vk.com/id446425943

Africa and Asia

Global Telecom Holding – GTHE

Pakistan continues to be GTHE’s strongest market with a significant opportunity to further develop its mobile money product. However, the Pakistani rupee’s (PKR) devaluation – it lost around 26% vs the dollar in 2018 – is the main drag on performance, with currency controls in place and the inability to upstream cash from the country.

The Bangladeshi and Algerian markets remain highly competitive, and in Algeria margins are likely to continue to be under pressure owing to competitive pricing in 2019 and a new Finance Law, effective from January 2018 and tax increases since mid-July 2018.

Subject to EGM approval, GTHE intends to proceed with a rights issue and to raise EGP11.8bn of new capital. If VEON participates in the capital rise, it could get to an 87% or even 92% stake in the company if no other shareholder participates. We think that getting approval for the rights issue will be tricky and VEON may revert to the stock buyback option in order to achieve its goal of taking GTHE private; prior to that, however, VEON might need to offer bridge financing to GTHE in order for the latter to honour its obligations to creditors.

We adjust our forecasts (mostly lower), incorporate a weaker exchange rate in Pakistan and reduce our TP to EGP5.2/sh (from EGP5.4/sh) while maintaining our HOLD rating.

Figure 64: GTHE – old estimates vs new, $mn (unless otherwise stated)

		Old (October 2018)				New	Deviation
		2018E	2019E	2018E		2019E	2018E		2019E
Revenue		2,712	2,687	2,808		2,705	3.5%		0.7%
EBITDA		1,223	1,181	1,215		1,159	-0.7%		-1.9%
EBITDA margin		45.1%	44.0%	43.3%		42.8%
Net income		(1)	19	(3)		19	na		-1.7%
Net debt		2,440	2,376	2,399		2,384	-1.7%		0.3%
							Source: Renaissance Capital estimates
Figure 65: SoTP valuation of Global Telecom Holding, $mn (unless otherwise stated) – YE19
				Value		Approach	FX Used	DCF	WACC
Algerian equity value				827		@ 4x EV/EBITDA	119	819	16.0%
Pakistan equity value				1,849		@ 4x EV/EBITDA	139	2,217	15.5%
Bangladesh equity value				257		@ 4x EV/EBITDA	84	82	14.3%
Holding costs + withholding taxes				(70)				(70)
Holding net debt				1,429				1,429
Equity value				1,435				1,619
Equity value, (50% multiple and 50% DCF SoTP), $mn				1,527
TP (50% multiple and 50% DCF SoTP and applying 10%				5.2
discount due to corp. governance), EGP/share
							Source: Renaissance Capital estimates

Renaissance Capital

8 January 2019

EMEA telecoms

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Renaissance Capital

8 January 2019

EMEA telecoms

Figure 66: Global Telecom Holding (GTHE) key financials, $mn (unless otherwise stated)*

Income statement	2017	2018E	2019E	2020E
Sales	3,015	2,808	2,705	2,821
Cost of sales	(1,670)	(1,593)	(1,546)	(1,606)
EBITDA	1,344	1,215	1,159	1,215
EBITDA margin	44.6%	43.3%	42.8%	43.1%
Depreciation & amortisation	(580)	(523)	(496)	(506)
PBIT	764	692	663	709
Net interest	(379)	(319)	(292)	(252)
PBT	316	351	351	447
Tax	(358)	(246)	(228)	(290)
Tax rate	113%	70%	65%	65%
Minorities	(103)	(108)	(104)	(112)
PAT	(144)	(3)	19	44
Shares, mn	4,721	4,721	4,721	4,721
EPS per common share, $	(0.030)	(0.001)	0.004	0.009
DPS per common share, $	-	-	-	-

Balance sheet	2017	2018E	2019E	2020E
Non-current assets	3,538	3,777	3,831	3,887
Current assets	592	562	541	564
Monetary assets	374	230	123	110
Other assets	830	830	830	830
Total assets	5,333	5,398	5,325	5,390
Current liabilities	2,027	2,050	1,975	2,059
Indebtedness	2,692	2,629	2,508	2,332
Minorities	139	247	351	463
Other liabilities	526	526	526	526
Equity	(50)	(53)	(34)	10
Total liabilities & shareholders' equity	5,333	5,398	5,325	5,390
Net debt	2,318	2,399	2,384	2,223

Cash flow	2017	2018E	2019E	2020E
PAT before minorities	(41)	105	123	156
Non-cash items	580	523	496	506
Change in working capital	(103)	53	(54)	61
Operating cash flow	877	681	565	724
Capex	(766)	(761)	(550)	(562)
Investing cash flow	(766)	(761)	(550)	(562)
Free cash flow	110	(81)	14	161
Financing cash flow	(157)	(63)	(121)	(175)

Note: *GTH is majority-owned by VEON and our GTH TP forms part of our valuation for VEON.

Source: Company data, Renaissance Capital estimates

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Egypt – Telecom Egypt

Telecom Egypt (TE) has continued demonstrating positive dynamics in its recently launched mobile business and core fixed line segment, while the cable business provides additional opportunities.

The mobile business continued to ramp up in 3Q18 despite tax fees imposed on new SIMs in July 2018, contributing high single digit share in retail revenue. In 3Q18, TE’s mobile market share reached 3% with 3.6mn subs (+9% QoQ) that bodes well for our expectation of c. 3.7mn subs at YE18 and the company’s plan to reach 10-15% market share by YE22 with a breakeven level at YE20

The company expects to beat its 2018 revenue guidance (high singleto low-double digit growth) due to the MENA cable acquisition and Bharti deal and despite it generating high non-recurring revenue of c. EGP1.6bn, TE expect to continue to demonstrate strong topline growth in 2019 (see Figure 67). The company states that it would like to go back to paying EGP1/share in dividends from 2019, although that would grow ND/EBITDA to c. 2.4x on our estimates. We maintain out TP of EGP17 and reiterate our BUY rating.

Figure 67: Telecom Egypt's 2019 guidance vs our expectations

	ETEL	RenCap
Revenue	Mid-to-high single digit	7.2%
Revenue (excl. MENA cable)	Mid double digit	15.0%
EBITDA margin	Mid-to-high twenties	27.6%
Capex/Sales	30%	30.0%

Source: Company data, Renaissance Capital estimates

Figure 68: Telecom Egypt financials, EGPmn (unless otherwise stated)

Income statement	2017	2018E	2019E	2020E
Sales	18,876	23,878	25,591	28,838
Cash opex	(13,692)	(17,344)	(18,535)	(20,581)
EBITDA	5,184	6,534	7,057	8,257
EBITDA margin (%)	27.5%	27.4%	27.6%	28.6%
Depreciation & amortisation	(2,006)	(2,823)	(3,026)	(3,409)
EBIT	2,122	3,145	3,389	3,962
Net interest	(296)	(1,041)	(1,406)	(1,429)
Associates	2,337	2,205	2,352	2,377
PBT	3,813	4,309	4,334	4,910
Tax	(520)	(754)	(758)	(859)
Net earnings after minorities	3,150	3,544	3,565	4,038
Shares, mn	1,707	1,707	1,707	1,707
EPS, EGP	1.85	2.08	2.09	2.37
DPS per common share, EGP	0.25	1.00	1.00	1.00

Balance sheet	2017	2018E	2019E	2020E
Non-current assets	43,826	51,650	58,478	63,166
Current assets	8,558	13,460	12,449	13,947
Monetary assets	507	1,575	120	432
Total assets	52,383	65,110	70,927	77,113
Current liabilities	19,115	16,953	17,402	18,745
Indebtedness	7,293	13,293	16,793	19,293
Minorities and other	12	23	34	46
Equity	30,576	33,694	35,551	37,883
Total liabilities & shareholders' equity	52,383	65,110	70,927	77,113
Net debt	6,786	11,718	16,673	18,861

Cash flow	2017	2018E	2019E	2020E
Net earnings	3,150	3,544	3,565	4,038
Non-cash items	2,006	2,823	3,026	3,409
Change in working capital	8,839	(1,522)	(2,346)	(2,221)
Other adjustments	(9,346)	11	11	12
Operating cash flow	4,649	4,856	4,255	5,239
Capex	(7,508)	(7,641)	(7,549)	(5,768)
Investing cash flows	(7,360)	(9,361)	(7,502)	(5,720)
Free cash flow	(2,858)	(2,785)	(3,295)	(529)
Financing cash flow	2,190	5,573	1,793	793

Source: Company data, Renaissance Capital estimates

Renaissance Capital

8 January 2019

EMEA telecoms

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Kenya – Safaricom

The stock’s performance in 2018 has been dismal and while we believe that c. KES22/sh is the ‘consolidation’ level for the share price, we would prefer to see the shares lower before adopting a more positive rating. Data revenues hardly grew in 1H19 and while that was explained by a need to reduce prices to counter Airtel’s aggressive expansion, we think 2H19 may be only slightly better, as Airtel continues with its aggressive pricing and to take market share away from Safaricom, as it has been doing, with its share now above 21%. The new excise duties on data services and increase of duties on telecom service to 15% may take a toll on ARPUs and subscriber usage as Safaricom opted to transfer those to the consumer. There is also a risk of corporate taxation increasing by 5 ppts to 35%.

We are more confident in MPESA, the revenues of which re-accelerated to 17% YoY in 1H19 and which we believe can reach 20% in 2H19. The still lowly penetrated market for e-cash payments between customers and mid-sized to smaller merchants is likely to grow, in our view, due to the better interface of Safaricom’s LIPA-na-MPESA product and its wider acceptance. Longer term, e-commerce remains an interesting opportunity, we believe.

We have adjusted (upwards mostly) our forecasts on the back of 1H19 numbers.

Safaricom’s growth profile is looking better now than it did six months ago, but the trading multiples of its peers in the fintech universe (PayPal, Square etc) have declined over the past three months, which challenges the idea of paying a premium to fintech multiples for Safaricom MPESA business which is denominated in KES and whose growth has fallen from 30%+ in 2016-17 to less than 20% in 2018. Thus, we maintain our HOLD rating with an unchanged TP of KES23.5. The one potential upside risk we see is the special dividend that Safaricom might decide to pay in 2019 – the company usually reconsiders its need for cash every three years and we believe the time has come for that.

Renaissance Capital

8 January 2019

EMEA telecoms

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Renaissance Capital

8 January 2019

EMEA telecoms

Figure 69: SAFCOM financials, KESmn (unless otherwise stated), fiscal year March-March

Income statement	2018	2019E	2020E	2021E
Sales	233,720	248,662	268,763	289,399
Cash opex	(120,890)	(124,790)	(134,073)	(143,393)
EBITDA	112,830	123,872	134,690	146,006
EBITDA margin (%)	48.3%	49.8%	50.1%	50.5%
Depreciation & amortisation	(33,560)	(35,349)	(37,442)	(39,107)
EBIT	79,270	88,523	97,248	106,899
Net interest	630	755	481	(115)
Associates	10	10	10	10
PBT	79,910	89,289	97,739	106,793
Tax	(24,620)	(28,572)	(34,209)	(37,378)
Tax rate	31%	32%	35%	35%
Net earnings	55,290	60,716	63,530	69,416
Shares, mn	40,065	40,065	40,065	40,065
EPS, KES	1.38	1.5	1.6	1.7
DPS, KES	1.1	2.3*	1.3	1.5

Balance sheet	2018	2019E	2020E	2021E
Non-current assets	139,834	142,282	143,811	145,220
Current assets	15,568	16,564	17,903	19,277
Monetary assets	11,892	34,245	5,984	20,998
Associates	146	156	166	176
Total assets	167,440	193,247	167,864	185,671
Current liabilities	43,530	52,691	55,386	57,778
Indebtedness	4,040	11,040	11,040	11,040
Equity	123,910	140,556	112,478	127,893
Total liabilities & shareholders’ equity	167,440	193,247	167,864	185,671
Net debt	(7,852)	(23,205)	5,056	(9,958)

Cash flow	2018	2019E	2020E	2021E
Net earnings	55,290	60,716	63,530	69,416
Non-cash items	33,550	35,339	37,432	39,097
Change in working capital	3,570	1,166	1,356	1,017
Other adjustments	(450)	(805)	(381)	215
Operating cash flow	91,960	96,415	101,937	109,746
Capex	(36,400)	(37,797)	(38,971)	(40,516)
Investing cash flows	(36,400)	(37,797)	(38,971)	(40,516)
Free cash flow	55,560	58,618	62,967	69,230
Financing cash flow	(52,020)	(36,265)	(91,228)	(54,216)

Note: *Incl. KES1/sh special dividend

Source: Company data, Renaissance Capital estimates

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West Africa – Sonatel

Renaissance Capital

8 January 2019

EMEA telecoms

According to GSMA, mobile revenue growth in West Africa will remain weak at a 201722E CAGR of c. 1.7% as voice and messaging revenues continue to be under pressure on the back of heightened competition from OTT services. Meanwhile, despite the highly penetrated mobile market, mobile internet penetration remains low in the region (see Figure 71) compared with the global average, with c. 100mn of new additions expected by 2025, according to GSMA, which would be a long-term growth driver for the industry, we believe. GSMA expects total mobile additions to reach c. 72mn by 2025, though most of them will come from lower income groups that are likely to spend less on mobile services than early adopters.

Figure 70: West Africa mobile revenue dynamics										Figure 71: Mobile internet penetration in West Africa
17.5			Revenue, $bn				YoY, % (RHS)		18% 50%
17.0									16% 45%
									14%	40%
16.5									12%	35%
										30%
									10%
16.0										25%
									8%	20%
15.5									6%	15%
15.0									4%	10%
									2%	5%
										0%
14.5									0%		Guinea-	Guinea	Mali Sierra Leone	Senegal	Global
2017		2018E		2019E	2020E		2021E	2022E			Bissau				average
										Note: Unique subscribers
								Source: GSMA Intelligence						Source: GSMA Intelligence

Sonatel’s share price decline by c. 25% in 2018, underperforming the MSCI frontier market index and, we believe, such a big decline was related to its unimpressive performance over the last 18 months on the back of high competition from both traditional telcos and OTT players along with the margin-dilutive Sierra Leone business acquired in 2016 (consolidated since 1H17).

In 1H18, revenue growth slowed to 4.7% YoY from 10.2% YoY (6.3% YoY excluding Sierra Leone) in 1H17, while the EBITDA margin shrank by 1.7ppts YoY to 46%, hovering around 50% before the acquisition. Additionally, pressure on margins was associated with lower mobile voice and international incoming revenue as OTTs continued to eat into them, while higher revenue from data had a margin-dilutive impact on the back of tough competition from other telcos.

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Renaissance Capital

8 January 2019

EMEA telecoms

Figure 72: Sonatel vs MSCI FM index, % 2018 performance

Figure 73: Sonatel’s revenue structure, %

10.0%

5.0%

0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% -35.0%

		MSCI FM		SNTC

Jan-18	Feb-18	Mar-18	Apr-18	May-18	Jun-18	Jul-18	Aug-18	Sep-18	Oct-18	Nov-18	Dec-18
											Source: Bloomberg

			Others				International wholesale
			Orange Money				Mobile data
			Mobile (excl. data and Orange Money)				Fix
	100%
				17.7%	12.8%			9.8%
								5.7%
				3.0%	4.7%
				9.1%	13.9%			17.8%
	50%
				58.1%	55.0%			55.3%
	0%
	2016				2017			1H18

Source: Company data

Upside risks:

▪Low mobile internet penetration across the countries of operation.

Sonatel continued to develop its 4G coverage in Senegal, Mali and GuineaBissau, contributing to an increase in data revenue of which the share in total revenue expanded to c. 18% in 1H18 vs 14% in 2017. We believe further extension of 4G coverage may represent a good opportunity for top-line growth given low mobile internet penetration among the operating footprint though competition remains high in this field.

▪Underpenetrated Guinea and Guinea-Bissau mobile markets

Mobile penetration remains low in these countries (c. 20% of total revenue in 2017) compared with regional peers, and this represents upside potential for the company, in our view. For instance, mobile penetration printed at c. 90% in Guinea and c. 70% in Guinea-Bissau vs 100-115% in Senegal and Mali in 2017.

▪Mobile financial services

Orange money continued to get traction with 5.1mn active users in 1H18 vs 3.1mn in 2016 (Safaricom’s M-PESA active users amounted to 21mn as of September 2018). Orange money is available in all of the company’s opcos and recorded a total of 467mn transactions across its markets in 2017, amounting to XOF5.2trn vs XOF1.8trn in 2015, but the contribution to total revenue was only 5.7% (M-PESA’s contribution to Safaricom’s revenue was 30% as of September18). Competition in terms of mobile financial services remains high in the SSA region, i.e. there were 57 live mobile deployments in West Africa and Orange money’s share in total active subscribers was c. 12%, while M-PESA’s was c. 28% in total active subscribers in East Africa. Aside from that, new players continued to enter the market, i.e. Expresso launched mobile money services in Senegal in February18 while Tigo and Orange already offer their services in the county. As a result, we think Orange money may be a growth driver for Sonatel in the long term, but we do not expect it to become a great contributor to the company’s revenue in the near future.

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Renaissance Capital

8 January 2019

EMEA telecoms

Downside risks:

▪Increasing competition

Sonatel operates in historically highly competitive markets with several players across the countries and new entrants continuing to tap into them in 2018, i.e. Telcel started its operations in Mali in January 2018 and successfully covered the southern part of the country, while QCell received a licence to operate mobile services in Sierra Leone in 3Q18 and the process of establishing the company will be completed soon, according to management. On top of that, telcos actively invest in 4G – e.g. Tigo obtained a 4G licence in Senegal in December 2018, while Malitel started offering its LTE-based services in November 2018. Thus, we think the 4G rollout effect will be constrained by tight competition and ARPU will remain under pressure.

▪Unfavourable regulation

A new tax imposed on telecom sector by Senegal authority in 1H18 (the tax is required to be paid by any operator with a public telecoms network and has been set at 5% of an operator’s-tax turnover) maypreserve as an affordability barrier limiting top-line growth. Any further extension of the tax burden could be a significant risk for telcos, in our view.

▪Sierra Leone operations

Currently there are four players on Sierra Leone’s mobile market including Sonatel (c. 40% market share in 2017, according to the company) with one more new entrant (QCell) looming on the horizon. In 2018, Africell and Sierratel launched their LTE services, while obtaining 4G frequencies by Sonatel is currently under question, representing a risk to further expansion. In 2017, the EBITDA margin in Sierra-Leone was c. 17% vs a 40-60% range in the other countries historically. It will be challenging to ramp up quickly given high competition in the country and uncertainties around further growth.

Bottom line: We roll over our valuation to YE19, adjust our model on Sierra Leone operations and use lower multiples due to the muted growth outlook and sector derating. The company has a good dividend history and we expect a dividend yield of c. 9.5% at current prices. We lower our TP to XOF19,153 (from XOF22,593) following the lowering of our forecasts and maintain our HOLD rating.

Figure 74: Sonatel – YE19 TP calculation

WACC, %	14%
Perpetuity growth rate, %	6%
Target Mkt Cap, XOFbn	1,814
DCF price per share, XOF	18,143
Target EV/EBITDA, x	4.5
Target EV, XOFbn	2,173.14
Target Mkt Cap, XOFbn	1,846
Price per share, XOF	18,456
Target P/E, x	10.5
Target Mkt Cap, XOFbn	1,636
Price per share, XOF	16,361
Target, blended (average DCF, EV/EBITDA, P/E), XOF	17,653
DPS, FCFA	1,500
Target price per share plus DPS, XOF	19,153

Source: Renaissance Capital estimates

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Renaissance Capital

8 January 2019

EMEA telecoms

Figure 75: Sonatel financials, XOFbn (unless otherwise stated)

Income statement	2017	2018E	2019E	2020E
Sales	973	1,060	1,086	1,149
Cash opex	(520)	(588)	(603)	(644)
EBITDA	453	472	483	505
EBITDA margin (%)	46.5%	44.5%	44.5%	43.9%
Depreciation & amortisation	(180)	(196)	(201)	(213)
EBIT	308	276	282	292
Net interest	(9)	(13)	(13)	(12)
PBT	297	263	269	280
Tax	(95)	(84)	(86)	(90)
Tax rate (%)	32%	32%	32%	32%
Minorities	30	26	27	28
Net earnings	172	152	156	163
Shares (mm)	100	100	100	100
EPS, XOF	1,725	1,522	1,558	1,626
DPS per common share, XOF	1,500	1,500	1,500	1,500

Balance sheet	2017	2018E	2019	2020
Non-current assets	1,107	1,127	1,148	1,170
Current assets	489	534	547	592
Monetary assets	231	254	260	288
Total assets	1,596	1,661	1,695	1,761
Current liabilities	661	715	733	775
Indebtedness	305	305	305	305
Minorities and other	90	116	143	171
Equity	626	612	601	597
Total liabilities & shareholders' equity	1,596	1,661	1,695	1,761
Net debt	74	52	46	18

Cash flow	2017	2018E	2019	2020
Net earnings	172	152	156	163
Non-cash Items	161	196	201	213
Change in working capital	98	31	11	26
Other adjustments	30	26	27	28
Operating cash flow	461	406	395	429
Capex	(378)	(217)	(222)	(235)
Investing cash flows	(368)	(217)	(222)	(235)
Free cash flow	83	189	173	194
Financing cash flow	(373)	(167)	(167)	(167)

Source: Company data, Renaissance Capital estimates

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Renaissance Capital 8 January 2019

Telecoms

Figure 76: Telco valuation summary in $ terms

	MktCap,	EV/EBITDA		EBITDA CAGR	EV/(EBITDA – Capex – Tax)			P/E	EPS CAGR	P/CE		Div yield		FCFF yield
	$mn	2018E	2019E	2016-19E	2018E	2019E	2018E	2019E	2016-19E	2018E	2019E	2018E	2019E	2018E	2019E
Frontier
Telecom Egypt	1,203	2.7	3.2	-6.2%	nm	nm	6.0	6.0	-15.9%	3.4	3.3	8.0%	7.9%	-15.7%	-14.6%
Kcell	1,000	7.2	7.0	-2.5%	13.2	17.7	24.8	19.2	2.2%	8.6	8.2	3.1%	3.7%	3.5%	5.3%
Global Telecom Holding	1,012	3.6	3.8	-1.7%	21.2	11.5	52.6	26.2	-32.6%	1.9	1.9	0.0%	0.0%	0.3%	2.7%
Safaricom	8,438	7.1	6.6	9.1%	14.4	13.0	14.8	13.9	10.7%	9.3	8.8	9.1%	7.3%	6.8%	7.1%
Sonatel	2,962	4.0	3.9	5.4%	6.8	6.8	11.0	10.7	-3.7%	4.8	4.7	9.0%	9.0%	10.1%	9.2%
EM
MTS ADR	7,003	3.5	3.7	8.8%	8.9	7.9	6.7	7.6	8.2%	2.6	2.9	9.7%	7.5%	11.2%	4.6%
VEON	4,392	3.4	3.3	-3.1%	12.3	8.2	nm	20.9	nm	1.4	2.0	12.0%	13.2%	6.1%	7.7%
Rostelecom	2,988	3.5	3.5	0.7%	11.8	10.7	9.9	9.9	20.0%	2.4	2.6	7.3%	6.8%	6.6%	8.4%
Turkey
Turkcell ADR	4,884	3.5	3.5	2.4%	9.8	5.7	6.5	7.8	7.2%	4.0	3.7	3.9%	6.2%	5.7%	14.5%
Turk Telekom	2,433	3.4	3.4	-6.8%	6.4	8.5	2.5	4.3	na	14.0	2.5	0.0%	11.3%	13.2%	10.8%
Average		4.7	4.6	1.0%	11.9	10.3	15.5	13.3	3.0%	5.6	4.5	5.8%	6.8%	7.2%	8.1%

*MTS dividend for the calendar year

Source: Bloomberg, Renaissance Capital estimates

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