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Pharos Investor Conference: Meeting Minutes – Telecom Egypt

    Al Ahly Pharos Securities Brokerage
    24 June 2019

    Sector outlook 

    Despite the saturated mobile market, impact of Over the Top (OTT) players, declining number of subscribers and penetration rates, we still believe that mobile data and broadband will continue to grow and drive growth mainly on an under penetrated data market. Moreover, the telecom sector should see more infrastructure and digital transformation projects with government institutions in 2019, aimed at speeding up fiber infrastructure completion and enhancing service quality. 

    Telecom Egypt (FV: EGP16.22, Overweight)

    ETEL’s revenue and profitability will continue to be mainly driven by high growth in data services and improved overall market share through bundled service offering, and improved efficiency as mobile dilution gradually phases out. According to our projections, the retail segment contribution to total revenues will reach more than 66% of total revenues by 2023, mainly driven by the above average growth in home service ADSL revenues. Higher retail contribution will drive profitability for ETEL, reduce seasonality risks and improve ETEL’s cash conversion cycle. 

    ETEL plans to focus on digital transformation and financial inclusion projects through 2019:

    • ETEL will be looking forward to a greater role in the nationwide digital transformation and financial inclusion initiative. It started with the schools connectivity project in Q3 18 and connected c2,500 schools in Phase 1, with initial revenues of EGP482mn, aimed at providing high-speed internet over fiber as part of the education reform project. ETEL should be expecting more of these projects with other government institutions in 2019.
    • ETEL has connected 670 governmental sites in the Port Said governorate as a pilot for the pipeline of the government initiative for digital transformation and financial inclusion Phase 1. ETEL has recognised cEGP86mn from the Port Said digital transformation programme and plans to start connecting other governorates once the network is tested and services are concluded. Expected revenues could reach on average EGP100mn per governorate.
    • ETEL has distributed c613k SIM cards to students in the first year of high school in Q1 19 and currently plans to continue distributing mobile SIM cards to high school students every year.
    • ETEL has successfully used Vodafone’s dividends to repay all its EGP-denominated debt in March 2019, where ETEL managed to lower the net debt position to EGP8.1bn in Q1 19 from EGP12.6bn in Q4 18, which should translate to lower interest expense going forward.
    • There are two years remaining in ETEL’s protocol with NUCA and is usually renewed every three years. ETEL expects to receive cEGP400-500mn from NUCA every year – the company recognised EGP93mn in Q1 19 from NUCA and other infrastructure projects.
    • ETEL targets 2,000 employees in its 2019 early retirement plan. If successful, management believes it could cut costs by cEGP300-500mn per annum. 

    2019 financial performance guidance

    • Mid-high, single digit revenue growth, mainly on the base effect of the Bharti Airtel deal.
    • EBITDA margin of mid-to-high 20s.
    • Capex/sales of 30%.