April 2009

Telecom Egypt S.A.E. (TE)

Analyst Contacts:
Egypt Cairo

Tel. (202) 3749 5616

Fax (202) 3749 6184

Mohamed Adel - Risk Rating Analyst

mohamed.adel@merisratings.com

Opportunities/Strengths

Ahmed Badr El Din - Junior Risk Rating Analyst

ahmed_badr@merisratings.com

Rating Table:
Current
Rating

Previous
Rating

Entity Rating: Senior Unsecured

AA

AA

Bond Rating: Senior Unsecured

AA

AA

Stable

Stable

Category

Rating Outlook

Operating Statistics:
Figures in EGP mn
AROA (%)

FY08

AROE (%)
Operating Margin (%)
EBITDA

FY07

FY06

FY05

8.5

6.1

6.1

5.6

11.1

8.6

8.8

8.0

19.9

20.9

22.6

21.0

4,360.2

4,662.1

4,781.5

4,387.9

45.5

48.9

51.7

51.1

EBITDA Margin (%)

Risks/Weaknesses

Balance Sheet Statistics:

Figures in EGP
mn
Turnover

FY08

FY07

FY06

9,577.2

9,534.0

9,241.8

8,358.0

Total Assets

32,584.8

33,340.7

35,151.1

31,896.2

Debt/EBITDA (x)

0.8

1.1

1.6

1.1

EBITDA/Interest
Ex. (x)

12.1

7.8

12.2

11.5

Natural monopoly position in the Egyptian

telecommunications market, with a strong and
reputable brand name.
Solid and proven track record, in addition to
government support.
Strong performance, financial profile, relatively low
debt financing profile and healthy margins.
Well designed internal reform program, which has
started to reap some fruit.
Presence in high growth markets with low to modest
levels of telecom penetration (both fixed-line and
mobile).
Reasonably sophisticated and modern connectivity
infrastructure, coupled with a good customer base.
Playing a strategic role in developing the
telecommunications industry in Egypt.
Solid cash flow position exceeding operation and
Capex need.

Voice traffic migration from fixed to mobile.

Some drawbacks in the human resource element and
public sector mentality are considered a challenge to
TEs performance.
Being subject to event risk due to rapid technology
changes.

FY05

All analysis is based on audited unconsolidated financial statements.

This analysis provides a discussion of the factors underpinning the credit rating.

Telecom Egypt (S.A.E.) TE

Company Profile
Telecom Egypt (TE) was incorporated in 1998 as a joint stock company. TE is the incumbent provider of
telecommunications services in Egypt, providing fixed line telephony, connectivity to all mobile operators
and controlling 100% of wholesale internet and data business. TE is one of the largest bases in the MENA
region and the sole provider of fixed-line services in Egypt with more than 11.7 mn subscribers in
December 2008. Currently, the Egyptian government accounts for 80% of TE's shareholder structure
(down from 100% in 2005); the remaining amount is free float launched in both Cairo and Alexandria
Stock Exchange and London Stock Exchange.
In November 2008, the Egyptian Ministry of Communications and Information Technology announced that
the Egyptian government will postpone offering a second tranche of its 80-percent stake in Telecom Egypt
beyond 2009 as a result of the current market turmoil. It is worth mentioning that, by law, the government
has to retain a majority shareholding in the Company, which strengthens TEs position; although the level
of government support after the partial sale of its equity stake has not been tested yet. Management
highlighted the need to operate efficiently as a stand alone/corporate entity with limited influence and
intervention from the government. Generally, it is difficult to assess the degree of change in government
support factors until it is tested.

Key Rating Considerations

FACTOR 1: Size, Scale, Business Model and Competitive Environment
TE generated EGP 9.57 billion as total revenue in 2008, up by 0.5% on a Y-O-Y basis. The revenue
stream is generated from retail (57% of total revenue compared to 59.6% in FY2007) and wholesale (43%
of the total revenue compared to 40.4% in FY2007). On the subscribers' side, the retail subscriber base
increased by 4.2% to reach 11.7 mn customers in December 2008; however, this growth is not reflected in
the Company's total retail revenue as most of the additions occurred in the final quarter of 2008.
On the retail revenue side, the company implemented a tariff rebalancing in July 2008 trying to mitigate
some of the effects of the fixed-to-mobile substitution. But the tariff rebalancing was reflected only on the
subscription fees and local voice revenue, up by 12.5% and 13.7% respectively after raising the
subscription fees from EGP 10 to EGP 12 for residential customers and EGP 16 to EGP 24 for commercial
customers. For long distance fixed-to-international and fixed-to-mobile calls, the tariff rebalancing failed to
stop, correct, or soften the decline in revenue as a result of the lower termination rates applied between
mobile operators. Each offered a retail price which is lower than the termination fee that TE paid to them;
meaning that TE was unable to offer its customers a rate which can compete with that offered by the
mobile operators. The revenue generated from long distance, fixed-to-international and fixed-to-mobile
decreased by 13.7%, 13.2% and 25.6% respectively.
MERIS acknowledges a threat to TE's retail revenue due to the development of mobile operators that
attract voice traffic by offering greater mobility, as well as limited growth in the overall fixed line operation.
Although fixed to mobile substitution is negatively impacting TE's retail revenue, it is boosting the
Company's wholesale revenue as a result of mobile operators' usage across TE's network infrastructure for
handling their traffic for local and international calls. Telecom Egypt's revenue from wholesale has
increased by 6.7% on a Y-O-Y basis to reach EGP 4.11 billion, with a flat growth on the international
wholesale revenue.
As of December 2008, fixed-line subscribership reached 11.7 mn customers, with switching capacity of
14.3 mn. Recently, TE has released its target to increase the number of subscribers in 2009 by 100,000
200,000. 473,690 subscribers were added in 2008, which is 58% higher than their 2008 target. TE has
decreased its 2009 target in line with the expected slow down in the economy. 74% of the customer mixes
are located in Greater Cairo and Alexandria. Over 91% of the customer base is comprised of individual or
household subscribers, while wholesale/commercial business accounts for the remaining balance.
MERIS views the competition between Telecom Egypt and the mobile operators as increasingly
intensifying, which will push towards a change in the fundamentals of the telecommunications market;
subsequently impacting the servicer's profitability.

MERIS Analysis

April 2009

Telecom Egypt (S.A.E.) TE

Factor 2: Operating Environment

(a) Regulatory Framework
In MERISs view, the regulatory environment in Egypt is still somewhat volatile with a considerable degree
of uncertainty. Liberalization of the Egyptian telecom market started in 1998 after signing the WTO Basic
Telecommunications Agreement (BTA), through the issuance of two mobile network operating licenses and
turning Telecom Egypt, the state-owned incumbent operator, into a joint stock company. Furthermore,
1998 saw the establishment of the Ministry of Communications and Information Technology (MCIT) with
the responsibility of developing Egypts ICT infrastructure, stimulating the knowledge economy and forging
an e-government strategy and a legal framework that is in line with international digital requirements.
Liberalization was further advanced by the Telecommunication Regulation Law (No. 10) of February 2003.
A central aspect of the law was the creation of the National Telecom Regulatory Authority (NTRA), which
replaced the Telecom Regulatory Authority (TRA) in 2003 and took over all the regulatory functions as an
independent regulatory authority.
The NTRA has the power to monitor the performance of operators, grant all telecommunication operating
licenses and penalize deviations from licenses. Since 2003, it has awarded over 20 licenses to operators
who offer telecom services to the Egyptian market, including mobile, payphone, prepaid calling cards,
internet, data and VSAT (satellite) services.
In 2006, the NTRA deregulated Telecom Egypts monopoly of domestic and international telephone
service.
The NTRA has also announced an auction for a second fixed-line license; however, so far the tender has
been postponed three times and might remain on hold for a long time, given the current status of the global
economy.
While liberalization has been progressing relatively smoothly, criticism has centered on the overprotection
of TE, the incumbent telecom operator. Among some of the challenges to the liberalization process is the
role of the Minister in overseeing both the regulator and Telecom Egypt, a dual role that makes for a
difficult balancing act.
The intricate position of the regulator has been played out in the recent interconnection dispute between
mobile operators and Telecom Egypt (TE). The NTRA had sided with TEs decision to lower its fixed-tomobile termination rates, despite the existing effective agreement between TE and the wireless operator.
Mobinil and Vodafone have appealed the decision and have filed a law suit against the NTRA to resolve
the interconnection dispute. The continuous decline of interconnection rates is perceived as a main threat
to the wireless operator, putting downward pressure on its revenues and returns. Furthermore, the
implication of the new regime on consumer behavior is considered another concern, as it might result in a
traffic shift towards the fixed-line service, which will again negatively affect mobile operators.

(b) Technology Risk

MERISs rating takes into consideration the Companys exposure to technological advancement and how
well positioned it might be in handling such developments. The rating also factors in the potential capital
expenditure implications of any technological improvements and advances. TE has been in an expansion
mode in recent years. Capex figures reported their highest levels in 2005 by EGP 2.4bn, around 85% of
which will be directed to new installations. Capex is expected to increase in 2009 to EGP 1.5 2.0bn
mainly as a result of TE North project, greater broadband requirements for existing subscribers, and the
upgrading of the transmission network to cater for the increasing needs of mobile operators and ISPs.
TE's capex has decreased 6.2% on Y-O-Y basis reaching EGP 740 million for 2008 in line with the
rationalization program and due to delays in completing some of the cost control systems.

(c) Market Share

TE has strong presence in all the telecommunication and information technology services/industries in
Egypt (i.e. mobile, Internet data services ... etc), either directly through subsidiaries and affiliates, or
indirectly through revenue sharing agreements.
TE is enjoying a monopoly position in the fixed line business, with a strong presence in other
telecommunication businesses. TE retains a strategic stake in the local mobile market through its 44.95%
stake in Vodafone Egypt with a total subscriber base of more than 17.6 million, representing 42.7% share
of the Egyptian mobile market as of December 2008.
TE is penetrating the fastest growing segments in the domestic telecom market, namely the internet and
data service, through a majority owned subsidiary: TE Data, with a 95.04% shareholding stake. TE Datas

MERIS Analysis

April 2009

Telecom Egypt (S.A.E.) TE

ADSL subscribers increased by 91% in 2008 to reach more than 424 thousands, capturing 59% market
share from other seven ADSL players.
It is worth mentioning that TE is considered the sole provider for internet and data network/infrastructure in
the local market.
TE North:
Capitalizing on the geographic position of Egypt and targeting a more diversified revenue base, Telecom
Egypt expected to start the operation of TE North project by the end of 2009 to increase the service
footprint of the existing TE Transit Corridor and to lower the cost point of the group retail internet arm.
MERIS expects this diversified income stream to reflect positively on the Company's business operation.

Factor 3: Managements Financial Strategy

Management's strategy and tolerance for the financial risk will directly affect debt levels and credit quality
and it is therefore a key rating determinant. Regarding the cash distribution policy, TE's aim is to provide its
shareholders with steady and regular cash remuneration, taking into account the availability of appropriate
investment opportunities. TE announced the Board's approval for a dividend distribution of EGP 1.3 per
share which is 87% as a dividend payout ratio compared with 91% in FY2007
On the debt side, Telecom Egypt maintains a very healthy debt profile; the debt to EBITDA ratio is 0.8
times.
The Company does not have any short term refinancing requirements and uses its organic cash flow to
fund its long term debt according to the repayment program and to finance its capex commitments.
Telecom Egypt will be very selective in any regional green field investments or acquisition transactions on
the background of the incident of liquidating TE's investment in Algeria. TE and OT were awarded the
second fixed line license in 2005; however, as a result of difficulties with the Algerian regulator regarding the
unfair competition and dumping practices by the incumbent, TE's venture was forced to exit from the
Algerian market realizing a loss of EGP 446.7 million.

FACTOR 4: Operating Performance

Revenue and Profitability
Figures in EGP mn

FY08

FY07

FY06

FY05

Revenue

9,577.2

9,534.0

9,241.2

8,358.0

0.5

3.2

10.6

7.9

EBIT

1,904.7

1,992.3

2,087.5

1,757.0

EBITDA

4,360.2

4.662.1

4,781.5

4,393.0

45.5

48.9

51.7

52.5

19.9

20.9

22.6

21.0

(359.7)

(599.1)

(392.7)

(381.4)

153.0

78.9

45.9

24.9

2,796.7

2,078.8

2,049.6

1,835.7

29.2

21.8

22.2

21.9

Growth (%)

EBITDA Margin (%)

Operating Profit
Margin (%)
Interest Expense
Interest Income
Net Income
Net Income Margin
(%)

The level and stability of operating

margins is a key consideration in
assessing risk to debt holders. MERIS
reviews the EBITDA margin trend as well
as the absolute level of EBITDA for this
purpose.
Telecom Egypt holds a strong position in
this category, reflecting healthy EBITDA
margins over the last years. The reported
EBITDA margin for TE in 2008 is 45.7%
(on standalone financials). The EBITDA
figure deteriorated by 340 basis points
compared with 2007.
However, the
Companys profitability is expected to be
negatively affected in the future as a
result of intensified market competition
and the uncertainty in the macro
economic conditions.

Revenue has increased in FY08 by 0.5% on a Y-O-Y basis with the increase in number of fixed line
subscribers by 4.2% (FY08: 11.7mn; FY07: 11.23mn). A key driver to this growth was the promotional
activities that TE launched in the final quarter.
Despite the increase in operating figures in FY07 and FY08, EBIT and EBITDA margins dropped slightly as
a result of impaired assets which mainly came from trade receivables, in addition to the increase in
employee costs incurred in FY08 due to the two salary increases in January and May FY08. On the other
4

MERIS Analysis

April 2009

Telecom Egypt (S.A.E.) TE

hand, net income margin showed a jump, mainly attributed to the increase in income received from
subsidiaries, the majority of which was sourced from Vodafone investment; which almost doubled over the
last year (FY08: 1,333.2 mn; FY07: 771.6 mn).

FACTOR 5: Financial Strength

Improvement in Free Cash Flow Figures, Due to Increase in Dividends Received from Subsidiaries and
Reduction in Capex
Investment revenue has shown an
upward trend, peaking in FY08, which
was
associated
mainly
with
VodafoneEgy dividends distribution.
This revenue stream started to be
significant to the Companys cash flow,
representing around 48% of net income
generated in FY08. Going forward, the
outlook for this inflow is still
questionable, taking into consideration
that the competition in the domestic
mobile market is anticipated to intensify
in the short term.
On the other hand, there was a
reduction in interest expense as a result
of TE's debt reduction program, and an
increase in interest income due to the
increase in cash position which had lead
to the highest dividend payout in its
history of EGP1.30 per share.

Cash Flow & Coverage

Figures in EGP mn

FY08

FY07

FY06

FY05

EBITDA

4,360.2

4,662.1

4,781.5

4,393.0

Tax

(512.17)

(514.6)

(466.1)

(432.8)

Interest Paid

(359.67)

(599.1)

(392.7)

(381.4)

Investments

(36.01)

(69.9)

(4,832.1)

(722.6)

(789.1)

(1,800.1)

(2,418.
2)

CAPEX

(739.83)

Dividends Received

1,333.20

771.6

355.9

141.4

Dividends Paid

(1855.37)

(1,287.3)

(1,085.6)

(722.5)

Net Free Cash Flow

(excluding working capital)

2,190.31

2,173.7

(3,439.3)

(143.2)

Retained Cash Flow (RCF)

540.7

1,989.3

2,429.0

2,896.9

0.7

2.5

1.3

1.2

12.1

7.8

12.4

11.5

RCF/Capex (x)
EBITDA/ Interest Expenses(X)

Debt Structure:

Financial Leverage
Figures in EGP mn

FY08

FY07

FY06

FY05

As of December 2008,
Short-term Bank Debt
1,512.7
1,827.0
1,382.5
1,052.9
total debts are equivalent
to EGP 3.27bn down from
Long-term Bank Debt
1,626.0
3,151.0
6,105.4
3,734.8
EGP 5.14 bn in FY2007.
Other Financial Obligations
132.1
162.7
168.9
115.9
The
Companys
debt
Total Financial Obligations
3,270.9
5,140.8
7,656.9
4,903.6
profile is considered well
spread with around 46%
Cash and Cash Equivalent
2,477.4
1,202.0
502.9
698.5
short-term
in
nature,
Net Financial Debt
793.5
3,938.8
7,154.0
4,205.1
including
the
current
portion of long-term debts,
Contingent Liab. & C.
328.5
376.2
397.2
550.5
bond installments due
Commitments
within the year and credit
Net Worth
25,555.0
24,658.2
23,909.9
22,706.5
facilities.
As of December 08, the
Gross Debt /EBITDA (X)
0.8
1.1
1.6
1.1
medium
to
long-term
Adjusted Debt / Adj.
17.7
24.8
32.6
24.6
debts are equivalent to
Capitalization (%)
approx. EGP 1.62 bn
Net Adjusted Debt / EBITDA (X)
0.3
0.9
1.6
1.1
down from EGP 3.15bn,
RCF / Net Adj. Debt (X)
0.5
0.5
0.3
0.6
representing 50% of total
financial interest-bearing
obligations, divided between bonds (EGP 400.0mn) and bank loans (EGP 1.22bn). The latter consist of
around 37% governmental loans and 16% local loans, with foreign loans accounting for the remaining
balance. The majority of these debts were incurred while the Company was under the umbrella of the
Egyptian Governmental loan bearing soft-term conditions. The maturity of some of these debts has been
5

MERIS Analysis

April 2009

Telecom Egypt (S.A.E.) TE

extended till 2036, which relieves the pressure on the Companys cash flows. The EGP 2.0bn bond was
issued in 2005 and is divided into two equal tranches: one bearing an annual fixed rate of 10.95%, and a
floating rate (0.7% plus the Central Bank discount rate), to be paid quarterly. The issue is amortizing
whereby the entire value of the issue will be redeemed within 5 years from 2005; as of December 2008 the
bond was redeemed partially by 60% of the issued principle. Under the terms and conditions of the bond
agreement, key covenants include: long-term debt to tangible net worth ratio is not more than 1.2 levels,
debt service ratio not to fall below 1.2; in addition to interest coverage ratio not to fall below 3. As of
December 2008, the Company has been in compliance with the above-mentioned covenants.

TE Still Maintains Strong Debt Structure

Debt Structure

37%

47%

4%

12%

Overdrafts & CPLTD Bonds

Others

LT Bank Loans

In FY08, the Companys debt protection ratio

measured by debt to EBITDA figures, has improved
backed by the decrease in debt levels. Also, debt to
equity ratio was improved for the same reason to
stand at approx. 12.8%, compared to 20.8% in FY07
coupled by improvement in the Companys leverage
position, coverage ratios as measured by EBITDA to
interest expenses to stand at 12.1x in FY08,
compared to 7.8x in the previous year. This was
mainly as a result of the decrease in debt balance
during the year. Going forward, MERIS believes that
the coverage ratio is anticipated to remain at its
current level.

Other Considerations:
Liquidity Position is Considered Adequate.
Recent turmoil in the capital markets has highlighted the importance of having strong liquidity risk
management. Telecom Egypt's liquidity profile is more than enough to cover its debt and other cash
demands. As of December 2008, TE had around EGP 2,477mn in cash and cash equivalent, in addition to
other unutilized credit facilities from different banks which can be drawn at any time.

MERIS Analysis

April 2009

Telecom Egypt (S.A.E.) TE

Annex 1: Investments

MERIS Analysis

April 2009

Telecom Egypt (S.A.E.) TE

Annex 2: Subsidiaries

Xceed acts as the IT arm for Telecom

Egypt, the incumbent operator. Xceed
started its call center operation business
end of 2003, with state-of-the-art
Contact Center that supports a wide
array of inbound and outbound services
that are customized to the clients' needs.
TE Data was established in 2001 by
Telecom Egypt to function as its data
communications and Internet arm. The
company is the Internet Service Market
Leader in Egypt.
Centra is a shareholding company
established in 02. Its core business is to
provide complete IT solutions and
produce different models of a local brand
platform of PCs, Servers and Notebooks
of international quality.
MERC is a joint stock company that
established in year 2001. It is a leading
company in the fields of building,
operating and managing wireless
communications stations.

MERIS Analysis

April 2009

Telecom Egypt (S.A.E.) TE

Annex 3: Financial Summary of Telecom Egypt

31/12/2008

31/12/2007

9,577.2

9,534.0

9,241.2

8,358.0

4,360.2
1,904.7
153.0
2,796.7

4,662.1
1,992.3

4,781.5
2,087.5

4,275.0
1,751.9

78.9

45.9

24.9

2,078.8

2,049.6

1,835.7

Balance Sheet
Cash and Equivalents
Total Assets
Short-Term Debt
Long-Term Debt
Total Bank Debt
Net Worth

2,477.4
32,584.8
1,512.7
1,626.0
3,138.7
25,555.0

1,202.0
33,340.7
1,827.0
3,151.0

502.9
35,151.1
1,382.5
6,105.4

698.5
31,896.2
1,052.9
3,734.8

4,978

7,487.9

4,787.7

24,658.2

23,909.9

22,706.5

Profitability Ratios
Average Return on Assets (%)
Average Return on Equity (%)
EBITDA Margin (%)
Net Profit Margin (%)

8.5
11.1
45.5
29.2

6.1
8.6
48.9
21.8

6.1
8.8
51.7
22.2

5.6
8.0
51.1
21.9

Liquidity Ratio
Cash & Cash Equivalent/Total Assets (%)
Cash & Cash Equivalent/C. Liabilities (%)

7.6
47.0

3.6
22.4

1.4
10.1

2.2
13.1

Coverage Ratios
EBITDA/Interest Expense (x)
Net Debt/EBITDA
Debt/Equity (%)

12.1
0.2
12.8

7.8
0.8
20.8

12.2
1.5
31.3

11.2
0.9
20.8

Figures in EGP mn

Income Statement
Turnover
Operating Profit Margin (%)
EBITDA
EBIT
Interest Income
Net Income

MERIS Analysis

31/12/2006

31/12/2005

April 2009

Telecom Egypt (S.A.E.) TE

Annex 4: National Rating Scale

Gilt edged

AAA

Very high

AA+
AA
AA-

Upper-medium

A+
A
A-

Medium grade

BBB+
BBB
BBB-

Short

Prime 1

Prime 2

Questionable

BB+
BB
BB-

Poor quality

B+
B
B-

Very poor

CCC+
CCC
CCCCC
C

Investment Grade

Long

Prime 3

Not Prime

Speculative Grade

Quality of credit

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10

MERIS Analysis

April 2009