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A rather satisfactory year

A rather satisfactory year

EARNINGS/SALES RELEASES

Despite the modest revenue growth (+0.7% at JOD335m), Paltel’s FY2017 EBITDA recorded a significant increase by 6.4% to JOD152m, with an improved EBITDA margin of 45.3%, up by 240 bps indicating the group’s strong operational performance. On a like-for-like basis, Paltel’s FY2017 net profit would remain stable (+0.2%, yoy, at JOD81m). The group maintained a dividend of JOD0.4/share for 2017, which equals 2016 dividend. On a like-for-like basis, Paltel’s FY 2017 results are considered particularly satisfactory.

FACT

Paltel recorded a slight increase by 0.7%, yoy, in its 2017 revenues at JOD335m with a healthy rise in Data revenues offsetting the drop in Mobile services revenues and the flat growth in Fixed revenues. Indeed, in the face of a mature Palestinian market with a mobile penetration rate of 97%, and increased pressure from Wataniya Mobile, which started operating in the Gaza Strip in October 2017, Paltel’s Mobile revenues decreased by 2.9% in 2017, to JOD213m (contributing by 63.7% to the group’s FY2017 revenues vs. 66.1% in 2016). Note that Paltel’s Mobile customer base increased by only 1.6% to 2.9 million subscribers by the end of 2017, with a lower market share of 68% vs. 73% in 2016. The Fixed line segment remains flat at JOD29.7m with a stable contribution compared to 2016 (8.9%). By contrast, the Data segment performed well during this period, with a revenue growth rate of +10.6% at JOD91.6m, contributing 27.4% to the group’s FY2017 revenues (vs. 24.9% in 2016). Paltel’s FY 2017 customer base was up by 3.3%, yoy, to 3.8 million subscribers, with an increase across all business segments. The Mobile segment remains the first contributor to the group’s customer base with 78.3% in 2017, followed by the Fixed Line and Data segments contributing by 12.4% and 9.4%, respectively.


ANALYSIS

Mixed results
Paltel recorded a mixed FY 2017 set of figures, in line with our estimates, for, both, revenues and bottom line growth. However, Paltel surprised us with an EBITDA increase against our expectations. Indeed, the modest revenue growth was expected by our model assuming an increase by 0.67% vs. 0.71% actually achieved. Paltel’s FY2017 EBITDA increased by 6.4% to JOD152m, with an improved EBITDA margin of 45.3%, up by 240 bps indicating the group’s strong operational performance and better cost control, missing our estimates (-8.8% and an EBITDA margin of 38.9% expected by our model). However, and despite this significant EBITDA improvement, the decrease in the group’s EBIT and net profit was clearly foreseeable by our model. FY2017 Paltel’s EBIT and net profit were crushed by 22.8% and 11.9%, respectively, with an EBIT margin of 20.3% (-610 bps), vs. -17.7% and -17.8%, respectively expected by our model. Indeed, Paltel’s results were affected by the increase in amortisation expenses following the renewal of Jawwal and Paltel licenses at the end of 2016, coupled to higher finance costs, additional provisions related to employees’ indemnity and early retirement, in addition to the cancellation of Jawwal’s 50% income tax exemption and the expiry of Paltel’s 50% tax exemption stating the year 2017. Note that, on a like-for-like basis, Paltel’s FY2017 net profit would remain stable (+0.2%, yoy, at JOD81m).
Cash Flow’s resilience
Despite lower profits, Paltel maintained a dividend of JOD0.4/share for 2017, which is equal to 2016 dividend (in line with our projections). This was made possible thanks to the group’s sustained cash flow to support dividend payment. Note that despite a declining operating cash flow in 2017, Paltel was able to maintain a good cash generation capacity with a conversion ratio of its EBITDA to an FFO of 73.1%, which proves the group’s sound financials, as well as its ability to meet its obligations and enhance its shareholders’ wealth. FCF for 2017 was affected by the group’s higher investments following the renewal of Jawwal and Paltel licenses at the end of 2016 (with a Capex/Sales ratio of 51.9% vs. 10.6% in 2016 and 7.8% in 2015). However, for the coming years, we expect that Paltel will gradually resume its pre-licenses FCF levels. We project the FFO/EBITDA ratio to be at an average of 94% for the 2018-2020 period.
Even more solid
Paltel’s ongoing efforts to strengthen its revenues and improve its operational efficiency are clearly visible. On a like-for-like, Paltel’s FY 2017 performance deserves to be saluted! Given the serious challenges faced the group, we expect a rather flat revenues CAGR of 1.2% and an EBITDA margin of 44.2% on average over the 2018-2020 period. We, also, assumed a net profit CAGR of 0.7% over the same period. However, the group’s industry-leading position, its solid fundamentals and solid cash generation capacity offer a great growth potential in the coming years. We share the view that Paltel should further lure investors’ interest.


IMPACT

Our model was updated based on FY 2017 figures.