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06 March 2011

Analyst Day: Etisalat Still Interested in Zain Deal, Zain KSA Sale is A Deal Breaker
initial opinion diversified telecommunications │ uae
Omar Maher +20 2 3535 6388 omaher@efg-hermes.com Marise Ananian +20 2 3535 6152 mananian@efg-hermes.com STOCK DATA Price Fair Value
Last Div / Ex Date Mkt. Cap / Shares (mn) Av. Mthly Liqdty (mn) 52-Week High / Low Bloomberg / Reuters Est. Free Float

Deal Update: KWD1.7/share is Final Price, Zain KSA Could be Deal Breaker Etisalat management has confirmed that failure to sell Zain Group’s Saudi unit, Zain KSA, would prevent the acquisition of the Kuwaiti group as regulatory authorities in Saudi Arabia will not allow Etisalat to concurrently own Mobily and Zain KSA. The offered deal price of KWD1.70 per Zain Group share is the maximum that Etisalat will pay. Etisalat is currently negotiating with Zain Group following the due diligence process expiry, as per previous management guidance. A Successful Deal is Looking Less Likely, Maintain Neutral on Etisalat Considering the recent rejection of all offers for Zain KSA by Zain’s BOD, as well as the expiry of due diligence period, the likelihood of the deal going through is further reduced, in our view. While NIC announced that it has cancelled its commitment to collect Zain shares for Etisalat ahead of its proposed acquisition, Etisalat said that it remains interested in the deal. We keep our Neutral rating on Etisalat and our FV of AED12.54/share based on fundamentals and not taking into account the potential deal. UAE Weakness on International Traffic Slowdown During 2010, Etisalat’s UAE operation, the largest contributor to total revenue and valuation, saw its revenue and EBITDA margin pressured mainly as a result of pressure on international voice traffic (from both mobile and fixed-line). UAE mobile revenue declined 12.7% Y-o-Y in 2010, while fixed-line revenue declined 13.3% Y-o-Y. The EBITDA margin was at 62% versus 70% in 2009. Cash DPS of AED0.60 for 2010, 5.6% Yield; No Bonus Shares in 2011 The company has announced a AED0.60 cash DPS for FY2010 (5.6% yield) versus our estimated AED0.37/share. Etisalat has already distributed AED0.25/share in 1H2010, while the remaining AED0.35/share has an ex-date of 30 March 2011. There will be no bonus shares this year, unlike in previous years.

AED10.75 AED12.54
AED0.25 on 1 Apr 2010 AED84,991 / 7,906 AED251.8 AED11.85 / AED10.00 ETISALAT UH / ETEL.AD 40%

Price (AED) 12.5 11.5 10.5 9.5 03-Dec-10 03-Mar-10 03-Mar-11 03-Jun-10 03-Sep-10 ADI (Rebased)

KEY FINANCIAL HIGHLIGHTS December Year End (AED mn) Revenue EBITDA EBITDA Margin Net Profit EPS (AED) DPS (AED) Net Debt (Cash) P/E* (Attrib.) (x) EV EBITDA* (x) Dividend Yield (%)
*Price as at 03 March 2011 Source: Etisalat, EFG Hermes estimates

2010a 31,929 16,561 51.9% 7,631 0.97 0.60 (3,877) 11.1 4.9 5.6%

2011e 32,149 17,287 53.8% 7,605 0.96 0.37 (5,236) 11.2 4.7 3.4%

2012e 33,234 18,114 54.5% 8,056 1.02 0.39 (4,079) 10.6 4.5 3.6%

2013e 33,852 18,440 54.5% 8,174 1.03 0.39 (3,568) 10.4 4.4 3.7%

1 / 6 pages

kindly refer to the important disclosures and disclaimers on back page

Management saw little impact from the service cut-off during recent events in Egypt. nor do we see a significant crackdown on illegal VoIP traffic in the UAE. and subscribers up 38% Y-o-Y. FIGURE 1: EGYPTIAN OPERATORS' REVENUES & SHARES 2009a Vodafone Egypt Revenue (USD mn) Revenue Share Subscribers Market Share Mobinil Revenue (USD mn) Revenue Share Subscribers Market Share Etisalat Misr Revenue (USD mn) Revenue Share Subscribers Market Share 2. and iv) fixing an absolute amount. mainly on the back of the decline in UAE revenue.etisalat 06 March 2011 diversified telecommunications │ uae ROYALTY: NO NEWS YET. EFG Hermes estimates 2 / 6 pages .5% 1. margin up to 35% from 29% in 2009 (expecting c40% in the long run).2% 716 14.4% 41.9% 1.8% 24. WILL REMAIN PRESSURED IN THE SHORT TERM The UAE operation’s contribution to total revenue fell by AED1. EBITDA nearly double Y-o-Y. Any reduction in royalties would be positively reflected in our fair value (FV) and would be a major share price performance catalyst. Management stated that consolidated EBITDA fell 15% Y-o-Y in 2010.3% Source: Etisalat.8% 38. ii) charging royalty fees to the UAE operation only.7 billion in 2010. however.4% 37. iii) splitting the taxable base between the top line and earnings. We however expect some improvement in the UAE EBITDA margin but we do not expect it to return to the 60s% level. We therefore expect pressure on UAE revenues to carry on for at least one more quarter. and ii) illegal voice over internet protocol (VoIP) providers. an increase in costs. UAE OPERATION UNDER PRESSURE. with revenue up 57% Y-o-Y. Options could include: i) reducing the current 50% royalty.946 40.9% 20.160 44.121 21. Although the size of the provision was not provided.9% 2010a 2. we understand that the majority of it was charged to the UAE operation and therefore UAE EBITDA margin fell from 70% in 2009 to 62% in 2010. mainly as a result of pressure on international voice calls from: i) competition. Vodafone Group. and the revision of a provision that was booked in FY2010. Management has expressed it optimism regarding the final outcome. BUT TALKS UNDERWAY Etisalat has not received any updates on its royalty fees. discussions have begun and the government has appointed an advisor on the issue. We do not see a reason for competition on international tariffs coming to an end in the short term.2% 1. in our view.8% 37. given du’s royalty cut.152 41. Mobinil.877 36. EGYPT UNIT PERFORMANCE SHINES Etisalat Misr’s 2010 performance exceeded management expectations. and expects another strong year in 2011.

with an approximate length of 1. SUDAN COULD HAVE LARGE POTENTIAL IF GSM LICENCE IS OBTAINED Management has highlighted that the Sudanese operation. Canar (89% owned).etisalat 06 March 2011 diversified telecommunications │ uae Impact on Egyptian Telcos Etisalat Misr’s debt position stands at USD984 million (56% of group consolidated gross debt). With the USD-EGP weakening. We calculate annual interest expense of around USD86 million in 2010. keeping a low profile until more clarity on the issues is available. Management has confirmed that talks were ongoing with the government regarding the GSM licence. Etisalat might. and is not worried about the separation issue. The issues around the Indian operation have caused management to decide to intentionally slow down the growth of the operation and its investments (hence the Y-o-Y decline in EBITDA). but were recently suspended on the back of the Zain deal discussions (Zain owns an operation in Sudan). Etisalat DB.800 kilometres (km). Management has blamed the decline in Canar’s revenue in 2010 on the fact that the licence is a CDMA versus a GSM licence. We therefore believe that Etisalat Misr will start to focus more on profitability than increasing its subscriber base. which reinforces our view that competition will continue to slow down and that no more competition on headline tariffs and price cuts will be seen. however. according to management. exit its investment in the country if it fails to obtain the GSM licence. since these issues relate to the company’s local partner and date back to before Etisalat decided to take part in the joint venture. has great potential if it is able to obtain a GSM licence (it currently operates a CDMA network). Etisalat maintains a healthy relationship with Sudan’s North and South governments. 3 / 6 pages . 59% of which is USD-denominated. Canar has the most advanced fibre optic network in Sudan. at least in 2011. we expect interest expense to increase by around USD10 million. INDIA: NO LEGAL LIABILITY ON ETISALAT Etisalat is not legally accountable for any of the issues surrounding its Indian subsidiary.

7 1.6% 38.237 221 377 329 -0. -1.8 14.9% -23.197 451 1.7 0.3% 20.5 139 25 21 15 187 20 112 28 21 14 210 28 -19.2% 4.5% 2.0% -4.6% 28.5% 8.164 4.4% 4 / 6 pages .294 1.6 0.0% 30.9% -63.168 439 1.060 1.9 1.114 233 314 623 -6.195 367 753 (63) 54 (16) 15.6% 19.2% -9.618 31 8 257 -10.9% 11.1 1.5% 2.462 1.594 4.9% 9.7% 36.6% 24.3% 24.4% -16.0% -38.2% 61.5 Y-o-Y 0.1 3.3% N/M 14.4% 27.7% 56.5% -3.0% -2.4% -65.7 4.5% N/M -71.0% -25.1% -83.3% 36.8% 26.0% -6.652 50 13 132 -9.2% 7.3 Var.5% 62.017 419 1.628 215 375 293 24.6% 26.0% -2.5% 95.5% 213. EFG Hermes estimates 2010a 7.4% 18.9% N/M 69.4% -37.1 2.6% 4.9% 5.378 2.296 (55) 32 21 8.9% 8.7% -29.0% 130 18 23 14 190 9 -13.4% 10.8 5.0% -29.3 1.458 (87) 9 69 -16.4 0.2% 2010e 7.3% 2.1 17.4% -16.9% 11.5% 35.1% 57.625 91 22 246 2.0% -38.8% -1.8 19.3% 40.7% 89.4% -5.6% 93.4% 14.8 6.3% 14.9% -0.5% 6.8% 15.7% 12.8% 12.6% -24.9% -2.425 396 1.etisalat 06 March 2011 diversified telecommunications │ uae FIGURE 2: FY2010 OPERATIONS' RESULTS 2009a Subscribers (mn) Etisalat UAE Atlantique Telecom Etisalat Misr (Egypt) Zantel (Tanzania) Canar (Sudan) Etisalat Afghan ARPU (AED) Etisalat UAE Atlantique Telecom Etisalat Misr (Egypt) Zantel (Tanzania) Canar (Sudan) Etisalat Afghan Revenue (AED mn) Etisalat UAE Atlantique Telecom Etisalat Misr (Egypt) Zantel (Tanzania) Canar (Sudan) Etisalat Afghan EBITDA (AED mn) Etisalat UAE Atlantique Telecom Etisalat Misr (Egypt) Zantel (Tanzania) Canar (Sudan) Etisalat Afghan EBITDA Margin Etisalat UAE Atlantique Telecom Etisalat Misr (Egypt) Zantel (Tanzania) Canar (Sudan) Etisalat Afghan Capex (AED mn) Etisalat UAE Atlantique Telecom Etisalat Misr (Egypt) Zantel (Tanzania) Canar (Sudan) Etisalat Afghan Source: Etisalat.3% 112.7% 56.4% 12.6% 38.465 593 1.

fair value estimates and statements regarding future prospects may not be realized. directly or indirectly.com Head of GCC Institutional Sales Amro Diab +971 4 363 4086 adiab@efg-hermes. This research report is prepared for general circulation to the clients of EFG Hermes and is intended for general information purposes only. Although the information in this report has been obtained from sources that EFG Hermes believes to be reliable. EFG Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. from any use of such information or opinions or otherwise arising in connection therewith. "EFG Hermes") for third parties may own the securities that are the subject of this report. We base our long-term fair value estimate on a fundamental analysis of the company's future prospects.com UAE Retail Sales Reham Tawfik +971 4 306 9418 rtawfik@efg-hermes. DISCLAIMER This Research has been sent to you as a client of one of the entities in the EFG Hermes group. . and Distribution Rasha Samir +20 2 35 35 6142 rsamir@efg-hermes. Al-Bihlal +9661 279 8670 kalbihlal@efg-hermes. hereby certify that the views expressed in this document accurately reflect our personal views about the securities and companies that are the subject of this report.com KSA SALES TEAM call center +800 123 4566 RiyadhCallCenter@efg-hermes. the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by EFG Hermes or any other person for any loss howsoever arising. Our investment recommendations take into account both risk and expected return.com Head of Western Institutional Sales Mohamed Ebeid +20 2 35 35 6054 mebeid@efg-hermes. The authors of this report may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which they have no discretion.com Client Relationship Khalid S. Funds managed by EFG Hermes Holding SAE and its subsidiaries (together and separately. EFG Hermes Holding SAE hereby certifies that neither it nor any of its subsidiaries owns any of the securities that are the subject of this report.EGYPT SALES TEAM Local call center 16900 cc-hsb@efg-hermes. The Investment Banking division of EFG Hermes may be in the process of soliciting or executing fee earning mandates for companies that are either the subject of this report or are mentioned in this report.com RiyadhTraders@efg-hermes.com Head of Publ. We have conducted extensive research to arrive at our investment recommendations and fair value estimates for the company or companies mentioned in this report. after having taken perceived risk into consideration.com RESEARCH MANAGEMENT Cairo General + 20 2 35 35 6140 UAE General + 971 4 363 4000 efgresearch@efg-hermes. we have not independently verified such information and it may not be accurate or complete.com Head of Research Wael Ziada +20 2 35 35 6154 wziada@efg-hermes.com UAE SALES TEAM call center +971 4 306 9333 uaerequests@efg-hermes. Omar Maher and Marise Ananian. Readers should understand that financial projections. It is not tailored to the specific investment objectives. We also certify that neither we nor our spouses or dependants (if relevant) hold a beneficial interest in the securities that are traded in the UAE stock exchanges. either expressly or implied. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice.com DISCLOSURES We.com Gulf HNW Sales Chahir Hosni +971 4 363 4090 chosni@efg-hermes.com Director of Client Relationship Mazen Matraji +9661 279 8640 mmatraji@efg-hermes. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any security.com Western Institutional Sales Julian Bruce +971 4 363 4092 jbruce@efg-hermes. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs. This Research must not be considered as advice nor be acted upon by you unless you have considered it in conjunction with additional advice from an EFG Hermes entity with which you have a client agreement. financial situation or needs of any specific person that may receive this report. EFG Hermes does not represent or warrant.

hfismcap . B129. Phase 3. The information in this document is directed only at institutional investors.efgi . COPYRIGHT AND CONFIDENTIALITY No part of this document may be reproduced without the written permission of EFG Hermes.939. Reviewed and approved by EFG Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number 1010226534. long-term rating approach. the analyst will be encouraged to review the rating. UAE.hrms . the ratings are defined by the following ranges in percentage terms: Rating Buy Neutral Sell Potential Upside (Downside) % Above 15% (10%) and 15% Below (10%) EFG Hermes policy is to update research reports when appropriate based on material changes in a company’s financial performance. the general economic outlook. In such cases. Dubai. or any other changes which could impact the analyst’s outlook or rating for the company. Cairo-Alexandria Desert Road. Report prepared by EFG Hermes Holding SAE (main office). and EFG Hermes UAE Limited. CONTACTS AND STATEMENTS Background research prepared by EFG Hermes Holding SAE.com . EFG Hermes changed its investment rating approach to a three-tier. the sector outlook. the sectors that they are exposed to. if a stock has been outside of its longer-term investment rating range consistently for 30 days or more.GUIDE TO ANALYSIS EFG Hermes investment research is based on fundamental analysis of companies and stocks. the analyst will not necessarily need to adjust the rating for the stock immediately. EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the corresponding fair value. However. DIFC. If you are not an institutional investor you must not act on it. Building No. Tel +20 2 35 35 6140 | Fax +20 2 35 37 0939 which has an issued capital of EGP 1. The Gate. The information within this research report must not be disclosed to any other person if and until EFG Hermes has made the information publicly available. KM 28. Effective 16 December 2009. Egypt 12577. bloomberg efgh reuters pages .320.hfidom efghermes. which is regulated by the DFSA and has its address at Level 6. For the 12-month long-term ratings for any investment covered in our research. Share price volatility may cause a stock to move outside of the longer-term rating range to which the original rating was applied.000. as well as the country and regional economic environment.efgs . Smart Village. In special situations. taking total return potential together with any applicable dividend yield into consideration.

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