Beltone financial investment bank said in its 2020 yearbook that the challenging environment affecting the Egyptian telecom sector which started in 2017 will continue in 2020 on the absence of any developments on proposed amendments from operators to restructure telecom taxes and fees to revive market growth. Beltone analysts therefore see total market mobile subscribers growing only by 1% year over year (YoY) with a 99.5% penetration rate, while mobile broadband subscribers' base growing by 8% YoY with a penetration rate of 42%. Beltone analysts also expect Telecom Egypt to grow its mobile subscription by 15%, YoY in 2020 and reach a market share of 8%. Financially, Beltone analysts expect Telecom Egypt revenues to grow by 7% YoY in 2020, driven by a 12% YoY increase in the retail segment on steady growth in data revenue by 13% YoY. Although they expect the early retirement programme to continue until 2021, margins are expected to improve from 2019-pressured levels. In addition, they expect core earnings to almost double YoY in 2020, driven by saving early retirement costs recording EGP 1.5bn and FX gains recording EGP 873m. Telecom Egypt is Egypt's sole integrated telecom operator and 80% of it is owned by the Egyptian government. The company started operations in 1854, corporatised in 1998, and was listed on the EGX in 2005. Currently, Telecom Egypt is the sole fixed-line operator and the leading ADSL provider with 75% market share as of 1H19 through its fully owned interest service provider TE Data. Telecom Egypt offers retail, voice, and ADSL services to home and enterprise segments. Wholesale services, which represent 48% of revenues in the first half of 2019 (1H19), include leasing bandwidth capacity to ISP, domestic and international interconnection service, and selling and leasing capacities on submarine cables. In September 2017, Telecom Egypt launched its mobile services under the brand "WE" and managed to register 4.3m subscribers by 1H19. Furthermore, Telecom Egypt owns 45% stake in Vodafone Egypt, the leading mobile operator in the country with 42% market share in 1H19. Beltone analysts have a Buy rating on Telecom Egypt with a fair value of EGP 16.6 per share using a SOTP/methodology with a five-year discounted cash flow model for Telecom Egypt's core telecom business, and Vodafone Egypt. They expect revenues to grow in 2019-2023 by 6%, driven by a strong retail segment, gross profit, and EBITDA growing at 8% and 11% respectively, core earnings to grow by 13%, and ease in finance costs by 20%. Downside risks include imposing further taxes or duties on telecom services that could pressure usage, weaker than expected growth in the market, and higher than expected capex or leverage needs. On the other hand, EFG Hermes said in its yearbook 2020, over the past years, data has remained the largest umbrella theme is telecom sector, from which other subthemes emerged. EFG analysts expect the start of the 5G network to rollout across the GCC, North Africa, Sub-Saharan Africa, and other frontier markets to accelerate growth further in 2020 and beyond. Data traffic per smartphone in the Middle East and North African (MENA) region is expected to grow in 2019-2025 by 29%, driven primarily by 33% in Sub-Saharan Africa. This is a major opportunity for businesses that serves the industry. In Egypt, the market is valuing telecom Egypt at EGP 20bn, the same as their valuation for its stake in Vodafone Egypt. This means the market implied valuation of Telecom Egypt's businesses, excluding the Vodafone Egypt stake, is nil. They see this as unwarranted, given that the emergence of a solid equity story after Telecom Egypt's strategy has become much clearer, in tandem with its strong performance in 2019, better profitability starting in fiscal year 2020, and ongoing interest rate cuts in Egypt. They said that Telecom Egypt is the best-positioned operator to capitalise on Egypt's digital transformation. Moreover, Pharos Holding said in its yearbook 2020 that they hope the digital transformation initiative will pave the way for investment opportunities, along with unexpected high growth in mobile data usage. ADSL's expansion into automated services can also create healthy revenue growth momentum. They also hope that expansion plans to capitalise on digital transformation and financial inclusion can secure sustainable revenue stream. Stronger currency translates into higher FX gains and offsets weaker revenue growth on lower revenue contribution for foreign currency. As Pharos analysts fear limitations on dividends distribution on aggressive capex spending, as well as failure to cut cost and price pressures from competitions, weaker EGP may translate into FX losses since companies in the telecom sector usually borrow in USD, so to benefit from lower rates. Pharos analysts also remind us that regulatory and legal changes that could impose new taxes on mobile operators and customers will cap demand.
