• Cut FV and downgrade to Neutral on LT fundamental concerns We cut our FV by 16% to EGP10.25 due to lower FCF estimates as we expect TE to keep spending significantly on infrastructure upgrades (excluding any mobile-related capex). We raise our margin forecasts given management’s guidance, but remain concerned about the LT outlook, with pressure from wages and interconnect costs. We disregard ST gains in the stock from a possible VFE sale and an ensuing super dividend, given the large uncertainty on this happening. We still view TE as a dividend play, but the mobile scenario could compromise dividends. While we believe the stock would rally in the event of a one-off distribution following the sale of VFE, this would only be short-lived, in our view. The risk to our call is that if/when an EGP devaluation takes place in 2H16, the stock will likely rally given its natural hedge against devaluation (c30% of revenue in USD-terms).
• Too many unknowns? What is the price of the 4G and mobile licences? How much capex will TE pay to deploy the network? What are the detailed terms of the licences? Will TE have to sell its stake in VFE? If yes, are there enough suitors? These are key variables needed to understand the worth of TE’s mobile ambition to investors. With too many questions unanswered, we could only make a back-of-the-envelope exercise, which indicates that in a best-case scenario (minimal capex and the lower end of the licence prices mentioned) the mobile arm would be value-neutral to TE’s shareholders. We expect delays to the license awards given operators’ concerns on certain license terms.
• 2Q16: retail to keep driving growth, but margins a source of concern We expect ongoing strength from the retail business (+13% Y-o-Y) on strong growth in data revenue. However, we believe the EBITDA margin will come under pressure in 2Q (29.5% vs. 32.2% in 1Q) as a result of higher opex. We expect TE to book a net profit of EGP685mn for the quarter, barring any FX gains as the EGP remained stable vs. USD in 2Q. TE had booked a FX gain of EGP383mn in 1Q16.

Omar Maher
Karim Riad