Mubasher upgrades Telecom Egypt fair value, recommends buy

08 Oct 2017

Mubasher Trade Research has upgraded its fair value (FV) for Telecom Egypt (TE) to EGP 18.80 per share from EGP 8.34, with a “Buy/Moderate risk rating”, according to a recent report.

TE’s earnings rose 22% year-on-year to EGP 1.27 billion in the second quarter of 2017 from EGP 1.04 billion in the same period last year.

TE’s management attributed this increase to higher demand for data services, higher ICA and ICN services, as well as higher investment income from Vodafone Egypt, which is highly impacted by FX gains, the report added.

Meanwhile, TE posted a gross profit margin of 77% in Q2 2017, versus 83% in Q2 2016, reflecting a decrease of 645 basis points (bps) year-on-year on the back of higher interconnection costs, mainly impacted by the flotation of the Egyptian pound.

Moreover, EBITDA margin declined to 31% in Q2 2017 from 34% in the year-ago period, due to higher salaries.

The report further noted that TE has benefited from the profit and loss level from the pound’s flotation, which took place in November 2016, as one third of TE’s revenues is US-denominated, which helps the telecom operator to finance its huge CAPEX requirements that are mostly “benchmarked to the US dollar.”

It is worth mentioning that TE has officially launched its mobile network under the slogan “WE”.

Egypt’s National Telecom Regulatory Authority (NTRA) is set to officially activate fourth generation (4G) services for all four mobile operators within weeks.

On the other hand, the main down risk to this new operator “WE” is “the quality of the customer service, which is a critical success factor for the mobile business,” according to Mubasher Trade Research.

It noted that Egypt’s 110%-penetrated mobile market is not seen as an issue compared to other markets, such as Algeria, Morocco, Jordan, Iran, and Tunisia, which had “a median penetration rate of c.135%.”

Meanwhile, Pharos Research said that the Central Bank of Egypt’s (CBE) decision to raise the reserve requirement on banks will have a short-term negative impact on net interest margin (NIM).

This decision will devour 5% of the fair value (FV) of listed banks, Pharos added in a recent report.

The CBE will raise the cash reserve ratio to 14% from 10% starting from 10 October 2017.

Pharos indicated that banks will tend to protect profitability through lowering interest rates paid on deposits to compensate for the lost yield and requesting higher rates of return in treasury auctions.

The required reserves ratio settled at 14% between 2001 and 2012, and was gradually lowered since January 2011 by 4%, until it reached 10% to support the Egyptian banking sector.

Pharos noted further that Commercial International Bank – Egypt (CIB), Credit Agricole Egypt, and Export Development Bank of Egypt (EBE) will be the least affected by the CBE’s decision because of the local deposits these banks have.

dailynewsegypt

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