Maroc Telecom: Telecoms

Maroc Telecom (MT) is the leading operator in the telecommunications sector in Morocco with operations in Morocco and sub-Saharan Africa. In January 2015, MT acquired six additional sub-Saharan subsidiaries, bringing the international portion of the business contribution to revenue to 42%. While subSaharan Africa remains mostly a mobile market, the firm engages in Morocco in both the mobile and fixed segments. The stock has traded in the Casablanca Stock Exchange under the ticker IAM since 2004 and accounts for more than 20% of the total market capitalisation of the market.

MT is poised to regain some of the glow lost in Morocco amid a fierce competition as the sub-Saharan subsidiaries are expected to deliver substantial growth. Indeed, the region Mobile penetration rate is expected to soar in the coming years along with higher smartphone penetration, which is likely to reshape the sub-Saharan telecommunications sector landscape. MT has an excellent track-record of market share gain and margin expansion in the subsidiaries held prior to 2015 (Mauritania, Gabon, Burkina Faso and Mali), and is likely to leverage their learning curve to reiterate that success in the newly acquired subsidiaries in Côte d’Ivoire, Benin, Togo, Gabon, Niger and the Central African Republic.

In 2014, the firm's consolidated top line stood at Dh29.14bn (€3.2bn), up 2% year-on-year (y-o-y). While the Morocco operation delivered a modest decrease of 0.8%, sub-Saharan subsidiaries generated double-digit growth of 11.3%. Earnings before interest, taxes, depreciation, and amortisation ( EBITDA) decreased by 3.2% y-o-y, although this was offset by an improvement in the firm’s international EBITDA by 5.3%. At the international subsidiaries, a high level of EBITDA margin was maintained at 47.7% in 2014, down from 50.4% in 2013.

The company’s net income group share grew 5.6% y-o-y, however, if it were to be normalised according to the 2013 net income group share by adding back restructuring charges of Dh140m (€15.2m) and the settlement of a tax dispute that cost Dh1.03bn (€112m), the y-o-y change in net income group share actually declines 13%.

MT delivered earnings per share of Dh6.70 (€0.73). In Morocco, MT maintained a strong cash generation profile with cash flow from operations (CFFO) to EBITDA at 76% up from 75% in 2013. Cash generation was substantially improved in the international subsidiaries with CFFO to EBITDA up 6 points to 67%. The consolidated CFFO to EBITDA ratio stood at 74%, up 2 points y-o-y. Net Debt to EBITDA stood at x0.3 in December 2014, down from x0.4 in 2013.

Strategic Development 

MT is currently facing persisting competition from Morocco Mobile, although expectations were that the price war could soften as a result of signs that elasticity of the demand had lessened. We expect that mobile prices are likely to resume their plunge before an eventual stabilisation in 2017. In the Morocco fixed-line segment, the infrastructure-sharing ruled by the regulator is likely to result into the erosion of MT market shares starting in 2016. In sub-Saharan Africa, we like the fact that MT has acquired subsidiaries in markets with attributes analogous to the markets in which MT has already a strong track-record of margin expansion. The odds that MT will succeed in the newly acquired subsidiaries are high, since they could leverage their learning curve.

We value MT using the discounted cash flow methodology with a target price of Dh127 (€13.81). We are recommending holding MT. As a side note, the current 2014 earnings enterprise value/EBITDA is x8.2, the forward 2015E and 2016E enterprise value/EBITDA were 7.7x and 7.5x, respectively. These relatively high multiples could be justified by the appeal of MT to defensive and income investors ( dividend yield of 5% per annum), and the fact that funds would naturally flow to the company, which accounts for 21% of the market capitalisation of the bourse.