Data, infrastructure, and cable revenues drive growth; despite a relatively strong base effect
ETEL reported 4Q21 revenues of EGP10.71 billion, compared to EGP9.56 billion in 4Q20 and EGP9.01 billion in 3Q21 (+12.0% YoY, +18.8% QoQ), primarily driven by data, infrastructure revenues, and cable revenues (related to TEX cable among other cable revenues), despite a strong base effect in 4Q20 (witnessed the recognition of EGP1.9 bn of revenues related to the 2Africa Cable.
During the quarter, retail revenue grew by 23.7% YoY and 3.4% QoQ (contributing c.56.4% of total revenues, +5.4pps YoY, -8.5pps QoQ), driven by a YoY increase of 23.9% YoY in Home Service revenues and an increase of 23.3% YoY in Enterprise Solutions revenues.
During 2021, ETEL recorded revenues of EGP37.1 billion, an increase of 16.2% YoY, driven by significant YoY growth in data revenues (+29.6% YoY), enterprise solutions revenues (+19.5% YoY), and domestic wholesale revenues (+25.3% YoY).
Home and consumer data continued to drive growth during 4Q21 (+23.9% YoY, +1.4% QoQ), fueled by a growth of 15.8% YoY in Home and Consumer ADSL subscribers to stand at 7.8 mn subscribers; with ARPU standing at EGP145/month (+6.5% YoY, -2.3% QoQ). This came along with an increase of 13.2% YoY in Home and Consumer fixed-line subscribers reaching 9.8 million subscribers in 4Q21.
Home fixed voice revenues showed a healthy growth of 17.9% YoY and 1.6% QoQ. The increase is on the back of subscribers’ growth, given a flat growth in fixed voice ARPU per month (+0.2% YoY, -2.4% QoQ) recording EGP24.9 per month in 4Q21.
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 customers additions across the board along with higher ARPUs fueled by increased consumer spending. Moreover, higher customers 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 revenues witnessed a growth of 23.3% YoY and 11.4% QoQ, reaching EGP1.25 billion in 4Q21. This is attributed to a significant increase in enterprise data revenues of 27.2% YoY, along with a surge in infrastructure-related revenues (+29.6% YoY, +22.9% QoQ).
Mobile customers registered 9.36 million subscribers in 4Q21 (+27.6% YoY, +21.5% QoQ). The increase is primarily driven by the addition of 1.3 million mobile subscribers related to the social solidarity beneficiaries and school student lines programs. Its worthy to note that starting April 2021, NTRA enforced new decisions limiting the line validity to 90 days active for pre-paid customers and 180 days for postpaid customers; accordingly led to a decline in number of subscribers in 2Q21 and 3Q21.
Wholesale revenues showed a flat performance on an annual basis (-0.3% YoY) and a spike of 47.7% QoQ to record EGP4.67 billion in 4Q21. The flat annual performance is driven by a strong base effect in 4Q20 (recognition of EGP1.9 bn of revenues related to 2Africa Cable), while the quarterly increase is stemming from the recognition of EGP1.27 billion of cable revenues (TEX cable among other cable projects).
Revenues from Domestic Wholesale recorded an increase of 52.2% YoY and 5.1% QoQ, recording EGP1.65 million in 4Q21, driven by infrastructure transmission revenues. International Carrier Affairs recorded revenues of EGP1.11 billion in 4Q21 (+5.0% YoY, +12.7% QoQ).
International Customers and Networks (IC&N) recorded a decline of 24.2% YoY, driven by a strong base effect in 4Q20, that witnessed the recognition of EGP1.9 billion related to the 2Africa cable. On a quarterly basis, IC&N recorded a surge of 203% QoQ, primarily driven by the recognition of EGP1.27 bn of cable revenues related to TEX cable among other cable projects.
A favorable revenue mix counterbalances seasonal spike in expenses, and cushions margin pressure
Gross profit came in at EGP4.03 billion in 4Q21, showing a moderate increase of 7.1% YoY and 2.4% QoQ; implying a GPM of 37.7% in 4Q21 (-1.7pps YoY, -6.1pps QoQ). Gross profit performance is capped by a relatively weak fourth quarter that witnesses the recognition of end-of-year related expenses; despite a favorable revenue mix of growing retail, infrastructure, and cable revenues. EBITDA came in at EGP3.88 bn in 4Q21 (+7.3% YoY, +8.3% QoQ), implying an EBITDA margin of 36.2% (-1.6pps YoY, -3.5pps QoQ). During 2021, gross profit came in at EGP15.14 billion (+21.5% YoY), implying a margin of 40.8% in 2021. EBITDA came in at EGP14.19 billion (+27.6% YoY), implying a margin of 38.3% in 2021 (+3.4pps YoY).
FX gain, income from Vodafone and lower interest expense drive bottom-line
Net profit came in at EGP2.3 billion in 4Q21 (+75.7% YoY, +4.3% QoQ); implying NPM of 21.7% (+7.9pps YoY, -3.0pps QoQ). For 2021, net profit came in at EGP8.42 billion, a significant increase of 73.6% YoY. Bottom-line performance during 2021 is mainly attributed to:
solid revenue growth and healthy operational performance,
an increase in net finance income of 167% YoY, on the back of EGP541mn FX gain,
a decline of EGP183 million in impairment costs,
a decline of 14% YoY in net interest expense, attributed to 20% YoY decline in gross debt, reaching EGP16.0 billion as of December 2021, compared to EGP20.3 billion as of December 2020; on the back of utilizing dividends received from Vodafone,
a surge of 51.5% in investment income from Vodafone on the back of provisions and taxed reversals of EGP502 million, without which investment income from Vodafone would have grown by 29% (on the back of organic growth).
Digital transformation projects 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 to 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.
Management Guidance for 2022
· Early double-digit revenue growth
· Mid-high 30s for EBITDA margin
· Capex to sales at mid-to-low 20s
· Net Debt/EBITDA (including vendor financing) of 1.5x
· Early double-digit free cash flow to EBITDA
BoD proposed distributing dividends of EGP1.00/share (+33% YoY), implying a payout ratio of 20.3% for 2021 and DY of 5.3%. Telecom Egypt is currently trading at 2022f P/E of 4.7xand EV/Adjusted EBITDA of 2.5x.