach 1.757mn in 1Q2014, giving TE Data a 63.4% market share. TEs operating costs declined 5% to reach EGP 1,156.9mn in 1Q2014 and continued to represent 44% of consolidated revenues. This decline was driven by the decrease in interconnection costs as a result of a decline in the interconnection price with the mobile operators. The companys gross profit thus fell 6% to reach EGP 1,452.3mn in 1Q2014 with the GPM remaining stable at 56%. SG&A expenses increased 8% to reach EGP 603.3mn due to the annual salary increase and the restructured incentive rewards program while depreciation and amortization expenses fell 10% to EGP 397.2mn in 1Q2014. Investment income from Vodafone Egypt declined 32% to record EGP 154.2mn in 1Q2014 compared to EGP 227mn in 1Q2013. Net finance income fell 69% to reach EGP 100.2mn and net taxes declined by 32% to record EGP 150.1mn in 1Q2014. Finally, TEs NPM declined significantly to 21% in 1Q2014 down from 31% in 1Q2013. Integrated Telecom License The Ministry of Communications & Information Technology (MCIT) has offered TE the integrated telecom license without new frequencies to be able to provide mobile services at EGP 2.5bn. TE will depend on local roaming through leasing networks from the mobile operators until offering 4G frequencies in 2016 and there are current negotiations to determine the leasing rate under the supervision of NTRA. According to TE, there is no official obligation on the company to divest its 45% stake in Vodafone Egypt; however TE might sell its stake after acquiring the 4G frequencies in 2016 in order to avoid asset duplication. TE decided to pay the EGP 2.5bn integrated license cost using part of its excess cash which recorded EGP 6.76bn at the end of 1Q2014 and expects to start providing mobile services as early as 3Q2014 targeting to attract 5mn subscribers in the first year.
  • 4. Valuation Update4 CAPEX reached EGP 226.1mn in 1Q2014 compared to EGP 151mn in 1Q2013 with TE successfully signing a number of network upgrade contracts which are to come into effect in 2Q2014, such CAPEX figures are expected to skyrocket especially if TE is required to pay the EGP 2.5bn integrated license cost as a lump sum this year. Although the cost of a mobile license is usually paid on installments, there is no official agreement that illustrates the payment method until now. 4G Frequencies As mentioned before, and according to NTRA, the 4G frequencies license shall be offered to TE after 2 years from the integrated license offering date, supposedly in 2016. Due to the uncertainty behind such license where there is no exact date or terms for the offering, we did not include it in our forecast. However, we believe that by acquiring the new frequencies, TE will be able to operate its mobile business unit more efficiently through reducing operating costs on the long-run by saving funds it would otherwise pay for leasing networks from mobile operators, in addition to the higher anticipated demand on mobile broadband, which will have the effect of increasing mobile revenues. Finally, it is important to note that we did not include the scenario of selling TEs stake in Vodafone Egypt in our valuation since it is a general assembly decision that will depend on acquiring 4G frequencies. Integrated License SWOT Analysis from TEs Perspective Strengths TE owns the backbone of communications and IT infrastructure in Egypt. TE has a solid client base in voice and data services part of which can be potentially converted to mobile clients. TE can offer a variety of packages and bundles including an integrated package that comprises fixed line, home or enterprise ADSL and mobile services (voice & data). Weaknesses TE does not have its own mobile network and will temporarily depend on mobile operators until offering 4G frequencies. The cost of local roaming may be a subject of dispute between TE and the mobile operators. Opportunities A large and growing population of over 85mn makes Egypt an attractive market for mobile services. Egypt has a young population which ensures better adoption of the latest technologies and value added services. The Egyptian market is evolving both in terms of volume and value added services thus providing telecom players with many growth opportunities.
  • 5. Valuation Update5 Potential economic growth coinciding with the expected upcoming political stability gives room for heavier mobile usage. Adding 4G frequencies will result in higher demand on mobile broadband. Threats Mobile subscribers in Egypt already exceed 100mn leaving little room for additions thus TE will have to attract subscribers of other mobile operators either through persuading them to convert to TE or through selling them additional lines with the first option being a very difficult task and often results in price wars that significantly reduces profitability and the second option resulting in lower usage per line especially for the additional line. According to the integrated license, mobile operators have the right to provide fixed line services (in return for a cost of EGP 100mn per license) in addition to having their own international gateways (in the case of Mobinil and Vodafone Egypt as Etisalat Misr already has its own international gateway) which will have a negative effect on TEs retail & wholesale revenues if mobile operators decide to acquire such license. The delay in offering 4G frequencies will extend the period of leasing networks from the mobile operators which will be a cost burden on TE with the leasing rate to remain a matter of potential dispute. Financial Forecasts We expect TEs consolidated revenues to grow at a 5-year CAGR of 9% during the forecasted period FY2014-FY2018. Consolidated revenues are expected to decline by 1.5% to record EGP 11,127.6mn in FY2014 affected by the aforementioned decrease in 1Q2014 wholesale revenues. The top line is then expected to increase by a considerable 21% to reach EGP 13,469.9mn in FY2015 backed by the forecasted mobile services revenues. Finally, TEs consolidated revenues are then expected to increase at a declining rate starting FY2016 to reach EGP 17,233.1mn by FY2018. Retail Segment Retail segment revenues are expected to grow at a 5-year CAGR of 12% during the forecasted period FY2014-FY2018, due to the expected addition of the mobile services business unit to the retail segment. While total revenue generated from the home services and enterprise solutions business units together is expected to decline slightly during most of the forecasted period, the mobile services business unit is expected to be the growth driver of retail segment revenues. Due to the expected addition of mobile services, retail segment revenues are expected to account for 49% of TEs top line (excluding other operating revenues) by FY2018 up from 43% in FY2013. By FY2018, mobile services revenues alone are expected to account for 22% of TEs total consolidated revenues (excluding other operating revenues). Wholesale Segment Wholesale segment revenues are expected to grow at a 5-year CAGR of 6% during the forecasted period FY2014-FY2018 with the international carriers affairs business unit revenues expected to rebound from its decline in 1Q2014 starting FY2015. International
  • 6. Valuation Update6 customers and networks business unit revenues are expected to witness growth during the forecasted period albeit at a much slower rate than FY2013 while domestic wholesale business unit revenues are expected to decline in FY2014 then rebound starting FY2015. Wholesale segment revenues are expected to account for 51% of TEs top line (excluding other operating revenues) by FY2018 down from 57% in FY2013 with international carriers affairs to remain the highest revenue generating business unit almost throughout the forecasted period accounting for 28% of TEs total consolidated revenues (excluding other operating revenues) in FY2018. Investor Table Valuation Our DCF valuation was based on the companys projected free cash flow to firm (FCFF) during the period from FY2014 to FY2018. FCFF during that period was discounted at multiple WACCs that range between 18.38% and 18.53%, using a of 0.77 and a terminal growth rate of 3%. The DCF method led to a fair value of EGP 17.29/share. Based on the shares estimated total return of 37% including an expected dividend yield of 10%, we revised our recommendation from Buy to Strong Buy. Sensitivity Analysis Investor Analysis 2013A 2014E 2015F 2016F Revenues (EGP mn) 11,293.0 11,127.6 13,469.9 15,000.4 Revenue Growth 10% -1% 21% 11% Net Profit (EGP mn) 2,958.6 2,895.0 3,219.5 3,711.7 Net Profit Growth 13% -2% 11% 15% EPS (EGP) 1.73 1.70 1.89 2.17 DPS (EGP) 1.00 1.30 1.40 1.50 Dividend Yield 7.4% 9.6% 10.3% 11.1% P/E 7.8 8.0 7.2 6.2 P/BV 0.8 0.8 0.8 0.7 Source: TE & OKAZ Research TerminalGrowth Cost of Equity 17% 18% 19% 20% 21% 1% 19.00 17.97 17.04 16.20 15.45 2% 19.18 18.11 17.16 16.31 15.54 3% 19.36 18.26 17.29 16.42 15.63 4% 19.56 18.43 17.43 16.53 15.73 5% 19.78 18.61 17.58 16.66 15.84 Source: OKAZ Research
  • 7. Valuation Update7 Financials & Ratios Income Statement (EGP mn) 2013A 2014E 2015F 2016F Revenues 11,293.0 11,127.6 13,469.9 15,000.4 Operating Cost -4,831.1 -4,822.9 -6,248.7 -6,815.8 Gross Profit 6,461.9 6,304.7 7,221.2 8,184.6 SG&A Expenses -2,623.1 -2,630.7 -3,190.8 -3,556.1 Depreciation & Amortization -1,694.6 -1,697.8 -1,698.4 -1,720.1 Other Income/Expenses 1,566.6 1,651.6 1,738.7 1,772.4 Net Interest 42.3 45.7 14.8 29.0 Net Profit Before Tax 3,753.0 3,673.5 4,085.3 4,709.8 Net Taxes -792.4 -775.6 -862.6 -994.4 Minority Interest -1.9 -2.9 -3.2 -3.7 Net Profit 2,958.6 2,895.0 3,219.5 3,711.7 Balance Sheet (EGP mn) 2013A 2014E 2015F 2016F Cash & Equivalents 5,761.6 2,564.3 3,887.9 5,701.0 Accounts Receivable 3,386.0 3,343.2 4,055.0 4,519.2 Inventories 458.6 438.4 531.8 592.7 Other Current Assets 1,424.1 1,425.0 1,728.4 1,926.2 Total Current Assets 11,030.4 7,770.9 10,203.1 12,739.0 Net Fixed Assets 11,243.4 12,045.7 11,097.2 10,127.2 Other Long Term Assets 10,364.5 13,414.0 13,394.0 13,379.0 Total Assets 32,638.3 33,230.5 34,694.3 36,245.1 Short Term Debt 107.2 82.2 62.2 52.2 Accounts Payable 636.2 657.7 797.7 889.0 Other Current Liabilities 2,604.3 2,630.7 3,190.8 3,556.1 Total Current Liabilities 3,347.7 3,370.6 4,050.8 4,497.3 Long Term Debt 475.3 425.3 375.3 325.3 Other Long Term Liabilities 499.0 439.7 439.7 439.7 Total Liabilities 4,322.0 4,235.6 4,865.8 5,262.3 Total Common Equity Including Minority 28,316.3 28,995.0 29,828.5 30,982.9 Total Liabilities and Equity 32,638.3 33,230.5 34,694.3 36,245.1 Ratios 2013A 2014E 2015F 2016F Liquidity Current Ratio 3.3 2.3 2.5 2.8 Quick Ratio 3.2 2.2 2.4 2.7 Efficiency Accounts Receivable Turnover 3.3 3.3 3.3 3.3 Average Collection Period 109 110 110 110 Fixed Assets Turnover 1.0 0.9 1.2 1.5 Debt Debt Ratio 0.1 0.1 0.1 0.1 Profitability Revenue Growth 9.5% -1.5% 21.0% 11.4% GPM 57.2% 56.7% 53.6% 54.6% Net Profit Growth 12.9% -2.2% 11.2% 15.3% NPM 26.2% 26.0% 23.9% 24.7% ROA 9.1% 8.7% 9.3% 10.2% ROE 10.4% 10.0% 10.8% 12.0% Source: TE & OKAZ Research
  • 8. Valuation Update8 Recommendation Guidelines The Fair Value calculation is mainly based upon absolute valuation methodologies; DCF, WEV and/or NAV, it can sometimes include relative valuation methodologies (multiples). Fair Value Recommendation Sell < 020% > Hold 035% > Buy 20%Strong Buy 35% Our rating system is based on estimated total return which is calculated using expected price appreciation/depreciation as well as expected cash dividend distributions during the coming 12-months. Rating
  • 9. Valuation Update9 OKAZ Stockbrokers & Investments on behalf of itself has prepared this publication, solely for its internal use and for the information of its clients. This publication is not intended for use as an invitation, offer or solicitation for the purchase and/or sale of any financial instrument/tool. The information contained herein was presented on a best effort basis regarding its accuracy and completeness and is subject to change without notice. Accordingly OKAZ Stockbrokers and Investments along with any member of its staff DOES NOT accept any liability whatsoever for any direct and or indirect loss resulting from the use of this publication or its content. Copyright OKAZ Stockbrokers & Investments. All rights reserved. No part of this publication may be transmitted in any form or means without prior consent. Disclaimer Sales Maher Farahat maher@okazinvest.com Walid Abd-El-Maguid walid@okazinvest.com Samar Soliman samar@okazinvest.com Nesma El Sebaay nelsebaay@okazinvest.com OKAZ Stockbrokers & Investments Head Office 35, Emad El-Din St., Cairo Tel: 202-25914741 / 25918955 / 25895321 Fax: 202-25891499 www.okazinvest.com Enas Mohamed Senior Financial Analyst enas@okazinvest.com Nirvana Haggagy, CPM Administrator research@okazinvest.com Research Sherif El Essaily, MBA Head of Research selessaily@okazinvest.com Ahmed Ramadan Financial Analyst asayed@okazinvest.com