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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 firstname.lastname@example.org Marise Ananian +20 2 3535 6152 email@example.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.
AED0.25 on 1 Apr 2010 AED84,991 / 7,906 AED251.8 AED11.85 / AED10.00 ETISALAT UH / ETEL.AD 40%
SHARE PRICE PERFORMANCE RELATIVE TO ADI REBASED
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.
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