Earnings Report /

Telecom Egypt: Lower investment income from Vodafone and a strong base effect shape bottom line

  • Annual revenues driven by retail segment; Quarterly performance hindered by a strong base effect

  • Higher retail contribution managed to partially offset higher employee costs

  • Lower investment income from Vodafone and a strong base effect shape bottom line

Annual revenues driven by retail segment; Quarterly performance hindered by a strong base effect

ETEL reported 1Q22 revenues of EGP9.4 billion, in line with our estimates of EGP9.3 billion, compared to EGP8.3 billion in 1Q21 and EGP10.7 billion in 4Q21 (+12.1% YoY, -12.1% QoQ). Annual revenue growth continues to be driven by retail revenues (+16.3% YoY). The quarterly performance came on the back of a solid base effect in 4Q21 that witnessed the recognition of cable revenues (TEX and others).

During the quarter, retail revenue grew by 16.3% YoY and 2.5% QoQ (contributing c.65.7% of total revenues, +2.4pps YoY, +9.3pps QoQ), driven by a YoY increase of 19.3% in Home Service revenues and an increase of 5.2% YoY in Enterprise Solutions revenues.

Home and consumer data continued to drive growth during 1Q22 (+19.3% YoY, +4.5% QoQ), fueled by a growth of 21.7% YoY in Home and Consumer data revenues and a 14.3% YoY increase in ADSL subscribers to stand at 8.0 mn subscribers; with ARPU standing at EGP145.9/month (+4.6% YoY, +0.6% QoQ). This came along with an increase of 12.5% YoY and 1.5% QoQ in Home and Consumer fixed-line subscribers reaching 9.9 million subscribers in 1Q22.

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 revenues witnessed a growth of 5.2% YoY and a decline of 5.2% QoQ, reaching EGP1.19 billion in 1Q22. This is attributed to an increase in enterprise voice revenues (+9.0% YoY, +13.6% QoQ) and enterprise data revenues (+24.8% YoY, +3.7% QoQ)

Mobile customers registered 10.16 million subscribers in 1Q22 (+19.3% YoY, +8.5% 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.

Wholesale revenues showed a slight increase of 4.9% YoY and a decline of 30.9% QoQ to stand at EGP3.23 billion in 1Q22. The quarterly decline is stemming from a strong base effect in 4Q21 on the recognition of EGP1.27 billion of cable revenues (TEX cable among other cable projects). On an annual basis, wholesale revenues was fueled by an increase of 2.4% YoY in domestic wholesale and an increase of 19.8% in International Customers and Networks (IC&N).

Revenues from Domestic Wholesale recorded a minimal increase of 2.4% YoY and a decline of 13.5% YoY, recording EGP1.40 million in 1Q22. International Carrier Affairs recorded revenues of EGP1.03 billion in 1Q22 (-1.5% YoY, -6.8% QoQ).

International Customers and Networks (IC&N) recorded an increase of EGP19.8% YoY and dropped by 59% QoQ to stand at EGP797 million in 1Q22. On a quarterly basis, the decline in revenues can be attributed to a strong base effect in 4Q21 (the recognition of EGP1.27 bn of cable revenues related to TEX cable among other cable projects).

Higher retail contribution managed to partially offset higher employee costs

Gross profit came in at EGP3.6 billion in 1Q22, showing a muted increase of 5.6% YoY and a decline of 10.1% QoQ; implying a GPM of 38.5% in 1Q22 (-2.4pps YoY, +0.8pps QoQ). Gross profit performance is capped by higher employee costs (+12% YoY), eating up revenue growth during the quarter. On a quarterly basis and despite higher employee costs, slight margin expansion came on a weak base effect in 4Q21 that usually witnesses the recognition of end-of-year related expenses. EBITDA came in at EGP3.58 bn in 1Q22 (+10.6% YoY, -7.8% QoQ), implying an EBITDA margin of 38.0% (-0.5pps YoY, +1.8pps QoQ). EBITDA performance was mainly driven by a favorable revenue mix and slightly lower SG&A as a percentage of sales (-0.5pps YoY, -0.3pps QoQ) fueled by cost optimization.

Lower investment income from Vodafone and a strong base effect shape bottom line

Net profit came in at EGP1.37 billion in 1Q22 (-35.7% YoY, -41.2% QoQ); implying NPM of 14.5% (-10.8pps YoY, -7.2pps QoQ), lower than our estimate of EGP1.6 billion. During the quarter, the bottom-line performance came on the back of:

  • a decline of 67% YoY and 69% QoQ in investment income from Vodafone to stand at EGP317 million in 1Q22, compared to EGP952 million in 1Q21 and EGP1.02 billion in 4Q21, mainly on the back of Vodafone recognizing FX loss of EGP222 million,

  • recognizing FX loss of EGP29 million in 1Q22, compared to FX gain of EGP355 million in 1Q21 and FX gain of EGP146 million in 4Q21,

  • annual GPM contraction (-2.4pps YoY).

  • Bottom-line performance for 1Q22 came despite a decline in interest expense of 28% YoY, on a lower effective interest rate of 4.6% compared to 5.7% in 1Q21. Net debt balance stood at EGP15.05 billion in 1Q22, compared to EGP17.34 billion in 1Q21. Net debt/EBITDA stood at 1.2x in 1Q22, compared to 0.9x in 2021 on the EGP devaluation, without which it would have stood at 1.1x.

It is noteworthy to mention that ETEL recognized EGP1.86 billion of FX losses on the other comprehensive income statement.

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.

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 had previously proposed distributing dividends of EGP1.00/share (+33% YoY), implying a payout ratio of 20.3% for 2021 and a DY of 6.25%. Telecom Egypt is currently trading at 2022f P/E of 3.8x and EV/Adjusted EBITDA of 2.2x.