Equity Analysis /

Telecom Egypt: 1Q19 – solid operational performance, maintain Overweight

    Revenue growth led by infrastructure, data revenues and digital transformation projects

    ETEL reported 1Q19 results showing revenues of EGP6.1 billion, an increase of 27.3% YoY and 12.5% QoQ. Witnessed revenue growth was mainly on: 

    • Domestic IRU sales of c.EGP400 million, “which is volatile on a QoQ basis, stable YoY”, spiking the domestic wholesale unit by 48.8% YoY and 60.0% QoQ.
    • Home and Consumer data revenues grew by 35.5% YoY, fueled by an increase of 27.2% in ADSL number of subscribers on low data penetration rates.
    • Recognition of c. EGP86 million from the Portsaid digital transformation program and c. EGP93 million from other infrastructure projects including NUCA, boosting enterprise revenues by 28.6% YoY
    • Mobile revenues grew, contributing to a low double digit to retail revenues and mid-single digit to total revenues. 
    • continuous customers additions on all fronts, where fixed line subscribers grew by 13.0% YoY and 3.2% QoQ, mobile customers grew by 44.9% YoY and 10.0% QoQ, mainly on c. 613k SIM cards provided to students in the first year of high school (students ARPUs are usually lower than average, however ETEL have added higher quality subscribers to its mobile customer base, which offset each other)
    • Sequential revenue growth can be attributed as well to a relatively weaker quarter

    EBITDA boosted by strong revenue growth

    EBITDA amounted to EGP1.9 billion in 1Q19, up from EGP1.5 billion in 1Q18 (+26.4% YoY, 137.4% QoQ), yielding a margin of 31% (almost flat YoY, +16.5pps QoQ) and an adjusted normalized margin of 29%. Higher contribution of retail revenues to reach 51.8% of total revenues, up from 50.4% in 1Q18 (+1.4pps YoY) and contributing to 57% of the total YoY growth, Portsaid digital transformation and NUCA projects backed up healthy revenue growth and shielded margins.

    Bottom line surged on FX gains and higher investment income from Vodafone

    Net profit showed a YoY surge of 1.1x and stood at EGP1.6 billion, mainly on the revaluation of USD facilities on EGP appreciation, healthy EBITDA growth and rebounding Vodafone investment income. Normalized net profit for IRU sales, employees’ bonus and forex gains stood at EGP1.1 billion. Investment income from Vodafone grew by c. 125% YoY and remained stable QoQ to record EGP647mn in 1Q19, up from EGP287 million in 1Q18. Vodafone investment income YoY increase is mainly on provisions booked by Vodafone in 1Q18.

    Moreover, ETEL has received EGP4.6 billion dividends from Vodafone, which lowered the net debt position from EGP12.6 billion in 4Q2018 to EGP8.1 billion in 1Q19, which should translate to a lower interest expense going forward.

    Solid operations in 1Q19, probably followed by another strong quarter

    ETEL’s 1Q19 results were quite solid, underpinned by the completion of strategic digital transformation programs, customer additions across the board, along with continued growth in data revenues. Going forward, lower debt levels and a stronger EGP should lead to lower interest expense (since current debt facilities are USD denominated), thus faster bottom line growth. 

    ETEL’s 2Q19 financial performance should witness c. EGP346 million (USD20.0 million) cables revenue on the latest PEACE cable agreement, with solid growth in data revenues and stable investment income from Vodafone. 

    Additionally, the latest announced PEACE cable agreements secure a blended revenue recognition of USD40mn (USD20 million immediately recognized and USD20 million within 2 months or upon the signature of the agreement) as well as USD25 million over 25 years. Since we have already accounted for USD27.0 million cables agreement in our fair value, the additional amount would add EGP0.03/share to our FV, bringing our FV to EGP16.25.

    Digital transformation to prop growth and uphold margins going forward

    We believe ETEL should be expecting more infrastructure and digital transformation projects with other government institutions in 2019. ETEL already has the assets for the implementation of these projects; thus ETEL will generate returns without incurring much costs. ETEL plans to connect 5 more governorates with fiber over an expected timeline of 2 years.

    Maintain Overweight; Telecom Egypt is trading at attractive multiples

    ETEL is trading at attractive multiples compared to global peers, with P/E 2019f of 6.6x, compared to a global average of 13.0x and an EV/EBITDA 2019f of 3.1x, compared to a global average of 5.5x. Telecom Egypt is going to be the sole listed Telecom company post GTHE delisting and OIH’s shift in strategy, which accordingly paves the way for liquidity flowing into the stock for sector allocation.