Equity Analysis /
Egypt

Telecom Egypt: 2Q19 – Profitability hammered by one-off cost, despite strong revenue growth

    Al Ahly Pharos Securities Brokerage
    8 August 2019

    Strong revenue growth

    ETEL reported 2Q19 revenues of EGP6.6 billion, up from EGP5.3 billion in 2Q18 and EGP6.1 billion in 1Q19 (+23.7% YoY, +8.6% QoQ). Retail revenues continued to drive revenue growth, growing by 32.2% YoY and 7.6% QoQ, contributing 51.3% of total revenues. Home and consumer segment contributed 64% of total retail growth, recording revenues of EGP2.54 billon and contributing 38.4% to total revenues, implying an increase of 31.2% YoY and 5.7% QoQ. Enterprise Solutions recorded a 35% YoY hike on the growth of other enterprise revenues namely managed services.

    Data revenues drove retail segment growth as usual, where Home and Consumer data revenues contributed 64% of total retail revenue growth and grew by 37.6% YoY and 7.4% QoQ. Enterprise data revenue showed a moderate increase of 16.8% YoY and a slight increase of 2.8% QoQ.

    Domestic wholesale revenues declined by 13.3% YoY and decline by 28.1% QoQ, which is mainly due to the strong base effect in 1Q19 that has witnessed domestic IRU sales of c.EGP400 million, and the lack of infrastructure and transmission revenues in 2Q19. 

    International Customers and Networks (IC&N) revenues grew significantly by 105% YoY and 128% QoQ to reach EGP1.14 billion, which can be explained by the recognition of cable projects’ revenues such as PEACE cable.

    Lower interest expense offsets the decline in investment income

    Telecom Egypt reported 2Q19 interest expense of EGP274.0 million, compared to EGP333.5 million in 2Q18, a decline of c.17.8% YoY, on the debt restructuring and settlement of all the Egyptian pound denominated credit facilities. Investment income from Vodafone declined to EGP478 million in 2Q19, down from EGP587 million in 2Q18 and down from EGP647 million in 1Q19, a decline of 18.6% YoY and 26.2% QoQ. The decline in Vodafone’s investment income came despite an increase of 20.2% YoY and 6.0% QoQ in blended ARPUs. This can be attributed to a higher interest expense paid by Vodafone after distributing c.90% of their retained earnings as dividends. 

    Profitability hammered by a one-off cost and cost inflation

    ETEL’s 2Q19 profitability was hammered by a one-off cost and cost inflation, where COGS grew by 32.7% YoY and 12.2% QoQ, reaching EGP4.1 billion in 2Q19. Accordingly, GPM dropped to 38.5% in 2Q19, down 4.2pps YoY and down 2.0pps QoQ, due to faster-growing COGS than revenues. Gross profit growth was therefore capped at 11.6% YoY and 3.3% QoQ, reaching EGP2.55 billion, up from EGP2.28 billion in 2Q18 and up from EGP2.46 in 1Q19.

    The company recorded a total cost of EGP1.0 billion for the Early Retirement Program (ERP) with c.2,000 employees signing up, which will be paid to the employees in Q3. The one-off cost led to the decline of EBITDA to reach EGP735 million in 2Q19, a steep decline from EGP1.78 billion in 2Q18 and a steeper decline from EGP1.90 billion in 1Q19 (-58.9% YoY, -61.4% YoY). EBITDA margin has significantly dropped to 11.1% in 2Q19 (down from 33.4% in 2Q18 and down from 31.3% in 1Q19). Net profit dropped significantly to EGP517 million in 2Q19, down from EGP1.3 billion in 2Q18 and down from EGP1.6 billion in 1Q19 (-59.8% YoY, -68.0% QoQ)

    Excluding the impact of the one-off ERP cost, EBITDA margin would have stood at 26% (down from 33.4% in 2Q18 and down from 31.3% in 1Q19) on cost inflation and a low-margin cable agreement and net profit would have been EGP1.3bn on the back of forex gains and a lower interest expense paid concealing the decline in investment income from Vodafone.

    Telecom Egypt to speed up the copper-to-fiber replacement program

    Telecom Egypt plans to speed up the copper-to-fiber replacement program over 2 years rather than 4 years, ending in 2020, resulting in an in-service capex of EGP2.27 billion in 2Q19, compared to EGP1.32 billion in 2Q19 and EGP1.40 billion in 1Q19, a spike of 99.3% YoY and 62.3% QoQ. In-service Capex/sales surged to c.34% in 2Q19, up from 23% and 24.7% in 1Q19 and 2Q18 respectively.

    Telecom Egypt is trading at attractive multiples

    ETEL is trading at attractive multiples compared to global peers, at P/E 2019f of 7.4x and 2019 EV/Adjusted EBITDA of 3.4x compared to global average P/E and EV/EBITDA of 13.8x and 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.