Telecom Egypt: Telecommunications

THE COMPANY: Telecom Egypt (TE) is Egypt’s incumbent telecommunications operator, controlling the country’s only fixed-line network, with 8m subscribers as of the end of 2011. It participates in the mobile sector by providing interconnectivity to operators via its infrastructure and through a 44.95% stake in Vodafone Egypt (VFE), one of Egypt’s three mobile operators. Additionally, TE’s internet subsidiary, TE Data, currently holds a 62% share of the fixed broadband internet market in Egypt. TE constitutes 11% of the market capitalisation of the Egyptian Exchange 30 Index. Public enterprises and the government own 82% of the company, with the balance traded on the Egyptian Exchange. Following the sale of most of Mobinil, an Egyptian mobile service provider, to France Telecom, TE now offers the only opportunity on the exchange for exposure to the Egyptian telecommunications sector.

TE’s revenue structure is composed of retail inflows – access, voice and internet – and wholesale revenue, which includes international calls and interconnection. The company’s total revenue rose at a 2007-10 compound annual growth rate (CAGR) of 1%, owing to a 7.9% wholesale revenue CAGR that barely offset a dive in retail revenue (-4.3% CAGR). TE’s performance throughout 2011 was largely in line with the trend established in prior years. Retail revenue, 48% of total revenue, continued to dwindle, down 11.9% year-on-year (y-o-y). It remained a drag on total revenue (down 3.2% y-o-y), and offset growth in the wholesale segment, which was up 6.6% y-o-y and is 52% of revenue).

The decline in retail revenue is attributed to two factors: falling access revenue (down 14.3% y-o-y, 33% of retail revenue) on the back of 1.3m y-o-y subscriber disconnections and lower connection fees at LE50 ($8.97); and decreased voice revenue (down 19% y-o-y, 36% of retail revenue) due to the overall economic slowdown, which resulted in lower revenue from fixed to international calls and increased fixed to mobile substitution. As internet revenue comprises only 22% of retail revenue, its 29% y-o-y gain was not enough to compensate for the drop in access and voice revenue. However, the company’s wholesale segment is on a growth spree. Domestic wholesale grew 11.9% y-o-y on increased demand for infrastructure leasing to mobile and internet service providers, while international wholesale grew 5% y-o-y on increased capacity sales.

TE’s attributable net profit declined 8.8% y-o-y, due mostly to a LE445m ($74.5m), 33% decline in investment income from VFE, which resulted from lower revenue on stronger average revenue per user (ARPU) dilution and decreased margins on the back of intense competition in the mobile space.

DEVELOPMENT STRATEGY: In 2012 TE expects total turnover to remain flat or decline slightly and plans to invest cLE1.2bn ($200.8m) in infrastructure.

The company’s strategy is to diversify its revenue and become a total telecommunications operator. On the retail front, TE is capitalising on its market position in broadband and internet revenue to reverse the downtrend in total retail revenue. In 2011 wholesale exceeded retail revenue for the first time, and the trend is expected to continue in the near future as management anticipates that a pipeline of projects related to the cable system will be deployed successively.

The company exists in the mobile space only through a large but powerless stake in VFE. TE has on several occasions made clear that it plans to compete directly in the mobile segment. At present, its best chance to do so is to acquire the mobile virtual network operator (MVNO) licence that the government plans to put up for tender before the end of August 2012. Should TE win the licence, it would cannibalise VFE’s market share, which in turn would have a negative effect on VFE’s revenue and thus on TE’s investment income from VFE. However, VFE would gain a new revenue segment (if TE were to buy capacity from it), which would impact TE’s investment income positively. Whether these developments would offset each other remains uncertain as the future outcome would depend on the wholesale agreement and the MVNO’s rate of success.