• Weak numbers at operating level; earnings boosted by FX gain Earnings came in at a weak EGP41mn, missing our estimate of EGP137mn, as the company impaired its share of profit from the North Korean operation, Koryolink, to the tune of EGP263mn, which we had not expected. Our estimate for Koryolink’s contribution was EGP242mn. OTMT’s earnings were boosted by FX gain of EGP167mn; excluding the FX gain, earnings would have reached a loss of EGP98mn, we calculate, which would have been broadly in line with our adjusted net loss estimate of EGP105mn, excluding Koryolink’s profit. Results were weaker than expected at the operating level, despite revenue being in line with our estimate, as the EBITDA margin came in at a weak -49% vs. our estimate of -27%, largely due to a weaker-than-expected loss at the ‘Others’ segment.
• Remain Sellers, as we see no sign of progress in North Korea We reiterate our Sell rating on the stock, as it remains overvalued at current price, in our view. Our break-up valuation suggests the bulk of the company’s value lied in its cash and Koryolink, which we had opted to fully discount to zero, following the announcement of deconsolidation of Koryolink in November 2015. We continue to believe OTMT would be incapable of recovering the value of the unit in case it had to dispose of it. Moreover, we see no tangible progress in the negotiations with the Korea Post and Telecommunications Corporation (KPTC) for a potential merger between Koryolink and the state-owned operator, Kang Song NET. OTMT said it is following up on certain arrangements made with its North Korean partner to ensure a better competitive environment, as well as a potential easing in cash repatriation, but this remains contingent upon the government fulfilling its obligations, which we see no guarantee to; hence, we see no material easing in operating and financial hurdles as yet, which is a significant hindrance to the unit’s competitive advantage, in our view.

Omar Maher
Karim Riad