April 2014
Egyptian Company for Mobile Services
S.A.E. (mobinil)
Analysts Contact:
Egypt – Cairo
Tel. (202) 3749 5616
Fax (202) 3749 6184
Opportunities/Strengths

Marwa Ezzat M. Osman - Senior Risk Rating Analyst
marwa.ezzat@merisratings.com
Miglena Spasova - Senior Risk Rating Analyst
miglena.spasova@merisratings.com

Radwa Weshahy - Risk Rating Analyst
radwa.weshahy@merisratings.com


Rating Table:
Current
Rating
Previous
Rating
Entity Rating: Senior Unsecured
A-
A
Bond Rating: Senior Unsecured
A-
A-
Negative
Negative
Category
Rating Outlook

Risks/Weaknesses

Stand Alone Operating Statistics:
Figures in EGP mn
3 Yrs
Average*
FY13
FY 12
FY 11


AROA %
(1.5)
(2.5)
(1.0)
(1.0)
AROE %
(10.3)
(17.8)
(6.5)
(5.0)
EBIT
842.4
588.6
825.0
1,113.6
8.5
5.9
8.4
11.4
3,282.8
3,065.8
3,344.1
3,438.5
33.3
30.7
34.0
35.2
EBIT Margin %
EBITDA
EBITDA Margin %

* Based on FY11, FY12, and FY13 results.
NB: EBITDA and EBIT figures exclude provisions and provisions no longer required

Stand Alone Key Statistics:
Figures in EGP mn
Turnover
3 Yrs
Average*
FY13
FY12
FY11
9,864.9
9,995.0
9,831.9
9,768.0
16,447.0
15,967.7
16,596.5
16,776.7
Debt/EBITDA(x)
2.6
2.8
2.4
2.4
EBITDA/Interest
Expenses (x)
3.6
3.1
3.8
4.1
Total Assets
A strong and unified senior management team,
with a clear vision and strategy, working hard on
overcoming the existing obstacles.
A clear shift in management strategy and focus on
value creation, rather than sheer market share
leadership.
Strong shareholder and an experienced
management partner, who have a strategic
interest in their Egyptian operations.
Simplified shareholding structure following
Orange’s acquisition is reflecting positively on
operations and by easing the complexity of the
decision making process.
One of the leading mobile operators in Egypt with
proven track record and strong brand equity.


The implication of the unified license on the
business operation as well as on the future cash
flow are still unclear.
The volatility in the telecom industry is foreseen to
further intensify competitive environment.
Increasingly
competitive
and
challenging
operating environment, exerting negative pressure
on margins and market share.
Significant weakening in the operating and
financial metrics due to a number of factors
additionally aggravated by the increased political
uncertainty and general deterioration in the
macro-economic conditions.
The Egyptian pound devaluation will exert extra
pressure on the company’s business operation,
especially on the capex exposure.
High capex requirements needed for capacity
expansion and network enhancement negatively
affecting mobinil’s free cash flow generation.
Loss of market leadership, further exacerbated by
the loss of subscribers.
* Based on FY11, FY12, and FY13 results.
NB: EBITDA and EBIT figures exclude provisions and provisions no longer required
1
MERIS Analysis
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
Summary Rating Rationale
MERIS (Middle East Rating & Investors Service) reviewed the senior unsecured debt - NSR - of the Egyptian
Company for Mobile Service (mobinil). MERIS has downgraded the entity rating to an “A-” grade from “A”, while
maintaining the instrument rating at “A-”. The outlook for both the entity and the instrument ratings remains at
"Negative Outlook".
The change in the entity rating was triggered by the volatility in the telecom industry over the last years, which is
expected to be further intensified over the short to medium term following the entrance of the fourth mobile operator.
The timing of the changes in the industry dynamics is very critical for the already saturated mobile market in general
and mobinil in specific, which already suffers from fragile credit metrics since 2011. Going forward, we expect that
mobinil’s financial ratios will remain weak for at least 2014 with no prospects of recovery in the short term to levels
commensurate with the previous rating category. MERIS is concerned regarding the company’s stressed operating
and financial performance. The drop in performance was evident through (i) the notable decline in the quantitative
aspects, witnessed in weak revenue growth, a significant deterioration in bottom line results, and profitability margins.
This has also adversely affected the leverage and coverage positions; (ii) the loss of its lead market position as a result
of the erosion in market share from 40% in 2010, to roughly 34% in 2013. Moreover, the recent devaluation of the
Egyptian pound exposes the company to significant foreign exchange risk, which adds to the already sensitive cash
flow metrics. MERIS views the capital expenditures related to network expansion and enhancement as a necessary
requirement to maintain the company’s technological competitiveness in the market. It is worth mentioning that
management/shareholders have implemented actions to mitigate the effect of the companies deteriorating domestic
performance on credit metrics, including: i) exploring innovative financing options to enhance the cash resources, in
order to relief the pressure on the leverage as well as coverage fronts, to a certain extent; ii) rationalizing the cost
structure; iii) recommendation of the management to the board not to distribute dividends going forward (which was
accepted in 2012). MERIS believes that management will continue its initiatives to mitigate the risk of the increasingly
tough operating and regulatory environment; nonetheless, we are concerned that these actions might not be sufficient
to fully offset the company's increased business risk amidst a challenging industry and macroeconomic conditions.
Moreover, we believe that further cost cutting opportunities might be diminishing, on top of rising pressure on the
financing need. In a recent action, the Telecom Ministry has announced the unified license preliminary term sheet,
which gives the local telecom operators the rights to provide all the telecommunication services. There are several
details/aspects are still under negotiation, including the detailed payment terms, therefore, the implication of the
proposed license on the business operation as well as the future cash flow is unclear.
Mobinil issued the second unsecured bullet bond amounting to EGP 1.5bn in 2010, which will be maturing in January
2015. At the time of issuance, the bullet feature of the instrument placed the bondholders in a structurally subordinated
position in terms of payment compared to the other lenders of the company. MERIS has reviewed this clause taking
into consideration that the bond is fully due early next year, and the bondholders will be repaid before certain of the
existing lenders. As such, MERIS affirmed the bond rating at A-, with a Negative outlook.
Rating Outlook
The negative outlook reflects the increased risks to M mobinil business from the challenging operating/industry
environment, which might impose further pressure on the company’s business operation and financial performance.
The outlook could move to stable if there is more clear perspective in the regulatory and macroeconomic environment
and there is a stable and contained foreign currency market. A return to positive profitability growth across the industry,
combined with stable margins and sustainable cash flow, would also lead to a stable outlook.
What Could Change the Rating Up
Although not currently expected in view of the recent rating action, MERIS could consider a rating upgrade if the
company: i) improves its financial profile by enhancing its operating margins, cash flow metrics and leverage position
to level close to 2010 results; ii) strengthens its cash-flow generation, translating into sustainable positive free cash
flows; iii) debt protection and coverage ratios were to strengthen significantly as a result of improvements in its free
cash flows and reduction in debt; iv) succeed in fully integrating its business with the key shareholder and thereby
realize marketing and operational synergies.
What Could Change the Rating Down
The rating could be further downgraded if: i) the company’s financial performance continues its downward spiral as a
result of the increased intensity in the competitive environment and the stressed macro-economic conditions; ii) the
cash flow metrics weaken further under the pressure of dividend distribution and/or excessive capex/investment
outlays, which might result in additional indebtedness.
2
MERIS Analysis
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
Company Profile
The Egyptian Company for Mobile Services (ECMS) is a leading wireless telecom service provider in Egypt. ECMS
operates under the brand name mobinil and has 34.8mn subscribers as of December 2013 (33.8mn as of December
2012), which translates into a market share of approximately 34%. Its network of 6620 sites at the end of 2013 and 34
switches currently covers most of the urban areas in Egypt, or 99.66% of the population.
ECMS was initially established in November 1997 by the state-owned Arab Republic of Egypt National
Telecommunication Organization (ARENTO), which was succeeded by Telecom Egypt (TE). The company
commenced its operations in May 1998, when all the mobile-related assets of TE were sold off to Mobinil
Telecommunications, a consortium comprised of one local and two international telecom giants, Orascom Telecom
Holding (OTH) France Telecom (FT), and Motorola. Afterwards, the company was owned by two of its founding
shareholders OTH and FT/Orange Group, with direct and indirect ownership of 34.6% and 36.4% respectively. The
remaining 29% of the shares represented free float. OTH name was changed to Orascom Telecom Media Technology
(OTMT) in light of the acquisition of VimpelCom Ltd. In 2012, Orange acquired additional stake in mobinil, ultimately
gaining majority control of the company with a total shareholding of roughly 94%. As a result, OTMT’s share was
reduced to only 5% and the balance represents free float. According to management, it is not foreseen to have any
significant changes in the shareholding structure, if the macro-economic conditions remain challenging as they are
today”.
Key Rating Considerations
BUSINESS RISK FACTORS
FACTOR 1: Size, Scale, Business Model and Competitive Environment
Mobinil is a leading mobile operator in Egypt. It is the second largest national player in terms of subscribers, roughly
34.8mn subscriber as of December 2013, reporting 2.9% growth rate on Y-o-Y basis, compared to 33.8mn as of FY12.
Management views the decline in the growth of the subscriber base in line with its revised strategy to focus on
capturing value driven/ high quality customers. With equal note, despite the moderate size and scale of the business
by industry norms, Mobinil still enjoys some of the benefits of larger companies by making use of the strength and size
of its strategic shareholder (Orange) and management partner (OTMT), when making equipment purchases and
entering into roaming agreements. Furthermore, mobinil’s commercial and marketing departments maintain strong
links with their counterparts at Orange, sharing best practice and market knowledge. Thus, the relationship with its
strategic shareholder and management partner gives the company some additional strength, beyond that of a pure
independent player.
The company’s business operations experienced a number of challenges over the last years, due to various internal as
well as external factors, which was reflected in substantial changes in the company’s profile. The serious drop in
performance started in 2010, the main challenge facing the company was the limited dial up numbers, which
suppressed the company’s growth prospects. In 2011, the company faced a number of obstacles of various nature,
which adversely affected its operations and financial performance. The main causes for the company’s weakened
position in 2011 included the boycott campaign in 2011, following the highly politicized tweet and the subsequent loss
th
of subscribers and brand damage, in addition to the political and economic turmoil, following the January 25
Revolution . The combined effect of all these events was reflected in a significant drop in mobinil’s market share from
approximately 40% in 2010 to roughly 34% in December 2013, a decline in EBITDA figure by roughly 32% (between
FY10 and FY13). Going forward, the challenging operating environment as well as the stressed macro-economic
conditions added further pressure to the performance. With equal note, the introduction of the unified license, which is
expected to materialize in the short term horizon, is anticipated to further stress the market fundamentals and intensify
the competitive environment.
The management team, which is one of the positive key rating consideration, has a solid experience in the telecom
industry both in the local and the international markets. MERIS met with the top management and believes that they
form a strong and unified team with a clear view and strategy for the company’s way forward. The team is well aware
of the challenges and is working hard to overcome the existing obstacles, which is considered a positive factor to the
rating.
3
MERIS Analysis
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
Historically, mobinil’s strategy has focused on growing its subscribers’ numbers and was the first to introduce new
aggressive offers to the market, maintaining leading market share until 2010/2011. However, in light of the saturation
of the local mobile market, management reviewed the growth strategy to include a more pronounced shift towards
value creation. Nonetheless, management underscored the need to maintain a leading market share as well. This was
reflected in low net ads figures over the last two years (FY13: 968K, FY12: 926k, compared to 2.7mn in FY11). As part
of its value oriented strategy, management is planning to expand rapidly on the data/broadband front, taking into
account the low penetration rate, which offers high growth opportunities. In this regard, mobinil will in particular
capitalize on its fully owned subsidiary Link Dot Net, which was acquired in 2H10.
Mobinil offers a diversified product mix covering both the corporate and retail market segments. With regard to the
retail segment it continued pursuing a dual strategy, targeting both the lower and higher ends of the market. Staying
close to the customers, understanding their needs and creating the right products to address the clients’ different
needs is at the core of mobinil’s commercial strategy. Voice telephony is the main revenue stream for the company,
but following the rollout of the 3G network, it also provides other services such as mobile broadband. Going forward,
the company will continue expanding in value-added services, broadband services and others to compensate for the
expected decline in the voice business.
In terms of business model, mobinil is a local wireless operator with a focus on growing its operations organically and
with no appetite for regional or international expansion. In general, MERIS views a mobile only operation as a less
robust business model than a fully integrated telecom provider. Integrated players have sounder platforms for
adopting a range of new products and benefit from the diversity of their business risks. Nevertheless, pursuing an
integrated business model in Egypt is currently not an option for the wireless operators, as long as Telecom Egypt
remains the sole provider of fixed-line services. The award of the unified license including second fixed-line operator
license has been postponed several times by the government. The Unified license is assumed to liberalize the local
telecom market.
In a recent action, the Telecom Ministry announced the preliminary outline for the proposed license terms and
conditions. The unified license is an integrated license, with four components. It will give the telecom operators the
rights to provide all the telecommunication services, such as, voice services (mobile and fixed lines), transmission
fibers, international gateway, and full unbundling…etc. It will include: 1) granting Telecom Egypt the right to initially
enter the local mobile market by a virtual network, capitalizing on the existing operators mobile networks and once
Telecom Egypt acquired the frequency offered, it will start building their own mobile networks to be ready for the
second phase. The mobile license cost will be EGP 2.5bn, in addition to a revenue sharing agreement; 2) offering the
existing mobile operators full unbundling/the virtual fixed license against EGP 100mn and certain revenue sharing
agreement; 3) reviewing the terms and conditions to the international gateway license which was offered previously,
whereby, mobinil and Vodafone will pay up front fees amounting to EGP 1.5bn and EGP 1.8bn respectively, in
addition to 6% revenue sharing fees; and 4) offering the operators to enter into an infrastructure company that will have
license to build a transmission network against EGP 300mn and certain revenue sharing agreement. Currently there
are on-going negotiations between the telecom operators and several government authorities to finalize the license
terms, at the same time to reach an agreement with regard to the other pending components (i.e. the fiber optic
network ..etc) and to solve the existing disputes/conflicts between the telecom players. According to management they
are currently exploring the feasibility of all the components under the license; therefore, the investments and capex
needs attached to the license are not clear yet. MERIS believes that the outlook for the local mobile industry is
negative, as we expect that the market dynamics will continue to intensify competition and further squeeze profitability
margins to add extra pressure to the fully penetrated market. Moreover, the implication on the cash flow in the short
term, is not certain yet; as it will depend highly on which component management will explore and the payment terms
for each. On the other hand, the recent devaluation of the Egyptian pound as well as the uncertainty surrounding the
th
political and economic environment since the January 25 Revolution, add to the pressure on the company’s revenue
especially that the consumer is anticipated to be increasingly price-sensitive.
Factor 2: Operating Environment
(a) Regulatory & Industry Framework
In MERIS’s view, the regulatory environment in Egypt is still volatile with a considerable degree of uncertainty.
Liberalization of the Egyptian telecom market started in 1998 through the issuance of two mobile network operating
4
MERIS Analysis
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
licenses. Furthermore, 1998 saw the establishment of the Ministry of Communications and Information Technology
(MCIT) with the responsibility of developing Egypt’s ICT infrastructure, stimulating the knowledge economy and forging
an e-government strategy and a legal framework that is in line with international digital requirements. Liberalization
was further advanced by the Telecommunication Regulation Law (No. 10) of February 2003. The law rests on four
main pillars: information disclosure, free competition, the provision of unified services and user protection. A central
aspect of the law was the creation of the National Telecom Regulatory Authority (NTRA), which replaced the Telecom
Regulatory Authority (TRA) in 2003 and took over all the regulatory functions as an independent regulatory authority.
While liberalization has been progressing relatively smoothly, criticism has centered on the overprotection of the
incumbent telecom operator. Among some of the challenges to the liberalization process is the role of the Ministry of
Communications and Information Technology in overseeing both the regulator and Telecom Egypt (80% government
owned and the sole fixed line service provider), a dual role that makes for a difficult balancing act.
The intricate position of the regulator has been played out in the recent interconnection dispute between mobinil and
Telecom Egypt (TE) since 2007. NTRA had sided with TE’s decision to lower its fixed-to-mobile termination rates,
despite the existing effective agreement between TE and the wireless operator. mobinil, as well as Vodafone, have
appealed the decision and filed law suits against NTRA, to decide on which interconnection rate to apply (i.e. either the
initially agreed upon rate stated in the contracts or the lower rate proposed by NTRA). At the same time, there is
another lawsuit appealed by the same mobile operators against NTRA claiming that the regulator has no right to
interfere in the termination rates agreed upon between telecom operators. On August 2013, the court ruled out a final
and non-appealable decision on the first litigation, confirming the mobile operators rights to stick to the initial terms of
the contracts between TE and mobile operators. As for the second lawsuit, it is still in court; however, there is no
financial or any other obligation that may arise from the remaining case as it is on the substance of the problem not on
the termination rate itself.
Over the last three years, the dynamics of the telecom industry in Egypt notably have changed; due to the weak
macroeconomic conditions and the low GDP growth rate, which keeps consumer price sensitive. MERIS believes that
the outlook for the local mobile industry is negative, as the market will entail higher business risk, especially following
the entrance of a fourth mobile operator. In general, the integrated incumbent operators such as TE might fare better
than companies with just mobile or fixed offerings because they can offer bundled voice and data services, adding
extra pressure to the already squeezed sector margins. Despite the fact that the changes in the market dynamics will
enhance the service offering, it will further intensify the competition; as the companies will fight to gain or retain their
market share. As such, the sector will remain on negative outlook due to the slow pace of the macroeconomic
conditions and the intensified competition, this is reflected in uncertain sustainability of the revenue recovery, as well
as margins and financial metrics.
(b) Technology Risk
MERIS’s ratings take into consideration a company’s exposure to technological advancement and how well positioned
it might be in handling such developments. The ratings also factor in the potential capital expenditure implications of
any technological improvements and advances.
(c) Market Share
As we highlighted earlier, mobinil’s market share was pressured significantly since 2010 culminating in the loss of its
market lead to Vodafone in 2011; dropping from 40% to 34.2% as of FY13. As we mentioned earlier, the main reasons
contributing to the drop in market share were the tweet-related political controversy, which led to a boycott campaign
against the company, in addition to the challenging operating and market environment. Despite the fact that
management is working hard on maintaining the current market share, the entrance of the fourth mobile operator is
expected to further challenge the current position.
On the subscribers’ front, mobinil’s subscriber mix remains predominantly prepaid, as the local market is predominantly
prepaid in nature. Initially, the rapid expansion of prepaid services in the market has been the main tool for the
operators in their quest for expanding their respective market shares. It is worth mentioning that the increasing
prominence of prepaid tariffs, however, has been reflected in the operators’ declining ARPU levels, as prepaid
spending levels are 6-7 times lower than postpaid levels. This stark difference in spending levels between the two
market segments illustrates the acute need for operators to improve their subscriber mixes and introduce new
services. Mobinil have slightly higher number of postpaid customers. Historically, Vodafone used to have a relatively
better subscriber mix, as illustrated by its higher ARPU. However, following vodafone’s aggressive subscriber base
5
MERIS Analysis
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
expansion initiatives, which led to the acquisition of mostly lower income clients, it has recently narrowed the gap with
mobinil’s blended ARPU. Going forward, in accordance with management’s revised growth plan, mobinil will continue
to focus on the postpaid segment, with relatively higher income generation capacity. Moreover, management
introduced new postpaid bundle offers to cater to the needs of the upper bracket of the prepaid segment. These
initiatives decreased the contribution of prepaid segment to the total subscriber base to 87% in 4Q13 compared to
around 95%. This action was reflected in maintaining the global ARPU figures at the range of EGP 23 over the last two
years.
Factor 3: Management’s Financial Strategy
1
In May 2012, Orange (formerly France Telecom) acquired roughly 94% of mobinil’s capital, through its wholly-owned
subsidiary, MT Telecom SCRL (“MT Telecom”). So far, there is no clear plan for fully integrating mobinil’s business
into the FT group, nonetheless, the simplified shareholding structure increased the efficiency of running the business,
through easing the complexity of the strategy formulation and decision making process.
Historically, the dividends distribution practices, coupled with the fierce market competition has put significant pressure
on the company’s cash flow position over the last few years. Mobinil used to follow a high dividend payout policy to
meet its shareholders' objectives. The company’s cash flow has also been used to support the high capex and
investment (i.e. 3G license payment) requirements, especially those associated with the payment of the 3G license
and network upgrading. The company’s high dividend payout policy, coupled with the capital intensive nature of the
industry have already constrained mobinil’s financial flexibility. Going forward, the company’s management has
affirmed its orientation to balance the shareholders’ requirements with the need to maintain a healthy debt profile.
Accordingly, the company will be flexible in reviewing the future strategy based on market, economic and funding
conditions. The company’s financial strategy for the next 3 years is to maintain it within the covenants range and to
continue to invest heavily to further upgrade and expand its network. At the same time, it is carefully assessing the
feasibility of any other expansion initiatives in the local market (i.e. international gateway, 4G network, etc.). According
to management, the financing needs for the coming years will cover mainly the unified license, if needed, and the
capex/investment requirements. It is worth mentioning that the future cash flow requirements will depend highly on the
terms and conditions of the proposed licenses. In terms of geographical expansion, mobinil remains committed to its
growth within Egypt, with no appetite for further diversification by embarking on a regional expansion. The
management strategy and tolerance for financial risk have a direct impact on the debt level and credit quality and is
therefore paramount for the rating grade.
Management will continue with the cost cutting initiatives which was introduced in 2012, as it proved to partially
contain the negative impact of the challenging operating environment. Going forward, management is planning to
continue with the cost cutting strategy, although such opportunities might be increasingly difficult to find and
implement, especially in light of the devaluation of the local currency, and the challenging operating environment which
is excessively pressuring the cost structure. Furthermore, the company has plans to increase the tariff and to pass any
potential cost/tax increases to consumers, in order to relief the foreseen pressure on the cash flow.
FACTOR 4: Operating Performance
Mobinil financial statements are audited by Ernst & Young. The company's financial statements have been prepared in
accordance with Egyptian Accounting Standards (EAS). However, in the auditor's opinion, there are no material
differences between EAS and the International Accounting Standards (IAS). For the entity rating, as well as the bond,
MERIS analysis is based on the audited unconsolidated accounts (a stand-alone basis); as such we didn’t take into
consideration Link Dot Net investment.
Revenue and Margins Pressured on the Back of a Difficult Operating Environment
Mobinil revenues have been almost stable over the last two years; while the decline continued on the EBITDA level. As
the graph below shows, the decline was steeper on the EBIT front with roughly 29% drop in absolute figures as of
December 2013. This was due to the instability in the political and economic environment, along with the devaluation
of the local currency, in addition to the severe competitive pressure. Going forward, the pressured performance is
1
Orange long-term issuer and senior unsecured rating was downgraded in January 14th, 2014, to Baa1 from A3 by Moody's
Investors Service. The outlook on the ratings is stable.
6
MERIS Analysis
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
expected to continue in the short term horizon, in light of the intensified competitive environment. Accordingly, the
profitability margin is expected to be further squeezed, in light of the increasing operating expenses. According to
management, operating profitability is anticipated to be maintained at below 10%.
In FY12 bottom line was hit dramatically to reach EGP 165.7mn in losses and EGP 401mn in FY13. The severe drop
resulted from the overall poor operating performance, followed by the notable increase in interest expenses. In view of
the saturation of the market, as well as the difficult macroeconomic and political environment in Egypt, MERIS believes
that the coming years will continue to challenge the local mobile operators in general and mobinil in specific, especially
after losing its leading position and the entrance of the fourth player into the local mobile marker. As we expect
revenues will show limited growth in 2014, it is not clear how sustainable any recovery will be in the near future.
In a recent action, the company published lately
the 2013 full year results. Reporting 1.7%
growth in revenue figure to stand at roughly
EGP 10bn, while EBITDA figure has reached its
bottom point at EGP 3bn. Also, the profitability
margins is showing a downward trend with
EBITDA and EBIT margins of 30.7% and 5.9%,
respectively. The net income was dropped
significantly to reach negative EGP 401mn. The
continued decline in performance was due to the
stressed macroeconomic conditions which
negatively affected the performance, along with
the devaluation of the Egyptian pound which
inflated cost and expenses notably. Also the
increase in interest rate contributed to the drop in
the bottom line.
Revenue & Profitability
FY13
FY12
Revenue
Growth (%)*
Figures in EGP mn
9,995.0
1.7
9,831.9
0.7
FY11
9,768.0
(6.5)
10,450.1
(3.2)
FY10
EBIT
EBITDA
EBITDA Margin (%)
Operating Profit Margin
(%)
588.6
3,065.8
30.7
5.9
825.0
3,344.1
34.0
8.4
1,113.6 **
3,438.5
35.2
11.4
2,515.3
4,486.3
42.9
24.1
Interest Expense
Interest Income
(988.1)
67.9
(876.6)
68.4
(838.8)
42.6
(631.5)
43.5
Net Income/loss
Net Income Margin (%)
(401.4)
(4.0)
(165.7)
(1.7)
(171.0)
(1.8)
1,378.0
13.2
* Y-o-Y Basis
** In an action to separate between the shareholders’ remunerations and employees’ profit
sharing, management changed the accounting treatment of the employees’ bonus in 2011, to be
accounted for in other operating cost (employees bonus accounts for EGP 225mn in FY11, and
EGP 58mn in 1Q12).
In terms of revenue mix, prepaid subscribers
continue to be the company’s key driver
NB: EBITDA and EBIT figures exclude provisions and provisions no longer required figures
accounting for roughly 87% in FY13, compared to
a historical average of 97% of customer base, which comes in line with management strategy to shift to the value
share strategy. Although prepaid customers are expected to continue dominating the revenue mix going forward, a
minor erosion of their share might be foreseen in light of the management intention to shift to a value extracting
strategy. By service type, currently, voice revenue is considered the main revenue driver, accounting for more than
85% of revenues. Despite the fact that the share of non-voice and other revenues registered a significant increase by
more than 60% in FY13, voice revenues will continue to have the dominant share on the medium term, since the
Egyptian consumer is mainly voice oriented. Roaming revenue accounted for less than 2% of revenue down from 4%
th
in 2010, due to the drop in tourist visitors to Egypt since the January 25 revolution in 2011.
12,000
50%
Profitability
10,000
40%
8,000
EGPmn
30%
6,000
20%
4,000
10%
2,000
0%
2007
-2,000
Revenues
Net Income*
2008
2009
2010
2011
EBITDA*
EBITDA Margin %
2012
2013
-10%
EBIT*
EBIT Margin %
*Adjusted for employees' bonus retroactively for 2007, 2008, 2009 and 2010
7
MERIS Analysis
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
Historically, mobinil has been more aggressive in terms of customer acquisition – especially in the middle and lowerend segments, which jeopardized its ARPU figures and profitability margins, which were relatively lower compared to
its peer group. In 2011, management indicated a shift in its growth strategy towards value extraction in an attempt to
ease the pressure on the company’s operating metrics. Nevertheless, given the intensified competitive environment,
especially in a saturated market with more than 100% penetration, MERIS expects that the company’s margins will
remain weak in 2014 with no prospects of recovery in the short term to levels commensurate with the previous range.
FACTOR 5: Financial Strength
Difficult Operating Environment, Challenging Credit Metrics
Historically, the company has been
generating strong operating cash flow.
Nonetheless, the free cash flow position
was pressured by the aggressive
dividends distribution policy, coupled
with the significant capex requirements.
The cut down in shareholders
remuneration, since mid-2012, relieved
the pressure on the cash flow position to
a certain extent. Going forward, in FY13,
mobinil generated EGP 847.4mn
negative free cash flow, which was
mainly due to negative changes in
working capital as well as the payment
of EGP 750mn to the regulator against
the last installment of the spectrum fees.
A negative trend which is expected to
continue in 2014.
Cash flow & Coverage
Figures in EGP mn
FY13
FY12
FY11
FY10
Funds From Operation (FFO)
- Dividends
Retained Cash Flow (RCF)
2, 919.4
0.0
2, 919.4
3,301.8
0.0
3,301.8
3,233.1
(1,412.3)
1,820.7
4,063.9
(889.3)
3,174.7
Funds From Operation (FFO)
+/- Changes in Working
Capital
Cash Flow From Operation
(CFO)
- Dividends
- Capex
- Investments (license Fees)
Free Cash Flow (FCF)
2, 919.4
3,301.8
3,233.1
4,063.9
(1,134.6)
(1,372.2)
(900.0)
(1,136.8)
1,784.9
1,929.6
2,333.0
2,927.1
0.0
(1,757.2)
(875.0)
(847.4)
0.0
(1,918.6)
0.0
(786.9)
(1,412.3)
(1,707.7)
0.0
(787.0)
(889.3)
(1,919.4)
(1,850.0)
(1,731.5)
1.8
3.0
1.7
3.8
1.1
4.1
1.7
7.1
RCF/Capex (%)
EBITDA/ Interest Exp (x)
As highlighted earlier, management demonstrated its commitment to scale down and even completely forego
shareholder returns, when market conditions made such cash preservation tactics necessary. This conservative
dividend distribution policy is viewed positively by MERIS. With equal note, the devaluation of the Egyptian pound is
anticipated to impose serious pressure on the company’s credit metrics. As such, management might cut capex
expenses to offset this challenge, to a certain extent. On the other hand, the future capex and investment requirements
are unclear, taking into consideration that the detailed terms and conditions of the unified license are not fully released
yet.
5,000
Cash Flow
4,000
EGPmn
3,000
2,000
1,000
-1,000
2007
2008
2009
2010
2011
2012
2013
-2,000
-3,000
Retained Cash Flow (RCF)
8
MERIS Analysis
Cash Flow from Operations (CFO)
Free Cash Flow (FCF)
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
In terms of interest coverage, mobinil's position deteriorated significantly from the 7x range to 3x in FY13, which is
associated with the higher debt level linked to network enhancement, license fees and working capital requirements
along with the drop in the EBITDA figures.
A Highly Leveraged Debt Profile
Mobinil's leverage position has been
pressured over the last couple of
years.
The company’s borrowing
Figures in EGP mn
FY13
FY12
FY11
FY10
increased since 2010, after the EGP
Short-term Debt
2,929.5
1,958.2
2,111.2
1,017.2
1.5 billion bond, which was followed
Long-term Debt
5,647.6
6,119.3
6,300.8
5,968.2
by the EGP 2bn, seven-year
Total Debt
8,577.1
8,077.6
8,412.0
6,985.4
unsecured syndicated loan in 2011
Cash and Cash Equivalent
660.1
969.8
1,208.0
546.3
and the EGP 2.9bn medium term
syndicated loan undertaken in
Net Debt
7,916.9
7,107.7
7,204.0
6,439.1
September 2012, which will mature in
2019. The latter is divided into two
O. Financial Obligations (License fees)
0.0
750.0
750.0
750.0
equal tranches: (i) a medium-term
Total Financial Obligations
8,577.1
8,827.6
9,162.0
7,735.4
loan amounting to EGP 1.1bn to
partially refinance existing debts and
Debt Adjustments:
to finance capex and working capital
Capital commitments & contingent L.
494.0
790.0
593.0
699.0
requirements; (ii) a declining revolving
Adjusted Debt
9,071.0
9,617.6
9,755.0
8,434.3
facility amounting to EGP 1.79bn, to
be paid gradually over the two years
Equity
2,052.5
2,461.5
2,640.5
4,227.0
before the debt maturity. The loan
entails a floating interest rate to be
EBITDA – Capex / Interest Exp. (x)
1.3
1.6
2.1
4.1
paid semiannually.
The favorable
FFO + Interest Exp / Interest Exp (x)
4.0
4.8
4.9
7.4
terms and conditions of the newly
Net Debt/EBITDA (x)
2.6
2.1
2.1
1.4
negotiated syndicated facility in a
Gross Debt/Equity (x)
4.2
3.3
3.2
1.7
difficult political and macroeconomic
Gross Debt/ EBITDA (x)
2.8
2.4
2.4
1.6
environment are a clear testimony to
Adj. Debt / Capitalization (%)
87.4
96.0
94.6
97.3
the strong partnership of mobinil with
FCF/Adjusted Debt (%)
(9.9)
0.8
(8.6)
(22.4)
the local banks. In early 2014,
RCF / Adjusted Debt (%)
32.2
34.3
18.7
37.6
management secured a new debt,
amounting to EGP 2.26bn, from eight banks. The seven year debt carries approx. two years grace period and will be
used for refinancing existing debts. With equal note, the syndicated loan also entails a floating interest rate, which will
be paid semiannually. According to management, the company will operate within a target leverage range (Net
Debt/EBIT) of around 2.0 – 3.0x. The company’s debt profile is considered well spread, with approximately 30% of the
outstanding balance short-term in nature, containing the current portion of long-term debts and credit facilities.
Meanwhile, management also, is exploring other sources of non-bank finances to secure its financial obligations.
Financial Leverage
Mobinil’s second unsecured bullet bond, issued in 2010 and maturing in January 2015, amounted to EGP 1.5bn. The
bond bears a fixed coupon rate of 12.25%, payable semi-annually. It is non-convertible and callable after three years.
Initially the bullet feature of the bond placed it in a structurally subordinated position in terms of repayment compared
to the other lender of the company. As such and taking into consideration that the bond is due during the coming year,
this clause has been reviewed and the bondholders will be repaid before certain of the existing lenders. As illustrated
in the graph below, regardless of the notable increase in mobinil's indebtedness, the amortization of the loans is
designed in a way, which alleviates the pressure on the company’s liquidity metrics.
It is worth mentioning that roughly EGP 3bn of the company’s debt profile will mature over 2014 and the 1Q15.
According to management these outstanding balances will be mostly funded through the already secured new loan.
Drop in Debt Protection Ratios
RCF figures dropped significantly in FY11 on the back of the deterioration in operating performance, as well as the
excessive dividends distribution. This resulted in a substantial hit to the RCF/Adjusted Debt ratio, which declined from
mid 40% range in FY09 to 18.7% in FY11. In 2012 the ratio has improved, thanks to the cut in the dividends
distributions figures which reflected positively on the RCF position. It is worth mentioning that the adjusted debt ratio,
9
MERIS Analysis
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
takes into consideration the debt obligation (bank debts as well as bonds), in addition to license payment obligations,
capital commitments and contingent liabilities.
The company’s indebtedness has been on the rise as reflected in the Gross Debt/EBITDA position, which deteriorated
from 1x in FY09 to 2.4x in FY12 and 2.8x in FY13 . While, the gross debt to equity ratio is showing a downward trend
over the last years, as a result of the shrinkage in the equity base, associated with the generated loss. At the same
time, the net debt to EBITDA ratio has deteriorated as well, where it dropped from 0.8x in FY09 to 2.1x in FY12 and
2.6x in FY13.
In terms of coverage, despite the deterioration, the company was still able to report healthy ratios with enough room to
serve interest obligations after fulfilling its on-going investment needs. As detailed in the table above, EBITDA less
Capex/Interest Expense ratio was around 1.3x, in FY13, compared to around 4.1 x in FY10.
Times (x)
9
Indebtedness and Coverage
4.0
8
3.5
7
3.0
6
2.5
5
2.0
4
1.5
3
1.0
2
0.5
1
0.0
Times (x)
4.5
0
2008
2009
2010
2011
Gross Debt/Equity (x)
Gross Debt/EBITDA (x)*
EBITDA/Interest Expense (x)* (right axis)
2012
2013
Net Debt/Equity (x)
Net Debt/EBITDA (x)*
*Adjusted for employees' bonus retroactively for 2007, 2008, 2009 and 2010
Other Considerations
Liquidity Position is Considered Adequate
Mobinil's liquidity position is considered adequate. As of December 2013, mobinil had more than EGP 660mn in cash
and cash equivalent.
It is also worth noting that the single obligor limit with the banks improved significantly following the Orange takeover
and the subsequent removal of mobinil from the OT group exposure. This has provided the company with additional
opportunities for access to bank debt. As of January 2014, the company had short term credit facilities sourced from
12 different banks, amounting to roughly EGP 1.3bn. Around 40% of the total authorized limits were unutilized.
Furthermore, mobinil has an additional available limit of EGP 1.8 billion as a revolving loan under the syndicated loans,
in addition to another EGP 100mn under the EGP two billion facility, which is also supportive of its liquidity position.
10 MERIS Analysis
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
Annex 1: Shareholding Structure
ECMS
MT Telecom (MTT)
94%
11 MERIS Analysis
Orascom Telecom Media and
Technology Holding (OTMT)
5%
Free Float
1%
April 2014
Egyptian Company for Mobile Services (S.A.E.) mobinil
Annex 2: National Rating Scale
Gilt edged
AAA
Very high
AA+
AA
AA-
Upper-medium
A+
A
A-
Medium grade
BBB+
BBB
BBB-
Questionable
BB+
BB
BB-
Poor quality
B+
B
B-
Very poor
Quality of credit
CCC+
CCC
CCCCC
C
Short
term
Prime 1
Prime 2
Investment Grade
Long
term
Prime 3
Not Prime
Speculative Grade
Quality of credit
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12 MERIS Analysis
April 2014