JAZIRA SECURITIES BROKERAGE TELECOM EGYPT

Monday, September 20, 2010

Equity Research

Mobile is not the only new play TE can get HOLD

Egypt’s fixed line addressable market penetration rate has fallen to 48% in 1H Market Price (EGP/share) 17.3
FY10, down from 60% at the end of 2008, as TE has cleaned up its customer
Target (EGP/share) 19.5
base from inactive and non-paying customers. This clean-up has resulted in
muting the impact mobile market price wars had on TE’s fixed line ARPU, Upside 13%
which even with TE’s writing-off 2.3 million or 20% of its customers count, GDR Market Price (US$/GDR) 15.3
have remained almost flat at EGP40.6/month. However, TE is fighting back
with more visible promotions and marketing approach. The fixed line revenue GDR Target (US$/GDR) 17.2
stream declined 3.7% per annum over the past 4 years and is expected to wit- Share : GDR Conversion Rate 5:1
ness a 1.7% CAGR decline over the forecasted period.
We believe TE should be seen simply, as the third largest player in the local Reuters Codes ETEl.CA
& national telephony in Egypt, as its and mobile operators’ markets and ETELq.L
strategies have became extremely intertwined. Full Name: Telecom Egypt Company
Internet & data is the sole activity in TE’s retail segment which is demon- Short Name TE
strating healthy growth of 48% CAGR over the past four FYs, and is expected
to witness 22% CAGR from 2010 to 2015, as TE’s fully owned ISP, TE Data, Exchange Listing EGX
LSE
captures over 60% of Egypt’s broadband market, which its addressable market
penetration is expected to witness a 21% CAGR over the coming 5 years. Index Inclusion EGX30
The global economic slowdown and the further rise of VoIP are both
pounding on the international call revenue stream. However, TE has man- Number of Shares (mn) 1,707
aged to increase international revenues by 14% to EGP1.89 billion in 1H FY10, Market Cap (EGP bn) 29.5
through the generating of around EGP312 mn from the sale of its new cable
EV 2010 (EGP bn) 29.8
capacities. We expect that sale of TE North and transit corridor capacities
will maintain international revenues growth in 2010 and 2011. 52 Week Low-High (EGP) 15.1 - 20.3

Although Vodafone Egypt has reported a yoy bottom line decline in the 6 Average Daily Volume (52 weeks) 1.3 mn
months ending June 2010 of 9% to EGP1.35 billion, TE reported a 16% in- Stock Performance Absolute / Relative to index
crease in investment income from VE to EGP730 million, as a result of some
Three Month +1.7% / -1.6%
adjustments VE made in its employee profit share account. We project that VE
will report 6% decline in net profit for the 12 months ending December Six Month -1.9% / -3.3%
2010, a minor setback in a year in which we expect Mobinil to witness nearly One Year -8.0% / -5.7%
27% bottom line decline.
For FY10, we expect revenues to grow by 1.1% after receiving a bump up from
the cable operation mitigating the expected declining fixed line revenue stream. Shareholders Ownership stake
Going further forward, we project revenues growth will start to pick up mo- Egypt Government 80%
mentum by 2013, as the global economic recovery will support relatively Free Float & Others 20%
better international call revenue, plus better domestic wholesale revenues
from the sale of capacities to satisfy a growing broadband demand and Analyst: Mohamed Fahmy
businesses including call center activity, in addition to acceleration of the
Email : mfahmy@jaziracapital.com
broadband revenues growth on the retail front.
Mobile: +2012 2157312
TE has a cash rich balance sheet, which improved even further after receiv-
ing EGP1.35 billion cash dividend from VE in July 2010. While TE has no 21 TE Shar e Pr ic e (EGP)
intentions to invest abroad, TE has its eyes on expanding its operations locally,
19
into areas that would integrate with its prevailing operations. TE revealed it’s in
the look out for a system integrator company to consolidate. 17

TE is still a dual play operator, the initiative of making the whole of Luxor 15
wi-fi covered can be done on a wider scale, and with the surge of smart phones, S - O- N- D- D- J - F- M- M- A- M- J - J - J - A- S -
Ipad and laptops accessing the net on the go, TE can capture significant por- 09 09 09 09 09 10 10 10 10 10 10 10 10 10 10 10
tion of the wireless broadband revenue, which currently is dominated by mo-
bile operators.
FY ending Dec. 2009a 2010e 2011f 2012f
Still to be a real triple play operator, TE has the potential to penetrate the
Revenues (EGP mn) 9,960 10,072 10,372 10,493
cable TV, content and media fields. To be a quadruple player, TE would need
to have its own mobile network. We see Etisalat Misr is a perfect candidate, EBITDA Margin 50.3% 47.6% 47.0% 45.6%
since if anyone can make this network profitable it would be TE due to the inte- EPS (EGP) 1.64 1.78 1.81 1.95
gration potential. However, we don’t think Etisalat’s owners would sell any DPS (EGP) 1.30 1.30 1.50 1.65
time soon as long as banks are still giving them more funding, supported by PER 10.4x 9.6x 9.4x 8.7x
the operator’s mother company credit reputation. A forth network, well this
DY 7.6% 7.6% 8.8% 9.7%
would be just one network too many...
EV/EBITDA 5.6x 5.4x 4.9x 4.7x
Net Debt (EGP mn) 1,063 (1,015) (2,646) (4,127)

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 JAZIRA SECURITIES BROKERAGE
September 20, 2010
Customer clean up over the
past two years have masked
the real declining trend of
TE’s fixed line ARPU
The lines between fixed and
mobile telephony are becom-
ing blurry
Broadband addressable market
penetration rate is expected to
hike to 38% in 2015 from 11%
at the end of 2009
Mobile operators have the
capacity to invest in ISPs
TELECOM EGYPT
Equity Research
Fixed Line Activity
Telecom Egypt have wrote off inactive customers in 2009 and in Q1 2010, bringing total sub-
scribers down from 11.7 million at the end of 2008 to 9.6 million at the end of 2009, and further
down to 9.3 million at the end of Q1 2010. Writing off subscribers is great to reflect the true
penetration level and revenue generating customer base. Currently, fixed line penetration stand
at 48% of the addressable market down from 60% at the end of 2008. However, the real issue is
that ARPU, which should have went up as a result of filtering out the inactive subscribers, have
actually went down. Although the 2% decline in 2009 fixed line services ARPU, is in face value
a small decline, it hides the fact that ARPU would have declined at a larger degree if not for the
inactive subscribers write off.
However, some signs that TE is able to hold back the fixed line ARPU from falling further have
showed up in 1H 2010 ARPU levels, which reached EGP40.6 gaining 1.1% over FY09 figure.
But again subscribers stood at 9.42 million down from 9.55 million, which imply that it can be
rather lesser revenue per sub but distributed on a lesser pool of customers.
So, who’s eating TE’s cheese?
Mobile operators in their competition to grab more subscribers or even just retain their subscrib-
ers in a market with limited access to new customers, have brought mobile airtime rates signifi-
cantly lower, in part they have expanded the country’s communications revenue pool but aslo
have went deep into TE’s traditional fixed line airtime revenue comfort zone.
We believe without the need for a second fixed line operator, TE is in fact just the third out of a
four players local and national telephone connectivity market. We also believe that TE recog-
nizing this fact, have upped its marketing campaigns and promotions while lowering rates. The
competition will remain fierce and we expect TE fixed line services ARPU to continue its
downward trend and to have limited customer growth.
We project that customer base growth will mainly be related to new houses and businesses
opening. So, it will be closely tied to the Egyptian economic and population growth trends.
Based on these factors we estimated that TE will attract between 350k and 400k new customers
each year over the coming 5 years.
Regarding ARPU, we expect fixed line services ARPU to witness a -3.1% compounded annual
decline rate over the same period, as a result of decline in both subscription fees per customer
and decline in airtime ARPU.
All this would lead to revenue from fixed line services to decline 13% in FY10, but will manage
a CAGR of 0.3% from FY11 to FY15.
Internet Activity may be the retail segment’s only balancing factor
Egypt’s broadband addressable market penetration stood at 10.7% at the end of 2009. Still there
is way much potential in this area. We expect broadband addressable market penetration to
reach 37.6% by 2015. However, competition is fierce in the broadband market, and again the
mobile operators are leaping to capture a portion of TE’s best single performing segment of
operation. Both Mobinil (EMOB.CA) and Vodafone Egypt have bought internet service provid-
ers in order to support their efforts to boost their wireless broadband provision and diversify
revenue sources. The mobile providers broadband initiative may not be appealing to the whole
spectrum of their subscribers, but it will sure sell well to the high end customers and businesses.
Furthermore, internet service provision is capital intensive and having a mobile operator back-
ing the operation will boost the incumbent mobile operators’ ISP business in the face of TE
Data dominant market position.
TE Data is TE’s fully owned IS provider, and currently holds over 60% market share. TE inter-
net & data revenues as a percentage of total TE’s retail segment revenues have increased from
2% in 2005 to 11% in 2009. Furthermore, the segment’s ARPU declined at a compounded aver-
age of 36% over the same period to EGP103/month.
We expect TE to manage to maintain a mid 60s% broadband market share, over the forecasted
period while its ARPU is expected to decline 6% per annum over the forecasted period.
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 JAZIRA SECURITIES BROKERAGE
September 20, 2010
Retail segment contribution to
TE’s revenues to shrink to
54% over the forecasted pe-
riod from 63% recorded aver-
age for the past 4 FYs
Fixed line operators are al-
ready adopting wholesale
VoIP to carry their interna-
tional calls in order to cut cost
TE cable operation will gener-
ate around EGP800 million
worth of leased bandwidth
capacities in 2010 & 2011
Mobile & ISPs demand for
infrastructure is boosting TE’s
domestic wholesale revenues
Egypt has been ranked as the
the 4th most favorite destina-
tion for contact centers
TELECOM EGYPT
Equity Research
Retail Revenue contribution to shrink
The expected growth in TE Data revenues, while all other of TE’s retail activity are expected to
weaken further over the years, will result in the internet & data transmission segment of opera-
tion to have a larger contribution of the total retail revenues from its current 14.5% contribution
in 1H FY10 to 33.5% in FY15. All in all, retail revenues will contribute an average of 54% of
TE’s total revenues over the forecasted period versus 58% in FY09 and an average of 63% over
the past 4 years.
The Wholesale Activity
Income from international dialing is jeopardized by VoIP popularity
International calls revenue stream has been always a lucrative segment for Telecom Egypt,
given Egypt’s large expat community in oil rich countries. International segment, all in all, rep-
resented 75% of the wholesale services revenues for TE in FY09 and 32% of total revenues,
with its majority stemming from international calls. However, global competition on this lucra-
tive segment of communications is extremely high with cheaper substitutes such as voice over
internet protocol have made strong strides to attract a considerable portion of the traditional
international calls market. Furthermore, with telecom operators worldwide not able to limit
VoIP growth, they decided to join them, through providing their own VoIP services. This looks
very similar to airlines banning travelers from the use of mobiles claiming it is not good for
navigation just to boost profits, while now have caved to customer needs and accepted to com-
promise and permit a degree of on-flight mobile usage.
The same for fixed line operators own VoIP service, it is limited and rates are expensive com-
pared to pure VoIP providers on the pretense that it is of better quality and include true infra-
structure cost. However, with the boom in internet capacities, and cheaper service rates, custom-
ers will be able to acquire higher bandwidth with cheaper rates which would leave the pretense
of better quality of fixed line telephone weak.
This will result in increased competition from pure VoIP providers, which will push some coun-
tries to aggressively lower their rates to maintain their market stake, especially that most fixed
line operators are already using wholesale VoIP to carry their international traffic in order to cut
costs. TE may not be one of the first to take such actions but its share of international call reve-
nue originated from such countries will be impacted. Furthermore, with Egypt’s internet sub-
scription fees getting lower, while its speed and affordability are getting higher, the competition
on international calls is expected to increase over the coming period.
Cable capacities rollout is starting to have a significant contribution to TE’s revenues
Amazingly, the VoIP which is expected to weaken the lucrative international calls market is
creating new opportunities in the call centers market among others. Call centers is part of the
bandwidth hungry new batch of solutions which TE have identified as opportunities for growth
and constructed the TE North cable linking Europe to mainland Egypt and into Asia. TE have
sold around EGP312 million of the estimated total cable bandwidth income of EGP800 million
during 1H 2010. The remaining of the lease capacities value of the cable bandwidth is expected
to be sold through the remaining of 2010 and over 2011. Furthermore, TE will receive 4% of
the leased capacity sale value per annum, over the contract period, which is estimated between
10-15 years.
Domestic Wholesale Revenues
TE’s domestic wholesale market is essentially broken down into two parts, the first and larger
up till now, is the mobile to fixed termination fee income which TE collects from the mobile
operators. The second part, is the revenue generated from the income TE receives from provid-
ing its infrastructure to mobile operators and internet service providers and is currently gaining
ground. We expect that the boost in call centers and broadband penetration in Egypt will sup-
port the expansion of TE’s domestic wholesale revenues in the medium term.
Egypt has been ranked the 4th most favorite destination for contact centers in a recent Datamoni-
tor report. With the explosion of call center hubs on the outskirts of Cairo with the new Maadi
contact center that will add 40,000 seat capacity, once completely operational by 2012, to
Egypt’s growing contact center business. Contact service business is expected to witness a
CAGR higher than 20% over the coming 4 years.
We see that Egypt will reach a saturation in telecommunication and bandwidth capacity in less
that four years time, after which growth will be muted in tune with economic growth levels.
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 JAZIRA SECURITIES BROKERAGE TELECOM EGYPT
September 20, 2010
Equity Research

Wholesale Activity

International revenues grew
14% yoy in 1H 2010 driven by
cable capacities sale
Sale of local infrastructure led
domestic wholesale to rise by
17% in 1H
The wholesale segment is ex-
pect to have a greater influ-
ence on TE’s top line over the
coming years
International calls wholesale revenues witnessed a decline of 4.8% in 1H FY10, as a result of a
softer global economy and lower international rates by carriers. However, the sum of interna-
tional wholesale operations witnessed a 14% growth in 1H FY10 to EGP1.9 bn compared to
EGP1.7 bn in 1H FY09, as a result of the cable business EGP312 million sales during 1H FY10,
while no such revenue was recorded in 1H FY09.
The domestic wholesale grew by 17% to EGP619 mn in 1H FY10, driven by infrastructure
sales to ISPs and mobile operators, while the wholesale operation in total witnessed a 15% in-
crease in 1H FY10 to EGP2.5 billion compared to EGP2.2 billion in 1H FY09.
We expect the wholesale segment revenues to grow at a CAGR of 6% over the forecasted pe-
riod supported by the growth in triple play provision to new suburban communities, more infra-
structure requirements from local ISPs and mobile operators and new cable business rollout. On
the other hand, we expect that international gateway revenues to shrink further, due to VoIP
customer migration, Etisalat increasing its customer base thereby routing their calls through its
own international gateway and TE itself lowering rates in order to ward off any further loss of
market position.
Consolidated Revenues

TE’s consolidated revenues All in all, we expect revenues to grow by 1.1% in FY10 to EGP10.07 billion compared to
are expected to witness 1.1% EGP9.96 billion in FY09. Revenues grew 0.13% in 1H FY10, we expect the better end of year
growth in FY10 and 5% top line growth to stem from more cable sales, improved internet based income growth and
CAGR over the following 5 TE’s customers become more responsive to TE’s fixed line airtime offers. Over the coming 5
years years, we expect revenues to improve at a CAGR of 4.5%, driven essentially by broadband re-
tail and wholesale domestic activi-
First Half KPIs Ending June 2009 2010 Change
ties. Furthermore, as the global Fixed line Subscribers (k) 9,840 9,424 -4.2%
economy improves, we expect the Fixed line ARPU (EGP) 41.81 40.57 -2.9%
international wholesale income will Broadband Subscribers (k) 502 741 47.6%
Broadband ARPU (EGP) 104.9 88.4 -15.7%
relativity improve as Egyptian ex-
Broadband Market Share 59.8% 61.4% 2.7%
pats count in the gulf region in- Capex (EGP mn) 615 519 -15.6%
creases along with current expats’ Net Cash Position (EGP mn) -112 894 n/a
income and consumer confidence Vodafone Egypt
improvement, resulting in relatively Closing Subscribers (k) 20,370 25,791 26.6%
ARPU (EGP) 48 38 -21.2%
higher level of international call VE Revenues (EGP mn) 5,846 5,830 -0.3%
consumption. In addition to TE roll- VE Net Income (EGP mn) 1,486 1,349 -9.2%
ing out further international cable TE Invest. Income from VE (EGP mn) 632 730 15.5%
capacities.
Income Statement (EGP mn) 1H09 1H10 Change
EBITDA Access Revenue 1,073 908 -15.4%
Voice Revenue 1,413 1,118 -20.9%
EBITDA margin fell from 51.6% in Internet & Data 316 393 24.4%
1H FY09 to 49.6% in 1H FY10. Others 216 284 31.6%
Retail Revenues 3,018 2,703 -10.4%
Management attributed the decline Domestic 530 618 16.6%
to the cables operation lower mar- International 1,654 1,887 14.1%
gins compared to TE’s conventional Wholesale Revenues 2,184 2,506 14.7%
operations margins. However, we Total Operating Revenues 5,202 5,209 0.1%
COGS 1,476 1,524
believe it’s the competition on all Gross Profit 3,726 3,685 -1.1%
fronts and consequent lower ARPU S, G & Adm. Expenses 937 934
levels are the main culprits for this Ongoing Provisions 14 10
decline. Other Operating Expenses 88 158
EBITDA 2,687 2,583 -3.8%
Going forward, we expect the EBITDA Margin 51.6% 49.6% -4.0%
EBITDA margin is expected EBITDA margin to gradually fall to Depreciation 1,330 1,281
to reach mid 40s% by 2013 Reported EBITA 1,357 1,302 -4.1%
the mid 40s % by 2013. We expect Interest Income 85 68 -19.1%
the EBITDA figure to drop 2.8% in Investment Income 636 735 15.6%
FY10, but starts improving by 2011, Other Non-Operating Income 48 148 209.9%
with a CAGR of 2.7% from 2011 to Other Non-Operating Expenses 0 1
Interest Expense 104 11 -89.1%
2015. NPBT 2,022 2,241 10.9%
Income Tax 284 325 14.5%
Total Extra-Ordinary Items 16 47 197.4%
Minority Interest 4 0 -88.7%
Net Income 1,750 1,963 12.1%
Source: Telecom Egypt

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 JAZIRA SECURITIES BROKERAGE
September 20, 2010
TE reported a 15.6% growth
in its investment income from
VE during 1H FY10, however,
VE’s bottom line declined 9%
over the same period
We valued TE’s stake in VE at
EGP13.3 billion
TE is practically debt free
TE is estimated to has now
over EGP3.5 billion of cash
TELECOM EGYPT
Equity Research
Vodafone Egypt
Although it’s mobile business that is eating from TE’s fixed line operation pie, the mobile op-
erators won’t fair better this year. The Egyptian mobile sector is facing a slowdown in customer
uptake as its mobile penetration level is close to the 70% rate. In addition to Etisalat’s offers,
which in its attempt to see some real feasibility to its operation has brought prices significantly
lower, compounded with a sluggish consumer sentiment are drowning the sector into a declin-
ing profit trend. This has brought us to expect that TE’s 45% stake in Vodafone Egypt will gen-
erate lower income this year by 3% compared to 2009. VE’s net income in 1H FY10 based on
TE’s fiscal year already reported a 9% decline to EGP1.35 billion compared to EGP1.49 billion
in the 6-month ending June 2009 and is expected to close the 12 month period ending Decem-
ber with a 6% yoy decline.
TE has reported EGP730 mn of investment income from VE in 1H FY10 compared to EGP631
mn in 1H FY09. We don’t expect the full year income to witness such growth, since it included
some one off adjustments.
Our Vodafone Egypt assumptions pertained that VE’s market share would remain in the low to
mid 40s%, revenues to suffer a mild decline in 2010, but start a positive trend next year, and
pick an upward robust momentum by 2013, as the economic recovery will relatively boost new
subscriber uptake, mobile airtime and data consumption.
The book value of TE’s stake in VE stood at EGP8.14 billion in 1H FY10, while we valued it at
EGP13.3 billion using an earning discounted model, since we do not have VE’s detailed income
statement to correctly assess what’s over or below the EBITDA, in order to value the company
using a DCF model.
Cash & Interest Bearing Debt
Telecom Egypt had a total interest bearing debt of EGP1.04 billion at the end of FY09, and as
long term debt levels went down in 1H 2010, we expect the interest bearing debt to fall in FY10
to EGP852 million.
TE is cash rich, even after distributing a EGP0.55/share or EGP939 million cash dividend on
June 30, 2010, its 1H FY10 financials showed over EGP1.74 billion of cash. Furthermore, in
August 2010, Tarek Tantawy, TE’s CEO revealed that the company’s cash position has soared
to around EGP3.5 billion, essentially driven by the Vodafone Egypt, July 7, 2010, cash divi-
dends in which TE’s portion amounted to EGP1.35 billion.
Net Income
TE has reported a 12% increase in 1H FY10 net income, mainly driven by a 16% increase in
investment income and sharp drop in interest expense as most of the its long term debt is for-
eign currency denominated, while a large EGP denominated loan had matured in September
2009, which had an interest rate of corridor +1%. Furthermore, 1H FY10 income included a non
recurring customs duty refund at the amount of EGP70 million.
We expect FY10 full year bottom line to record a yoy increase of 6.6% to EGP3.3 billion. The
growth will be driven by a mild increase in top line, essentially driven by cable revenues
growth. EBITDA is expected to decline by 4.2%, due to lower margins due to competition and
cable’s revenues lower margin than those of TE’s conventional lines of business.
Also, an expected one off custom duty rebate in the amount of EGP150 million is expected to
boost TE’s FY10 non-operating revenues. Furthermore, due to the sharp drop in interest ex-
pense, and boost in cash, TE would record a net interest income of EGP132 million compared
to a net interest expense of EGP5 million in FY09.
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 JAZIRA SECURITIES BROKERAGE
September 20, 2010
We valued TE based on a DCF
model while its investment in
VE was valued through an
EDM
We calculated the total value
of TE at EGP33.3 billion or
EGP19.5/share
TELECOM EGYPT
Equity Research
Valuation
We have valued Telecom Egypt using discounted valuation model, through discounting the
company’s operational free cash flow, we have also valued TE’s stake in Vodafone Egypt on a
separate model using discounted earning model, since we don't have Vodafone EBITDA fig-
ures, to correctly calculate VE’s NOPLAT.
We have used in both TE and VE valuation a cost of equity of 15.74%, which is based on a
market risk of 17.5% and a beta of 0.78x. In addition, we utilized a perpetual growth of 4% in
both valuation models. Furthermore, we have factored the cost of debt in TE’s standalone
valuation in order to attain the WACC.
Based on the outlaid assumptions and discount factors, we have attained a stand alone share-
holders equity value for TE at EGP20.0 billion and a value of EGP13.3 billion for TE’s 45%
stake in Vodafone Egypt, thereby the consolidated value of Telecom Egypt’s shareholders eq-
uity culminated at EGP33.3 billion or EGP19.5/share.
Beyond Valuation
Our valuation is based on TE’s current dual play operation. Even as a dual play, TE has a lot
more to provide. Creating and marketing wi-fi zones can provide huge potential if marketed to
clubs, malls and business areas.
Providing triple play to Cairo’s suburban compounds is also another area which TE is currently
addressing and can provide some good growth potential.
However, TE is far from becoming a true triple or quadruple telecom operator.
We believe that TE still has more growth potential in triple play areas, that it can capitalize on
its current advanced network and ability to penetrate most of Egypt households through entering
into areas of media, web content, creating integrated solutions and cable TV.
Regarding having a mobile network of its own, we don’t think Egypt mobile industry can sus-
tain more than three networks, while remain a profitable one. Both Vodafone and Mobinil are
too expensive for TE to buy and their owners have low incentive to sell, other wise to a very
attractive bid.
Etisalat is the best candidate for TE. But TE will need to wait around 5 years prior to the
Etisalat Misr’s Emeriti owners recognize there is nothing to gain from being a third operator in
a country like Egypt. A third mobile company in Egypt require an operator who is very innova-
tive or can be very cost efficient. TE can be the second and with its capability for integration
between its other services, a mobile network even if it is the smallest in the country can prove
profitable and rewarding.
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 JAZIRA SECURITIES BROKERAGE TELECOM EGYPT
September 20, 2010
Equity Research

FY Ending December 2007a 2008a 2009a 2010e 2011f 2012f 2013f 2014f 2015f
Population (mn) 80.1 81.5 83.1 84.7 86.3 87.9 89.6 91.3 93.0
Population Growth 1.9% 1.7% 2.0% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9%

Fixed Line Subscribers (mn) 11.20 11.70 9.55 9.64 10.00 10.37 10.76 11.16 11.57
Growth 4% 4% -18% 0.9% 3.7% 3.7% 3.7% 3.7% 3.7%
Addressable Market Penetration Rate 58.7% 60.3% 48.3% 47.8% 48.7% 49.5% 50.4% 51.3% 52.3%
Penetration Rate 14.0% 14.4% 11.5% 11.4% 11.6% 11.8% 12.0% 12.2% 12.4%
Penetration Growth 1.8% 2.7% -19.9% -1.0% 1.8% 1.8% 1.8% 1.8% 1.8%
Fixed Line Subscribers Net additions (k) 400 500 -2,146 87 359 372 386 401 415

Fixed Line Activities Revenue Streams

Access revenue (EGP mn) 1,888 1,999 2,049 1,758 1,763 1,810 1,859 1,909 1,960
Growth 6% 6% 3% -14% 0% 3% 3% 3% 3%
Access Revenue Per Sub (EGP) 14 15 16 15 15 15 15 15 14
Growth 2% 2% 10% -5% -2% -1% -1% -1% -1%
Voice revenue (EGP mn) 3,167 3,015 2,618 2,246 2,195 2,174 2,154 2,133 2,113
Growth 0 0 0 -14% -2% -1% -1% -1% -1%
Voice revenue Per Sub (EGP) 24.0 21.9 20.5 19.5 18.6 17.8 17.0 16.2 15.5
Growth -19% -9% -6% -5% -5% -5% -5% -5% -5%
Others (EGP mn) 630 591 448 426 404 404 404 404 404
Growth -27% -6% -24% -5% -5% 0% 0% 0% 0%
Retail Fixed line Services Revenues
5,685 5,605 5,115 4,430 4,362 4,389 4,417 4,446 4,477
(EGP mn)
Change -11% -1% -9% -13% -2% 1% 1% 1% 1%
Retail Fixed Line ARPU (EGP mn) 43.07 40.79 40.11 38.5 37.0 35.9 34.8 33.8 32.8
ARPU Growth -14% -5% -2% -4% -4% -3% -3% -3% -3%

Broadband Revenue Stream

Egypt ADSL Subscribers (k) 427 719 1,027 1,413 1,871 2,383 2,914 3,562 4,356
ADSL Penetration Rate 0.5% 0.9% 1.2% 1.7% 2.2% 2.7% 3.3% 3.9% 4.7%
Addressable Market Penetration 3.8% 6.1% 10.7% 14.7% 18.7% 23.0% 27.1% 31.9% 37.6%
TE Data Market Share 52% 59% 61% 62% 63% 64% 65% 66% 67%
TE broadband Subscribers (K) 222 424 625 873 1,174 1,518 1,883 2,337 2,900
Growth 141% 91% 47% 40% 34% 29% 24% 24% 24%
TE Broadband Net Addition (K) 129.9 202.2 200.8 248.0 300.7 343.6 365.7 453.9 563.3
Growth 100% 56% -1% 23% 21% 14% 6% 24% 24%

Internet service Rev. (EGP mn) 456 575 649 862 1,095 1,353 1,624 1,915 2,257
Growth 148% 26% 13% 33% 27% 24% 20% 18% 18%
Internet ARPU (EGP) 242 148 103 96 89 84 80 76 72
Internet ARPU Growth -6% -39% -30% -7.0% -7.0% -6.0% -5.0% -5.0% -5.0%

Contribution to Retail Revenues

Access Revenues 31% 32% 36% 33.2% 32.3% 31.5% 30.8% 30.0% 29.1%
Voice Revenues 52% 49% 45% 42.4% 40.2% 37.9% 35.7% 33.5% 31.4%
Internet Services & Data Transmission 7% 9% 11% 16.3% 20.1% 23.6% 26.9% 30.1% 33.5%
Others 10% 10% 8% 8.0% 7.4% 7.0% 6.7% 6.4% 6.0%
Total Retail Services Revenues 6,141 6,180 5,764 5,291 5,457 5,742 6,041 6,361 6,735
Growth -7% 1% -7% -8% 3% 5% 5% 5% 6%

Wholesale Revenues
Total wholesale (EGP mn) 3,852 3,936 4,197 4,782 4,916 4,752 5,084 5,364 5,660
Domestic (EGP mn) 925 1,058 1,029 1,132 1,188 1,260 1,348 1,442 1,543
International (EGP mn) 2,927 2,878 3,168 3,650 3,728 3,492 3,736 3,922 4,117

Retail Revenues (EGP mn) 6,141 6,180 5,764 5,291 5,457 5,742 6,041 6,361 6,735
Growth -7% 1% -7% -8% 3% 5% 5% 5% 6%
% of Total Revenues 61% 61% 58% 53% 53% 55% 54% 54% 54%
Wholesale Revenues (EGP mn) 3,852 3,936 4,197 4,782 4,916 4,752 5,084 5,364 5,660
Growth 36% 2% 7% 14% 3% -3% 7% 6% 6%
% of Total Revenues 39% 39% 42% 47% 47% 45% 46% 46% 46%
Total Revenues (EGP mn) 9,993 10,116 9,961 10,073 10,373 10,494 11,124 11,725 12,395
Growth 6.0% 1.2% -1.5% 1.1% 3.0% 1.2% 6.0% 5.4% 5.7%

CAPEX (EGP mn) 945 919 981 2,200 1,056 1,109 1,164 1,222 1,284
Growth -51% -3% 7% 124% -52% 5% 5% 5% 5%
CAPEX/Revenues 10% 9% 10% 22% 10% 11% 11% 11% 11%

Source: Telecom Egypt historical data & Jazira Capital estimates and forecasts

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 JAZIRA SECURITIES BROKERAGE TELECOM EGYPT
September 20, 2010
Equity Research

FY Ending December 2007a 2008a 2009a 2010e 2011f 2012f 2013f 2014f 2015f
Vodafone Egypt Assumptions
Mobile Penetration 36% 50% 63% 71% 77% 83% 87% 90% 91%
Active Subscribers (mn) 29.1 40.6 52.7 60 67 73 78 82 85
Growth 56% 40% 30% 14% 11% 9% 7% 5% 4%
Mobinil 14.2 19.2 24.1 27.6 30.7 33.5 36.0 37.8 39.4
Vodafone 12.5 16.8 22.2 25.3 28.2 30.8 33.0 34.8 36.2
Etisalat 2.4 4.6 6.4 7.3 7.9 8.5 8.9 9.2 9.3

Market Share
Mobinil 48.7% 47.3% 45.8% 45.8% 45.9% 46.0% 46.1% 46.3% 46.4%
Vodafone 42.9% 41.4% 42.1% 42.1% 42.2% 42.3% 42.4% 42.5% 42.6%
Etisalat 8.4% 11.4% 12.1% 12.1% 11.9% 11.7% 11.4% 11.2% 11.0%

Vodafone Rev. (EGP mn) 9,933 11,577 11,990 11,899 12,463 13,282 14,753 16,324 18,013
Growth 0 17% 4% -1% 5% 7% 11% 11% 10%
ARPU (EGP) 73 62 49 39.75 36.95 35.72 36.66 38.19 40.26
Growth -15% -14% -22% -19% -7% -3% 3% 4% 5%
Net profit (EGP mn) 2,820 2,918 3,216 3,032 3,112 3,284 3,647 4,036 4,453
Growth 12% 3% 10% -6% 3% 6% 11% 11% 10%
Net Profit Margin 28% 25% 27% 25% 25% 25% 25% 25% 25%

Total (EGP
TE Valuation Breakdown Per Share % of Total
mn)
TE Standalone Value 19,965 11.7 60%
VE Value 13,288 7.8 40%
TE Consolidated Valuation 33,253 19.5 100%

Source: Telecom Egypt historical data & Jazira Capital estimates and forecasts

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 JAZIRA SECURITIES BROKERAGE TELECOM EGYPT
September 20, 2010
Equity Research

Historical & forecasted financials

Figures are in EGP mn
Income Statement 2008a 2009a 2010e 2011f 2012f 2013f 2014f 2015f
Revenues 10,117 9,960 10,072 10,372 10,493 11,124 11,724 12,394
Growth 1.2% -1.5% 1.1% 3.0% 1.2% 6.0% 5.4% 5.7%
EBITDA 5,150 5,007 4,795 4,870 4,787 5,019 5,235 5,483
Growth -4.2% -2.8% -4.2% 1.6% -1.7% 4.8% 4.3% 4.7%
EBITDA Margin 50.9% 50.3% 47.6% 47.0% 45.6% 45.1% 44.7% 44.2%
Depreciation & Amortization (2,734) (2,731) (2,506) (2,581) (2,448) (2,329) (2,225) (2,137)
Reported EBIT 2,416 2,275 2,289 2,289 2,339 2,690 3,010 3,346
Non-Operating Items 1,073 1,258 1,414 1,409 1,520 1,722 1,937 2,168
Net Interest (203) (5) 132 273 422 559 700 833
Net Profit Before Tax 3,286 3,528 3,835 3,971 4,281 4,971 5,648 6,346
Income Tax (512) (453) (575) (596) (642) (746) (847) (952)
Net Profit After Tax 2,774 3,075 3,260 3,376 3,639 4,226 4,800 5,394
Extraordinary Items 21 (18) 50 - - - - -
Minority Interest (6) (5) (6) (6) (6) (7) (8) (9)
Net Income 2,790 3,051 3,304 3,370 3,632 4,218 4,792 5,385
Non-Appropriation Items (251) (252) (272) (278) (299) (348) (395) (444)
Net Attributable Income 2,539 2,800 3,031 3,092 3,333 3,870 4,397 4,941
EPS 1.5 1.6 1.8 1.8 2.0 2.3 2.6 2.9
Growth 8.4% 10.3% 8.3% 2.0% 7.8% 16.1% 13.6% 12.4%

Balance Sheet 2008a 2009a 2010e 2011f 2012f 2013f 2014f 2015f
Cash & Marketable Securities 2,735 2,453 4,359 6,192 7,879 9,638 11,286 12,845
Trade Receivables-Net 2,965 2,821 2,795 2,879 2,912 3,087 3,254 3,440
Inventory 473 414 419 431 436 462 487 515
Other Current Assets 1,869 1,532 1,550 1,596 1,614 1,711 1,804 1,907
Total Current Assets 8,042 7,220 9,122 11,097 12,842 14,899 16,831 18,707
Net Fixed Assets 17,531 16,086 15,780 14,255 12,915 11,750 10,747 9,894
Other LT Assets 8,297 9,155 8,177 8,388 8,610 8,858 9,131 9,434
Non-Current Assets 25,828 25,241 23,957 22,642 21,525 20,607 19,879 19,327
Total Assets 33,870 32,461 33,079 33,740 34,367 35,506 36,709 38,034

Short Term Bank Debt & CPLTD 1,520 186 140 71 68 68 68 68

Account Payable 477 488 493 508 514 545 574 607
Dividends Payable 2,471 2,472 2,492 2,836 3,117 3,620 4,112 4,621
Other Current Liabilities 3,128 3,263 3,199 3,072 2,933 2,970 2,998 3,042
Total Current Liabilities 7,595 6,408 6,324 6,488 6,633 7,203 7,753 8,338
Long-Term Debt & Bonds 1,626 858 712 638 568 497 427 356
Other LT Liabilities 487 439 475 512 550 591 635 682
Non-Current Liabilities 2,113 1,296 1,187 1,150 1,118 1,088 1,061 1,038
Paid in Capital 17,071 17,071 17,071 17,071 17,071 17,071 17,071 17,071
Total Shareholders' Equity 24,161 24,757 25,569 26,102 26,617 27,215 27,895 28,659

Net Debt (adjusted with Div. Payable & Cash) 2,882 1,063 (1,015) (2,646) (4,127) (5,453) (6,679) (7,800)
Working Capital 447 812 2,799 4,609 6,209 7,696 9,078 10,369

Free Cash Flow 2008a 2009a 2010e 2011f 2012f 2013f 2014f 2015f
NOPLAT 1,809 1,755 1,776 1,744 1,757 2,017 2,248 2,493
Depreciation 2,734 2,731 2,506 2,581 2,448 2,329 2,225 2,137
Gross Cash Flow 4,543 4,486 4,282 4,326 4,206 4,346 4,473 4,630
Gross Investments 103 (501) (2,505) (1,325) (1,305) (1,426) (1,479) (1,558)
Operating Free Cash Flow Excluding Intangibles 4,646 3,985 1,778 3,001 2,901 2,920 2,994 3,072
Investment in Goodwill & Intangibles 69 27 - - - - - -
Operating Free Cash Flow Including Intangibles 4,715 4,012 1,778 3,001 2,901 2,920 2,994 3,072
Non -Operating Cash Flow (643) 665 915 (342) 32 288 714 1,126
Free Cash Flow 4,072 4,677 2,693 2,660 2,933 3,208 3,708 4,198
Source: Telecom Egypt financials & Jazira Capital estimates and forecasts

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 JAZIRA SECURITIES BROKERAGE TELECOM EGYPT
September 20, 2010
Equity Research

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