EUR 59.72 For Business Accounts Only

Unjustifiable discount of retail business; Upgrade to Overweight

TE among cheapest operators in the region. As per our calculations, the stock’s current price implies a valuation of EGP1.34/share for TE standalone (excl. VFE), as we value VFE at a 2019e EV/EBITDA of 3.6x (20% discount to peers), representing an attributable EGP9.36/share. This translates into a 2019e P/E of 1.21x for TE standalone, which is unjustified, in our view, given the 2019-23e EPS CAGR of 11.7% (excl. one-off cable revenue in 4Q18) for the business. We upgrade our rating to Overweight from Underweight and raise our TP for the consolidated entity by 23% to EGP14.8/share, implying a 2019e P/E of 6.0x. This is still below the company’s 2-year historical average of 7.5x and peers’ 2019e P/E of 13.1x.

Raise TE’s standalone valuation by 61% on growing retail segment (WE). We expect TE’s standalone EBITDA to grow at a 2018-23e CAGR of 9.4%, driven by a 8.5% p.a. growth in revenue over our forecast horizon (excl. impact from cable revenue in 4Q18). This comes mainly on the fixed BB segment (39% of revenue), as we expect Egypt’s penetration of the fixed BB HH market to grow to 43% by 2023 from 23.6% in 2017. This should be triggered by the: i) growing dependency on data and ii) revamp of fixed BB packages, offering higher value for money.

Upgrade VFE’s value (63% of valuation) on lower pricing pressure. We raise VFE’s valuation by 9%, on lower-than-expected pricing pressure in 1H18 (EBITDA +6.1% y-o-y) from TE’s entrance, with VFE’s 2018-20e EBITDA growing by 3.6% p.a.. The growth in EBITDA comes on growing data usage, with Egypt’s mobile internet traffic as a % of total web traffic standing at 41% (average is 52%). In our valuation, however, we apply a 20% discount to account for the lack of liquidity, marketability, and TE’s control over VFE.

Network deployment a key watch factor. TE is still in the deployment phase for its 4G network, with plans of reaching a 50% population coverage by end-2018. Any delay in network deployment would mean higher national roaming fees for TE. A 10% increase in national roaming fees would shave 4% off our valuation. With fixed BB being the major contributor to the growth (70%), we highlight that a 10% drop to our data revenue assumptions over our forecast horizon would lower our valuation by 9%, all else constant.