Earnings Report /

Telecom Egypt: Healthy revenue growth drives profitability and margin expansion

  • Retail revenues grow significantly

  • Healthy revenue mix and cost controls drive margin’ expansion

  • Margin expansion, lower net interest expense and FX gains drive bottom line performance

Retail revenues grow significantly

ETEL reported 1Q21 revenues of EGP8.40 billion, compared to EGP7.00 billion in 1Q20 and EGP9.56 billion in 4Q20 (+19.9% YoY, -12.2% QoQ). Retail revenue grew by 35.8% YoY and 9.0% QoQ (contributing c.63.3% of total revenues, +7.4pps YoY, +12.3pps QoQ), driven by a YoY increase of 33.9% in Home and Service revenues and an increase of 43.6% in Enterprise Solution revenues. On a quarterly basis, revenues’ decline is attributed to a strong base effect in 4Q20 (recognition of 2Africa Cable revenues).

Home and consumer data continued to drive growth during 1Q21 (+37.7% YoY, +7.8% QoQ), fueled by a growth of 23.4% YoY and 4.6% QoQ in Home and Consumer subscribers to stand at 7.0 mn subscriber, along with a moderate increase of 14.0% YoY and 2.4% QOQ in Home and Consumer Data ARPUs to reach EGP139.4 per month in 1Q21.

Home fixed voice revenues showed a notable growth as well of 21.1% YoY and 11.0% QoQ. Annual increase is attributed to an increase of 7.6% YoY in fixed voice subscribers base to reach 8.8 million in 1Q21, along with an increase of 7.4% in fixed voice ARPU per month to EGP26.9 per month in 1Q21.

Management noted before that ETEL has not seen a big jump in data traffic, since the first wave of Covid-19, however, the traffic created by wave 1 was sustained. This is attributed to the fact that schools and offices are still working from home or on rotational basis. Another factor driving the sustained demand is content, a new phenomenon in Egypt, where international players come into the Egyptian market, with specifically dedicated content, similar to Netflix, OSN and Watch It.

Enterprise solutions revenues showed a YoY surge of 43.6% and an increase of 11.1% QoQ, reaching EGP1.13 billion. This is attributed to a significant increase in other enterprise revenues, mainly complementary access services, on the recognition of EGP180 million related to NUCA and other digital transformation services.

ETEL’s retail revenue growth was fueled as well by customer additions, where Mobile customers recorded 8.51 million subscribers in 1Q21 (+37.8% YoY, +16.0% QoQ); Home and Consumer Voice subscribers grew to 8.8 million subscribers in 1Q21 (+7.6% YoY, +2.2% QoQ); and Home and Consumer ADSL subscribers reached 7.0 million subscribers in 1Q21 (+23.4% YoY, +4.6% QoQ).

Wholesale revenues came in flat YoY, recording EGP3.08 billion in 1Q21, and declined by 34.3% QoQ, on the back of a strong base effect in 4Q20, due to the recognition of 2Africa cable revenues.

International Customers and Network (IC&N) revenues declined by 5.4% YoY and dropped significantly by 74.1% QoQ, recording EGP665 million in 1Q21, compared to EGP703 million in 1Q20 and compared to EGP2.56 billion in 4Q20 (which was boosted by the EGP 1.9bn in cable project revenue related to the 2Africa cable), along with a strong base effect in 1Q20, due to the recognition of the mesh solution agreement with Google, that contributed to EGP270 million in 1Q20.

Domestic Wholesale revenues came in at EGP1.36 billion (+9.3% YoY, +28.6% QoQ), driven by continuous demand for transmission services from MNOs (Mobile Network Operators) and ISPs (Internet Service Providers).

Healthy revenue mix and cost controls drive margin’ expansion

Gross profit came in at EGP3.43 billion in 1Q21, an increase of 26.0% YoY, and a decline of 8.8% QoQ; implying a GPM of 40.9% in 1Q21 (+2.0pps YoY, +1.5pps QoQ). This was mainly driven by faster growing revenues than COGS. EBITDA came in at EGP3.23 bn in 1Q21 (+41.7% YoY, -10.6% QoQ), implying an EBITDA margin of 38.5% (+5.9pps YoY, +0.7pps QoQ). Margin expansion can be attributed as well to cost controls efforts, where call costs declined by c.2.49pps as percentage of revenues, standing at 17.1% in 1Q21; attributed to enhanced revenue mix. Additionally, employee costs declined by 3.36pps YoY as percentage of revenues, standing at 21% in 1Q21.

Operating profit stood at 2.23 billion (+82% YoY, +25% QoQ), where solid operational performance managed to offset an increase of 16% YoY in depreciation expense. Excluding a reversal of tax provisions (The reversal relates to a new tax directive waiving penalties on delayed sales tax payments) amounting to EGP240 million, operating profit would have grown by 63% YoY.

Investment income from Vodafone doubles annually

Investment income from Vodafone recorded EGP952 million in 1Q21 (+103.2% YoY, +48.1% QoQ). Annual surge could be partially coming from a weak base in 1Q20, where Vodafone recognized one-off costs and provisions.

Vodafone’s other operating and financial KPIs are not yet available, since Vodafone is yet to release results on May 18, 2021; after which, we would be able to shed more light on performance.

Margin expansion, lower net interest expense and FX gains drive bottom line performance

Net profit came in at EGP2.12 billion in 1Q21 (+61.9% YoY, +60.7% QoQ); implying NPM of 25.3% (+6.6pps YoY, +11.5pps QoQ). Bottom line growth is primarily driven by solid operational performance and operating margins enhancements, along with the recognition of EGP188 million of FX gains (because of EGP appreciation against the EUR and USD); where growth was capped on the back of a one-off deferred tax expense of EGP377 million (related to a 10% dividends tax on the total retained earnings of Vodafone).

Net interest expense declined by 4% YoY and increased by 13% QoQ; despite an increase of around 8.1% in net debt balance to stand at EGP19.76 billion in 1Q21, where a lower effective interest rate of 5.7% (-1.7pps YoY) boded well for the net interest expense figure. Total debt balance stood at EGP21.19 billion in 1Q21, compared to EGP20.29 billion in 2020.

Sustained healthy revenue mix and digital transformation support growth

Data revenues (both fixed and mobile) continue to drive ETEL’s revenue growth, where the data traffic and demand generated by covid-19 are sustained, supporting ETEL’s plans to invest in its network along with enhancing customer experience and solidify its market positioning.

ETEL is looking to finalize phase 1 of the digital transformation program with a total contract value of around EGP1.1 billion, equivalent to around 5000 points. The government is currently planning phase 2, which should be implemented in 2021, where ETEL expects to start recognizing revenues during 2021. Similar to phase 1, phase 2 should witness the company connecting 5000 points and around EGP1.1 billion in revenues. Post the completion of phase 2, around 20,000 points are still remaining  (4x as much as phase 2). Phase 3 might be coming as well in 2021, but it is still early to judge where it will stand.

Currently, Telecom Egypt is looking at expansion beyond the initial plans into communities, where urban communities are expanding beyond greater Cairo and Alexandria; dedicating expansion plans during 2021 to new cities that the government is looking at, similar to New Alamien, New Ismailia and New Portsaid; which are likely to attract more customers in the future.

Telecom Egypt is currently trading at 2021f P/E of 4.6x, lower than its historical 5yr and 10yr P/E average of 5.9x and 7.3x, respectively, and is at a significant discount to peer group average of 10.9x. ETEL is currently trading at 2021f EV/Adjusted EBITDA of 2.6x, at a significant discount as well to peer group average of 5.9x.