telecom egypt - re-initiation of coverage - march 2016

PRIME INVESTMENT RESEARCH AUTOMOTIVE |EGYPT

GB AUTO – INITIATION OF COVERAGE JANUARY, 14TH

2016

PRIME INVESTMENT RESEARCH

TELECOM|EGYPT TELECOM EGYPT – RE-INITIATION OF COVERAGE

MARCH 24TH, 2016

WE RE-INITIATE COVERAGE FOR … ETEL … ASSIGNING A “BUY” RATING

WE SEE ONE OF THREE SCENARIOS TAKING PLACE OVER THE

MEDIUM-TERM …

1) IF CURRENT OPERATIONS CONTINUE AS IT IS, WE

WOULD THEN BELIEVE IN TE`S FAIR VALUE OF EGP

11.56/SHARE. OR IF, 2) TE HUNT FOR MOBILE OPERATIONS, TAKES PLACE

SUCCESSFULLY BY 2017; WE WOULD SEE 1 OF 2

SCENARIOS THEN,

- SCENARIO 1: A VALUE OF EGP 8.13/SHARE, IN CASE FIBER OPTICS ROLLOUT PROCEED

PARALLEL TO INCURRING MOBILE CAPEX.

- SCENARIO 2: A VALUE OF EGP 10.1/SHARE, IN CASE MOBILE OPERATIONS` REQUIRED

CAPEX TO SOLELY BE INCURRED.

WE RE-INITIATE COVERAGE FOR TELECOM EGYPT AT A FAIR VALUE

OF EGP 11.56/SHARE IMPLYING 54% UPSIDE POTENTIAL.

WE ASSIGN ETEL A “BUY” RATING.

2

PRIME INVESTMENT RESEARCH TELECOM EGYPT – RE-INITIATION OF COVERAGE

MARCH, 2016

We Re-initiate coverage on Telecom Egypt with a “BUY” rating; due to an upside potential of 54% driven from a Fair Value of EGP 11.56/share as our base case. We valued TE using DCF valuation methodology. We valued ETEL utilizing an average WACC over our forecasted horizon of 17.36%, a risk free rate of 10.87%, and a risk premium of 8%. We assigned ETEL its statistically adjusted beta of 0.86. We also applied a perpetual growth rate of 2%, relative to the company`s economic stage. TE ROIC is by far below the company`s average WACC; being in maturity stage justifies the historical dividend play. However, in our base case through which we assume current operations continuation up to 2020, we see a squeeze in dividends driven by high fiber optics CAPEX. Assuming current operations` continuation means no mobile operations for TE. Hence, we anticipate cash payments from VFE to resume after years of freezing. However, we set VFE retention at 40%, added to TE`s investment BV. Broadband, TE`s upcoming success story; anticipated to grow in revenues over the horizon by a CAGR of 15.9%, increasing in contribution to total revenues from 21.6% in 2015 to 39.3% by 2020. To alleviate a massive expected compounded decline of 15.3% in wholesale business units revenues; being under adverse effect from tourism arrivals` declines and Over-The-Top applications` cannibalization. Concerning the lack of visibility we have for the outcome of current disputes going on between TE and other operators and concerning the sector`s regulatory reforms application. We will be revising our numbers once new indications show up. We would also like to note that news/rumors about former CEO Mohamed El-Nawawy getting back the executive chair at TE, is out there.

Looking at Scenario 1, we followed 2014`s regulatory reforms, driving CAPEX higher on the back of obtaining the MVNO license and 4G spectrum License at an estimated EGP 5bn by 2017. Necessitating TE`s 44.95% VFE stake sale, estimated at EGP 13.99bn at an EV/EBITDA of 5.41x by 2017. Out of which EGP 2.54bn represents TE`s after-tax capital gain. Through Scenario 1, we assume the continuation of the fiber optics rollout, but extending the project up to 2021 versus TE`s indication of 2019. We chose to slow down fiber optics` CAPEX in years of mobile licenses acquisition. We also see TE`s capturing a market share of 20% by 2020, as we believe in a predatory pricing coming at discounts to all other market players. In Scenario 1 we applied same discounting parameters, and our assumptions yielded a fair value of EGP 8.13/share; 8% above market price. Liberalizing International Gateway, is also assumed to take place by 2017. Leading to losing revenues of EGP 14.6bn from our base case projected Domestic wholesale and International Carriers Affairs revenues; captured by VFE and Orange. However, a net gain in revenues of EGP 1.94bn would take place thanks to mobile operations, generating EGP 16.5bn over same time duration; neglecting time value of money. We also tested for another case, scenario 2, in which we slowed down CAPEX other than mobile operations related, to 5% of sales starting from 2017, assuming completely halting fiber optics roll out or at least postponing the project beyond 2016`s already under-deployment CAPEX. Scenario 2 yielded a value per share of EGP 10.1, providing a 34% upside.

TELECOM EGYPT … TAKING ONE OF 3 ROADS AHEAD

WHETHER IT BECOMES FULLY FLEDGED OR NOT … ALL SCENARIOS SAY IT’S A BUY

Stock Data Outstanding Shares [in mn] 1,707.0 Mkt. Cap [in mn] 12,837.2 Bloomberg – Reuters ETEL EY / ETEL.CA 52-WEEKS EGP 5.5 – EGP 11.4

Ownership Government 80% Free Float 20%

Financial Highlights

EGP mn 2015 2016E 2017E 2018E

Revenues 12,184.2 12,503.9 12,862.4 13,310.1 GPM (%) 54.7% 53.7% 52.4% 51.5% EBITDA 3,112.9 3,140.0 3,014.9 2,954.9

N.Income 2,997.4 2,117.9 1,883.9 1,773.2

EPS 1.76 1.24 1.10 1.04 P/E 4.28x 6.06x 6.81x 7.24x DPS 0.75 0.37 0.33 0.31 BV/S 16.97 17.21 17.75 18.30 FCF/S 1.02 0.91 0.29 0.20 GCF/S 2.54 2.31 1.77 1.76 EV/EBITDA 3.5x 3.65x 3.9x 4.1x ROA 8.96% 6.06% 5.24% 4.77% ROE 10.75% 7.26% 6.31% 5.75% ROIC 9.4% 8.07% 6.83% 5.97%

Source: Telecom Egypt, Prime Estimates All prices are as of 23 March 2016

Source: Bloomberg

0

2

4

6

8

10

12

14 ETEL EGX 30 - rebased

“BUY” MARKET PRICE EGP 7.52 FAIR VALUE EGP 11.56 POTENTIAL 54% UPSIDE

INVESTMENT GRADE “VALUE”

Report Content Valuation & Risks 3 Financial Statements 4 Telecom Egypt Synopsis 5 Regulations 6 Operational Overview 7

1- Base Case 7 2- Scenario 1 20 3- Scenario 2 25

Disclaimer 27

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MARCH, 2016

N.B We would like to note that, we assumed the continuation of current operations to reflect our base case, as we feel that a lack of visibility lies within the horizon concerning the sector`s recent developments and regulations. In any case, we will remain cautious for updates and instantly revise our numbers for pop-ups.

Valuation

In EGP mn 2016F 2017F 2018F 2019F 2020F

FCF 1,556.7 500.9 346.9 298.7 551.8

PV - FCF 1,390 381.4 224.9 164.8 259.1 Terminal Value

5,940

Average WACC 17.36%

Perpetual G 2.00%

Add: 50% of Cash 1,206

Add: LT. Invs 10,561

Entity Value 20,128

Deductions (Debt & MI) 396.3

Equity Value 19,731.99

DCF/s 11.56

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MARCH, 2016

SOURCE: TE, PRIME

Financial Statements … Historical & Forecast Income Statement Brief Hist. Forecast

In EGP Mn 2015 2016F 2017F 2018F 2019F

Revenues 12,184.2 12,503.9 12,862.4 13,310.1 13,769.1

Change 0.2% 2.6% 2.9% 3.5% 3.4%

COGS 5,519.3 5,793.9 6,122.9 6,453.4 6,797.3

Change 4.9% 5.0% 5.7% 5.4% 5.3%

Depreciation & Amortization (1,589.1) (1,621.5) (1,708.4) (1,793.7) (1,883.4)

Gross Profit 6,664.9 6,710.0 6,739.5 6,856.7 6,971.8

GPM 54.7% 53.7% 52.4% 51.5% 50.6%

EBITDA 3,112.9 3,140.0 3,014.9 2,954.9 2,884.1

EBITDA Margin 25.5% 25.1% 23.4% 22.2% 20.9%

Net Income After MI 2,997.4 2,117.9 1,883.9 1,773.2 1,663.0

NPM 24.6% 16.9% 14.6% 13.3% 12.1%

Balance Sheet Brief Hist. Forecast

In EGP Mn 2015 2016F 2017F 2018F 2019F Assets

Cash 2,413.5 1,760.0 1,483.8 1,135.6 813.6 Net Receivables 4,611.6 4,732.6 4,868.3 5,037.7 5,211.4 Net Inventory 556.9 544.9 570.7 601.6 633.6

Other Current Assets 1,585.4 1,611.7 1,653.2 1,705.1 1,758.4

Total Current Assets 9,167.3 8,649.2 8,576.0 8,480.1 8,417.0

Net PPE 11,839.3 12,408.7 13,319.6 14,218.0 15,118.7 Net Intangibles 933.0 877.5 833.6 792.1 683.9 Other LT-Assets 12,638.1 13,403.6 13,830.2 14,281.2 14,745.8

Total Long Term Assets 25,410.5 26,689.8 27,983.4 29,291.3 30,548.4

Total Assets 34,577.8 35,339.0 36,559.5 37,771.3 38,965.4

Liabilities

STD - incl CPLTD 62.5 65.3 69.2 28.5 24.5 Accounts Payable 330.0 346.4 366.1 385.9 406.4

Other Current Liabilities 3,859.3 4,092.5 4,290.0 4,495.1 4,712.7

Total Current Liabilities 4251.8 4504.2 4725.2 4909.5 5143.6

LTD 326.9 327.7 306.5 301.6 279.6 Other Long Term liabilities 1,024.7 1,122.3 1,222.6 1,326.4 1,433.9

Total Long Term Liabilities 1,351.6 1,450.0 1,529.1 1,628.1 1,713.5

Total Liabilities 5,603.4 5,954.2 6,254.3 6,537.5 6,857.1

Equity

Paid-in-Capital 17,070.7 17,070.7 17,070.7 17,070.7 17,070.7 Reserves 6,380.1 6,337.8 6,356.6 6,427.5 6,494.1

RE 5,508.9 5,832.0 6,667.3 7,453.3 8,183.3 Minority interest 10.3 11.8 13.1 14.3 15.4

Total Equity 28,974.4 29,384.8 30,305.1 31,233.8 32,108.3

Cash Flow Brief Hist. Forecast

In EGP Mn 2015 2016F 2017F 2018F 2019F

CF Sources & Uses

Sources of Funds 2,284.5 761.2 1,220.5 1,211.8 1,194.1 Uses of Funds 2,587.3 1,414.7 1,496.6 1,560.0 1,516.2

Change in Cash (302.8) (653.5) (276.2) (348.1) (322.1)

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MARCH, 2016

SOURCE: TE, PRIME

SOURCE: TE SOURCE: TE

TE`S BOD & SHAREHOLDERS STRUCTURE

Telecom Egypt Synopsis

Telecom Egypt, Egypt’s incumbent telecommunications operator, started its operations in 1854 with the first telegraph line in Egypt. Then it was corporatized in 1998 to replace the former Arab Republic of Egypt National Telecommunication Organization (ARENTO). TE is Egypt`s largest and main infrastructure provider. The Company is the largest provider of fixed-line services in the Middle East and Africa with c. 6.6mn subscribers as at 31 December 2015. TE 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 bandwidth capacity leasing to Internet Service Providers (ISPs), and national and international interconnection services. TE`s services also include the provision of narrowband and broadband internet access through its subsidiary TE Data. TE Data has active operations in Egypt and Jordan. TE currently participates in the mobile segment in Egypt by providing mobile interconnectivity through its current stake of 44.95% in Vodafone Egypt, the largest of three existing mobile operators in Egypt. TE`s shares and GDRs (ETEL.CA, TEEG.LN) are traded on The Egyptian Exchange and the London Stock Exchange. On a consolidated level, TE has around 50k employees.

Telecom Egypt Lines of Business … The Company has two main divisions under which its business

operations are aligned.

Board Members

Waleed Hassan Gad Chairman/ Non-Executive

Ossama Yassin CEO/ Executive

Tarek Mohi El-din Non-Executive

Khaled Mahmoud Sayed Sherif Non-Executive

Ashraf Mohamed Saeed Non-Executive

Al-Sayed Mohamed Al-Sayed Non-Executive

Alexander Adel Alexander Non-Executive

Mohamed Abd El-Lateef Ataeya Non-Executive

Ahmed Mohamed Gamal Non-Executive

Taha Mahmoud Khaled Non-Executive

- Value Added Services - Voice – Local Calls - Voice – Fixed to Mobile - Voice – international Calls - Voice – National Calls - Mobile – to – Fixed calls (M2F) - Internet & Data - Other Domestic Customers

- Value Added Services - PRI (DID & DOD)/ leased lines - Voice – Local Calls - Voice – Fixed to Mobile - Voice – international Calls - Voice – National Calls - Mobile – to – Fixed calls (M2F) - Internet & Data - Assays

- National Transmission Services

- International Transmission Services

- Collocation - International Call Conveyance - Access Services

- International Settlement - Cable Projects - Ancillary Services (O&M) - Capacity Sales

HS - Business ES - Business DW - Business ICA – Business IC&N - Business

Revenue Drivers

Providing traditional voice services & high speed internet (ADSL) through home fixed-landlines

High speed internet services (ADSL) & enterprise integrated applications solutions for both private & governmental entities.

Versatile wholesale services including infrastructure leasing, as well as data transfer for mobile companies and internet providers.

International voice operations, thanks to TE`s bilateral relations with international carriers and companies, as well as a focus on diversity of inbound traffic sources.

Egypt's unique geography, connecting the Red and Med Seas, make TE`s network a unique global resource connecting Euro-Asia and Euro-E-Africa infrastructure.

Home Services Enterprise Solutions Domestic Wholesale Int. Carrier Affairs Int. Customers & Networks

Retail Wholesale

Revenue Contribution - 2015

Retail – 44.9%

DW – 24% ICA – 24.4% IC&N – 6.6% Voice – 22.6% Other – 0.7% Data – 21.6%

Wholesale – 55.1%

80%

20% Government Entities

Free Float

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MARCH, 2016

Egypt`s telecom sector is characterized by 1 player setting monopoly over the fixed-voice segment (Telecom Egypt), and 3 players (Vodafone, Orange and Etisalat Egypt) competing over the mobile business operations. The 4 players compete all together over the broadband business with TE levying dominance in the fixed-lines based data service (ADSL services), leaving a market share of less than 30% for the other 3 mobile virtual operators (MVOs) to compete on. However, currently the 3 MVOs capture the mobile-data competition for themselves with Vodafone acquiring the largest share.

Recent Regulations … Taking the Industry by Storm

Contemplating the telecom scene recent past, leads to an ambiguous outlook, driven by 2014`s regulatory reforms. The regulations amendments were assumed to be implemented for enhancing competition and industry dynamics. The reforms were scheduled to come in action phase by phase with the 1

st taking place in 2014, which did not till

date. The delay can be interpreted into many signals.

In December 2013, the National Telecommunication Regulatory Authority`s (NTRA) Board of Directors’ decided to launch regulatory procedures to issue a unified license for the 4 telecom operating companies in the Egyptian market. In April 2014, the framework was announced by the MCIT and NTRA, through which the 4 telecom operators were to be offered the right to provide the full spectrum of telecom services. The rationale behind the unified license was to enhance competition, as well as creating a national entity that permits investment and developing basic infrastructure, being the core for developing telecommunication services. The unified license was composed of 3 phases to be applied consecutively.

Phase I: Integrating telecommunication services and creating a unified new entity for the sole purpose of developing basic infrastructure – Implementation was planned by end of 2014-2015

The 1st

phase was meant to provide TE with the right to become the 4th

mobile operator through a license worth EGP 2.5bn. While granting the other 3 mobile operators (Vodafone, Orange, and Eitsalat Egypt) licenses to provide fixed-line services through TE`s infrastructure, for EGP 100mn per operator. The regulations allowed TE to launch its mobile operations through the 3 operators' networks until the issuance of 4

th operating license for ETEL.

Phase 1 also included a plan for creating a national entity for establishing and leasing the basic infrastructure for telecommunication networks, with granting rights to the 4 companies to share in this entity along with the State overseeing the financial management. The purpose of the unified entity was to allow the creation of basic infrastructure on the basis of cost-sharing and fast implementation in building and developing a nationwide infrastructure that covers all areas, thereby improving quality of service and delivering it in higher speeds and lower costs.

Phase II: Addressing the International Gateway Services (IGW) – planned implementation by June 2016

The 2nd

phase stated that Vodafone and Mobinil (currently Orange) should pay EGP 1.8bn and EGP 1.5bn respectively, to have access to TE`s legacy copper network in order to offer IGW services, with annual revenue share payment of 6% from both operators up from the current 2.4% to regulatory authorities. Etisalat Egypt, was to be exempted from the lump sum payment as it is the only operator with IGW license beside TE; however, its license is only limited to its customers and should then be paying EGP 8/subscriber for voice services to fixed and mobile phones. The 4G spectrum license was announced to be provided for the 4 operators by June 2016.

Phase III: The last phase of the proposed regulatory agenda was for NTRA to unify all regulatory and financial commitments for the 4 companies.

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MARCH, 2016

Following the regulations … A storm of disputes rose … And TE`s witnessed a Managerial and Board shake-up

In May 2014, TE`s BoD approved indulging in the Mobile-business and delegated former CEO Mohamed EL-Nawawy to finalize terms and negotiations with concerned parties. The cabinet approved the regulatory reforms in September 2014, and mandated TE to divest its 44.95% stake held in Vodafone Egypt (VFE) before the end of December 2015. The government has setup a committee comprised of representatives from the ministries of Telecommunication, Finance and Commerce to suggest best ways for TE`s exit.

The 1st

dispute came from the 3 operators, when VFE threatened seeking international arbitration if the Egyptian government approved the rule giving TE access to the country`s mobile networks to launch its mobile service through. The 3 mobile carriers have complained that the unified license only gives them limited access to TE`s older copper network, rather than its higher-speed fiber optics currently under deployment which offers faster broadband speeds. And the option for the fiber optics network usage was whether to rent/lease usage of fiber cables from TE or to establish their own through the unified proposed infrastructure company.

The 2nd

dispute rose on the back of TE`s stake in Vodafone, when VFE expressed interest in buying TE`s stake in the company following the regulations; while, TE`s management stated earlier that the company is not obliged to exit its JV with VFE and it may even bid to buy a controlling stake in the company when the 4

th license is issued. A matter

indicated from TE`s Article 3 amendment in February 2014.

Due to such disputes between TE and the 3 mobile operators; putting TE in the risk of arbitrations. The implementation of the regulations did not meet any deadline for application. Neither did TE exit its stake in VFE as mandated by the government, nor did TE obtain its MVNO license, and up to this moment the mobile operators did not file for obtaining the license for using TE`s copper infrastructure. Such disputes add skepticism to the scene, and disrupt beliefs in TE becoming a full telecom services provider in the near term, unless all disputes are resolved.

TE`s former CEO El-Nawawy was known for his strong bias towards obtaining the mobile license. As a consequence VFE halted dividends` payouts since 2013 till current time, as a mean for stressing TE to sell its stake or being able to negotiate better terms. Following the escalation of VFE and TE`s dispute, a major managerial and BoD change in May 2015 took place for TE, relieving El-Nawawy from his duties and appointing current CEO Ossama Yassin.

The change in TE`s management leads to beliefs in a strategy change. Whether concerning TE`s stake in VFE, TE`s joining the mobile operations, or liberalizing IGW services through the new unified. So in order to be in proximity from reality, we assume 3 scenarios, from which one is to take place or even a transition from one to another over the medium term.

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MARCH, 2016

SOURCE: TE, PRIME SOURCE: TE, PRIME

SOURCE: TE, PRIME

HISTORICAL FIXED VOICE OPERATIONS … DEPENDENCY ON HH REMAINS THE MAIN THEME … 2015

Operational Outlook

Over the coming partitions, we discuss 3 different operational scenarios, but we assume the first scenario as our base case.

Base Case … No structural changes in operations over medium term … (Fair Value - EGP 11.56/share) We choose our base case scenario to represent the continuation of the company`s business operations as it is, with no business segments additions "Mobile operations or restructuring to take place "IGW liberalization".

1- Retail Business … a play on Data-returns to offset fixed voice cannibalization

This business division contributed to TE`s 2015 revenues by around 45% in 2015, included revenues from home services provided beside those provided to enterprises.

a) Fixed Voice Services TE is Egypt`s fixed voice services monopolistic operator, providing services through its nationwide infrastructure. The fixed voice business outlook is not shiny being under heavy cannibalization over the past years from mobile operations. Such substitution by mobiles is due to their mobility and technologically advanced features. Fixed lines subscriptions have been falling from year to year, however, the downward trend was reversed in 2015 as a result of TE`s efforts and campaigns in introducing its new fiber optics infrastructure connection replacing the legacy copper cables. The replacement enhances connectivity and quality of calls. An aspect that may have assisted in a net fixed lines additions of 215k in 2015, divided between 3.7% increase in house-holds fixed lines demand and 1.9% increase from enterprises. The cumulative increase in 2015 softened the past 5-periods negative compounded decline from 2010-to-2015 to stand at -7.4%.

Over the past years the average revenue per home-line subscriber kept on falling; impacted by mandatory price cuts from TE, in efforts to minimize or slowdown the mobiles-cannibalization effect on home lines. However, TE had more pricing ability over Enterprise users that find difficulty in replacing their land-lines due to the urgency of conducting internal and outbound conference calls.

Fixed Voice Revenues 2011 2012 2013 2014 2015 CAGR HH EGP ARPU/month 27 27 26 25 24 -3.3%

Change -4.9% 0.3% -4.7% -2.1% -6.6%

ES EGP ARPU/month 81 83 85 104 97 4.4% Change -12.3% 1.7% 2.6% 22.3% -7.1%

HH Revenues – EGP mn 2,436 2,136 1,861 1,676 1,530 -11.0%

Change -17.0% -12.3% -12.9% -10.0% -8.7%

ES Revenues – EGP mn 1098.0 1082.3 1093.0 1316.0 1229.0 2.9% Change -19.7% -1.4% 1.0% 20.4% -6.6%

HH Contribution 68.9% 66.4% 63.0% 56.0% 55.5%

ES Contribution 31.1% 33.6% 37.0% 44.0% 44.5%

8,130 6,840 6,240 5,720 5,280 5,475

1,152

1,094 1,083

1,060 1,050 1,070

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

-

2,000

4,000

6,000

8,000

10,000

2010 2011 2012 2013 2014 2015

Household Users - `000 Enterprise Users - `000 HH Change Enterprise Change

83.7%

16.3%

HH Contribution

Enterprises Contribution

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MARCH, 2016


A DOWNTREND IN HH AND A SLIGHT UPWARD FOR EU … SLIGHTLY MODIFYING CONTRIBUTION BY 2020

SOURCE: TE, PRIME

TE`s fiber optics project implementation with the purpose of reaching 6mn homes by 2016 will have a slight positive impact on slowing down the cannibalization of home lines. We believe home fixed lines would just come above the 5k mark by 2020 to record a compounded decline of 1.6% from 2015. To maintain the 5k-range the company would have to annually cut prices, in order to grab the appetite of new clients partially offsetting existing clients’ exits. As the ARPU earned by TE from home lines was slightly higher than that of the mobile market average in 2015. We do not account for new marriages and housing demand in our forecast for home lines as apparently that was not the equation reflected in historical performance. Instead, we anticipate efforts to maintain existing client base along with offering the projected lower priced lines along with the company`s other products.

As for enterprise fixed-lines, we see a low growth rate over the period; driven by additions from newly established companies. Mainly SMEs that might fully depend on land lines as their communication mean due to the unavailability of more expensive software enjoyed by larger corporations. However, we expect TE to cut its pricing for enterprises as well, to motivate additions over short term to hover around an average of EGP 83.3/month by the end of our horizon.

The fixed lines business is already in its declining stage, as new means of communication show up every morning, through devices powered by the internet. So the price cuts we see whether for homes or enterprises are believed to be followed by the company to extend the declining stage of such business over a longer as possible time period. However, if prices are to be maintained at current levels, loss in lines would be moving on an accelerating basis exceeding our expectations. And that would then signal the company`s strategy in trying to recognize early revenues on the expense of securing the segment`s future.

Fixed Voice Revenues 2015 2016F 2017F 2018F 2019F 2020F CAGR HH ARPU/month 23.71 22.29 21.17 20.33 19.72 19.12 -4.2%

Change -6.6% -6.0% -5.0% -4.0% -3.0% -3.0%

ES ARPU/month 96.62 90.82 86.28 84.56 83.29 83.29 -2.9% Change -7.1% -6.0% -5.0% -2.0% -1.5% 0.0%

HH Revenues – mn 1,530.00 1,445.97 1,342.72 1,266.42 1,213.05 1,164.89 -5.3%

Change -8.7% -5.5% -7.1% -5.7% -4.2% -4.0%

ES Revenues – mn 1,229.00 1,169.07 1,116.17 1,102.06 1,096.39 1,107.35 -2.1% Change -6.6% -4.9% -4.5% -1.3% -0.5% 1.0%

Total Fixed Revenues 2,759.00 2,615.05 2,458.90 2,368.48 2,309.44 2,272.24 -3.8%

Change -7.8% -5.2% -6.0% -3.7% -2.5% -1.6%

HH Contribution 55.5% 55.3% 54.6% 53.5% 52.5% 51.3%

ES Contribution 44.5% 44.7% 45.4% 46.5% 47.5% 48.7%

5,338 5,231 5,153 5,101 5,050

1,075 1,081 1,092 1,102 1,113

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2016F 2017F 2018F 2019F 2020F

Household Users - `000 Enterprise Users - `000

HH Change Enterprise Change

81.9%

18.1%

HH Contribution

Enterprises Contribution

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MARCH, 2016

SOURCE: MCIT, TE, PRIME SOURCE: MCIT, TE, PRIME

MOBILE INTERNET & ADSL WERE …(CHANGE-RHS) THE MAIN DRIVERS BEHIND INTERNET USERS INCREASE

b) Broadband … TE`s success story

The broadband business in Egypt has yet much to offer, as the country is under-penetrated in terms of internet usage. In November 2015, the number of mobile, ADSL and USB modem internet users reached 32.9mn, equivalent to around 36.8% of Egypt`s population a figure we assume to have increased to reach 33.2mn by the year end.

The low users-to-population ratio was mainly due the low computerization and personal computers (PCs) penetration in Egypt, and higher prices for PCs. Individuals using computers reached 40.9% of population as of September 2015, while the percentage of households using computers was 56.4% as of 2014. Such ratios were mainly accounted for due to the fall in prices of PCs due to the introduction of more advanced devices with higher mobility like smart phones and tablets. We are currently witnessing the fastest pace of technological advancement with the leading companies competing over new technologies being provided at more competitive prices to preserve their market shares. The competition over new technologies and lower-priced devices will be in the benefit of growing and developing nations like Egypt.

Internet users are the cumulative outcome of mobile internet, USB modem connection, leased lines and ADSL broadband numbers. Mobile internet users have been increasing on the back of new packages and offers from the 3 current operators, backing up the option of mobility and conducting business while freely changing places. While USB modem is seen as declining use of internet being replaced by the mobility of mobile internet, added to current consumer preferences for ADSL broadband connectivity within residential premises due to higher speeds.

21.8 23.3 24.1 25.0 25.6

4.1 4.2 4.1 4.0 3.9

3.0 3.3 3.5 3.6 3.8

-10.0%

-5.0%

0.0%

5.0%

10.0%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

4Q2014 1Q2015 2Q2015 3Q2015 4Q2015E

Mobile Internet Users - mn USB Modem Users - mn

ADSL - mn Mob Change

USB Change ADSL Change

28.8 30.8 31.7 32.7 33.2

75.5% 75.7% 76.0% 76.6% 77.0%

14.0% 13.7% 13.0% 12.2% 11.6%

10.5% 10.6% 11.1% 11.1% 11.4%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 55.0% 60.0% 65.0% 70.0% 75.0% 80.0%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

4Q2014 1Q2015 2Q2015 3Q2015 4Q2015E

Internet Users Mobile % USB % ADSL %

11


MARCH, 2016

SOURCE: CAPMAS, PRIME SOURCE: MCIT, PRIME

A GROWING POPULATION & HH NUMBERS HAND IN HAND … WILL BE ADSL UPWARD DRIVER …

SOURCE: MCIT, PRIME

Telecom Egypt … ADSL broadband market Leader As of 2014 end, Egypt`s population reached 87.96mn, we expect population to reach 101.96mn by 2020 growing at a CAGR of 2.49%. The number of households stood at 20.9mn families in 2014 and is seen growing to 24.3mn by 2020 in line with population growth. Such large base of households provides broadband services a wide room to grow. BB penetration is still far below the number of households, as up to this moment certain families still depend on dial-up connections, while others do not enjoy the luxury of internet access. Over our forecast horizon, we believe mobile, ADSL BB, and USB modem internet users to grow at a CAGR of 12.96% from 2014-to-2020 reaching around 60mn internet users, equivalent to an internet penetration ratio of 58.8% up from 32.8% in 2014 and around 37% estimated in 2015. The growth in internet users' will be driven by the mobility of mobile internet and higher connectivity speed and quality of ADSL BB. In 2014, 10.5% of internet users had access through ADSL; we believe that the percentage of users dependent on ADSL will be increasing year on year, reaching 13% on conservative basis by 2020, equivalent to 7.8mn ADSL. ADSL forecasted CAGR of 17.05% over 2014-2020, is seen reasonable given the current under-penetration, represented by only 3.73mn users in November 2015, which grew by 23.14% over 2014`s 3.03mn users.

TE is believed to have acquired a market share of around 74.2% in 2015E from the ADSL market. The company was able to record over 8 percentage points` increase in market share in only 1-year. The jump was of no surprise and is believed to proceed on an upward trend but at lower magnitudes; due to the company`s fiber optics project that introduced new speed limits and larger downloading/uploading capacities that was not available for Egypt`s internet users` before. We believe the upcoming increase in ADSL broadband contribution to total internet users will be driven from USB substitution besides the increase in internet users. We followed a top-down approach in estimating the number of ADSL BB connections up to 2020, from which we were able to identify the possible market share to be acquired by TE due to its huge fiber optics` project that puts the company at an advantage over all other players. Although, we were conservative in anticipating the increases in TE`s market share, to account for other players responding through a pricing war to maintain their clientele. Still, we see TE enjoying the upper hand in enhancing its market dominance as ongoing operational costs for such business line is considered relatively low after the project`s CAPEX is fulfilled; while other players will still face the burden of interconnection fees paid to TE for transmitting their data capacities using the company`s infrastructure networks.

ADSL BB - `000 2014 2015E 2016F 2017F 2018F 2019F 2020F CAGR TE 1,977.0 2,809.0 3,490.2 4,135.8 4,888.2 5,664.2 6,117.4 20.7%

Others 1,053.0 976.0 1,132.6 1,270.5 1,419.2 1,551.4 1,675.5 8.0% Total 3,030.0 3,785.0 4,622.8 5,406.3 6,307.3 7,215.6 7,792.8 17.1%

TE`s Market share 65.2% 74.2% 75.5% 76.5% 77.5% 78.5% 78.5%

Others Market Share 34.8% 25.8% 24.5% 23.5% 22.5% 21.5% 21.5%

ADSL BB Users - % of Population 3.4% 4.2% 5.0% 5.7% 6.5% 7.3% 7.6%

ADSL BB Users - % of Households 14.5% 17.6% 21.0% 24.0% 27.3% 30.5% 32.1%

3.0 3.8 4.6 5.4 6.3 7.2 7.8

28.8 33.2

39.2

45.1

50.5 55.5

59.9

10.5% 11.4%

11.8% 12.0% 12.5%

13.0% 13.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2014 2015E 2016F 2017F 2018F 2019F 2020F

ADSL BB - `000 Internet Users - 000

% of Internet Users

88.0 90.1 92.4 94.7 97.0 99.5 102.0

20.9 21.5 22.0 22.5 23.1 23.7 24.3

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2014 2015E 2016F 2017F 2018F 2019F 2020F

Egypt`s Population No. of HH - families

12


MARCH, 2016


SOURCE: TE, PRIME

TE`S BB; AN IMPRESSIVE GROWTH … (CHANGE-RHS) WITH EU CONTRIBUTION SLIGHTLY INCHING UP …

TE ADSL subscribers base is divided between households and enterprises, with the households historically representing the vast majority of clientele. In 2015, TE reported a massive growth of 41.5% in from household clients; although BB price cuts took place in 2015. However, the price cuts were so beneficial to the BB business revenue stream for TE. As according to news, a proposal was made by the MCIT responding to clients` complaints about the relatively high BB prices in Egypt in comparison with MENA peers. The proposal came to set the 1Mbps capacity BB as the minimum available BB capacity, and for its price to be slowed down to EGP 50/month; nearly a 50% cut, while the 2Mbps capacity to be set around EGP 100/EGP. The pricing differed accordingly at a permitted range between all 4 BB operators. A matter taking the market by another dispute over TE`s charged connection fees for operators.

Although the prices were slashed, an effect of only 1% cut was apparent on the company`s ARPU/month. As we believe the majority of customers upgraded their subscriptions to higher capacities of 2Mbps+ that became more affordable or nearly equivalent to what they used to pay for at lower speeds. On the revenue stream effect, price easing were beneficial as it grabbed a bulk of new net additions; incentivized by the appealing prices along with the better connection qualities provided by the fiber optics connectivity.

Over the horizon we anticipate the company`s households clients to grow at a CAGR of 16.7% from 2015-to-2020 reaching 5,719.7k users, while enterprise users to grow at a CAGR of 19.2% reaching 397.6k users. We believe competition is stiffer over HH BB new additions as other operators are currently marketing wireless BB connections which would grab clients' attention. However, as TE plans to connect more homes and enterprises with its fiber optics` project by 2019; we believe our projections might even be more conservative concerning the net new additions acquired by TE over the medium term, after considering 2015`s impressive Jump.

From 2016 and ongoing, we anticipate low price reductions for HH BB replicating to an extent 2015`s story, while we see more aggressive cuts for ES BB that to maintain the company`s dominance for such segment. Contribution to revenues from both HH and ES BB are almost constant according to our numbers, driven by simultaneous growth for both segments; taking the broadband weighted CAGR to 15.9% by 2020.

ADSL BB Revenues 2015 2016F 2017F 2018F 2019F 2020F CAGR HH ARPU/month 64.2 63.6 63.0 62.3 62.3 62.3 -0.6%

Change -0.9% -1.0% -1.0% -1.0% 0.0% 0.0%

ES ARPU/month 297.0 273.21 265.02 259.72 257.12 254.55 -3.0% Change -20.2% -8.0% -3.0% -2.0% -1.0% -1.0%

HH Revenues – mn 2,038.0 2,503.5 2,921.4 3,418.3 3,961.0 4,277.8 16.0%

Change 40.3% 22.8% 16.7% 17.0% 15.9% 8.0%

ES Revenues – mn 588.0 686.6 854.9 990.2 1,136.0 1,214.6 15.6% Change 20.7% 16.8% 24.5% 15.8% 14.7% 6.9%

Total BB Revenues 2,626.0 3,190.1 3,776.3 4,408.5 5,096.9 5,492.4 15.9%

Change 35.4% 21.5% 18.4% 16.7% 15.6% 7.8%

HH Contribution 77.6% 78.5% 77.4% 77.5% 77.7% 77.9%

ES Contribution 22.4% 21.5% 22.6% 22.5% 22.3% 22.1%

1,868.0

2,644.0

3,280.8

3,867.0

4,570.5

5,296.1 5,719.7

109.0 165.0 209.4 268.8 317.7 368.2 397.6

-5%

5%

15%

25%

35%

45%

55%

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

2014 2015 2016F 2017F 2018F 2019F 2020F

Household Users - `000 Enterprise Users - `000

HH Change Enterprise Change 94.5% 94.1% 94.0% 93.5% 93.5% 93.5% 93.5%

5.5% 5.9% 6.0% 6.5% 6.5% 6.5% 6.5%

2.2% 3.1% 3.8% 4.4% 5.0%

5.7% 6.0% 8.9%

12.3%

14.9%

17.2%

19.8%

22.4% 23.6%

0%

5%

10%

15%

20%

25%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

2014 2015 2016F 2017F 2018F 2019F 2020F

HH -% of TE`s Users - LHS ES -% of TE`s Users - LHS TE`s Users - to - population TE`s HH Users - to - HH

13


MARCH, 2016

SOURCE: TE, PRIME

c) Retail Division Aggregation

The main theme for TE`s retail division revenue stream in the upcoming period is apparent in the below table, where we see total revenues growing at 7.6% over our forecast period. We see the increase in total revenues to be mainly supported by the broadband segment anticipated performance, offsetting further deteriorations in fixed voice revenue stream. As we see data contribution to revenues increase from 48.8% in 2015 to reach 70.7% by 2020; due to a CAGR of 15.9% offsetting in time the fixed voice segment is projected to record a compounded decline in revenues of 3.8%.

Total Retail Revenues - Voice & BB 2015 2016F 2017F 2018F 2019F 2020F CAGR

Total Revenues - EGP mn 5,385.0 5805.2 6235.2 6777.0 7406.4 7764.7 7.6% Change 9.2% 7.8% 7.4% 8.7% 9.3% 4.8%

HH - Fixed Rev - EGP mn 1,530.0 1,446.0 1,342.7 1,266.4 1,213.1 1,164.9 -5.3%

Change -8.7% -5.5% -7.1% -5.7% -4.2% -4.0%

% of Total Revenues 28.4% 24.9% 21.5% 18.7% 16.4% 15.0%

ES - Fixed Rev - EGP mn 1,229.0 1,169.1 1,116.2 1,102.1 1,096.4 1,107.3 -2.1% Change -6.6% -4.9% -4.5% -1.3% -0.5% 1.0%


Total Fixed Voice Revenues 2,759.0 2,615.0 2,458.9 2,368.5 2,309.4 2,272.2 -3.8%

Change -7.8% -5.2% -6.0% -3.7% -2.5% -1.6%


HH - BB Rev - EGP mn 2,038.0 2,503.5 2,921.4 3,418.3 3,961.0 4,277.8 16.0% Change 40.3% 22.8% 16.7% 17.0% 15.9% 8.0%


ES - BB Rev - EGP mn 588.0 686.6 854.9 990.2 1,136.0 1,214.6 15.6%

Change 20.7% 16.8% 24.5% 15.8% 14.7% 6.9%


Total BB Revenues 2,626.0 3,190.1 3,776.3 4,408.5 5,096.9 5,492.4 15.9% Change 35.4% 21.5% 18.4% 16.7% 15.6% 7.8%


Voice Contribution 51.2% 45.0% 39.4% 34.9% 31.2% 29.3%

Data Contribution 48.8% 55.0% 60.6% 65.1% 68.8% 70.7%

14


MARCH, 2016

SOURCE: TE, PRIME

2- Wholesale Division … The old school play Historically, Wholesale was the major division in revenue contribution for TE, benefiting from domestic transmission services for MNOs, strong growth in international traffic, and high IC&N revenue driven by commissioning new sub-marine cable projects.

a) Domestic Wholesale Business Unit (DW BU) The DW BU incorporates revenues from infrastructure leasing, as well as internet data transfer for mobile companies and internet service providers (ISPs). Mobile network operators currently use TE`s extensive fiber based network for transmission services. The full penetration for mobile market and technology has led to an increase in bandwidth (the speed used for an amount of data transmitted over a network connection between devices) and transmission demand. TE owns an extensive infrastructure network extending over thousands of Kilometers all over Egypt, a network that the company has consistently been after enlarging and raising its capacity. Revenues from the DW BU comes from several activities; mainly domestic and international transmission. Through domestic transmission, TE carries MNOs and ISPs backhaul traffic (links between core or backbone networks and sub-networks). TE enjoys monopoly over backhaul capacities. Such segment is anticipated to move along growth in mobile voice and data beside fixed BB services provided by other operators as well. International Transmission (Outbound) services takes place specifically for International Long Distance (ILD) services mainly from VFE and Orange capitalizing on TE`s IGW License. Etisalat enjoys its own IGW through which it operates outbound; however, it is exclusive to its clientele. TE renewed its agreement with VFE and Orange in January 2015, as the old one expired by the end of 2014. The new signed long term agreements were to provide the 2 MNOs with both domestic and international voice and data transmissions for a total value of about EGP 15bn. Out of the EGP 15bn, EGP 3bn are for infrastructure transmission services, valid for 3 years for VFE and 5 years for Orange. Beside EGP 12bn for international communication services, valid for 4 years for both operator; and includes a right-to-terminate for both operators in case they receive own IGW licenses. The different parties agreed that TE would provide discounts through this agreement based on the transmitted capacities. However, due to such agreement we see more pressures on profit margins, as TE did not conduct an equivalent deal for discounting interconnection fees incurred by the company. In addition to that, ARPUs for transmitting voice and data services domestically and internationally were already on a downtrend. Added to a very crucial aspect rapidly developing, the widespread use of applications for conducting voice and video calls through established internet connections. This enables a onetime pilling for end users through their ordinary data subscription, missing on the voice calls conducted through such applications; conducted almost for free or on a pro-rate basis of data subscription charge may worth much lower than through voice transmission channels. For such reasons, we do not deeply believe in new dynamics for such business unit accounting for impressive growth over the horizon. Instead, we see domestic inbound slowing down to grow modestly thereafter. We think international outbound will continue its downtrend on the back of technological innovation and economic status for individuals; beside tourists` arrivals decline.

Domestic Wholesale Revenues 2015 2016F 2017F 2018F 2019F 2020F CAGR Domestic Transmission - EGP mn 2,142.0 2,249.1 2,294.1 2,340.0 2,386.8 2,434.5 2.6%

Change 17.7% 5.0% 2.0% 2.0% 2.0% 2.0%

International Outbound - EGP mn 784.0 705.6 649.2 616.7 585.9 556.6 -6.6% Change -11.2% -10.0% -8.0% -5.0% -5.0% -5.0%

Total DW BU - EGP mn 2,926.0 2,954.7 2,943.2 2,956.7 2,972.6 2,991.1 0.4%

Change 8.3% 1.0% -0.4% 0.5% 0.5% 0.6%

D-Transmission Contribution 73.2% 76.1% 77.9% 79.1% 80.3% 81.4%

Inter-Outbound Contribution 26.8% 23.9% 22.1% 20.9% 19.7% 18.6%

.

15


MARCH, 2016

SOURCE: PRIME SOURCE: PRIME

SOURCE: TE, PRIME

EGP VS. USD TREND … (CHANGE-RHS) ALONG WITH TOURISM ADVERSE SITUATION; INJURES ICA …

b) International Carriers Affairs (ICA) … An Era of growth ended by 2013

This segment is the main international voice operations supporter for TE; through which TE leverage its IGW license, carrying VFE and Orange inbounding transmission of voice. Thanks to TE`s bilateral relations with international carriers and companies. TE develops and grows international and regional hub business, through developing adjacent voice services (Home Country Direct (HCD) – International Free-phone Service (ITFS)). Through which the company can directly connect callers from different countries together accessing TE`s network, or resident callers with other carriers or companies.

In 2015, ICA revenues dropped by 2.9% y-o-y to stand at EGP 2,977mn; such drop was mainly caused by a 15.7% y-o-y drop in tourism arrivals causing a drop in international traffic demand. However, the effect from EGP devaluation of c. 6% seemed to have had a positive flattening impact on revenues` declines. The devaluation positive impact on ICA revenues was apparent through preventing the 14.8% drop in incoming minutes in 2015, widening from a drop of 10.3% in 2014 to be passed to revenues in full magnitude.

Going forward we believe the ICA revenues downward trend will not be reversed over our horizon. In 2016, we anticipate the most aggressive drop ever in tourism arrivals with a magnitude of 45%, irreversible by the recent EGP 14.3% devaluation but slightly smoothed down. We believe tourism arrivals to start showing y-o-y enhancements from 2017 and onwards. However, this segment is currently susceptible to the declining international traffic driven by callers’ current preference in shifting to broadband powered applications for international calls, that is currently available for free or at very low cost. We see all ICA operators suffering from the cannibalization from Over-The-Top (OTT) applications worldwide. We believe 2019 and 2020, will witness the most aggressive declines although tourists` arrivals are projected to reach 10.15mn and 12.7mn respectively per our numbers. But OTT cannibalization impact on ICA traffic will be strengthened by our projections for 2 consecutive appreciations of 2% in EGP during 2019 and 2020. What strengthens our view for substitution coming from OTT applications is that the already occurring declines are to an extent a replication for an earlier story when an influx of Saudi Arabia SIM cards privileged through Saudi telecom operators by free international roaming services took place in late 2013; hurting TE. And regulators had to intervene to request the service halt.

ICA Wholesale BU Revenues 2015 2016F 2017F 2018F 2019F 2020F CAGR ICA Inbound - EGP mn 2,977.4 2,828.5 2,743.7 2,606.5 2,398.0 2,206.1 -5.8%

Change -2.9% -5.0% -3.0% -5.0% -8.0% -8.0%

7.30 7.74

8.72 8.95 8.95 8.77

8.60

-2.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

0.0

2.0

4.0

6.0

8.0

10.0

2014 2015 2016F 2017F 2018F 2019F 2020F

EGP/USD Change

8,330

4,580

6,496

8,120

10,150

12,688

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2015 2016F 2017F 2018F 2019F 2020F

Tourists` Arrivals Change

16


MARCH, 2016

SOURCE: TE, PRIME

c) International Customers & Network (IC&N)

This segment benefits from Egypt`s geographic location, being at the center linking Africa, Asia and Europe; through connecting the Red and Mediterranean seas. TE commissions new cables` projects in cooperation with global partners, and then offers support and maintenance through its ancillary services provided, mainly operating and maintenance (O&M). TE also sells and lease capacity passage over cables in which the company has ownership, carrying transmission from and to other operators; currently through TE`s 2 cable routes and back-up lines.

In 2015, IC&N revenues dropped significantly by 41.5% reaching EGP 807.2mn. The decline came due to an exceptional performance in 2014, when TE conducted 2 non recurring deals for cables` installation worth EGP 881mn; namely, SEA-ME-WE-5 and Asia-Africa-Europe (AAE)-1 that was one of the largest cables systems ever launched employing 100Gbps with a design capacity of 40 terabits and extending over 25k Km. Normalizing the impact of such deals, we would have seen revenues growing by 52.3%, on the back of an extraordinary performance from the capacity sales segment increasing by more than 2-folds. While ancillary and International customer services` revenues cumulative change was flat.

Over the upcoming horizon, we chose not to project revenues coming from new cables installation by TE, however, we used 2015`s revenues as a base to grow on which at perpetual growth anticipating a replication of minor cables` annual additions or extensions. We almost followed the same methodology for other IC&N segments, but considering slight upward adjustments over perpetual growth rate, driven from mobile and broadband global transmitting capacities. However, as we know that Egypt`s mobile market penetration rate is relatively lower than MENA and European peers; meaning that most countries transmitting capacities are already characterized by over-penetrations. So the growing trend we see is primarily backed by broadband usage growth. And here comes an upward shift in Ancillary services, growing due to maintenance required for exhausting existing cables; beside global expansions in bandwidth on back of new generation-technologies introduced, as talks about 5G being presented in the near term from USA is already taking place.

IC&N Revenues - EGP mn 2015 2016F 2017F 2018F 2019F 2020F CAGR Cable Projects 47.0 47.9 48.9 49.9 50.9 51.9 2.0%

Change -94.7% 2.0% 2.0% 2.0% 2.0% 2.0%

% of Revenues 5.8% 5.8% 5.8% 5.7% 5.7% 5.7%

Ancillary Services (O&M) 165.0 170.0 175.0 182.1 188.4 192.2 3.1% Change 2.5% 3.0% 3.0% 4.0% 3.5% 2.0%

% of Revenues 20.4% 20.6% 20.6% 20.8% 21.0% 21.0%

Capacity Sales 467.0 476.3 490.6 507.8 518.0 528.3 2.5%

Change 125.6% 2.0% 3.0% 3.5% 2.0% 2.0%

% of Revenues 57.9% 57.8% 57.9% 58.0% 57.8% 57.8%

International Customer Support 128.0 130.6 133.2 135.8 138.6 141.3 2.0% Change -1.5% 2.0% 2.0% 2.0% 2.0% 2.0%

% of Revenues 15.9% 15.8% 15.7% 15.5% 15.5% 15.5%

Total IC& N Revenues - EGP mn 807.0 824.8 847.7 875.6 895.8 913.7 2.5%

Change -41.5% 2.2% 2.8% 3.3% 2.3% 2.0%

17


MARCH, 2016

SOURCE: TE, PRIME

3- TE Aggregate Revenues … Contribution shift to Retail … Thanks to BB Over the horizon, the wholesale performance visualized, says that we are about to witness a transitional stage for the business, shifting from maturity to the declining stage in its economic cycle. As we believe the developed world has already reached its full penetration for mobile uses. While the story remaining to tell, is all about broadband and cables installation. We chose not to set assumptions for further whole-cables` projects implementation as we lack visibility for such area. However, we believe good news might show up in TE`s press releases, in line with mega-replenishment projects that take place every now and then especially due to the fast growing population in Africa and Asia. The broadband story, is impressive; as all the technologies showing up every day ends up adding to this line in TE`s revenues. Although, our figures says that we are not very optimistic about wholesale medium-term outlook; we believe that such downtrend in wholesale will largely become captured by the BB business segment.

Total Revenues – EGP mn 2015 2016F 2017F 2018F 2019F 2020F CAGR

Retail Revenues

Total Fixed Voice Revenues 2,759.0 2,615.0 2,458.9 2,368.5 2,309.4 2,272.2 -3.8%

Change -7.8% -5.2% -6.0% -3.7% -2.5% -1.6%


Change 35.4% 21.5% 18.4% 16.7% 15.6% 7.8%

Other Revenues - EU BU 89.0 90.8 92.6 94.4 96.3 98.3 2.0%

Change 17.1% 2.0% 2.0% 2.0% 2.0% 2.0%

Total Retail Revenues - EGP mn 5,474.0 5,895.9 6,327.8 6,871.5 7,502.7 7,862.9 7.5%

Change 9.3% 7.7% 7.3% 8.6% 9.2% 4.8%

Contribution to Total Revenues 44.9% 47.2% 49.2% 51.6% 54.5% 56.3%

Wholesale Revenues

Domestic BU revenues 2,926.0 2,954.7 2,943.2 2,956.7 2,972.6 2,991.1 0.4%

Change 8.3% 1.0% -0.4% 0.5% 0.5% 0.6%

ICA Revenues 2,977.4 2,828.5 2,743.7 2,606.5 2,398.0 2,206.1 -5.8%

Change -2.9% -5.0% -3.0% -5.0% -8.0% -8.0%

IC&N Revenues 807.0 824.8 847.7 875.6 895.8 913.7 2.5%

Change -41.5% 2.2% 2.8% 3.3% 2.3% 2.0%

Total Retail Revenues - EGP mn 6,710.4 6,608.0 6,534.6 6,438.7 6,266.4 6,110.9 -1.9%

Change -6.1% -1.5% -1.1% -1.5% -2.7% -2.5%


Total Revenues 12,184.4 12,503.9 12,862.4 13,310.1 13,769.1 13,973.8 2.8%

Change 0.2% 2.6% 2.9% 3.5% 3.4% 1.5%

Contribution to Revenues Voice 22.6% 20.9% 19.1% 17.8% 16.8% 16.3%

BB 21.6% 25.5% 29.4% 33.1% 37.0% 39.3%

Other Revenues - EU BU 0.7% 0.7% 0.7% 0.7% 0.7% 0.7%

Domestic BU 24.0% 23.6% 22.9% 22.2% 21.6% 21.4%

ICA BU 24.4% 22.6% 21.3% 19.6% 17.4% 15.8%

IC&N BU 6.6% 6.6% 6.6% 6.6% 6.5% 6.5%

18


MARCH, 2016

SOURCE: TE, PRIME

SOURCE: TE, PRIME

SOURCE: TE, PRIME

Operational Costs … GPM under pressure as overheads continues upward

movement

On a CAGR basis we see operating costs growing by 4.1% through 2015/2020 duration. As interconnection costs are seen growing driven by VFE and Orange EGP 15bn renewal deal. Added to TE`s other commercial agreements. We also see fuel costs over the horizon increasing by 2.3% driven by hike in prices, indicated by the government expected austerity measures to be announced by FY2016/17. Other costs are seen moving upward in line with revenues; required for maintaining the company infrastructure and different businesses.

Operating Cash Costs – EGP mn 2015 2016F 2017F 2018F 2019F 2020F CAGR Interconnection Costs 2404.5 2,500.8 2,636.8 2,795.1 2,960.4 3,004.4 4.60%

Change 2.30% 4.00% 5.40% 6.00% 5.90% 1.50% Fuel 270.4 295.2 324.3 319.4 310.8 303.0 2.30%

Change 55.40% 9.20% 9.90% -1.50% -2.70% -2.50% Spare Parts 82.8 85.0 87.4 90.5 93.6 95 2.80%

Change 6.30% 2.60% 2.90% 3.50% 3.40% 1.50% Maintenance 310.5 318.6 327.7 339.1 350.8 356 2.80%

Change 8.40% 2.60% 2.90% 3.50% 3.40% 1.50% Leased Circuits & Satellite Subscriptions 137.8 141.4 145.4 150.5 155.7 158 2.80%

Change 33.90% 2.60% 2.90% 3.50% 3.40% 1.50% Total Operating Cash Costs 3,205.99 3,340.96 3,521.67 3,694.67 3,871.24 3,916.36 4.10%

Change 7.20% 4.20% 5.40% 4.90% 4.80% 1.20%

Other Operating Cash Costs represented 43% and 42% from total COGS in 2014 and 2015 respectively, and are anticipated to proceed upward in contribution, to reach 44% by 2020. Mainly due to the huge contribution from salaries and wages that grew by a range over 8% in 2013 and 2014. As TE has a growing force currently estimated at 50k employees, engineers and technicians. Other costs are related to TE`s licensing fees and increasing frequencies bandwidth, and the increasing social insurance account.

Other Operating Cash Costs - EGP mn 2015 2016F 2017F 2018F 2019F 2020F CAGR Salaries & Wages 1,198.3 1,282.2 1,371.9 1,468.0 1,570.7 1,680.7 7.00%

Change -1.12% 7.00% 7.00% 7.00% 7.00% 7.00% Other Operating Costs 1,115.1 1,170.8 1,229.3 1,290.8 1,355.4 1,423.1 5.00%

Change 5.53% 5.00% 5.00% 5.00% 5.00% 5.00% Total Other Op. Costs 2,313.34 2,452.97 2,601.26 2,758.77 2,926.06 3,103.78 6.05%

Change 1.98% 6.04% 6.05% 6.05% 6.06% 6.07%

In 2015, TE was able to capture a GPM of 54.7% excluding depreciation, declining from approximately 56.7% a year earlier. Signaling one of the maturity signs, as the company currently has several revenue generating segments in maturity or declining, while licensing and interconnectivity costs, out of which some agreements are fixed over certain time durations burden margins. By 2020, we see COGS to Sales surpassing GPM for the first time, due to the high overhead costs historically growing faster than revenue streams.

Aggregate Operational Costs - EGP mn 2015 2016F 2017F 2018F 2019F 2020F CAGR COGS 5,519.3 5,793.9 6,122.9 6,453.4 6,797.3 7,020.1 4.93%

Change 4.95% 4.98% 5.68% 5.40% 5.33% 3.28%

Gross Profit 6,665.8 6,710.0 6,739.5 6,856.7 6,971.8 6,953.7 0.85% Change -3.4% 0.7% 0.4% 1.7% 1.7% -0.3%

COGS/Sales 45.3% 46.3% 47.6% 48.5% 49.4% 50.2%

GPM 54.7% 53.7% 52.4% 51.5% 50.6% 49.8%

19


MARCH, 2016


CAPEX – TO – SALES – EGP MN …EXTENDED OVER 1-MORE PERIOD NOT TO EXHAUST CASH

SOURCE: TE, PRIME

SOURCE: TE, PRIME

CAPEX … Fiber Optics

TE has launched a massive project, years ago for upgrading its infrastructure network from the legacy copper wires to fiber optics; characterized by superiority in bandwidth and speeds for transmitting data. TE currently has a plan of reaching 6mn homes by 2016`s end. A matter that assist in maintaining the company`s broadband accelerating penetration and prevent slashes in fixed voice users.

During TE`s 2015 results` conference call, management indicated the project`s fulfillment would take place by 2019. TE`s management pointed out to a CAPEX to sales of 22-25%, which we believe that it would be cash exhausting and would put TE away from its legacy being a cash rich operator. So we assume the extension of the rollout for one more year to end up by 2020 instead of 2019 and trim down the indicated CAPEX to Sales to 20% over 2016/2019 duration. We anticipate a 20% increase in CAPEX in 2016, a matter of connecting 2.5mn homes and other institutions. Reaching 6mn users by 2016 would set households penetration at around 27%. The project has been a key in attracting new subscribers along with the company`s pricing cuts applied in 2015, setting altogether superiority in the market rally over BB.

SG&A … to continue pressuring EBITDA margin

We believe TE`s massive SG&A to continue pressures on margins on the back of high salaries and wages required for BB marketing and penetration, beside the company`s structured incentive rewards program and social insurance contribution and discounts allowed to MNOs.

SG&A - EGP mn 2015 2016F 2017F 2018F 2019F 2020F CAGR Salaries & Wages 1,992.2 2,100.8 2,213.3 2,337.9 2,469.9 2,591.9 5.40%

Change 5.33% 5.45% 5.35% 5.63% 5.65% 4.94%

Other SG&A 1,236.9 1,269.1 1,305.5 1,350.9 1,397.5 1,418.3 2.77% Change 5.59% 2.60% 2.87% 3.48% 3.45% 1.49%

Total SG&A 3,229.14 3,369.94 3,518.76 3,688.80 3,867.36 4,010.17 4.43%

Change 5.43% 4.36% 4.42% 4.83% 4.84% 3.69%

% of Revenues 26.50% 26.95% 27.36% 27.71% 28.09% 28.70%

Leading to and EBITDA margin moving on the downtrend; due to a slower moving gross profit in comparison with such amounts that we do not see slowing down but instead surpassing top line inclines; a matter that would require re-structure.

EBITDA – EGP mn 2015 2016F 2017F 2018F 2019F 2020F CAGR EBITDA 3,112.9 3,140.0 3,014.9 2,954.9 2,884.1 2,720.0 -2.66%

EBITDA margin 25.5% 25.1% 23.4% 22.2% 20.9% 19.5%

2,077.5 2,500.8 2,572.5 2,662.0 2,753.8 2,375.6

-

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

16,000.0

2015 2016F 2017F 2018F 2019F 2020F

CAPEX to Sales Sales

17.1% 20.0% 20.0% 20.0% 20.0%

17.0%

-15.0% -10.0% -5.0% 0.0% 5.0%

10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 55.0% 60.0% 65.0% 70.0%

2015 2016F 2017F 2018F 2019F 2020F

CAPEX Change CAPEX/Sales

20


MARCH, 2016

Scenario 1 … Unified License Application … VFE stake sale + MVNO + Fiber Rollout (Fair Value - EGP 8.13/share)

In our 1st

scenario, we assume the full implementation of the unified license, leading TE to divest its 44.95% stake in Vodafone Egypt, and acquiring the virtual mobile license for transmission to take place over the current 3 operators’ networks. We also maintain the fiber rollout project, but extend its implementation to 2021; 1-year further than our base case scenario.

We followed the guidelines early announced after the government approved the regulatory reforms in September 2014. Through which, all existing telecom operators have been offered the opportunity to move to the unified license regime, allowing them to offer integrated telecom services. The regulations indicated the establishment of a new unified entity to carry out infrastructure projects, but we actually do not see TE ready to forgo its infrastructure. In May 2015, a new legislative amendment submitted from the Ministry of Defense came in to the picture, entitling the MoD a 60% stake in the new entity that will be responsible for developing an alternative infrastructure and telecom network, the government would hold 20%, and existing telecom operators to hold 20%. However, as we are not 100% sure about the implementation of such legislative amendment, we simply account in this scenario for the liberalization of IGW Licenses being the only exit for TE not to become under multiple arbitration cases; and anticipate TE`s mobile entry to take place through operators` networks, while providing them the right to lease Fiber optics or copper cables.

Vodafone and Orange should then pay EGP 1.8bn and EGP 1.5bn respectively, to have access to TE`s legacy copper network in order to offer IGW services, with annual revenue share payment of 6% from both operators up from the current 2.4% to regulatory authorities. Etisalat Egypt, is to be exempted from the lump sum payment as it is the only mobile operator with IGW license beside TE; however, its license is only limited to its customers and should then be paying EGP 8/subscriber for voice services to fixed and mobile phones.

TE … a fully Integrated Telecom Operator

Before getting into TE, a quick review over the current mobile operations in Egypt shows in our beliefs market saturation. As NTRA has already been cancelling and suspending SIM cards for 1) being un-utilized or 2) due to unpaid pills.

Over the upcoming horizon we believe, as a matter of enhancing business climate, gradual enhancements in disposable income, along with the population increases anticipated, mobile subscriptions would regain growth.

Vodafone Egypt, the historical market leader is anticipated to maintain heading the market, but we expect such share to tremble over 2 main aspects.

1) Mobinil rebranding as Orange, after the mother company took over, means generous offers and high selling, distribution and marketing spending by Orange, to secure a better medium term after finally turning into profitability zone.

2) Telecom Egypt joining the market, with predatory pricing; setting discounts to ARPUs driven by no infrastructure annual leasing/transmission fees payments, but only accounting for access costs to operators` networks.

As per the unified license TE should pay EGP 2.5bn for acquiring the Mobile Virtual Network Operator License (MVNO) added to our estimation for around EGP 2.5bn for acquiring the 4G spectrum license. We believe the 4G spectrum issuance would come by 2H2016 during 1Q-FY2016/17 – 2Q-FY2016/17 which would generate around EGP 10bn from the 4 current mobile operators. However, we should note that the MCIT minister Yasser El-kady recently indicated permitting other international players getting into the 4G auction. Such aspect would push real cost higher than our estimated EGP 2.5bn as a matter of bidding, if it was realized. However, we are skeptical about new entrants appetite, given the market`s almost saturation; as we do not see Egypt`s mobile penetration approaching the 120%+ as in some other developed markets at least within our forecast duration.

If TE is to acquire the 2 licenses, then VFE stake sale is a must. We assume the sale closure to take place by early 2017, providing the required internal funding for the licenses acquisition; assumed to operate by 2017 as well. We also assume liberalization to take place for the IGW same year.

21


MARCH, 2016


ANTICIPATED MARKET PLAYERS SHARES … INDICATES TE PREDATORY ENTRANCE … MN USERS

SOURCE: PRIME


TE`S MOBILE MARKET ENTRANCE … TO CAPTURE MOBILE INTERNET GROWTH – MN USERS

1- TE Mobile Operations … Penetrating at the V-shape midpoint

Mobile operators ARPUs have been inclining on the back of the regulator`s security measures for issuing new SIM cards, that became strictly linked to identification. The increasing competition on such a shrinking customer base became tougher, leading last resort to cutting down prices through generous offers. Over the upcoming period, Orange rebranding will further push pricing down, added to TE 2017`s entry. we believe TE will be the sector`s predator capturing a massive market share in a little span of time. TE will not be subject to transmission leasing fees for carrying its voice and mobile internet capacities, capitalizing on its infrastructure. As all international outbound and inbound contracts already in place being the historical carrier for other operators.

We expect the number of mobile users to start rebounding by 2017, driven by TE`s join and Orange marketing activities, to reach a total of 112mn subscribers by 2020; recording a CAGR of 3.7% exceeding that of population growth and hence driving penetration back upward after dropping for over 3 years in a row now. We believe in a 5% per annum market share gain for TE starting from 2017 to 2020, driven by an assumed 5% discount to VFE`s estimated ARPU by 2017. To capture a market share of 20% by 2020 equivalent to around 22.4mn subscribers, and replace Etisalat, being the 3

rd.

Mobile Operations 2015E 2016F 2017F 2018F 2019F 2020F CAGR Users - mn 93.7 94.2 98.5 101.9 107.4 112.2 3.7%

Change -1.7% 0.6% 4.5% 3.5% 5.4% 4.4%

Population – mn 90.1 92.4 94.7 97.0 99.5 102.0 2.5% Change 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Mobile Penetration 104.0% 102% 104% 105% 108% 110%

In time of capturing mobile subscriptions market share, TE will also rapidly capture mobile internet users, with estimations to reach 18.7% of total mobile internet users by 2020, which would represent around 50% of TE mobile subscriptions.

37.7 36.3 35.5 35.1

34.0 34.0 34.1 33.7

21.8 21.4 21.8 20.9

4.9

10.2

16.1

22.4

0.0

10.0

20.0

30.0

40.0

2017F 2018F 2019F 2020F

Vodafone Orange Etisalat Egypt TE

25.6 30.6

36.0 41.4

46.1 50.4

17.4%

19.5% 17.9%

14.8%

11.3% 9.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2015E 2016F 2017F 2018F 2019F 2020F

Internet Users - mn Mobile Internet Users

Mob - Change

1.7

4.1

7.3

11.2 35%

40%

45%

50%

3.8% 8.1%

13.1%

18.7%

0%

20%

40%

60%

-

5.0

10.0

15.0

2017F 2018F 2019F 2020F

TE Mob-Internet Users TE Mob-internet users % of Mob subscribers TE Market Share

41.3%

31.3% 35.5%

30.0% 23.2%

18.6%

0.0%

20.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2015E 2016F 2017F 2018F 2019F 2020F

Vodafone Orange Etisalat Egypt TE

22


MARCH, 2016

SOURCE: PRIME

SOURCE: PRIME

We assume a predatory discount to VFE ARPU by 2017, which would lead to a mobile voice and data average ARPU of EGP 17.88, anticipated to drop over the horizon by 0.5% driven from leveled competition. However, with almost no barriers to entry, and transmission infrastructure already in place while capitalizing on a huge retail outlets existing thanks to TE data and TE centrals. We would see mobile subscriptions jump positively impacting mobile internet that would also grow on the back of an under-penetrated nation. We conservatively set the segment`s COGS to Sales at 30%, taking into consideration VFE COGS to Sales range of c. 30%, and considering fees for other operators’ networks accessibility. SG&A expenses are anticipated to initially show up high, as a matter of launching expenses and nationwide advertisement and marketing that trim down later. We set 2017 SG&A at 60%, and take it down to 25% by 2020.

TE Mobile Operations 2017F 2018F 2019F 2020F CAGR Mobile Subscriptions - mn 4.9 10.2 16.1 22.4 65.8% Mobile Internet Users - mn 1.72 4.08 7.25 11.22 86.7%

ARPU EGP/month 17.88 17.79 17.70 17.61 -0.5% Revenues - EGP mn 1,425.78 3,044.95 4,962.41 7,110.01 70.8%

2- IGW Liberalization We based the liberalization adverse effect on our estimated upcoming Vodafone and Orange subscriptions market share. As both would then join Etisalat and operate their own IGW. The impact of liberalization is anticipated to fall on Domestic Wholesale and International Carriers Affairs; dropping massively in comparison to our base case scenario.

IGW liberalization would lead to wasting EGP 14.6bn from the base case anticipated IGW revenues from 2017 to 2020, however on a net revenues basis TE would gain EGP 1.94bn over lost IGW revenues from following scenario 1 driven from the projected mobile revenues of EGP 16.5bn over same time duration; neglecting time value of money.

TE IGW Revenues – EGP mn 2015 2016F 2017F 2018F 2019F 2020F CAGR Domestic & ICA Revenues - Pre IGW 5,903.9 5,783.2 5,686.9 5,563.1 5,370.6 5,197.2 -2.5%

VFE & Orange - Market Share 76.8% 76.5% 72.9% 69.0% 64.7% 61.4%

Domestic & ICA Revenues - Post IGW 5,903.9 5,783.2 1,543. 1,722.72 1,895.8 2,007.9 -19.4% Change 2.3% -2.0% -73.3% 11.6% 10.0% 5.9%

3- Fixed Voice & Broadband The agreed up on regulatory reforms also stated liberalizing fixed voice operations for EGP 100mn per operator, but we do not see takers. We maintain our assumption for TE being the sole Fixed-wired services provider given its owned infrastructure. In addition to that the segment is already in its declining stage being under mobile substitution. Leaving no room for competition and expansion; except for Enterprise users that we believe have preference for TE, due to its inclusive offers of voice and data at appealing priced packages. We also do not see internationally-backed up operators targeting competition over such segment unless they have already been there long enough; to avoid CAPEX that should be directed to other segments with growing potential. Fixed BB services are already liberalized, with 4-operators competing all together. We do not see adverse effect on TE`s base case data assumptions, as the adverse effect of transmission revenues will be passed to DW BU and ICA BU.

23


MARCH, 2016

SOURCE: PRIME

SOURCE: PRIME

SOURCE: PRIME

4- TE Aggregate Revenues … A Drop in Wholesale … Cured by Mobile Operations

Total Revenues – EGP mn 2015 2016F 2017F 2018F 2019F 2020F CAGR

Retail Revenues

Total Fixed Voice Revenues 2,759.0 2,615.0 2,458.9 2,368.5 2,309.4 2,272.2 -3.8% Change -7.8% -5.2% -6.0% -3.7% -2.5% -1.6%


Change 35.4% 21.5% 18.4% 16.7% 15.6% 7.8%

Other Revenues - EU BU 89.0 90.8 92.6 94.4 96.3 98.3 2.0%

Change 17.1% 2.0% 2.0% 2.0% 2.0% 2.0%

Mobile Operations 0.0 0.0 1,425.8 3,044.9 4,962.4 7,110.0

Change

113.6% 63.0% 43.3%

Total Retail Revenues - EGP mn 5,474.0 5,895.9 7,753.6 9,916.4 12,465.1 14,972.9 22.3% Change 9.3% 7.7% 31.5% 27.9% 25.7% 20.1%


Wholesale Revenues

Domestic BU revenues 2,926.0 2,954.7 798.6 915.6 1,049.3 1,155.5 -17.0% Change 8.3% 1.0% -73.0% 14.6% 14.6% 10.1%

ICA Revenues 2,977.4 2,828.5 744.4 807.1 846.5 852.3 -22.1%

Change -2.9% -5.0% -73.7% 8.4% 4.9% 0.7%

IC&N Revenues 807.0 824.8 847.7 875.6 895.8 913.7 2.5% Change -41.5% 2.2% 2.8% 3.3% 2.3% 2.0%

Total Retail Revenues - EGP mn 6,710.4 6,608.0 2,390.8 2,598.3 2,791.6 2,921.6 -15.3%

Change -6.1% -1.5% -63.8% 8.7% 7.4% 4.7%


Total Revenues 12,184.4 12,503.9 10,144.3 12,514.7 15,256.7 17,894.5 8.0% Change 0.2% 2.6% -18.9% 23.4% 21.9% 17.3%

Contribution to Revenues Voice 22.6% 20.9% 24.2% 18.9% 15.1% 12.7%

BB 21.6% 25.5% 37.2% 35.2% 33.4% 30.7%

Other Revenues - EU BU 0.7% 0.7% 0.9% 0.8% 0.6% 0.5%

Mobile Revenues 0.0% 0.0% 14.1% 24.3% 32.5% 39.7%

Domestic BU 24.0% 23.6% 7.9% 7.3% 6.9% 6.5%

ICA BU 24.4% 22.6% 7.3% 6.4% 5.5% 4.8%

IC&N BU 6.6% 6.6% 8.4% 7.0% 5.9% 5.1%

Operational Costs & Margins …

As a matter of mobile operations launching, we see 2017, the lowest in GPM due to salaries and wages and other operational expenditure pressuring margins; however, we also account for annual fees for accessing mobile networks. As we proceed, margins are anticipated to regain superiority.

Operating Cash Costs – EGP mn 2015 2016F 2017F 2018F 2019F 2020F CAGR Total Operating Cash Costs 3,205.9 3,340.9 2,712.1 3,442.3 4,287.7 5,065.2 9.6%

Change 7.20% 4.20% -18.82% 26.92% 24.56% 18.13% Total Other Op. Costs 2,313.3 2,452.9 2,601.3 2,758.8 2,926.1 3,103.8 6.1%

Change 1.98% 6.04% 6.05% 6.05% 6.06% 6.07% COGS 5,519.3 5,793.9 5,313.4 6,201. 7,213.8 8,168.6 8.2%

Change 4.95% 4.98% -8.29% 16.71% 16.33% 13.24% COGS/Sales 45.30% 46.30% 52.4% 49.6% 47.3% 45.7%

GPM 54.70% 53.70% 47.62% 50.45% 52.72% 54.35%

SG&A & EBITDA 2015 2016F 2017F 2018F 2019F 2020F CAGR SG&A - EGP mn 3,229.1 3,369.9 3,518.8 3,688.8 3,867.4 4,010.2 4.43%

Change 5.43% 4.36% 4.42% 4.83% 4.84% 3.69%

% of Revenues 26.50% 26.95% 34.69% 29.48% 25.35% 22.41%

EBITDA - EGP mn 3,112.9 3,140.0 992.7 2,158.2 3,028.3 4,188.9 6.12% EBITDA margin 25.55% 25.11% 9.79% 17.25% 19.85% 23.41%

24


MARCH, 2016

SOURCE: BLOOMBERG

SOURCE: BLOOMBERG, PRIME

VFE Stake Sale …

We believe that TE does not have sufficient cash for incurring the MVNO license and 4G spectrum, as the company has a low debt to equity policy. We maintain the company`s capital structure over the horizon, which necessitated VFE stake sale; holding on to the stake might lead to massively shrinking retained earnings and no dividend payout which does not seem achieving the government`s goals being the majority stake holder at TE.

In addition to a probable duplication in CAPEX for the licenses, incurred directly and through the company`s proportionate stake, that might dilute VFE`s retained earnings and then evaporate TE`s withheld equity share.

The sale will also be necessary to take place before launching the mobile operations in order to avoid adverse international arbitration from probable lawsuits filing from the 3 operators international mother companies.

Egypt remains the highest margin-recognizing market for Vodafone Group globally, even after TE`s mobile market entrance and VFE market share dilution. So within this scenario we assume that Vodafone Group will buyout TE`s stake at an EV/EBITDA of 5.4x, calculated from average comparables leading EV/EBITDA. The sale will take place in 2017, before TE launches mobile operations.

The sale will provide TE with the necessary cash needed for funding the licenses, while adding an after tax capital gain of EGP 2.5bn to 2017`s stressed operations to end the year on a y-o-y increase. A dividend of EGP 1.12/share would then be distributed equivalent to EGP 2bn, given the high CAPEX level.

EV/EBITDA - 2017 EBITDA margin EBITDA – EGP mn EV – EGP mn TE Share Stake Sale – EGP mn 5.41 42% 5,751 31,113.64 45.0% 13,985.58

BV - 2016 10,809.56

Capital Gain 3,176.02

After-tax Capital Gain 2,540.81

Ticker Name EV/EBITDA Next Yr

ETEL EY Equity TELECOM EGYPT 3.73 TKG SJ Equity TELKOM SA SOC LTD 3.10

BEZQ IT Equity BEZEQ THE ISRAELI TELECOM CO 7.99 BATELCO BI Equity BAHRAIN TELECOM CO 4.32

OTEL OM Equity OMAN TELECOMMUNICATIONS CO 4.70 STC AB Equity SAUDI TELECOM CO 6.26 IAM MC Equity MAROC TELECOM 6.60 PTNR IT Equity PARTNER COMMUNICATIONS CO 6.16 DU UH Equity EMIRATES INTEGRATED TELECOMM 4.43 CEL IT Equity CELLCOM ISRAEL LTD 5.95

ORDS QD Equity OOREDOO QSC 4.24 VOD SJ Equity VODACOM GROUP LTD 7.48

GTHE EY Equity GLOBAL TELECOM HOLDING 2.42 MTN SJ Equity MTN GROUP LTD 4.64 ZAIN KK Equity MOBILE TELECOMMUNICATIONS CO 4.81 EEC AB Equity ETIHAD ETISALAT CO 6.80

SAFCOM KN Equity SAFARICOM LTD 7.27 ETISALAT UH Equity EMIRATES TELECOM GROUP CO 6.49

Average 5.41

25


MARCH, 2016

SOURCE: TE, PRIME

SOURCE: TE, PRIME

CAPEX- EGP MN (LHS) …

CAPEX- EGP MN (LHS) …

CAPEX …

In Scenario 1, we tested for the probability of TE proceeding with the fiber optics project while incurring the licenses costs. We extended the fiber optics implementation beyond 2019, but smoothing percentage of sales down from the company`s indication to 8% in 2017, stabilized in 2018 and then gradually increasing over the horizon.

Scenario 2 … We Tested for Scenario 1 … Less the Fiber Optics implementation over

medium term (Fair Value - EGP 10.1/share)

The only difference in this Scenario over Scenario 1, is the assumption of an annual CAPEX equivalent to 5% of sales over the horizon, beyond 2016 20% of sales assumed CAPEX, which the company has already started incurring. We remind that in 2016 we assumed a 20% of sales CAPEX down from the company`s indication of 22-25%, as its already around 20% y-o-y higher than 2015`s EGP 2.08bn CAPEX. And is believed to be sufficient for a 2.5mn more connections.

17.1%

20.0%

57.3%

8.0% 15.0%

20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

-

2,000

4,000

6,000

8,000

2015E 2016F 2017F 2018F 2019F 2020F

CAPEX % of Revenues

17.1% 20.0%

54.3%

5.0% 5.0% 5.0%

-10.0%

10.0%

30.0%

50.0%

70.0%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2015 2016F 2017F 2018F 2019F 2020F

CAPEX % of Revenues

26


MARCH, 2016

27


MARCH, 2016

PRIME SALES TEAM

Hassan Samir Managing Director

+202 3300 5611 [email protected]

Mohamed Ezzat Head of Sales & Branches


Shawkat Raslan Heliopolis Branch Manager


Amr Saber Team Head-Institutions Desk


Amr Alaa, CFTe Manager


Mohamed Elmetwaly Manager


Emad Elsafoury Manager


RESEARCH TEAM

* [email protected]

+202 3300 5728

HEAD OFFICE PRIME SECURITIES S.A.E. Regulated by CMA license no. 179 Members of the Cairo Stock Exchange 2 Wadi El Nil St., Liberty Tower, 7th-8th Floor, Mohandessin, Giza, Egypt Tel: +202 33005700/770/650/649 Fax: +202 3760 7543

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telecom egypt - re-initiation of coverage - march 2016

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