Retail revenues drive growth
ETEL reported 4Q19 revenues of EGP6.79 billion, up from EGP5.4 billion in 4Q18 and up from EGP6.3 billion in 3Q19 (25.5% YoY, 7.6% QoQ). Retail revenue grew by 32.6% YoY and 10.6% QoQ (contributed to 55.4% of total revenues), mainly driven by a YoY increase of 27.2% in Home and Service revenues and a YoY increase of 46.5% in Enterprise Solutions revenues. Home, Consumer and Enterprise Solutions contributed c.41.5% and 18.4% of total revenues.
Home and Consumer data revenues continued to grow significantly during 4Q19 (+29.8% YoY), offsetting a minor YoY decline of 5.1% in Enterprise data revenues. Enterprise Solutions revenues witnessed the recognition of EGP407 mn relating to NUCA projects and the first phase of the digital transformation initiative, which is characterized by high margins.
International customers and Networks (IC&N) revenues recorded a hike of 84.3% YoY and 59.9% QoQ, mainly on the recognition of EGP305 million in cable projects related to two different carrier deals.
On an annual basis, ETEL recorded revenues of EGP25.8 billion in 2019, compared to EGP22.8 billion; an increase of 13.3% (which is higher than management revenue growth guidance of high single digit); driven by growth in retail and domestic wholesale revenues.
Mobile customers recorded a 32.8% YoY surge, reaching c.5.13 million customers; driving mobile revenues to a YoY surge of 61% (fueled by a growing customer base and healthy ARPU), representing 20% of overall revenue growth. Domestic wholesale revenues grew by 16.3% in 2019; hitting EGP4.16 billion, driven by the continuing demand for data from MNO customers.
The annual decline of 14.6% in International Customers and Networks (IC&N) during 2019 was mainly due to a strong base effect of the Bharti deal signed in 2018. International carrier affairs (ICA) revenues remained almost flat YoY (-0.9%), despite EGP appreciation; due to higher international incoming traffic.
High margin business lines and reversal of ERP costs drive margin improvement
During 4Q19, COGS grew by 12.1% YoY and slightly declined by 1.9% QoQ; leading to a growth of 65.0% YoY and 33.2% QoQ in gross profit and GPM improvement of 7.96pps YoY and 6.41pps QoQ; reaching 33.3% in 4Q19. EBITDA recorded EGP2.1 bn with a margin of 31.4%. Operating margins improvement is mainly due to: i. high margin complementary access services revenues, ii. a reversal of EGP210 mn in ERP costs as this cost was borne by the loyalty pension fund, ii. and lower advertising costs (-27% YoY). Normalizing for the ERP reversal, the margin would have settled at 28%.
On an annual basis, COGS grew by 15.7% YoY, capping gross profit growth at 9.2% YoY and leading to a drop of 1.3pps in GPM; dropping to 34.7% in 2019. Operating profits during the year were hammered by ERP costs recognized (c.1.30 billion, post the reversal of EGP210 million) and higher employee costs on the reintroduction of the loyalty pension fund, the bonus in 1Q and the annual increase in salaries. EBITDA remained flat YoY at EGP5.8 billion at an EBITDA margin of 22.6% in 2019; pressured by ERP costs in 2019. Normalizing for ERP costs, EBITDA would reach EGP7.1bn, recording a margin of 28%.
Investment income from Vodafone surges on 3Q19 one-offs
On an annual basis, investment income from Vodafone showed a YoY increase of 29.2% to reach c.EGP2.83 billion, despite remaining flat QoQ. Annual increase can be attributed mainly to 3Q19 one-offs namely: i. the sale of VIS unit recognized in 3Q19- worth c.EGP450 million, ii. the reversal of dispute related provisions, iii. operational growth and iv. lower interest expense on lower debt balances.
During 2019, Vodafone Egypt customers slightly grew by 1.0% YoY; stabilizing at c.40.0 million subscribers; implying a mobile market share of c.42%. Vodafone’s Egypt service revenues grew by 13.6% YoY reaching EGP24.4 billion; mainly driven by a growth of 19.3% in blended ARPUs, given minimal customer additions.
FX gains boost profitability despite higher D&A expenses
ETEL’s net attributable profit came at EGP1.18 billion in 4Q19, compared to net attributable profits of EGP1.1 billion in 3Q19 and compared to net attributable losses of EGP209.2 million in 4Q18. Net profit improvement is mainly driven by solid operational growth, high margin projects along with FX gains of EGP271 million during the quarter. Net attributable profit margin during 4Q19 recorded 17.4%, slightly improving from 17.2% in 3Q19.
On an annual basis, net attributable profit came at EGP4.4 billion in 2019, compared to net attributable profits of EGP3.3 billion in 2018; an increase of 33.4% YoY. Annual growth in net profit is mainly driven by: i) healthy revenue growth with high margin projects, ii) an increase of 29.2% in investment income from Vodafone, iii) FX gains of EGP1.57 bn during 2019. Bottom line improvement came despite a hike of 43.5% in depreciation expense.
Annual effective interest rate dropped to c.9.5% in 2019, compared to 10.8% in 2018; despite an increase of 18.8% in gross total debt balance. Lower effective interest rate was mainly on successful debt restructuring implemented. Net debt currently stands at c.EGP15.0 billion.
Telecom Egypt exceeds in-service capex guidance
Telecom Egypt reported that it had exceeded its in-service capex/sales guidance for 2019 of 30% by recording 49% capex/sales; in light of the company’s plan to complete its copper-to-fiber replacement program in 2 years rather than 4, ending mid-2020.
No direction yet regarding Vodafone investment
Regarding the potential STC-Vodafone deal, ETEL ensured that its options are open to make a decision that serves the benefits of its shareholders. Two investment banks have been hired to assist with the decision, but no developments have taken place so far.
Telecom Egypt is trading at attractive multiples
ETEL is currently trading at 2020f P/E of 5.6x and EV/Adjusted EBITDA of 2.7x, at a discount to global peer average of 10.0x and 5.6x.