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 Dividends 15 Bonds 15 Financial analysis 18 Financial summary 20 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, is also the largest provider of fixed-line services in the Middle East with some 8.0 million customers as at the end of December 2011. Telecom Egypt is the only company in Egypt that is able to offer the full range of fixed line and retail telecommunications services and is the sole provider of wholesale telecommunications services. Telecom Egypt provides retail telecommunication services including access, local, long distance and international voice, Internet and data, and other services. The company also provides wholesale services including broadband capacity leasing to ISPs, and national and international interconnection services. Telecom Egypt currently participates in the mobile segment in Egypt by providing mobile interconnectivity through its current 44.95% holding in Vodafone Egypt, one of the three Egyptian mobile operators. Vodafone Egypt already has a growing subscriber base of over 36.8 million as at December 2011. Telecom Egypts Internet and data services include the provision of Internet broadband access through its subsidiary TE Data, data transmission services and leased lines. In December 2009, TE Data was servicing more than 1,111,223 thousand ADSL subscribers, an increase of 25.8 % from December 2010.

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History
Years of Telecommunications 150 1854 witnessed the birth of Egypt's telecommunications industry. The first telegraph 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 of Telecom 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 launch of an initial public offering of its Telecom Egypt shares and GDRs to retail investors in Egypt and institutional investors internationally. The Offer represented 20% of Telecom 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. TENORTH 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

Governance
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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 decree of 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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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.
o

The Ordinary General Assembly also looks into other matters pertaining to the Companys Board of Directors including:

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 Assembly without an acceptable excuse for their absence;
o

authorizing the Managing Director to hold the position of managing director in another company;
o

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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.
o

Other responsibilities of the Ordinary General Assembly pertaining to the Auditor and liquidation of the Company include:

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 is incapable 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; and o Specifying the place in which the Companys files shall be stored after the Company has been stricken off from the Commercial Registration Authority.
o

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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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) L.E. 10,318 million L.E. 4,865 million

2010 Revenue* 2010 EBITDA *

2010 EBITDA 47.1% Margin* Listed Shares in issue Ownership The Egyptian Exchange (EGX) and London Stock Exchange (LSE). 1,707,071,600 shares in issue with a par value of L.E. 10 each 80% owned by the Egyptian Government and 20% free float

Customer base Fixed-line customer network of 9.3 million (Year Ended TE Data Internet broadband subscriber base of December 2010) 883,171. Investments Total number of 18 related equity interests across Egypt and the Middle East and North Africa region

Previous Coupon Distributions: Coupon number 1 Distribution date 30th April 2006
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Dividends per shares share (L.E.) 0.50

2 3 4 5 6 7

26th April 2007 24th April 2008 30th April 2009 29th April 2010 30th June 2010 26th May 2011

0.70 1.00 1.30 0.75 0.55 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 Central Depository (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 Face Value of the bond Value of redemption per bond in EGP Outstanding amount per bond in EGP

1 December 20% 2007 1 June 2008 20% 1 December 20% 2008 1 June 2009 20% 1 December 20% 2009 100%

20 20 20 20 20 100

80 60 40 20 0

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 company balance sheet from 2006 to 2010
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2006(000) 2007(000) total long assets term 30074503 27893396 508416 1302241 6697734 5485958 1211776 29105172

2008(000) 25828007 473015 2711761 8041642 5433942 2607700 28435707

2009(000) 25241197 413973 2343988 7219986 4278401 2941585 28182782

2010(000) 24078396 463117 4976261 9125758 4344659 4781099 28859495

inventory 597928 cash on hand and at banks 588845 total current assets 5962967 total current liabilities 5051899 work capital 911068

total investments 30985871 total equity attributable to equity holders of the holding company 24563142 non controlling interest 34839 total equity 24597981 total long term liabilities 6387590 total equity and long term liabilities 30985571

25743914 39846 25783760 3321412 29105172

26631027 38058 26669085 1766622 28435707

27227346 40969 27268315 914467 28182782

27968010 20000 27876010 871485 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 net operating profit net profit for the year before tax & minority interest net profit before minority interest net profit for the year after tax & minority interest earnings per share dividends

3724486 2279974 2897825 2429774 2426877 1.34 0.7

3950707 2153001 3054345 2541014 2534014 1.37 1

4201367 1937361 3307531 2795218 2790218 1.49 1.3

4219047 1944605 3510152 2056765 3050765 1.6 1.3

4473606 2620127 3636513 3311773 3142773 1.62 1.3

Financial summary

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year on year key figures in EGP millions except per share data revenue % growth gross profit EBITDA % margin EBIT % margin net profit before tax & minority interest profit for the year % margin earnings per share (L.E)

2006 9517 11.30% 6421 5277 55.40% 3376 35.50% 2898 2427 25.50% 1.34

2007 9993 5% 6687 5389 53.90% 3667 36.70% 3054 2534 25.40% 1.37

2008 10117 1.20% 6752 5163 51% 3505 34.60% 3308 2790 27.60% 1.49

2009 9960 1.50% 6691 5048 50.70% 3515 35.30% 3510 3051 30.60% 1.64

2010 10218 2.60% 6976 4663 45.60% 3411 33.40% 3637 3143 30.80% 1.62

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balance sheet year on year key figures in EGP millions total current assets property plant & equipment other assets total assets total current liabilities total non- current liabilities total liabilities total equity & minority interest

2006 5963 21074 8892 35929 5052 6279 11331 24598

2007 6698 19372 8521 34591 5486 3321 8807 25784

2008 8042 17531 8297 33870 5434 1767 7201 26669

2009 7220 16086 9155 32461 4278 914 5193 27268

2010 8995 14740 9474 33209 4462 871 5334 27876

cash flow year on year key figures in EGP millions cash flow from operating activities cash flow from investing activities cash flow from financing activities net movement in cash and cash equivalents

2006 3581 (6265) 6502 3818

2007 3445 (149) (2487) 809

2008 2642 636 (1869) 1408

2009 1906 (65) (2085) (244)

2010 4361 393 (2229) 2525

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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% 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. It can 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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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-theparts 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 revenue EBITDA EPS dividend per share balance sheet total assets total liabilities total equity & minority interest 28116 2011 32797 4681 2012 34129 4815 29314 2013 34712 4834 29879

2011 9895 4551 1.49 1.1

2012 9990 4595 1.65 1.4

2013 10211 4697 1.73 1.56

cash flow 2011

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2012

2013

cash flow activities cash flow activities cash flow activities net

from from from

operating 2602 investing 382 financing (2371) 613 (2601) 1232 (2527) 1371 (1473) (1500) 5306 5398

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.

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