Earnings Report /
Egypt

Telecom Egypt: Bottom line mirrors healthy revenues and solid operating profit performance

  • Healthy revenues across all business lines

  • Solid margins on favorable revenues and controlled opex

  • Bottom line mirrors healthy revenues and solid operating profit performance

Al Ahly Pharos Securities Brokerage
11 August 2022

Healthy revenues across all business lines

ETEL reported 2Q22 revenues of EGP10.98 billion, broadly in line with our estimates of EGP10.48 billion, compared to EGP8.97 billion in 2Q21 and EGP9.42 billion in 1Q22 (+22.4% YoY, +16.6% QoQ). Healthy revenue growth is driven by growth in ETEL’s retail and whole segments by 20.2% YoY and 26.1% YoY. Wholesale segment witnessed IRU sales worth around EGP178 million, contributing to wholesale revenue growth.

On a semiannual basis, ETEL reported revenues of EGP20.4 billion in 1H22 (+17.4% YoY), driven by a growth of 18% in retail revenues and a 16% increase in wholesale revenues. During 1H2022, data continued to be the main driver of growth, contributing 52% of total top line growth.

During the quarter, retail revenue grew by 20.2% YoY and 9.4% QoQ (contributing c.48.6% of total revenues, -0.9pps YoY, -4.5pps QoQ), driven by a YoY increase of 20.3% YoY in Home Service revenues and an increase of 20.1% YoY in Enterprise Solutions revenues.

Home and consumer data continued to drive growth during 2Q22 (+20.3% YoY, +6.7% QoQ), fueled by a growth of 21.6% YoY in Home and Consumer data revenues stemming from a 12.8% YoY increase in ADSL subscribers to stand at 8.1 mn subscribers; with ARPU standing at EGP151.7/month (+4.8% YoY, +4.0% QoQ). This came along with an increase of 10.7% YoY and 1.1% QoQ in Home and Consumer fixed-line subscribers reaching 10.0 million subscribers in 2Q22.

Home fixed voice revenues showed moderate growth of 10.4% YoY and 4.0% QoQ. The increase is on the back of subscribers’ growth, given a decline in fixed voice ARPU per month (-8.5% YoY, -1.2% QoQ) recording EGP24.6 per month in 1Q22.

Telecom Egypt has been investing over the past years in its fixed broadband and mobile infrastructure, resulting in a faster speed and better quality. Demand has been both volume and price-driven, with the company witnessing customer additions across the board along with higher ARPUs fueled by increased consumer spending. Moreover, higher customer usage was accelerated by Covid along with content specifically directed to the Egyptian market. Solid retail revenue growth supported the company’s margins as well, given their relatively higher margin nature than the wholesale segment.

Enterprise solutions revenueswitnesseda growth of 20.1% YoY and 20.6% QoQ, reaching EGP1.4 billion in 2Q22. This is attributed to an increase in enterprise data revenues (+22.5% YoY, +4.4% QoQ) and enterprise other revenues (+32.4% YoY, +27.8% QoQ), which includes revenues from infrastructure projects.

Mobile customers registered 10.74 million subscribers in 2Q22 (+44.2% YoY, +15.5% QoQ). It’s worthy to note that mobile customers include 4.7 million mobile subscribers related to the social solidarity beneficiaries and school student lines programs, out of which 0.7 million added in these categories during 1Q22. The Annual surge in mobile customers additions came on the back of a weak base in 2Q21 due to the enforced decisions by NTRA in April 2021, limiting the line validity to 90 days active for pre-paid customers and 180 days for postpaid customers; accordingly around 1.1 million customers were disconnected.

Wholesale revenues showed an increase of 26.1% YoY and 30.5% QoQ to stand at EGP4.2 billion in 2Q22. Healthy wholesale revenue growth is attributed to solid growth across Domestic Wholesale (+27.1% YoY, +21.1% QoQ), International Carrier Affairs-ICA (+18.2% YoY, +25.7% QoQ), and International Customers and Networks-ICN (+34.0% YoY, +53.3% QoQ).

Revenues from Domestic Wholesale recorded an of 27.1% YoY and 21.1% QoQ, recording EGP1.69 billion in 2Q22, driven by higher demand on data services from MNOs along with the recognition of around EGP178 million of IRU sales. International Carrier Affairsrecorded revenues of EGP1.30 billion in 2Q22 (18.2% YoY, 25.7% QoQ), on the back of higher transit revenues.

International Customers and Networks (IC&N) recorded an increase of EGP34.0% YoY and 53.3% QoQ to stand at EGP1.22 million in 2Q22. Revenue growth can be attributed to capacity and cable projects sales.

Solid margins on favorable revenues and controlled opex

Gross profit came in at EGP4.69 billion in 2Q22 (+25.0% YoY, +29.2% QoQ); implying a GPM of 42.7% in 2Q22 (+0.9pps YoY, +4.2pps QoQ). Gross profit performance came on the back favorable revenue growth across all segments and controlled opex. Salaries expenses dropped as percentage of sales to stand at 19% (-1.17pps YoY) along with call costs as percentage of sales standing at 15% in 2Q22, compared to 16% in 2Q21; fueled by a reversal of an accrual on national roaming costs and improved revenue mix.

EBITDA came in at EGP4.48 bn in 2Q22 (+28.3% YoY, +25.3% QoQ), compared to our estimates of EGP4.1 billion, implying an EBITDA margin of 40.8% (+1.9pps YoY, +2.8pps QoQ), exceeding management guidance of an EBITDA margin of mid to high 30s in 2022.

Bottom line mirrors healthy revenues and solid operating profit performance

Net profit came in at EGP2.4 billion in 2Q22 (+38.2% YoY, +76.8% QoQ), higher than our estimates of EGP1.9 billion; implying NPM of 22.0% (+2.5pps YoY, +7.5pps QoQ). The quarterly surge is driven by a weak base in 1Q22 of lower investment income from Vodafone and GPM contraction in 1Q22.

During the quarter, the bottom-line performance came on the back of:

  • Healthy revenue growth of 22.4% YoY and 16.6% QoQ, driven by growth across all business lines,

  • GPM expansion (+0.9pps YoY, +4.2pps QoQ), and EBITDA expansion (+1.9pps YoY, +2.8pps QoQ) fueled by favorable revenue mix and controlled opex,

  • A growth of (19% YoY, 129% QoQ) in investment income from Vodafone which is annually driven by organic operational growth and quarterly by a weak base effect (Vodafone recognized FX loss of EGP222 million in 1Q22),

  • recognizing FX loss of EGP254 million in 2Q22, compared to FX loss of EGP29 million in 1Q22, and compared to EGP1.0 million in 2Q21,

  • a decline of 3% in interest expense during 2Q22, with an effective interest rate of 5.5% (almost flat YoY),

On a semiannual basis, net profit came in at EGP3.78 billion in 1H22, compared to EGP3.87 billion in 1H21; a slight decline of 2.3% YoY and implying a NPM of 18.5% (-3.8pps YoY), impacted by a relatively weak 1Q22. ETEL’s Net debt/EBITDA, including vendor financing, stood at 1.4x as of June 2022, compared to 1.6x as of March 2022, and compared to 1.4x as of December 2021.

ETEL’s Roaming Agreement with Orange offers a significant boost to operational margins

ETEL signed a 5-year commercial agreement with Orange Egypt for national roaming services. This new agreement provides a number of competitive, technical, and commercial advantages that will boost the development of Telecom Egypt’s services and enhance its position in the Egyptian mobile market. This agreement is expected to drive cost savings on the mobile front starting 2023, that should drive margin expansion going forward. Starting 2023, ETEL’s roaming agreement with Orange should lower ETEL’s interconnection costs by 50% (currently represents around 26.4% of ETEL’s total costs). We are currently working on updating our numbers and forecasts going forward accordingly.

Digital transformation projects, Hayah Karima, and Vodafone modified shareholders' agreement fuel 2022 positive outlook

The project of connecting government units together is scheduled over 3 phases, out of which ETEL has completed phase 1 with EGP1.0 bn of revenues recognized between 2020 and 2021. This leaves a pipeline of 2 phases, each equivalent to phase 1.Another key project is the “Hayah Karima project” at a value of EGP7.0 bn for phase 1 (covering 1mn homes scattered around Egypt in rural areas), intended to be completed over 8 months where the government is fully paying for the project in advance. ETEL is still negotiating with auditors regarding the accounting treatment, whether this should be recognized as revenues based on a percentage of completion (over 18 months) or following a grant account (over longer durations). It's worthy to note that despite the social aspect of the project, it has the same margins as ETEL’s conventional business.

In 2021, ETEL recognized EGP300-400 mn of digital transformation projects. By 2022, ETEL is expected to recognize around EGP4.5 bn coming from phase 1 of the Hayat Karima project, if auditors decide to follow the percentage of completion revenue recognition method.

In light of ETEL’s modified shareholder agreement with Vodafone, Management expects around EGP1.1 bn of dividends from Vodafone in 2022f and a slightly higher amount in 2023f (given that Vodafone’s FCF will be negatively impacted by spectrum fees payment over 2022 and 2023), after which management believes that going forward dividends from Vodafone could double.

Management Guidance for 2022

  • Early double-digit revenue growth

  • Mid-high 30s for EBITDA margin

  • Capex to sales at mid 20s

  • Net Debt/EBITDA (including vendor financing) of 1.5x

  • Early double-digit free cash flow to EBITDA

Telecom Egypt is currently trading at 2022e P/E of 3.6x and EV/Adjusted EBITDA of 3.2x, below its 5yr historical P/E average of 5.6x.