telecom egypt company

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Telecom Egypt

Prepaid by

Shaimaa Sabry Mahmoud

Mohamed Huseen Ahmed

Submitted to doctor: Saad Metawaa

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Table of contents

Company overview

2

History

4

Subsidiaries

6

Governance

7

Description

14

Dividends15

Bonds

15

Financial analysis

18

Financial summary20

Ratios

22

Forecasting

23

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Computing intrinsic value

28

Compeer

28

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Telecom Egypt company

An Egyptian joint stock company

Company overview

Telecom Egypt, the incumbent telecommunications provider in Egypt, isalso the largest provider of fixed-line services in the Middle East withsome 8.0 million customers as at the end of December 2011.

Telecom Egyptis the only company in Egypt that is able to offer the fullrange of fixed line and retail telecommunications services and is the sole

provider of wholesale telecommunications services.

Telecom Egyptprovides retail telecommunication services includingaccess, local, long distance and international voice, Internet and data, andother services.The company also provides wholesale services including broadbandcapacity leasing to ISPs, and national and international interconnection

services.

Telecom Egyptcurrently participates in the mobile segment in Egypt byproviding mobile interconnectivity through its current 44.95% holding inVodafone Egypt, one of the three Egyptian mobile operators. VodafoneEgypt already has a growing subscriber base of over 36.8 million as atDecember 2011.

Telecom Egypts Internet and data services include the provision ofInternet broadband access through its subsidiary TE Data, datatransmission services and leased lines. In December 2009, TE Data wasservicing more than 1,111,223 thousand ADSL subscribers, an increase of25.8 % from December 2010.

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History

150Years of Telecommunications

1854 witnessed the birth of Egypt's telecommunications industry. The firsttelegraph line connecting Cairo and Alexandria was inaugurated early in

1854, forming the company that was later to become Telecom Egypt.

In 1918, the Egyptian Government nationalized the Eastern Telephone

Company for 755,000 L.E. and created the Telephone & Telegraph

Authority, a forerunner ofTelecom Egypt.

In 1978, with a capacity of 120 channels, the first earth station linking

Egypt by satellite to the rest of the world was opened in Maadi.

Telecom Egypt launched its first mobile services in November 1996.

Telecom Egypt was transformed into a joint stock company in 1998, the

Egyptian Government maintaining 100% ownership of the 171,121,490

shares in issue.

In December 2003, Telecom Egypt acquired an 8.6% ownership stake in

Vodafone Egypt.

Telecom Egypt obtained an additional ownership stake of 16.9% in

Vodafone Egypt in January 2005, bringing total ownership to 25.5%.

In February 2005, Telecom Egypt issued the largest corporate bond in

Egypt to date, raising EGP 2 billion.

On November 14th 2005, the Egyptian Government announced the launchof an initial public offering of its Telecom Egypt shares and GDRs to

retail investors in Egypt and institutional investors internationally. The

Offer represented 20% ofTelecom Egypt's outstanding share capital and

rose over $US 890 million. At the time of the Offer, it was the largest

international equity offering to come out of the Middle East and North

Africa region.

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On December 14th 2005, Telecom Egypt shares and GDRs commenced

trading on the Cairo and Alexandria and London Stock Exchanges.

On February 22nd 2006, Telecom Egypts joint venture launched

commercial services in Algeria under the brand name Lacom.

On October 2nd 2006, Telecom Egypt announced the outcome of its

Public Tender Offer to acquire an additional stake of up to 24.4% of

Vodafone Egypt. Telecom Egypt's shareholding stake in Vodafone Egypt

reached 48.97%.

On November 8th 2006, Vodafone Group and Telecom Egypt announced

that they entered into a new strategic partnership to increase cooperation

between both parties and to jointly develop a range of products and

services for the Egyptian market. Telecom Egypts shareholding stake in

Vodafone Egypt reached 44.66% after tendering 4.31% of Vodafone

Egypt to Vodafone. A couple of months later, Telecom Egypt bought

around 320,000 shares of Vodafone Egypt bringing up its shareholding

stake from 44.66% to 44.79% in Vodafone Egypt.

In November 2006, Telecom Egypts internet subsidiary TE Data

launched the first IP-TV based entertainment service in Egypt

In September 2008, Telecom Egypt bought around 370,000 shares of

Vodafone Egypt bringing up its shareholding stake from 44.79% to

44.95% in Vodafone Egypt.

In September 2009, Telecom Egypt & Vodafone Egypt signed a 3-year

agreement for the provision of wholesale telecommunications services.

The deal comprises two distinct elements: Utilizing TE international

gateway services to transit all VFE customers incoming and outgoing

international traffic plus relying on TE extensive domestic network for all

VFE infrastructure leasing needs.

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In January 2010, Telecom Egypt acquired the remaining 4.95% of TE

Datas Stake, to have full ownership of its broadband subsidiary.

In December 2010, Telecom Egypt made several changes to its

organizational structure which supports TEs strategic objectives. Three

new Senior Vice President (SVP) positions have been created, which

report directly to TEs CEO and Managing Director Tarek Tantawy, and

three Vice Presidents (VP) have been promoted to the newly created

positions.

In August, 2011, Telecom Egypt and Alcate l-Lucent have announced

that the TE-NORTH Cable System, provisioned with 40 Gigabit per

second (40G) wavelengths across the Mediterranean, is in service. TE-

NORTH is the first Mediterranean cable network to provide commercial

service using this newest 40G technology. In 2011, TE Data, our fully

owned broadband subsidiary, had a record year. It surpassed one million

subscribers and recorded a revenue contribution of more than EGP 1

billion for the first time.

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Subsidiaries

GovernancePage 8 of30


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Telecom Egypt is committed to the best practice in the area of corporate

governance, working to ensure the integrity and sustainability of its

business operations at all times. Our main corporate governance and

Board practices during the 2010 financial year are described in this

section.

Our Board regularly reviews and updates our corporate governance

practices to accommodate developments occurring within the marketplace

and our business and to comply with internationally recognized

governance standards. We are guided by the corporate governance

principles presented by the Egyptian Financial Supervisory Authority,

ensuring that the highest standards of corporate governance throughout

our organization are consistently maintained.

The Board of Directors

Roles and responsibilities of the Board

Telecom Egypts Board of Directors is responsible to shareholders for the

overall strategy of the Company, its governance and performance. The

Board manages the Companys business and affairs and decides on

matters other than those that must be determined by shareholders pursuant

to Egyptian law and the Company's bylaws. The Boards role includes:

providing strategic direction to the Company by working

closely with management to determine, monitor, develop and

modify our strategy and performance targets;

approving the annual budget for the Company and other

significant business decisions;

reviewing and approving statutory accounts and overseeing

our financial position;

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issuing recommendations to the General Assembly

concerning our capital, including capital restructures, expenditure

and dividend policy; and

Monitoring the integrity of internal control and reporting

systems.

Board size and composition

As per the Companys bylaws, the Board of Directors is composed of

eleven Board seats: three of which are Independent Directors elected by

the General Assembly, one that is an employee representative elected by

the Companys Labor Syndicate and seven that are appointed by a decreeof the Prime Minister upon recommendation from the Ministry of

Communication and Information Technology (MCIT).

The Companys bylaws provide that meetings of the Board of Directors

are to be held at least four times a year. A quorum of the Board of

Directors requires the presence of at least a majority of its members. Each

member has one vote. The Board of Directors passes resolutions by at

least a simple majority vote of those members present and/or represented

at the meeting. In the event of a tie, the chairman casts the deciding vote.

Board Committees

The Board committees assist the Board in the fulfillment of its

responsibilities. The role of Board committees is to advise and make

recommendations to the Board. There are four standing committees:

- Audit Committee- Remuneration Committee

- Investment Committee

- Technical Committee

A description of the role and composition of each Committee is provided

below. Following each meeting, the Board receives a report from the

Committee on the activities and performance of the relevant Committee.

Audit Committee

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Telecom Egypt has an Audit Committee composed of four members, two

of whom are Independent Directors. The Audit Committee is charged with

monitoring the efficacy of internal audit procedures, internal controls and

the performance of the outside auditors, as well as reviewing and

discussing with management all audit reports, financial statements and

annual reports to shareholders. The Audit Committee additionally presents

periodic reports and recommendations to the Board of Directors regarding

the foregoing matters.

Remuneration Committee

Telecom Egypt has a Remuneration Committee comprised of five

members, two of whom are Independent Directors. The role of the

Remuneration Committee is to review and approve corporate goals and

objectives relevant to compensation of the executive directors and senior

management. The Remuneration Committee is required to evaluate each

individuals performance in light of these goals and to make

recommendations to the Board of Directors with respect to incentive and

equity-based compensation plans.

Investment Committee

Telecom Egypt has an Investment Committee composed of six members,

three of whom are Independent Directors. The Investment Committee is

charged with developing and recommending to the Board policies relating

to the Companys investments and also for overseeing the implementation

of these policies.

Technical Committee

Telecom Egypt has a Technical Committee composed of three members,

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none of whom are Independent Directors. The Technical Committee is

charged with the study and review of technical matters involved in the

performance of the operations of the Company. The Technical Committee

additionally presents reports and recommendations to the Board of

Directors concerning such technical matters.

The General Assembly

Roles and Responsibilities of the General Assembly:

The Companys annual Ordinary General Assembly convenes at least

once every year within three months following the end of the fiscal year to

consider the following:

review of the Auditors report;

review of the report of the Board of Directors;

approval of the financial statements;

approval of the distribution of dividends;

determination of the members of the Board of Directors

remuneration and allowance;

appointment of the auditor and determine his fees;

election of the Board of Directors as necessary;

extension of the appointment of the Chief Executive Officer

and the Deputies of the Chief Executive Officer over the age of 60.

In addition to the above-mentioned matters, the Companys Ordinary

General Assembly is responsible for the following:

With respect to the Companys financial matters the

Ordinary General Assembly reviews such matters as:

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o suspending the setting aside of the legal reserve if it

reaches half the amount of the Companys issued capital;

o formation of other reserves aside from the legal

reserve and the statutory reserve;

o use of statutory reserve for the benefit of the Company

or its shareholders;

o transacting on the reserves and provisions;

o approval of the distribution of the share of net profits

realized by the Company as a result of the sale of one of its

fixed assets or compensation therefore;

o approval of the issuance of bonds and the guarantees

given to the bearers of such bonds;

o review of the decisions and recommendations of the

group of bondholders;

o authorizing the founders and the members of the Board

of Directors to enter into bilateral contracts with the

Company; and

o Authorizing the Board of Directors to make donations.

The Ordinary General Assembly also looks into other

matters pertaining to the Companys Board of Directors including:

o discharging the Board of Directors or one of its

members and bringing a liability claim against them;

o discharging members of the Board of Directors that

have repeatedly failed to attend meetings of the General

Assembly and electing other members to replace them;

o applying a monetary fine against members of the

Board of Directors that fail to attend the General Assemblywithout an acceptable excuse for their absence;

o

authorizing the Managing Director to hold the positionof managing director in another company;

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o authorizing a member of the Board of Directors to

carry out a technical or administrative position in another

joint stock company on a permanent basis;

o authorizing a member of the Board of Directors to

trade for his own account or for the account of other

individual in the Companys field of activity;

o carrying out management actions that the Board has

failed to review due to an incomplete quorum;

o approval of any decisions issued by the Board of

Directors; and

o Issuing recommendations with regards to matters

within the authority of the Board of Directors.

Other responsibilities of the Ordinary General Assembly

pertaining to the Auditor and liquidation of the Company include:

o looking into changing the Companys auditors

throughout the course of the fiscal year;

o looking into discharging the Companys auditors and

bringing liability claims against them;

o

looking into the auditors report in the event that he isincapable of fulfilling his duties;

o appointing liquidators and defining their fees and

discharging the liquidators;

o extension of the time period set for liquidation upon

inspection of the liquidators report;

o looking into the temporary accounts submitted by the

liquidator every six months;

o

approving the final liquidation account; ando Specifying the place in which the Companys files

shall be stored after the Company has been stricken off from

the Commercial Registration Authority.

The Companys Extraordinary General Assembly Meeting is concerned

with amending the Companys bylaws, particularly the following:

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1- An increase or decrease of the capital of the

Company;

2- liquidation of the Company prior to expiry of its

terms;

3- amendment of the objectives of the Company; and

4- the merger of the Company with any other

company or legal entity.

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Previous Coupon Distributions:

Coupon number Distribution date Dividends per shares share

(L.E.)

1 30th April 2006 0.50

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Business

description

Egypts only provider of fixed line voice

telecommunication services. Supplies customers

with voice telephony, Internet and data services, and

wholesale interconnection access to its national

backbone, and carries a substantial part of Egypts

fixed-line and domestic long distance, and all of its

international traffic.

Founded Telecom Egypt was first founded in 1998 to replace

the former Arabic Republic of Egypt National

Telecommunications Organization (ARENTO)2010 Revenue* L.E. 10,318 million

2010 EBITDA * L.E. 4,865 million

2010 EBITDA

Margin*

47.1%

Listed The Egyptian Exchange (EGX) and London Stock

Exchange (LSE).

Shares in issue 1,707,071,600 shares in issue with a par value of

L.E. 10 each

Ownership 80% owned by the Egyptian Government and 20%

free float

Customer base

(Year Ended

December 2010)

Fixed-line customer network of 9.3 million

TE Data Internet broadband subscriber base of

883,171.

Investments Total number of 18 related equity interests across

Egypt and the Middle East and North Africa region


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2 26th April 2007 0.70

3 24th April 2008 1.00

4 30th April 2009 1.30

5 29th April 2010 0.75

6 30th June 2010 0.55

7 26th May 2011 1.30

Bonds

Issue size: EGP 2 billion divided into two tranches

1st Tranche: EGP 1 billion, annual fixed coupon rate at 10.95%

payable quarterly.

2nd Tranche: EGP 1 billion, annual floating coupon rate = (Central

Bank of Egypt discount rate + 0.70%) payable quarterly.

Face value : EGP 100 per bond

Maturity: 5 years

Number of bonds outstanding : 20 million bonds

Date of close of public subscription : 3 February 2005

Registration status : Bonds registered at Egyptian Stock

Exchange (EGX) and Misr for Clearance, Settlement and CentralDepository (MCSD)

Call Option/Prepayment : The Issuer has the right to

partially or fully prepay any amount of the Issue provided that the

partial prepayment is at least EGP 100 million (only one hundred

million Egyptian pounds) or its multiples and that the prepayment

date occurs on any of the Coupon Payment Dates. The call option /

prepayment possibility begins on the date of the coupon number (8)

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or the beginning of the third year. Prepayment will not entail the

payment of any penalties or indemnifications to the bondholders.

Coupon payment dates: 1 March, 1 June, 1 September and

1 December.

The Issue has a redemption profile whereby the entire value of the Issue

will be redeemed within 5 years from the date following the date of the

close of the public subscription. Below is the redemption scheduled:

Redemption

Date

Percentage

redeemed

of FaceValue of the

bond

Value of

redemption

per bond inEGP

Outstanding

amount

per bond inEGP

1 December

200720% 20 80

1 June 2008 20% 20 60

1 December

200820% 20 40

1 June 2009 20% 20 20

1 December

200920% 20 0

100% 100

If any date occurs on a day that is not on a business date, the coupon

period will extend to the next business day.

The above mentioned scheduled redemption profile does not preclude the

Issuer from partially or fully prepaying / calling the Issue starting from the

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beginning of the third year of the Issue as detailed in article 19 of the

Terms and Conditions of the Issue of this Prospectus.

Financial analysis

telecom Egypt companybalance sheet from 2006 to 2010

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2006(000) 2007(000) 2008(000) 2009(000) 2010(000)

total long term

assets 30074503 27893396 25828007 25241197 24078396

inventory 597928 508416 473015 413973 463117

cash on hand and

at banks 588845 1302241 2711761 2343988 4976261

total current assets 5962967 6697734 8041642 7219986 9125758

total current

liabilities 5051899 5485958 5433942 4278401 4344659

work capital 911068 1211776 2607700 2941585 4781099

total investments 30985871 29105172 28435707 28182782 28859495

total equity

attributable to

equity holders of

the holding

company 24563142 25743914 26631027 27227346 27968010

non controlling

interest 34839 39846 38058 40969 20000

total equity 24597981 25783760 26669085 27268315 27876010

total long term

liabilities 6387590 3321412 1766622 914467 871485

total equity and

long term liabilities 30985571 29105172 28435707 28182782 28859495

telecom Egypt company

income statement from 2006 to 2010

2006(000) 2007(000) 2008(000) 2009(000) 2010(000)

operating revenues 9488413 9993147 10116896 9960308 10217928

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cross operating profit 3724486 3950707 4201367 4219047 4473606

net operating profit 2279974 2153001 1937361 1944605 2620127

net profit for the year before

tax & minority interest 2897825 3054345 3307531 3510152 3636513net profit before minority

interest 2429774 2541014 2795218 2056765 3311773

net profit for the year after

tax & minority interest 2426877 2534014 2790218 3050765 3142773

earnings per share 1.34 1.37 1.49 1.6 1.62

dividends 0.7 1 1.3 1.3 1.3

Financial summary

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year on year key figures in EGP

millions except per share data 2006 2007 2008 2009 2010

revenue 9517 9993 10117 9960 10218

% growth 11.30% 5% 1.20% 1.50% 2.60%gross profit 6421 6687 6752 6691 6976

EBITDA 5277 5389 5163 5048 4663

% margin 55.40% 53.90% 51% 50.70% 45.60%

EBIT 3376 3667 3505 3515 3411

% margin 35.50% 36.70% 34.60% 35.30% 33.40%

net profit before tax & minority

interest 2898 3054 3308 3510 3637

profit for the year 2427 2534 2790 3051 3143

% margin 25.50% 25.40% 27.60% 30.60% 30.80%

earnings per share (L.E) 1.34 1.37 1.49 1.64 1.62


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balance sheet


millions 2006 2007 2008 2009 2010

total current assets 5963 6698 8042 7220 8995

property plant & equipment 21074 19372 17531 16086 14740other assets 8892 8521 8297 9155 9474

total assets 35929 34591 33870 32461 33209

total current liabilities 5052 5486 5434 4278 4462

total non- current liabilities 6279 3321 1767 914 871

total liabilities 11331 8807 7201 5193 5334

total equity & minority interest 24598 25784 26669 27268 27876

cash flow


millions 2006 2007 2008 2009 2010

cash flow from operating activities 3581 3445 2642 1906 4361

cash flow from investing activities (6265) (149) 636 (65) 393

cash flow from financing activities 6502 (2487) (1869) (2085) (2229)net movement in cash and cash

equivalents 3818 809 1408 (244) 2525


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1- Current Ratio measures whether or not your business has enough

resources to pay its bills over the next 12 months. So for Telecom Egypt,

the current ratio gives a clean bill of health. For every dollar in current

liabilities, there is L.E 2.10 in current assets in 2010.

2- Quick Ratio this is obviously a good position for the firm to be in. Itcan meet its short-term debt obligations with no stress. If the quick ratio

was more than 1.00X, that mean Telecom Egypt would have is better than

a quick ratio of less than 1.00X with regard to maintaining liquidity and

not being forced into the position of having to sell inventory.

3-Total debt ratio this ratio shows how much Telecom Egypt is in debt,

making it an excellent way to check its long-term solvency. Telecom

Egypt, then, has L.E0.3 pound in debt for every one pound of assets. So

for this business, the total debt ratio tells us that this business is not in

good health and may become really ill; for good health, the total debt ratio

should be 1 or less.

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ratios

Current Ratio= Current

Assets/Current Liability 118% 122% 148% 169% 210%

Quick Ratio=(Current Assets -

Inventory)/Current Liability 106% 113% 139% 159% 199%

Cash Ratio= Cash/ Current

Liabilities 12% 24% 50% 55% 115%

Total debt ratio 21% 11% 6% 3% 3%

Debt-equity ratio

Equity multiplier= Total Asset/

Total Equity 24% 26% 30% 26% 33%Profit Margin 26% 25% 28% 31% 32%

Return on Assets ROA 8% 9% 10% 11% 11%

Return on Equity ROE 10% 10% 10% 11% 12%


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4- Profit Margin Telecom Egypt shows how much net profit are its sales

producing? So for every pound in sales, Telecom Egypt is generating a

little more than 23 piaster net profit in 2010. How healthy is this? Other

than the obvious generality that the higher the profit margins the better off

the business, the profit margin is an extremely useful measure of how

Telecom Egypt is performing over time.

5- ROA, Telecom Egypt tells how efficiently it has been using asset base

to generate sales

Forecasting

Forecasts: Local economic turbulence to negatively affect retail revenue

The wider economic downturn has taken its toll on household incomes in

Egypt, which in turn, has had a negative impact on overall active

subscribers for Telecom Egypt and retail revenue. Retail revenue dropped

by an annual 13% at the end of 3Q11. We lower our revenue forecasts for

FY11, FY12 and FY13 by 8%, 4% and 4%, respectively, because of

increased pressure from the retail revenue side of operations, as economic

volatility may remain a factor throughout 2012. On the other hand,

proceeds from Telecom Egypts submarine cable projects (TE North) and

growth from TE Data seem to be unaffected, for the most part, by the

turbulence in the local economy.

We lower our EBITDA marginally through 2013F, as a result of our lower

top-line forecasts. Thus, we lower our EBITDA forecasts for FY11, FY12

and FY13 by 5%, 0.9% and 0.3%, respectively.

Valuation: We lower our target price by 17% to E16.7 per share

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We believe short-term volatility may remain at least until the first half of

2012, or until the presidential elections are over. Accordingly, we take a

cautious stance towards Egyptian telecoms under our coverage and raise

our discount rate from 10.5% to 14.5% to adjust for the higher political

risk in the country. We value Telecom Egypt based on our sum-of-the-

parts and DCF valuation model, revising our target price downwards by

17% to E16.71 compared to our previous target price of E20.15 and

reiterating our Buy recommendation on the stock. Telecom Egypt is

currently trading at PE multiples of 8.1x and 8.3x for FY11F and FY12F,

which are 22% and 20%, respectively, below our average MENA peers

multiple of 10.4x for 2011 and 2012. We believe Telecom Egypt retains

some value despite current local volatility, as we believe the economic

risk has been fully priced in the stock price and estimated dividend yields

for 2011F and 2012F are attractive, with an average yield above 9%

compared to our average MENA dividend yields of 5%. The main

downside risks are continued political and economic instability, which

could directly affect subscriber spending habits, and a more aggressive

fixed-to-mobile substitution trend.

key forecasts

year to December 2011 2012 2013revenue 9895 9990 10211

EBITDA 4551 4595 4697

EPS 1.49 1.65 1.73

dividend per share 1.1 1.4 1.56

balance sheet

2011 2012 2013

total assets 32797 34129 34712

total liabilities 4681 4815 4834total equity & minority

interest 28116 29314 29879

cash flow 2011 2012 2013

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cash flow from operating

activities 2602 5306 5398

cash flow from investing

activities 382 (1473) (1500)

cash flow from financingactivities (2371) (2601) (2527)

net 613 1232 1371

Key assumptions

We revise our target price slightly downwards to E20.12, maintaining

our Buy recommendation. Based on our forecasts, Telecom Egypt is

currently trading at a PE of

8.1x for 2011, which is 22% below our average MENA peers multiple for

2011 of 10.4x.

In our valuation of Telecom Egypt, our base-case scenario assumptions

include: cost of equity of 19%, based on a risk-free rate of 14.5% and a

premium of 5%, cost of debt of 15%, a terminal growth rate of 1.5% and a

beta of 0.83x.

Valuation and target price Sum-of-the-parts and discounted cash flow

TEs sum-of-the-parts/DCF valuation yields a 12-month fair value of

E16.71, which is more than 20% higher than the current price of

E13.66.

Operation Assumptions

Telecom Egypt DCF (risk-free rate: 14.5%, risk premium: 5%, cost of

debt: 15%, beta: 0.83x, LTG: 1.5%)

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Vodafone Egypt DCF (risk-free rate: 14.5%, risk premium: 5%, cost of

debt: 15%, beta: 0.91x, LTG: 3.0%)

Computing intrinsic value

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k=R +(km-k)

=0.935+0.7978(0.17-0.935)

=0.1061

g= ROE (1-POR)

=0.12(1-0.783)

=0.026

d=1.3

p = 1.3 / (0.1061 0.026)

=16.22

Fair value = 16.22

Compeer fair value to market price

Fair value < market price buy = under valued

Fair value > market price sell = over valued

Fair value = market price = hold

Fair value = 16.22

Market price = 15.52

Stock is good investment price is low than fair value.

telecom egypt company

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