Equity Analysis /
Egypt

Global Telecom Holding: Sequential revenue decline, operational performance cosmetically boosted by IFRS 16

    Sequential revenue decline despite organic growth

    During 1Q19, GTHE recorded organic revenue growth of 12.8% YoY, with a decline of 1.2% YoY in reported revenues, mainly due to currency depreciation in Pakistan and Algeria of 25.4% and 4.0% YoY, respectively. The group reported USD659.5 million revenues in 1Q19, down from USD667.5 million in 1Q18 and down from USD702 million in 4Q18 (-1.2% YoY, -6.1% QoQ).

    In Pakistan, Jazz reported a revenue increase of 6.2% YoY and a decline of 1.8% QoQ in revenues, mainly on an increase in a number of subscribers of 5.8% YoY and 3.7% QoQ. Despite the competitive market in Pakistan, particularly in data and social network offers, total organic revenue growth accelerated sequentially in 1Q19. Growth came from business performance and higher usage by customers, mainly due to the suspension of taxes collected from customers by mobile operators, which continued in 1Q19 and provided the whole market with additional revenue growth.

    In Algeria, Djezzy reported a revenue decline of 4.6% YoY and 5.4% QoQ in revenues; mainly on a decline of 11.7% YoY and a decline of 3.1% QoQ in ARPUs due to intense price competition. The decline in revenues came despite an increase of 4.6% YoY and 1.3% QoQ in the number of subscribers on the new offers launched earlier in 2018, driven by the successful commercial offers and channel-related incentives. Despite healthy growth in its customer base, revenues declined organically by 1.3% YoY during 1Q19, which is a slower pace of decline compared to 4Q18 as a result of operational stabilization with sequential customer growth.

    In Bangladesh, the regulatory environment remains challenging and limits customer growth in the market. However, Banglalink achieved 6.8% YoY growth in revenues, with subscribers growing by 2.8% YoY, backed by network improvements. Bangladesh 1Q19 was characterized by a challenging regulatory environment and price pressure on data offers from the competition.

    Solid operational margins on organic growth and IFRS 16 implementation

    Organic Growth and the Implementation of IFRS 16 reflected positively on EBITDA figures. GTHE reported EBITDA of USD336 million in 1Q19, up from USD305 million in 4Q18, and USD311 million in 1Q18; an increase of 7.9% YoY, and 10.0% QoQ; leading to an EBITDA margin improvement of +4.3pps YoY and +7.5pps QoQ. Margin Improvement was driven by IFRS 16 implementation along with strong margins in Pakistan and Bangladesh.

    In Pakistan, Jazz contributed c. 54.6% of the group’s EBITDA, reporting an EBITDA margin of 50.6%. Jazz showed an organic EBITDA growth of 32.0% YoY and 10.4% QoQ; however adverse currency movements limited growth to 10.0% YoY and 6.0% QoQ.

    In Algeria, Djezzy achieved a decline in EBITDA of 1.8% YoY and 3.7% QoQ. Dejezzy contributed to c. 26.6% of GTHE’s EBITDA. The new Finance Law and further tax increases continued to impact EBITDA and growth negatively by an approximate amount of DZD197 million (USD1.66 million).

    In Bangladesh, Banglalink contributed 17.8% to GTHE’s EBITDA, where EBITDA margin improved to 44.6% in 1Q19 (9.4pps YoY); mainly on a sequential acceleration of data revenues (+36.0% YoY in 1Q19 and +25.2% in 4Q18). Banglalink continues to focus on acquiring customers despite a highly competitive market, differentiating its offer with improved network availability.

    Bottom line supported up by lower expenses and FX losses 

    GTHE recorded profit of USD51.0 million in 1Q19, compared to a net profit of USD32 million in 1Q18. Improved bottom line performance was mainly due to the implementation of IFRS 16 along with: (i) lower operating expenses, which declined by 9.2% YoY as a result of lower G&A costs, (ii) lower FX losses, which declined by 35% YoY, primarily due to forex gain from the re-evaluation of the put option liability in Pakistan and (iii) other operating gain of USD5.0 million compared to a loss of USD4.7 million in 1Q19. 

    Banglalink guaranteed facility to provide liquidity breather

    GTH’s subsidiary, Banglalink, has entered into a new USD300 million syndicated term facility agreement - where the facility will be guaranteed by VEON Holdings – and used to refinance the principal amount of Banglalink’s USD300 million bond that matures on 6 May 2019. The guaranteed facility is expected to provide a needed breather on liquidity and will relieve minority shareholders from concerns about the potential capital increase, even if the MTO did not go through. The Ordinary General Assembly meeting that is scheduled for 26 June 2019 related to the rights issue remains unchanged.

    Veon’s ongoing offer to fully acquire Global Telecom

    GTHE confirmed that negotiations are ongoing with the Egyptian Tax Authority (ETA) to resolve outstanding tax issues. GTH has received a letter from ETA showing a claimed outstanding tax liability of EGP5,088 million, however GTH has objected to this letter, since it does not reflect the true tax obligations of the company. GTH managed to provide ETA with documents supporting its position. The claimed ETA tax liability is translated to EGP1.08/share; however the claimed tax liability is not yet final since negotiations are ongoing with the tax authority.

    At the current market price and based on the MTO price of EGP5.30, we have an Equalweight recommendation on GTHE. The stock currently trades at an EV/EBITDA of 3.0x.