EGYPT | TELECOMS
April 10, 2012
Mobinil
BUY (UPGRADED)
LTFV: EGP 96.0 (UNCHANGED)
TP: EGP 202.5 (UNCHANGED)
Upgraded to Buy on recent “speculative” sell-off
News published in Al-Mal newspaper about proposed amendments to the
Telecom Law was the main reason behind the selling pressure witnessed
today in Mobinil [EMOB] shares (down almost 10% intraday, 7% for the day).
According to the article, the new amendments could oblige telecom
companies to keep a minimum of 20% of its capital in Egyptian hands.
However, by end of today's trading session Reuters quoted an unnamed
source at the Ministry of Communications & Information Technology (MCIT)
as saying that the proposed amendments will be limited to new licenses
only (if any). In our opinion, if the Parliament approves such amendments,
we do not believe they will be applied retroactively on operating companies
and, if so, may be challenged as unconstitutional. If worst comes to worst,
France Telecom (FT) and Orascom Telecom Media & Technology (OTMT)
[OTMT] may have to fine-tune their deal to comply with the new rules. That
said, we see two scenarios at opposite ends of the spectrum: (1) France
Telecom (FT) may decide not to acquire any additional stakes in EMOB and
(2) FT can comply with the new ownership limit by listing 15% on the EGX in
addition to the 5% owned by OTMT. Absent any official news, we prefer the
second scenario and view today's intraday price fluctuation as speculative
in nature. Hence, we upgrade our recommendation for EMOB from Hold to
Buy, given a 25% upside potential to our target price: the suggested
EGP202.5/share acquisition price. Failure to execute the deal is the main risk
to our recommendation.
COMPANY SYNOPSIS
News suggesting new ownership limits for telecom companies: According to
today’s Al-Mal newspaper, the MCIT through the Legislative Committee of the
Cabinet of Ministers sent a draft of the proposed amendments to the Telecom
Law to the Committee of Transport & Communications of the Parliament. The
new amendments could oblige telecom companies to keep a 20% minimum stake
in Egyptian hands. The article mentioned that the proposal leaves the CIT minister
room to decide on a case-by-case basis.
Mobinil T elecom
F T Orange Group
OTMT
OTMT
Free Float
Total
EMOB’s stock price pressured on speculation this may affect FT/OTMT's
deal: We believe this news may have been the reason behind the pressure we
have seen today on EMOB's stock price (down 10% intraday to EGP 156.52
before pulling back to end 7% down for the day). As per the non-binding
agreement between FT and OTMT announced on February 13, 2012, OTMT is
considering to sell the majority of its stake in EMOB to FT at EGP202.5 a share,
while retaining a 5% financial interest in EMOB but the same voting rights and
representation on EMOB's board of directors.
Egyptian Company for Mobile Services (ECMS) “Mobinil”
[EMOB] was established in November 1997 under
Investment Law No. 8/1997, granting it a 5-year tax holiday
that ended in December 2003. The company began its
operations on May 21st, 1998, when all of Telecom Egypt’s
mobile assets were sold to Mobinil Telecommunications, a
consortium consisting of one local and two international
telecom giants: Orascom Telecom (OT), France Telecom
Mobiles International (FTMI), and Motorola.
Mobinil Telecom currently controls EMOB through its 51%
combined stake. In early 2001, both FTMI and OT
purchased Motorola’s stake on a pro-rata basis. In July
2002, FTMI was replaced by Orange, which then controlled
71.25% of Mobinil Telecom.
On April 18th, 1998, EMOB was formally awarded a 15-year
license (renewable for a 5-year period) to operate and
expand the existing GSM 900 network. In 2005, EMOB was
granted access to 7.5 mhz of the 1800 mhz spectrum for a
total payment of EGP1.24bn. In July 2007, Mobinil decided
to apply for a 3G license for EGP3.4bn, with the goal of
launching commercial 3G services in early September
2008. EMOB is the second largest local GSM mobile
operator in terms of subscribers (c. 32.9mn subs).
SHAREHOLDER STRUCTURE
20.0%
29.0%
100.0%
STOCK DATA
Reuters; Bloomberg
Recent price as of 10-Apr-12
No. of O/S shares
Market cap
52-wk high / low
Avg. daily volume / turnover
EMOB.CA; EMOB EY
EGP 161.53
100.0 mn
EGP 16,153 mn
EGP 185/ EGP 72.99
0.09 mn / EGP 11.4 mn
STOCK PERFORMANCE | 52 WEEKS
Volume
EGP
COMPANY NOTE
51.0%
71.3%
28.8%
EC MS
EGX 30 - rebased
mn shares
200
180
160
140
120
100
80
60
40
20
0
Details of FT/OTMT deal on EMOB: OTMT currently owns a total of 34.7% of EMOB
(14.7% indirectly through Mobinil Telecom and 20% directly). So far, FT has not officially
presented a tender offer for EMOB shares (which has been widely expected soon by the
market). However, from OTMT's latest official communication dated March 29, 2012,
OTMT has agreed to subscribe to what we believe is a special purpose vehicle (SPV)
called MT Telecom S.C.R.L. in which OTMT would have 30% voting rights and no equity
stake. MT Telecom, a newly-established company, is the acquirer that will submit the
tender offer to purchase all but 5% of EMOB direct and indirect shares. In order to
preserve its current voting rights in EMOB, OTMT will subscribe to 28,750,000 Class B
shares (voting shares with no economic rights), for a consideration of around EGP65mn,
in MT Telecom. As a result, OTMT will hold approximately 30% voting rights in MT
Telecom, which is similar to its current voting rights in EMOB, and will continue its longterm partnership with FT in EMOB as well as its representation on the latter's board of
directors and a number of other committees that would allow OTMT to continue to provide
strategic and management oversight over EMOB.
0.7
0.6
0.5
0.4
0.3
0.2
0.1
-
Mar-11 May-11Jun-11 Aug -11 Oct-11 Dec-11 Jan -12 Mar-12
Source: Reuters
Amr Hussein Elalfy, CFA
Amr.Elalfy@cicapital.com.eg
Mohamed Hamdy
Mohamed.Hamdy@cicapital.com.eg
1
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EGYPT | TELECOMS
April 10, 2012
What if these amendments are correct and the Parliament approved them?
We believe the new amendments, which are yet to be discussed in the
Parliament, will unlikely be ratified any time soon. We believe that other political
issues, such as the Political Isolation draft bill, will be given a higher priority to
these amendments. Even if the Parliament approves them, we do not believe they
will be applied retroactively on operating companies. And if they are, we think this
may be challenged in the court of law as unconstitutional. If worst comes to worst,
FT and OTMT may have to alter the proposed structure of their deal to comply
with the new rules (if approved and put in effect as a law that is not challenged). At
the end of the day, we see two scenarios at the opposite ends of the spectrum,
while we prefer the second – in case ownership limits are implemented:
(1) FT may decide to walk away from the deal and maintain the status quo
and its stake in EMOB. In other words, FT may decide not to acquire any
additional stakes in EMOB.
(2) FT may agree to the new rules and list 15% of its to-be-acquired 95%
stake on the market. This way, FT would be complying with the 20% (if
this is the limit to be applied) minimum ownership limit to be owned by
Egyptians (5% owned by OTMT and 15% to be listed in the stock
market).
More confusion with another official source saying new amendments will
only be limited to new licenses: According to Reuters, An unnamed official
source at the MCIT said today that the proposed amendments to the Telecom
Law are being studied by the Committee of Transport & Communications of the
Parliament and will only be limited to new licenses (if any). He also denied that the
proposed Egyptian ownership limit in telecom companies is 20%.
FT must submit its tender offer by April 13 unless extended by the regulator:
According to Article No. 330 of the Executive Regulations of Capital Market Law
No. 95/1992, FT must submit its tender offer within a maximum of 60 days from
the announcement date (i.e. by maximum April 13, 2012). However, this deadline
is subject to extension by the regulator if acceptable reasons are provided by FT.
According to Bloomberg, FT’s spokesman, Tom Wright, said today that FT is in
the process of completing the details of a non-binding agreement to buy most of
OTMT’s stake in EMOB. Thus, in our opinion and given the statement made by
FT’s spokesman, we would not be much concerned with the approaching
deadline, especially that both FT and OTMT seem to be working out the final
details of their agreement.
COMPANY NOTE
Valuation and recommendation: Absent official news that suggests otherwise,
we would tend to believe that today's sell-off was speculative in nature and driven
mainly by fear that the FT/OTMT deal may have fallen through. Given the 25%
upside potential to our target price of EGP202.5/share (the suggested acquisition
price), we upgrade our recommendation for EMOB from Hold to Buy.
2
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EGYPT | TELECOMS
April 10, 2012
Investment Rationale
 FT to acquire the remaining minority shares in EMOB at EGP202.5/share.
 Expected synergies from the acquisition of LDN.
 Rapid growth in data revenues, thanks to the growing demand for smartphone services.
 Faster-than-expected revenue growth from providing valued-added services
(e.g. mobile banking and broadband). We estimate mobile banking will be
launched in 2013 and could add as much as EGP5/share to EMOB value
(factored in our valuation).
 On-net promotions and cost optimization could stimulate usage and sustain
profitability margins.
 Better capex rationalization may help improve liquidity, leading to lower
reliance on use of debt.
Risks to Our Recommendation
COMPANY NOTE
 Failure to execute the FT/OTMT deal on EMOB at EGP202.5/share.
 Market maturity and boycott campaigns mute subscriber growth.
 High financing needs, mainly for capex on 4G network and 3G installment of
EGP750mn.
 Decelerating revenue growth rates due to lower tariffs on the heels of stiff
competition.
 Interconnection dispute with the NTRA could lead to a potential after-tax loss
of EGP814mn (from January 1, 2008 through December 31, 2011).
 The negative outlook on the tourism sector in view of country’s unrest might
affect roaming revenues.
3
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EGYPT | TELECOMS
COMPANY NOTE
April 10, 2012
Balance Sheet (EGP mn)
Assets
Cash & Cash Equivalent
Total Current Assets
Net Plant
Total Assets
814
1,257
9,800
14,640
610
1,235
10,270
16,731
1,256
1,986
10,094
16,880
542
1,294
10,067
15,649
768
1,508
9,942
15,416
897
1,508
9,643
14,796
920
1,543
9,332
14,196
941
1,572
9,000
13,572
Liabilities & Equity
Short-Term Debt
CP of Long Term Debt
Total Current Liabilities
Total Long-Term Debt
Total Liabilities
Shareholders' Equity
Total Liab. & Equity
559
407
6,347
4,013
11,308
2,930
14,640
206
819
5,065
5,968
12,117
4,145
16,731
377
1,734
6,644
6,301
13,935
2,468
16,880
1,979
1,522
7,336
4,201
12,566
2,605
15,649
3,209
1,633
8,811
2,432
12,306
2,632
15,416
4,080
1,872
10,090
450
11,630
2,688
14,796
4,956
143
9,519
307
10,945
2,774
14,196
3,981
143
8,890
164
10,198
2,896
13,572
Income Statement (EGP mn)
Yearend Subs (k)
Revenues
Cost of Revenues
Gross Profit
SG&A
EBITDA
Depreciation & Amortization
EBIT
Net Interest Expense
Imputed Interest
Other Non-Operating Inc/(Exp)
EBT
Taxes
NPAT
Minority Interest
Extraordinary Items
Attributable Profits
2009a
25,354
10,807
(2,039)
8,768
(3,647)
5,122
(1,907)
3,214
(688)
0
47
2,573
(536)
2,038
0
0
2,038
2010a
30,225
10,576
(2,401)
8,175
(3,871)
4,303
(2,001)
2,302
(589)
0
39
1,752
(393)
1,359
(0)
0
1,359
2011a
32,914
10,182
(2,543)
7,639
(4,381)
3,258
(2,408)
850
(801)
0
(27)
23
(275)
(253)
(0)
0
(253)
2012e
34,717
10,585
(2,488)
8,097
(4,710)
3,386
(2,352)
1,034
(834)
0
0
200
(50)
150
0
0
150
2013e
36,509
10,933
(2,332)
8,602
(5,029)
3,572
(2,262)
1,310
(915)
0
0
395
(128)
267
0
0
267
2014e
38,301
11,212
(2,190)
9,022
(5,270)
3,752
(2,171)
1,581
(827)
0
0
754
(188)
566
0
0
566
2015e
39,875
11,502
(2,162)
9,340
(5,406)
3,934
(2,102)
1,832
(697)
0
0
1,136
(283)
852
0
0
852
2016e
41,287
11,758
(2,121)
9,637
(5,526)
4,111
(2,023)
2,088
(452)
0
0
1,635
(408)
1,227
0
0
1,227
Cash Flow (EGP mn)
Gross Cash Flow (COPAT)
Cash After Current Operations
Financing Payments
Cash Before LT Use
Net Plant Change
FCFF
Others
Cash Before Financing
Change in Cash
2009a
4,658
5,273
(1,051)
4,222
(2,607)
2,666
(192)
1,423
163
2010a
3,820
3,091
(1,042)
2,049
(2,228)
863
(1,618)
(1,797)
(203)
2011a
2,888
3,394
(1,661)
1,733
(1,872)
1,522
(38)
(176)
645
2012e
3,337
3,366
(3,368)
(1)
(1,967)
1,400
242
(1,726)
(714)
2013e
3,444
3,350
(2,497)
853
(1,777)
1,573
56
(868)
226
2014e
3,564
3,592
(2,526)
1,066
(1,514)
2,078
57
(392)
129
2015e
3,651
3,666
(2,642)
1,024
(1,438)
2,228
70
(343)
23
2016e
3,702
3,702
(670)
3,032
(1,352)
2,350
82
1,762
21
2009a
69.6%
18.9%
13.9%
51.4%
47.4%
2010a
32.8%
12.9%
8.1%
25.0%
40.7%
2011a
-10.2%
-2.5%
-1.5%
6.5%
32.0%
2012e
5.8%
1.4%
1.0%
13.5%
32.0%
2013e
10.1%
2.4%
1.7%
16.4%
32.7%
2014e
21.1%
5.0%
3.8%
20.7%
33.5%
2015e
30.7%
7.4%
6.0%
25.3%
34.2%
2016e
42.4%
10.4%
9.0%
30.8%
35.0%
13.59
12.35
91%
11.9x
7.6%
$124
3.8
5.2x
1.5x
3.9x
(2.53)
0.00
0%
-63.9x
0.0%
$117
5.0
7.2x
2.2x
6.5x
1.50
0.00
0%
107.5x
0.0%
$111
4.8
6.9x
2.1x
6.2x
2.67
2.40
90%
60.5x
1.5%
$103
4.5
6.3x
1.8x
6.1x
5.66
5.10
90%
28.5x
3.2%
$94
4.3
5.8x
1.5x
6.0x
8.52
7.67
90%
19.0x
4.7%
$86
4.1
5.2x
1.1x
5.8x
12.27
11.04
90%
13.2x
6.8%
$78
3.9
4.7x
0.8x
5.6x
Key ratios & multiples
ROE
ROS
ROA
ROIC
EBITDA Margin
2009a
2010a
EPS
20.38
DPS
9.50
DIV./NPAUI
47%
P/E
7.9x
Dividend Yield
5.9%
EV/Sub (USD)
$133
P/ EBITDA
3.2
EV/ EBITDA
4.0x
Net debt/ EBITDA
0.8x
P/ BV
5.5x
Note: A = Actual; F = Forecasted
Source: EMOB and CI Capital Research forecasts
2011a
2012e
2013e
2014e
2015e
4
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2016e
RESEARCH
Amr Hussein Elalfy, CFA | Co-Head of Research
Amr.Elalfy@cicapital.com.eg
Mona Mansour | Co-Head of Research
Mona.Mansour@cicapital.com.eg
SALES
Investment Rating*
CI Capital Holding
64 Mohie El-Din Abou El-Ezz
Street, 5th Floor, Dokki, Giza,
Strong Buy
>30%
Egypt
Tel: +2(02) 33318357
Buy
>20% <30%
CI Capital Securities Brokerage
Khaled Abdelrahman | Managing Director &
Global Head of Securities Brokerage
Khaled.Abdelrahman@cicapital.com.eg
Dynamic Securities
CI Capital – US
Hold
>10% <20%
19 West 44th Street
New York, NY 10036
Tel: +646 454 8620
Hesham Khalil | Managing Director
Hesham.Khalil@cicapital.com.eg
Underweight
>0% <10%
Sell
<0%
CI Capital – US
Karim Baghdady | Director International Sales
kbaghdady@ci-capital.com
*Rating System
In February 2008, CI Capital Research (CICR) launched a new rating system to give analysts more freedom to be market responsive. This was to make
one element of our research more dynamic, namely the advertising of target prices and recommendations. What we did not change is our assessment of
the Long Term Fair Value (LTFV), nor did we stop our detailed industry and company research. What we did is change the target price to trade in the
balance of where a share should trade and where we think it will trade.
LTFV: As before we continue to estimate a fundamental valuation, largely DCF and/or NAV based.
Target Price: The price, which is not necessarily the LTFV, is where the analyst, given all (qualitative as well as financial) information available, thinks the
share price can get to within the next 3-12 months. This can be changed at any time on changing facts and perceptions.
Recommendations: Our new rating system falls out from the total return relating to the share price performance to the target price, and including any
distributions which may not be included in the target price calculation. To qualify as a BUY, the stock’s return must be over 19%, an arbitrary hurdle rate
we think reasonable given prevailing interest rates and risks (Please see investment rating bar above).
Disclaimer
The information used to produce this market commentary is based on sources that CI Capital Research (CICR) believes to be reliable and accurate. This
information has not been independently verified and may be condensed or incomplete. CICR does not make any guarantee, representation or warranty
and accepts no responsibility or liability to the accuracy and completeness of such information. Expression of opinion contained herein is based on certain
assumptions and with the use of specific financial techniques that reflect the personal opinions of the authors of the commentary and is subject to change
without notice. It is acknowledged that different assumptions can always be made and that there is a wide choice of techniques that can be adopted each
of which can lead to a different conclusion. Therefore, all that is stated herein is of an indicative and informative nature as forward-looking statements,
projections and fair values quoted may not be realized. Accordingly, CICR does not take any responsibility for decisions made on the basis of the content
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