TAKEStock: Telecom Egypt [ETEL] | Life Above 40
More about the underlying business, not just a stake sale
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Telecom Egypt [ETEL]
Egypt / Telecom Services & IT
12MPT EGP46.7 (+151%)
set on 3 Nov 2022
Impact POSITIVE / Degree STRONG
No, this is not a midlife crisis story. This is a story about a deeply unappreciated value-growth combo play in one of Egypt’s vibrant sectors, if not the most: the telecom sector. Yes, we were the first in the market to attach Telecom Egypt’s [ETEL] stock with a price tag way into the 20s (EGP22.5/share on 8 June 2021), at a time when the stock was trading in the low teens. We were also the first in the market to raise our price target to the high 20s earlier this year (to EGP28.1/share on 30 January 2022, page 46). Our previous somewhat bold calls have been quite positive so far; the first returned +41% (vs. +13% for EGX 30), and the second +14% (vs. -2% for EGX 30). At intraday highs, the first call generated +50%, more than double the EGX 30’s +21%. By all means, ETEL has outperformed EGX 30 since 8 June 2021. Today, we are making an even bolder call, tagging ETEL with a price target of EGP46.7/share! We might be a bit too bold to set a price target that is double the current average consensus price target of EGP23.5/share, but we have our reasons and it is not just Vodafone Egypt [VODE].
Our valuation rationale
Let’s jump to how we reached our EGP46.7/share price target. By way of background, ETEL had amended its shareholder agreement with Vodafone Group concerning VODE back in mid-2021, which triggered a re-rating of its stock to reflect a more amicable agreement that eventually led to a more consistent dividend payout within a clearer dividend policy. Recently, media reports alluded to a potential deal, where Qatar Investment Authority (QIA) could be interested in grabbing a 20% stake in VODE from ETEL’s 45% stake, which ETEL refuted saying it did not receive anything in that regard. Still, if ETEL receives an offer from QIA (or any other suitor), we think ETEL will not likely settle for less than VODE’s implied valuation from the Vodacom deal, when Vodafone Group transferred its 55% stake to Vodacom at EUR2.365bn (equivalent at the time to USD2.738bn). True, a VODE stake sale would unlock value in ETEL, but we think the market is ignoring ETEL’s underlying businesses that generate strong operating earnings as we highlight below:
VODE
At Vodacom’s implied VODE valuation, ETEL’s 45% stake would be worth EGP53.7bn or EGP31.5/share, based on an exchange rate of EGP24/USD. Assuming ETEL would only sell a 20% stake at the Vodacom valuation, ETEL would generate cash proceeds of EGP19.1bn or EGP11.2/share, net of capital gains tax (CGT). Valued at the same Vodacom valuation (but not counting for CGT), ETEL’s remaining 25% stake would be worth EGP29.8bn of EGP17.5/share. Hence, ETEL’s total investment in VODE would amount to EGP48.9bn or EGP28.7/share.
ETEL’s other businesses
Considering that ETEL’s other businesses could generate operating earnings of EGP6.2bn in 2022 (net of income tax), valuing the stub at only 5x (a very low P/E), we capture another EGP30.8bn or EGP18/share.
All in
ETEL could be worth EGP79.7bn or EGP46.7/share.
Amr Hussein Elalfy, MBA, CFA
Head of Research
T +202 3300 5724