te calling for integration

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Telecom Egypt (TE)Egypt

Equities | Telecoms | Initiation of Coverage

Monday, 7 November 2016

Calling for integration —

Initiate with Hold/Moderate Risk

Hold

Moderate Risk

Price Target: EGP10.95

ETR: +17.5%

Source: Company reports, MubasherTrade Research estimates

Despite economic challenges, many factors fuel sustainable demand for telecom services: Egypt has the largest population in the Middle East exceeding 90mn with 75% of inhabitants under 40 years, tending to be tech-savvy. Despite current economic challenges, the continuously-evolving services, relatively lower penetration rates in the MENA region, and new technologies (such as 4G/LTE) would support the sector growth. This will support demand for telecoms, which are considered basic services for all income segments. The Egyptian government plans to implement mega national projects, and residential expansions should also nourish demand for telecom and data services. Moreover, recently-offered 4G frequencies will enable operators to provide high-speed communications, which will further support demand for and usage of data services.

Yet, Telecom Egypt faces challenges from foraying in the mobile business: Telecom Egypt ‘TE’ (ETEL.EGX) has long been eager to acquire the 4G license to become an integrated telecom operator by introducing mobile telecom services. ETEL agreed on license terms and paid EGP5.2bn, yet we believe that the company will face significant challenges in rolling out its 4G services, mainly due to its huge capex, license fees, and currently-high mobile penetration exceeding 110%.

Initiate with Hold/Moderate Risk; PT EGP10.95 (ETR +17.5%): We used two valuation models to value ETEL: (1) Discounted cash flow (DCF),

resulting in EGP8.34/share, of which the mobile business was valued at negative EGP3.03/share, and (2) Multiples valuation based on 2016e EV/EBITDA, resulting in a fair value of EGP11.02/share (after a 20% discount on multiple). We assigned 80%/20% weights to both models, respectively, reaching a fair value of EGP8.87/share, implying a one-year price target (PT) of EGP10.95/share (ETR +17.5%). Hence, we initiate coverage on ETEL with a Hold/Moderate Risk rating.

Valuation of VFE: In view of introducing its 4G mobile services, ETEL could consider selling its c.45% stake in VFE to avoid any ‘conflict of interest and asset duplication’. We valued ETEL’s stake in VFE based on the average of our estimated acquisition value and the multiples valuation of VFE.

1) We estimated the acquisition value of VFE, using acquisition EV/EBITDA and EV/revenues multiples of 5.1x and 2.0x, respectively, reaching an equity value of ETEL’s stake at EGP11.3bn.

2) We based our multiples valuation on 2016e MENA PER and EV/EBITDA of 12.5x and 4.8x, respectively, to reach an average equity value of EGP14.7bn.

Thus, we reached an average valuation of ETEL's stake in VFE at EGP13.0bn (EGP7.59/ETEL share), while we expect that the after-tax proceeds from selling VFE would reach EGP12.5bn.

• Integrating its monopolistic wholesale services in Egypt with its 4G mobile business.

• Leading Egypt’s internet market through its fully-owned largest provider ‘TE Data’.

• Yet, facing challenges from stiff competition, huge capex, and license payments.

• Huge needed funds to pressure profitability, liquidity, and dividend payout.

• A probable sale of its c.45% stake in Vodafone Egypt ‘VFE’ can unlock hidden value that may ease the liquidity pressure on TE.

• Initiate with Hold; PT EGP10.95 (ETR: +17.5%), including –ve EGP3.03 for mobile business.

Ahmed RamadanEquity Analyst Mubasher [email protected]

Summary KPIs (EGP mn) 2013a 2014a 2015a 2016e 2017e 2018e

Net Revenues 11,138 12,158 12,184 13,366 14,468 16,168

EBITDA 3,684 3,841 3,442 4,283 4,476 4,684

EBITDA margin 33.1% 31.6% 28.2% 32.0% 30.9% 29.0%

Net Profits After Taxes 2,958 1,417 2,997 3,086 2,215 2,045

Net profit margin 26.6% 11.7% 24.6% 23.1% 15.3% 12.7%

EPS 1.71 0.51 1.45 1.50 1.07 0.99

DPS 1.00 0.56 0.75 0.50 0.45 0.42

BVPS 16.58 15.67 16.97 17.71 18.29 18.82

PER (x) 8.6x 23.4x 4.4x 6.2x 8.7x 9.4x

PBV (x) 0.9x 0.8x 0.4x 0.5x 0.5x 0.5x

EV/EBITDA* (x) 3.2x 2.1x -0.3x 2.2x 2.4x 2.7x

Dividend Yield 6.8% 4.7% 11.7% 5.4% 4.9% 4.5%

Net Debt (Cash)-to-Equity -16.3% -10.2% -5.5% 18.6% 26.5% 36.1%

Net Debt (Cash)-to-EBITDA -1.3x -0.7x -0.5x 1.3x 1.8x 2.5x

* EV excludes investment in VFE

Stock Performance & Details

ETEL (EGP) vs. EGX30 Rebased

Sto ck D etails

Last price (EGP) 9.32

52-W High (EGP) 10.60

52-W Low (EGP) 5.50

6M -ADVT (EGPmn) 17.49

% Chg: M oM 4.3

% Chg: YoY 38.5

% Chg: YTD 45.2

M ubasher Ticker ETEL.EGX

Bloomberg Ticker ETEL EY

C apital D etails

No. of Shares (mn) 1,707.1

M kt Cap (EGPmn) 15,909.9

M kt. Cap (USDmn) 1,034.6

Free Float (%) 20.0%

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Telecom Egypt | Egypt | Initiation of Coverage


Telecom Egypt (ETEL) is an 80% state-owned telecom incumbent in Egypt and the largest provider of fixed-line services in the Middle East with more than 6.3mn customers by end of Q2 2016. ETEL offers a full range of fixed-line services in addition to retail and wholesale telecom services. The company provides retail services including access, local, long distance and international voice calls, internet and data, and other services.

Before the acquisition of its 4G license, ETEL has been indirectly involved in the mobile market in Egypt through its current 44.95% holding in Vodafone Egypt (VFE), the leading mobile operator in Egypt, with a subscriber base of 39.8mn by end of June 2016.

In the internet market, ETEL fully owns TE Data, the largest internet services provider (ISP) in Egypt, with a market share of 77% and 3.2mn subscribers by end of Q2 2016.

ETEL had launched its successful IPO in 2005 by floating 20% of its issued shares (or 341.4mn shares) locally on the Egyptian Exchange (EGX) and in GDRs on London Stock Exchange (LSE) with a total value of EGP5.13bn.

Corporate Profile

Board of directors structure Shareholder structure

TE Data is Egypt's largest internet and data transfer service provider. The company was established in late 2001. TE Data has a 77% market share with a subs base of 3.2mn at end of June 2016. TE Data also owns operations in Jordan. TE Data’s portfolio includes narrowband and broadband internet access services, managed dedicated internet access services, and IP VPN connectivity services.

TE Data Jordan is a Jordanian registered ISP. It was established in April 2004 and is fully owned by TE Data. Jordan has a growing data market where internet penetration reached 76% or 6.2mn internet users.

Vodafone Egypt (VFE), a subsidiary of UK-based Vodafone Group, is Egypt’s leading mobile network operator. VFE (previously known as MisrfoneTelecom Co./Click GSM) entered the Egyptian telecom market as the second operator via a consortium between Vodafone International, AirTouch, and local and international partners. ETEL currently owns a 44.95% stake in VFE which has a market share of 41% with a subs base of 39.8mn.

Source: Company reports

Subsidiaries & affiliates


Government of Egypt

80%

Free Float 20%

Telecom Egypt (TE)

TE France was established in September 2008. It is a licensed operator established to land ETEL's 100% owned submarine cable system (TE North) in Marseille and provide networks and telecommunications services in France.

TE Investment Holding was established in 2009 to identify and promote suitable investment opportunities in both local and international markets. The company is also responsible for investing in companies involved in businesses related to ETEL and its subsidiaries.

100% 100% 45% 100% 100%






Corporate Profile (Cont.’d)

Operations key milestones


Xceed was established in 2001 to serve as the IT arm of ETEL with a client base of more than 11mn subs. Xceed is a global provider of quality, multi-lingual business process outsourcing (BPO) services. Xceed offers integrated customer care, technical support and associated back-office processing to commercial and governmental clients worldwide. Headquartered in Cairo’s technology park, The Smart Village, Xceed currently has four sites within Egypt. Xceed has an additional contact center geographically and culturally proximate to Europe at Morocco's technology park, CasaNearshore Park.

Centra Technologies was established in 2002. Its core business is to provide complete IT solutions and produce different models of a local brand platform of PCs, servers and notebooks of international quality, supported by after-sale services through a network of authorized and certified service centers.

Middle East Radio Communication (MERC) was established in 2001 as a joint stock company. MERC is a leading company in the field of building, operating, and managing wireless communications stations. MERC has obtained a license from National Telecom Regulatory Authority (NTRA). MERC produces designs and operates various types of programs and computer systems, in addition to developing software, operating systems and integrated systems, data entry on computers using electronic methods, establishing database and electronic information system, and producing electronic contents in different forms, such as voice, image, and data.

1918

•The Egyptian government nationalized Eastern Telephone Company and turned it into Telephones & Telegraph Authority, a forerunner of TE.

1985•Operating the first fiber-optic cable connecting Cairo’s telephone systems.

1992•Launching internet services in Egypt.

2001•ETEL established TE Data with a ‘Class A’ license.

2003•ETEL acquired an 8.6% stake in VFE.

2004•TE Data established TE Data Jordan to extend its services in the neighboring country.

2005-2008

•ETEL's stake in VFE rose to 25.5%.

•ETEL accumulated 44.95% ownership stake in VFE.

2011

•TE North Cable was launched.

•TE Data surpassed one million subs.

2014-2016

•MCIT awarded the integrated license to ETEL for EGP2.5bn without new frequencies, then ETEL was awarded 4G frequencies with mobile license at EGP7bn.

100%

51%

100%

Subsidiaries & affiliates (Cont.’d)






Valuation

Source: MubasherTrade Research estimates

Sum-of-the-parts valuation (EGP/Share)

Investment Rationale

Growth drivers of the telecom industry

• Vast population tends to be tech-savvy.

• Sustainable demand for telecom services despite economic challenges.

• 4G rollout and introducing LTE technology will support sector growth.

• Ongoing demand for data, specifically high-speed fixed broadband.

• Residential and business expansions support fixed-line and ADSL growth.

Company’s strengths

• Solely providing telecom wholesale services in Egypt, such as transmission and international interconnection services.

• Owning the leading ISP in Egypt, TE Data, with 3.2mn subs, implying a market share of 77%.

• Holding a significant c.45% stake in VFE, the largest MNO in Egypt in terms of subs and revenues.

• Providing international gateway services, which is required for passing international calls. MNOs prefer to lease ETEL's infrastructure as a commercial option than owning their own international license.

• Fiber optic network rollout allows more operational capabilities and higher speeds for data transmission.

• Government support, given a major stake of 80% in ETEL.

• A low debt burden and a high cash position would support ETEL in its investments in mobile business.

Key Risks

• Introducing mobile services in a very competitive and almost saturated market with a high penetration rate of 110%.

• Facing competition from MNOs in providing fixed-line services.

• High frequencies and mobile license cost exceed EGP7bn. The massive funds needed for its mobile business will be reflected on a high debt leverage.

• ETEL might be obliged to sell its stake in VFE, the leading MNO in terms of subs and revenues, to avoid any conflicts of interest.

• Fixed-mobile substitution (FMS) phenomenon results in ARPU erosion and decreasing fixed-line subs.

• Facing disputes with MNOs, regarding interconnection and termination rates. ETEL’s dispute with Orange Egypt reached c.EGP652mn.

• OTT* applications threaten the viability of ETEL’s international gateway.

* Over-the-top (OTT) applications are apps or services that provide products over the internet and bypass traditional distribution, such as Viber, WhatsApp and Facebook calls.

Initiate with Hold/Moderate Risk; PT EGP10.95 (ETR +17.5%): Using our two valuation models (DCF and multiples) and assigning 80%/20% weights to both models, respectively, we reached a weighted-average one-year PT of EGP10.95/share. This implies an ETR of only +17.5%, within our Hold rating range. Thus, we initiate coverage on ETEL with Hold/Moderate Risk rating.

DCF – EGP8.34/share: Our projection assumptions include the mobile services, which we expect to be launched in 2017, in addition to payments for the 4G license and frequencies. Although we believe the mobile data market still has room for growth, we valued ETE’s mobile business at negative EGP3.03 per ETEL share.

We discounted ETEL's free cash flow to the firm (FCFF) using a weighted average cost of

capital (WACC) of 17.3% on average. We calculate COE as 23.4% based on the following assumptions:• US 10-year Treasury yield of 1.8%.• Inflation differential (between Egypt and

USA) of 10.8%.• Adjusted 5-year monthly beta of 0.8.• US equity risk premium (ERP) of 6.4%,

Egypt country risk premium (CRP) of 5.7% as implied by its credit default spread (CDS) of 4.4%, levered up by 30% to account for inherent volatility in equity returns.

• Terminal WACC and terminal growth rate of 15.4% and 2.5%, respectively.

Multiples – EGP11.02/share: We applied a 20% discount to MENA 2016e EV/EBITDA median of 4.8x, reaching a fair value of EGP11.02/share. We note that ETEL’s 2016e EBITDA includes only non-mobile businesses.

9.32

3.78

8.34

11.02

8.87

10.95

7.59

(3.03)

Market price

FV of fixed-line business

FV of investment in VFE

FV of mobile business

Fair value - DCF

FV @ EV/EBITDA

Weighted average FV

12M price target






Valuation (Cont.’d)


Unit 2014a 2015a 2016e 2017e 2018e 2019e 2020e 2021e 2022e7-Year CAGR

(2015-2022)

Retail Revenues (Excl. Mobile) EGP mn 5,029 5,474 6,435 7,195 7,786 8,386 8,996 9,632 10,262 9.4%

Wholesale Revenues EGP mn 7,129 6,710 6,932 7,105 7,271 7,424 7,569 7,715 7,858 2.3%

Mobile Revenues EGP mn - - - 168 1,111 1,920 2,599 3,185 3,709

Revenues EGP mn 12,158 12,184 13,366 14,468 16,168 17,731 19,163 20,531 21,830 8.7%

YoY Growth % 9.2% 0.2% 9.7% 8.2% 11.7% 9.7% 8.1% 7.1% 6.3%

EBITDA EGP mn 3,841 3,442 4,283 4,476 4,684 5,385 5,950 6,437 6,854 10.3%

EBITDA margin % 31.6% 28.2% 32.0% 30.9% 29.0% 30.4% 31.1% 31.4% 31.4%

EBIT EGP mn 2,248 1,853 2,384 2,029 2,164 2,726 3,280 3,584 3,842 11.0%

EBIT Margin % 18.5% 15.2% 17.8% 14.0% 13.4% 15.4% 17.1% 17.5% 17.6%

Net Profits After Taxes EGP mn 1,417 2,997 3,086 2,215 2,045 2,120 2,251 2,247 2,263 -3.9%

2014a 2015a 2016e 2017e 2018e 2019e 2020e 2021e 2022e

EBIT 2,248 1,853 2,384 2,029 2,164 2,726 3,280 3,584 3,842

Taxes on EBIT (506) (417) (536) (457) (487) (613) (738) (806) (864)

Depreciation & Amortization 1,592 1,589 1,899 2,447 2,520 2,660 2,670 2,854 3,013

Capex on retail & wholesale business (2,151) (3,142) (3,074) (3,180) (3,233) (3,274) (3,303) (3,326) (3,336)

Capex on mobile business - - (269) (721) (1,101) (964) (840) (725) (625)

4G License payments - - (5,200) (470) (470) (470) (470) - -

Change in Working Capital 305 (189) (452) (190) (354) (304) (258) (232) (215)

FCFF 1,488 (307) (5,249) (541) (961) (240) 340 1,347 1,813

PV of FCFF (5,106) (439) (656) (138) 167 560 642

Terminal value (end of 2032) - based on TGR 17,536

2016e 2017e 2018e 2019e 2020e 2021e 2022e

Adjusted Beta 0.81 Equity weight 73.2% 65.2% 57.3% 51.7% 47.4% 44.5% 42.2%

US ERP 6.4% Debt weight 26.8% 34.8% 42.7% 48.3% 52.6% 55.5% 57.8%

Country Risk Premium 5.7% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of Equity (CoE) 23.4%

Aftr Tax Cost of Debt (AT CoD) 13.0% AT CoD 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%

Terminal Growth Rate 2.5% WACC 20.6% 19.8% 19.0% 18.4% 17.9% 17.6% 17.4%

Terminal ROIC 8.4% ROIC 11.0% 6.6% 6.4% 7.4% 8.2% 8.4% 8.6%

Terminal WACC 15.4%

All figures in EGP mn except per share numbers

DCF Valuation Multiples Valuation

Sum of PV of FCFF (2016-2032) (490) MENA 2016e EV/EBITDA median 4.8x

Discount 20% 8.0% 9.0% 10.0% 11.0% 12.0%

PV of Terminal Value 1,372 2016e EBITDA 4,283 12.0% 9.82 9.26 8.61 7.86 6.99

Enterprise Value 882 Enterprise Value 16,580 12.5% 9.67 9.11 8.47 7.74 6.89

Total Debt (2015) (389) Total Debt (2016) (5,821) 13.0% 9.52 8.97 8.34 7.62 6.79

Excess Cash (2015) 1,978 Excess Cash (2016) 187 13.5% 9.37 8.83 8.21 7.50 6.69

Other investments 99 Other Investments 99 14.0% 9.23 8.70 8.09 7.40 6.60

FV of Investment in VFE 12,955 FV of Investment in VFE 12,955

Minority Interest (2015) (10) Minority Interest (2016) (10)

Dividends distributed in 2016 (1,280) FV of mobile business (5,171) 18.7% 21.1% 23.4% 25.7% 28.1%

Equity value 14,233 Target equity value 18,818 1.5% 9.36 8.85 8.40 8.00 7.66

No. of shares 1,707 Implied Fair Value - EV/EBITDA 11.02 2.0% 9.32 8.81 8.37 7.98 7.64

Fair value - DCF 8.34 Weight of DCF Valuation 80.0% 2.5% 9.28 8.78 8.34 7.95 7.61

Weight of Multiples Valuation 20.0% 3.0% 9.24 8.74 8.30 7.92 7.59

12-month price target (PT) 10.95 Weighted Average Fair Value 8.87 3.5% 9.19 8.69 8.26 7.89 7.56

Cost of equity

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Valuation of mobile business

Unit 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e7-Year CAGR

(2017-2024)

Total Mobile Subs mn 99.0 109.3 118.0 125.3 131.4 137.0 142.2 145.1 148.0 4.4%

Mobile Penetration % 110% 119% 126% 131% 135% 138% 140% 140% 140%

ETEL Mobile Subs mn - 2.1 4.7 6.9 8.7 10.4 11.9 12.8 13.7 31.0%

ETEL Mobile Market share % 1.9% 4.0% 5.5% 6.6% 7.6% 8.4% 8.8% 9.2%

Blended ARPU EGP - 29.1 29.5 29.8 29.9 29.9 29.8 29.6 29.5 0.2%

YoY Growth % 1.5% 1.0% 0.5% 0.0% -0.5% -0.5% -0.5%

Revenues EGP mn - 180 1,195 2,065 2,794 3,424 3,989 4,398 4,681 59.3%

Annual fees from mobile revenues EGP mn (13) (84) (145) (196) (240) (279) (308) (328)

Net Revenues EGP mn - 168 1,111 1,920 2,599 3,185 3,709 4,090 4,353 59.3%

YoY Growth % 562.9% 72.9% 35.3% 22.6% 16.5% 10.3% 6.4%

EBITDA EGP mn - (67) (56) 480 909 1,274 1,595 1,798 1,898

EBITDA margin % -40.0% -5.0% 25.0% 35.0% 40.0% 43.0% 44.0% 43.6%

Depreciation EGP mn (40) (76) (158) (223) (272) (308) (334) (350)

Amortization EGP mn (118) (472) (472) (472) (472) (472) (472) (472) (472)

EBIT EGP mn (118) (579) (604) (150) 215 530 815 993 1,076

EBIT Margin % -345.3% -54.3% -7.8% 8.3% 16.6% 22.0% 24.3% 24.7%

2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e

EBIT (118) (579) (604) (150) 215 530 815 993 1,076

Taxes on EBIT - - - - (48) (119) (183) (223) (242)

Depreciation & Amortization 118 512 548 630 695 744 780 806 822

Capex on mobile business (269) (721) (1,101) (964) (840) (725) (625) (536) (458)

4G License payments (5,200) (470) (470) (470) (470) - - - -

Change in Working Capital (5) (33) (58) (78) (96) (111) (123) (131)

FCFF (5,469) (1,263) (1,660) (1,011) (527) 334 675 916 1,067

PV of FCFF (5,469) (1,077) (1,207) (627) (279) 151 260 300 298

Terminal value (end of 2032) - based on TGR 10,559

Debt weight 59%

Equity weight 41%

Total 100%

AT CoD 13.0%

CoE 23.4%

WACC 17.3%

IRR 8.1%

All figures in EGP mn except per share numbers (3.03) 15.3% 16.3% 17.3% 18.3% 19.3%

Sum of PV of FCFF (2016-2032) (5,996) 0.5% (2.66) (2.90) (3.10) (3.26) (3.40)

PV of Terminal Value 825 1.5% (2.61) (2.86) (3.06) (3.24) (3.39)

Net present value (5,171) 2.5% (2.55) (2.81) (3.03) (3.21) (3.36)

No. of shares 1,707 3.5% (2.48) (2.76) (2.99) (3.18) (3.34)

Fair value - DCF (3.03) 4.5% (2.40) (2.70) (2.94) (3.15) (3.31)

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Source: Bloomberg, Companies’ data, and MubasherTrade Research estimates

Valuation of investment in VFE

Valuation of VFE based on recent transaction multiples

(EGP mn) TV/Revenues TV/EBITDA

VIVA / STC 2.0x 4.1x

OTMT / Orange Egypt 2.0x 6.2x

Average multiples 2.0x 5.1x

VFE 2016 Revenues 16,017

VFE 2016 EBITDA 6,959

EV based on average TV/Revenues 31,554

EV based on average TV/EBITDA 35,737

Average EV 33,645

2016 MENA Net Debt/EBITDA 1.2x

Estimated VFE net debt (8,610)

VFE Equity Value 25,035

ETEL's stake in VFE 44.95%

ETEL's Estimated Equity Value in VFE 11,253

Valuation of VFE based on MENA Peers multiples

(EGP mn)

2016e MENA PER 12.5x

VFE's 2016 Estimated Earnings After Tax 3,203

Estimated Equity Value (Based on PER) 40,143

2016e MENA EV/EBITDA 4.8x

VFE's 2016 Estimated EBITDA 6,959

Estimated Enterprise Value 33,678

Estimated net debt for VFE (8,610)

Estimated Equity Value (Based on EV/EBITDA) 25,067

Average Estimated Equity Value 32,605

ETEL's stake in VFE 44.95%

ETEL's Estimated Equity Value in VFE 14,656

Average valuation of ETEL's stake in VFE 12,955

Cost of ETEL's Investment in VFE 10,583

Expected capital gain 2,372

Tax rate on capital gain 20.0%

Taxes on capital gain 474

Estimated after-tax proceeds from selling VFE 12,480







Source: Bloomberg, company reports, and MubasherTrade Research estimates

Mkt cap

(USD mn)

Country Company name 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017

Egypt Global Telecom 1,942 42.8% 43.9% 47.2% 45.2% -- -- 12.8x 7.0x 4.1x 2.6x 3.0x 3.1x -- -- -- 2.4%

Kuwait VIVA Kuwait Telecom 1,404 47.1% 46.7% 46.9% 46.6% 8.0x 11.5x 11.3x 10.8x 3.4x 4.0x 3.3x 3.2x -- -- -- 6.6%

Kuwait Zain Group 5,581 41.8% 43.1% 45.1% 44.8% 10.6x 8.8x 9.8x 9.1x 5.7x 4.6x 5.0x 4.9x 7.5% 8.6% 7.7% 8.7%

Morocco Maroc Telecom 12,015 55.0% 50.2% 48.9% 49.2% 17.1x 17.5x 20.2x 18.8x 6.8x 6.7x 7.9x 7.5x 6.1% 5.7% 4.9% 5.1%

Oman Oman Telecom 2,864 44.0% 41.9% 47.4% 47.3% 10.4x 24.1x 9.0x 9.0x 5.5x 4.9x 3.9x 3.8x 4.4% 7.3% 8.5% 8.3%

Oman Ooredoo Oman 1,069 48.6% 51.5% 47.1% 47.2% 10.8x 11.1x 8.7x 8.2x 3.9x 3.7x 3.4x 3.3x 6.1% 5.6% 7.6% 7.9%

Qatar Ooredoo Qatar 8,095 37.6% 39.2% 40.2% 39.8% 19.0x 11.3x 13.1x 12.2x 5.6x 4.3x 4.6x 4.5x 3.2% 4.0% 4.1% 4.8%

Saudi Arabia Mobily 3,900 18.9% 20.4% 32.5% 34.0% -- -- NM 21.1x 16.0x 11.7x 6.2x 5.7x 8.5% -- -- 2.2%

Saudi Arabia STC 32,152 42.5% 37.3% 37.4% 37.9% 12.0x 14.8x 12.3x 11.7x 6.2x 6.6x 5.5x 5.3x 5.3% 5.8% 6.8% 7.0%

Saudi Arabia Zain KSA 1,131 17.6% 24.2% 24.6% 27.2% -- -- -- -- 15.7x 9.2x 7.8x 6.7x -- -- -- --

UAE Etisalat Group 43,810 35.9% 37.3% 48.0% 48.0% 10.9x 16.5x 18.0x 17.6x 6.2x 8.1x 7.1x 6.8x 6.4% 5.0% 4.6% 4.6%

UAE du 7,531 41.1% 43.9% 44.1% 44.1% 11.0x 12.1x 15.6x 15.4x 4.3x 4.0x 4.7x 4.5x 6.3% 8.4% 5.8% 5.8%

MENA Peers' Average 10,125 39.4% 40.0% 42.4% 42.6% 12.2x 14.2x 13.1x 12.8x 6.9x 5.9x 5.2x 4.9x 6.0% 6.3% 6.2% 5.8%

MENA Peers' Median 4,741 42.1% 42.5% 46.0% 45.0% 10.9x 12.1x 12.5x 11.7x 5.6x 4.8x 4.8x 4.7x 6.1% 5.8% 6.3% 5.8%

Austria Telekom Austria 3,849 29.8% 34.1% 32.2% 32.4% n/a 9.2x 12.0x 11.4x 5.3x 4.3x 4.4x 4.4x 0.9% 1.0% 2.9% 3.3%

Britain Vodafone Group 72,361 8.8% 27.5% 28.5% 29.7% 5.2x 10.2x 40.9x 34.5x 22.3x 7.9x 7.1x 6.7x 5.0% 5.1% 6.0% 6.0%

France Orange 41,532 27.4% 27.9% 30.7% 31.1% 35.1x 18.6x 13.7x 13.1x 6.2x 6.4x 5.2x 5.1x 4.2% 3.9% 4.3% 4.6%

Germany Deutsche Telekom 75,382 28.4% 26.6% 30.1% 30.0% 20.4x 23.5x 16.2x 15.3x 6.4x 7.5x 5.9x 5.7x 3.8% 3.3% 4.0% 4.5%

Hong Kong China Mobile 230,763 37.3% 36.0% 35.8% 36.5% 13.5x 13.8x 14.4x 13.2x 4.3x 4.5x 4.3x 4.0x 3.2% 3.1% 3.0% 3.4%

India Bharti Airtel 18,522 32.4% 33.9% 34.9% 36.6% 45.3x 30.3x 23.5x 24.3x 7.1x 7.0x 6.5x 5.9x 0.6% 0.6% 1.0% 1.0%

Italy Telecom Italia 15,927 40.9% 36.0% 42.0% 42.9% 22.8x n/a 13.0x 12.6x 5.5x 7.7x 5.8x 5.6x -- -- -- --

Japan Nippon Telegraph 94,207 28.4% 26.3% 27.8% 27.5% 11.0x 15.6x 14.0x 12.2x 3.9x 4.9x 4.9x 4.9x 3.0% 2.4% 2.4% 2.7%

Japan NTT DOCOMO 99,971 34.5% 29.6% 31.3% 31.2% 14.5x 20.5x 19.0x 14.7x 4.5x 6.5x 7.2x 7.0x 3.7% 3.1% 2.7% 3.1%

Mexico America Movil 44,201 32.0% 29.9% 26.9% 26.9% 24.6x 23.1x 20.1x 14.7x 6.3x 5.4x 6.4x 6.3x 1.5% 2.1% 2.3% 2.3%

Netherlands VimpelCom 6,087 33.4% 26.9% 39.7% 39.0% 8.9x n/a 10.7x 11.0x 5.3x 4.0x 3.7x 3.6x 0.8% 1.1% 1.0% 3.6%

Norway Telenor 23,799 36.3% 33.8% 35.0% 35.4% 25.1x 65.3x 14.4x 12.2x 7.1x 6.7x 5.5x 5.4x 4.8% 5.1% 6.0% 6.2%

South Africa MTN Group 15,459 48.4% 39.9% 37.3% 38.8% 14.4x 17.8x 24.9x 11.8x 5.8x 4.7x 4.7x 4.7x 5.6% 9.9% 6.2% 6.8%

Spain Telefonica SA 49,011 31.7% 24.2% 31.1% 31.8% 21.8x NM 14.1x 12.0x 8.0x 9.8x 6.9x 6.6x 4.9% 5.9% 7.6% 6.6%

Sweden Tele2 AB 3,763 25.8% 20.2% 18.0% 19.6% 16.1x 29.8x 40.0x 21.2x 7.4x 8.7x 9.3x 7.9x 5.1% 6.3% 7.6% 8.0%

Turkey Turkcell 6,849 29.7% 30.2% 32.2% 32.8% 16.9x 10.5x 10.6x 9.9x 7.2x 6.0x 5.3x 4.8x 12.5% -- 6.0% 5.7%

United States T-Mobile 41,052 19.7% 21.1% 27.2% 26.9% n/a 39.6x 33.5x 26.2x 7.0x 7.9x 6.6x 6.1x -- -- -- --

United States AT&T 226,978 23.0% 31.9% 32.4% 32.9% 12.8x 14.1x 13.0x 12.3x 8.1x 7.1x 6.5x 6.3x 5.5% 5.5% 5.2% 5.4%

United States Verizon Communications 192,111 28.4% 37.3% 35.0% 36.4% 13.9x 11.6x 12.1x 11.8x 8.2x 6.0x 6.7x 6.4x 4.6% 4.8% 4.9% 5.0%

Russia Rostelecom 3,277 33.0% 33.4% 32.9% 33.4% 15.4x 14.6x 15.1x 12.3x 4.1x 4.1x 4.0x 3.9x -- -- 7.0% 7.2%

Russia Mobile TeleSystems 6,921 43.1% 38.7% 38.7% 38.7% 6.5x 8.4x 8.6x 7.9x 3.3x 4.2x 4.0x 3.9x 14.7% -- 11.5% 11.5%

Developed Peers' Average 60,573 31.1% 30.7% 32.4% 32.9% 18.1x 20.9x 18.3x 15.0x 6.8x 6.3x 5.8x 5.5x 4.7% 3.9% 4.8% 5.1%

Developed Peers' Median 41,052 31.7% 30.2% 32.2% 32.8% 15.4x 16.7x 14.4x 12.3x 6.3x 6.4x 5.8x 5.6x 4.4% 3.6% 4.9% 5.0%

Global Peers' Average 42,228 34.1% 34.1% 36.0% 36.4% 16.2x 18.7x 16.6x 14.2x 6.9x 6.1x 5.5x 5.3x 5.1% 4.7% 5.2% 5.3%

Global Peers' Median 15,459 33.4% 33.9% 35.0% 36.4% 14.2x 14.8x 14.0x 12.3x 6.2x 6.0x 5.5x 5.3x 4.9% 5.0% 5.2% 5.2%

Egypt Telecom Egypt @ Market Price 1,034.6 31.6% 28.2% 32.0% 30.9% 23.4x 4.4x 6.2x 8.7x 2.1x -0.3x 2.2x 2.4x 4.7% 11.7% 5.4% 4.9%

Egypt Telecom Egypt @ Price Target 1,215.7 31.6% 28.2% 32.0% 30.9% 21.5x 7.5x 7.3x 10.2x 1.7x 1.9x 2.9x 3.0x 5.1% 6.8% 4.6% 4.1%

Better than regional peers' average.

EBITDA Margin P/E EV/EBITDA Dividend Yield






Financial Summary

Balance Sheet (EGP mn) Per-Share DataFY End: December 2013a 2014a 2015a 2016e 2017e 2018e FY End: December 2013a 2014a 2015a 2016e 2017e 2018e

Tota l cash & short-term investments 5,762 3,810 2,587 855 940 1,051 Price 14.68 11.92 6.42 9.32 9.32 9.32

Accounts receivable, net 3,451 3,749 4,612 4,277 4,630 5,174 # Shares (mn) 1,707.1 1,707.1 1,707.1 1,707.1 1,707.1 1,707.1

Inventories 459 438 557 606 657 728 EPS 1.71 0.51 1.45 1.50 1.07 0.99

Other Current Assets 1,396 1,497 1,412 1,738 1,881 2,102 DPS 1.00 0.56 0.75 0.50 0.45 0.42

Total current assets 11,067 9,494 9,167 7,476 8,108 9,054 BVPS 16.58 15.67 16.97 17.71 18.29 18.82

Net property, plant and equipment 11,637 12,280 13,917 15,554 17,549 19,898

Goodwi l l & Other intangible assets 954 1,046 933 7,820 7,280 6,745 Valuation IndicatorsEquity and other investments 8,693 9,474 10,561 11,960 13,467 15,073 FY End: December 2013a 2014a 2015a 2016e 2017e 2018e

Total assets 32,350 32,293 34,578 42,810 46,403 50,770 PER (x) 8.6x 23.4x 4.4x 6.2x 8.7x 9.4x

Short-term debt 107 84 62 5,556 8,294 11,710 PBV (x) 0.9x 0.8x 0.4x 0.5x 0.5x 0.5x

Accounts Payable 176 214 330 312 338 375 EV/Sales* (x) 1.1x 0.7x -0.1x 0.7x 0.7x 0.8x

Other Current Liabi l i ties 3,588 4,284 4,877 4,542 4,928 5,459 EV/EBITDA* (x) 3.2x 2.1x -0.3x 2.2x 2.4x 2.7x

4G License Payable - - - 1,880 1,410 940 Dividend Payout Ratio 58.5% 109.7% 51.6% 33.4% 42.3% 42.3%

Total current liabilities 3,871 4,582 5,269 12,290 14,970 18,483 Dividend Yield 6.8% 4.7% 11.7% 5.4% 4.9% 4.5%

Long-term debt 475 383 327 264 202 139

Other non-current l iabi l i ties 29 572 17 17 13 12 Profitability & Growth RatiosTotal long term liabilities 504 954 344 282 215 152 FY End: December 2013a 2014a 2015a 2016e 2017e 2018e

Net Pa id in capita l 17,071 17,071 17,071 17,071 17,071 17,071 Revenue Growth 11.0% 9.2% 0.2% 9.7% 8.2% 11.7%

Total Reserves & Reta ined Earnings 11,229 9,687 11,893 13,167 14,147 15,065 EBITDA Growth -1.3% 4.3% -10.4% 24.4% 4.5% 4.6%

Shareholders' equity 28,299 26,758 28,964 30,238 31,218 32,135 EPS Growth 15.1% -70.3% 185.5% 3.0% -28.2% -7.7%

Total equity and liabilities 32,675 32,293 34,578 42,810 46,403 50,770 EBITDA Margin 33.1% 31.6% 28.2% 32.0% 30.9% 29.0%

Net Profi t Margin 26.3% 7.1% 20.4% 19.1% 12.7% 10.5%

Income Statement (EGP mn) ROAE 10.4% 3.2% 8.9% 8.6% 6.0% 5.3%

FY End: December 2013a 2014a 2015a 2016e 2017e 2018e ROAA 9.0% 2.7% 7.4% 6.6% 4.1% 3.5%

Net Revenues 11,138 12,158 12,184 13,366 14,468 16,168

Cost of revenues (2,903) (2,991) (3,206) (3,028) (3,286) (3,639) Liquidity & Solvency MultiplesEBITDA 3,684 3,841 3,442 4,283 4,476 4,684 FY End: December 2013a 2014a 2015a 2016e 2017e 2018e

Depreciation & Amortization (1,695) (1,592) (1,589) (1,899) (2,447) (2,520) Net Debt/(Cash) (4,622) (2,736) (1,588) 5,634 8,279 11,607

EBIT 1,989 2,248 1,853 2,384 2,029 2,164 Net Debt (Cash)-to-Equity -16.3% -10.2% -5.5% 18.6% 26.5% 36.1%

Non-operating income/(expenses) 1,442 763 977 1,184 381 (2) Net Debt (Cash)-to-EBITDA -1.3x -0.7x -0.5x 1.3x 1.8x 2.5x

Net Profits Before Taxes 3,431 3,011 2,830 3,568 2,411 2,162 Debt-to-Capita l 2.0% 1.7% 1.3% 16.1% 21.4% 26.9%

Extraordinary i tems & minori ty interest 320 69 123 (3) (2) (2) Current Ratio 2.9x 2.1x 1.7x 0.6x 0.5x 0.5x

Net Profits After Taxes 2,958 1,417 2,997 3,086 2,215 2,045

Consensus Estimates

Cash Flow Statement (EGP mn) FY End: December 2016e 2017e 2018e

FY End: December 2013a 2014a 2015a 2016e 2017e 2018e Revenues 12,916 13,328 14,291

Net Cash From Operating Activi ties 1,925 3,355 2,743 5,229 3,616 3,743 MubasherTrade Research vs . Consensus 3.5% 8.6% 13.1%

Net Cash used in Investing Activi ties (629) (3,274) (2,161) (10,396) (3,886) (4,312) Net Income 3,199 2,893 3,230

Net Cash used in Financing Activi ties (2,031) (3,078) (886) (2,131) (2,468) (2,846) MubasherTrade Research vs . Consensus -3.5% -23.4% -36.7%

Net Change in Excess Cash (735) (2,997) (304) (7,298) (2,738) (3,416) PER (x), MTR Price Target 7.3x 10.2x 11.0x

PBV (x), MTR Price Target 0.6x 0.6x 0.6x

Capex (593) (2,151) (3,142) (3,343) (3,901) (4,334) EV/EBITDA (x), MTR Price Target 2.9x 3.0x 3.3x

* EV excludes investment in VFE a = Actual; e = Estimate

Source: Company data, MubasherTrade Research estimates






Industry Overview

Telecom is a defensive sector by nature with stable demand: Although Egypt is currently facing monetary and fiscal challenges, the telecom sector is defensive in nature with sustainable demand for data and voice services. The Egyptian government is also implementing mega national projects and expansions, which will create further demand for telecom services. Telecom sector is comprised of three segments: fixed line, internet, and mobile segments.

1. Fixed Line Segment

Fixed telephone lines retreat due to Fixed Mobile Substitution phenomena: As a result of fixed-mobile substitution (FMS) phenomenon, Egypt’s fixed-line penetration rate declined from 12.2% (9.6mn subs) in 2010 to 7.0% (6.3mn subs) in June 2016. Similarly, fixed-line ARPU eroded from EGP26 in 2012 to EGP22 in June 2016. The change in customer usage from fixed line to mobile services was helped by the continuous decline of per-minute prices.

ETEL is no longer the sole fixed-line operator in Egypt: ETEL used to have an exclusive fixed-line license, serving the largest subs base in the Middle East. Recently, the Egyptian government offered fixed-line licenses to the incumbent three MNOs at a cost of USD11.3mn each. However, MNOs will face a challenge in introducing such services due to FMS and market saturation. As of June 2016, the home segment accounted for 82% of total fixed-line subs (5.2mn subs), with the enterprise segment making up the remaining 18% (1.1mn subs).

Expected modest growth in fixed lines: We believe that fixe-line penetration will not reverse its downtrend as we expect that new subs will only come from new residential and business expansions. In our forecasts, we expect that the penetration rate will reach 7.5% in 2022 with a 2.2% 7-year (2015-2022) CAGR in the number of telephone lines.

2. Internet Segment

Rising demand for data enriches the internet market: Ongoing demand for data services fuels growth for ISPs. We expect internet penetration to reach 41.6% in 2016, reflecting a number of users of 37.5mn. We expect considerable growth in data business to be supported by Egypt’s tech-savvy youth segment, the widespread of smartphones and tablets at favorable prices, in addition to the prospective 4G rollout. Thus, we expect a 9.1% 7-year CAGR for the internet subs, reaching a penetration of 60% in 2022.

ETEL fully owns the leading ISP in Egypt: ETEL fully owns TE Data, the leading ISP in Egypt in terms of market share of 77% with subs base of 3.2mn, whereas the remaining market share is held by VFE, Link DSL, Etisalat Misr and Noor DSL. The main challenge in this segment is illegal connections and line sharing phenomena, which resulted in lower registered numbers of subs. The Egyptian government is facing this by requesting that ISPs apply discounts on internet rates. On the other hand, ISPs requested lower rates of data transmission services provided by ETEL to increase the number of ADSL subs and maintain margins.

3. Mobile Segment

Competition is to intensify further by the entrance of ETEL as a 4G player: The mobile market is comprised of three operators, namely Vodafone Egypt (a 42% market share), Orange Egypt (OREG.EGX) (a 35% market share), and Etisalat Misr (EM) (a 24% market share). Mobile penetration rate reached its highest level of 118% in 2013 then declined to 110% in 2016 due to cancelling unregistered SIMs. Total mobile subs grew by a 7-year CAGR (2008-2015) of 12.5%, recording 94mn in 2015. In 2016, we expect a 5.3% YoY growth in mobile subs, while we expect a 6% YoY growth in average mobile ARPU to reach EGP33.5 in 2016. Going forward, we expect mobile ARPU to grow at a 6-year CAGR (2016-2022) of 0.11% to be supported by 4G services despite increasing competition, especially with the introduction of mobile services by ETEL as a 4G MNO.

ETEL is awarded 4G frequencies and mobile license: ETEL has been awarded the mobile license and 4G spectrum for EGP7bn in September 2016. ETEL is supposed to provide 4G services over 6 months from receiving spectrum while the company will provide 3G services virtually through local roaming agreements with other MNOs. VFE and Orange Egypt also obtained 4G frequencies at USD335mn and USD484mn, respectively, while EM was offered the same at USD535.5mn. According to their payment terms, the four operators will pay 50% of the value in US dollars. Additionally each mobile operator was offered providing fixed line services virtually at USD11.3mn.

Source: MCIT and Company reports.

Telecom Evolution

96.8 99.7 95.3 94.0 99.0109.3

118.0125.3

131.4 137.0 142.226.4

28.1 29.2 31.6

33.5 32.9 33.4 33.7 33.9 33.9 33.7

5

10

15

20

25

30

35

40

0

20

40

60

80

100

120

140

160

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

mn subs EGPMobile Subs (LHS) and ARPU (RHS)

Mobile Subs Mobile ARPU

8.9% 8.0% 7.3% 7.4% 7.4% 7.4% 7.5% 7.5% 7.5% 7.5% 7.5%

117% 118%110% 106% 110%

119%126% 131% 135% 138% 140%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

0%

5%

10%

15%

20%

25%

30%

Mobile and Fixed Penetration

Fixed penetration Mobile penetration

6.2 5.7 5.3 5.5 5.5 5.7 5.8 6.0 6.1 6.2 6.3

25.7 25.9 25.4 23.7

21.3 20.1 18.9 17.7 16.4 15.2 14.0

0

5

10

15

20

25

30

35

40

0

2

4

6

8

10

12

14

16

18

20

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

mn subs EGPHome Fixed Subs (LHS) and Home ARPU (RHS)

Home Fixed Subs Home ARPU






1.1 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.2 1.2 1.376

85

10497

107 111 115 120 125 130 134

5

25

45

65

85

105

125

145

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

mn subs Enterprise subs (LHS) & Enterprise ARPU (RHS)

Enterprise Fixed Subs Enterprise ARPU

EGP

21.825.0 27.5

33.037.5

42.246.5

50.754.4

57.860.9

26%30% 32%

37%42%

46%50%

53%56% 58% 60%

0%

10%

20%

30%

40%

50%

60%

70%

0

10

20

30

40

50

60

70

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

mn users Internet Users and Penetration

Internet Users Internet Pentration

2.22.6

3.03.8

4.54.8

5.25.6

6.06.4

6.9

1.4 1.7 2.02.8

3.53.9

4.34.7

5.15.5 5.8

61% 63% 65%74%

79% 81% 83% 84% 85% 85% 85%

0%

20%

40%

60%

80%

100%

0

1

2

3

4

5

6

7

8

9

10

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

mn subs FBB Subs, TE Data Subs and Market Share

FBB subs TE Data subs TE Data Market Share

ETEL’s business model is comprised of two main business segments:

Retail segment (45% of total revenues):

• Fixed telephone services to home units and enterprises.

• Fixed broadband services.

• Mobile services.

Wholesale segment (55% of total revenues):

• Transmission services.

• International carrier services.

• International network.

1. Retail segment

Significant erosion of fixed-line business: ETEL was the only telecom operator that has had a fixed-line license in Egypt since 1881 until offering fixed line licenses to MNOs in October 2016 to provide such service virtually. ETEL provides fixed-line services to both home units and enterprises. In Q2 2016, telephone lines to home units represented 82% of total fixed-line subs, whereas enterprises hold the remaining 18%. Total fixed-line subs reached 6.3mn, which is considered the largest subs base in the Middle East. Meanwhile, enterprise ARPU reached EGP110, while home ARPU reached EGP22. Over the last seven years, fixed-line penetration rate dropped dramatically from 12% to c.7% due to the dynamic evolution in the telecom market, which started by introducing mobile services in Egypt in the late nineties. Meanwhile, fixed-line ARPU experienced significant erosion from EGP26 in 2012 to EGP22 in 2016.

ADSL is the main driver for the retail segment: ETEL fully owns TE Data, the leading ISP in Egypt with a market share of 77% and a subs base of 3.2mn. TE Data was established in 2001, capitalizing on ETEL’s infrastructure and data transmission capabilities. TE Data showed an impressive performance and significant growth in subs base from 880,000 in 2010 to 3.2mn in June 2016, supported by ongoing demand for internet services and the vast population tending to be tech-savvy. The growth was also helped by the spread out of digital services and on-line applications, taking into account also the government investment in transforming its services into online services (e-Government) with digital platforms. Internet penetration in Egypt reached 39% in June 2016, which is considered lower than the median penetration in the MENA. Additionally, total market ADSL subs reached 4.1mn in June 2016 lower than ETEL’s fixed-line subs of 6.3mn which implies potential ADSL new adds.

Potential new subs from residential expansions: Despite the stagnant growth of fixed-line penetration, ETEL still has room for growth from expected new subs from new residential expansions. We believe the need for fixed-line access is required for at least having ADSL connection. We also believe an expected recovery in business activities should reflect positively on subs and ARPU growth.

Line sharing and illegal connections phenomena negatively affect ISPs: The main challenge in the ADSL market in Egypt is the line sharing and illegal connections phenomena. However, the government is facing this by cutting internet prices. To do so, the Ministry of Communications obligated ISPs to decrease their rates, but they asked for discounts on transmission services from ETEL to maintain their profitability margins. Hence, TE Data took

the initiative by reducing internet prices by 50% for the first six months of subscription.

Fiber optic cables upgrade TE Data capabilities: The speed of internet connection is expected to increase by introducing Fiber-To-The-Home (FTTH). ETEL is currently replacing its copper cables with fiber optic cables with a target to reach 6mn home units by end of 2017 (vs. 4mn today). Home units are the bulk of TE Data’s subs of 3mn compared to 181,000 enterprises. Data revenues generated from providing internet services to both homes and enterprises (EGP2.6bn in 2015) contributed considerably to ETEL’s revenues: 48% of retail revenues and 22% of total revenues.

ETEL expanded regionally by establishing TE Data Jordan: ETEL had managed to replicate its successful story of TE Data in Egypt by establishing a regional IP node. In 2004, ETEL established TE Data Jordan to provide services to neighboring countries and to grasp opportunities resulting from market liberalization. Internet penetration reached 76% in Jordan, with 6.2mn internet users, relatively lower than the comparable markets in MENA region.

Business Model

Source: MCIT, Company reports, and MTRe.






Business Model (Cont.’d)

2. Wholesale segment

ETEL still enjoys a monopoly in wholesale services in Egypt: ETEL has huge infrastructure capabilities, most importantly an extended 40,000 km in-land network, which is operationally required for providing data transmission services to both MNOs and ISPs. ETEL has the international gateway required to manage international traffic. Capitalizing on the strategic geographic position of Egypt, ETEL is involved in strategic international cables business agreements. The wholesale segment is comprised of domestic wholesale services, international carrier affairs and international customers and networks.

In-land telecom infrastructure is the backbone of domestic wholesale services: Domestic wholesale business depends on the demand for the national transmission services across ETEL's extensive network by MNOs and ISPs. Demand growth is driven by the growth in the transmitted volume in both domestic and international outgoing mobile traffic and data usage. Domestic wholesale revenues represented 44% of total wholesale revenues in 2015 compared to 40% in 2011, rising at a 5-year CAGR of 5.4%. As a sole provider of transmission services, ETEL will be positively impacted in case of economic and business recovery, a nourishing tourism sector, and a booming in data market. Data services rose rapidly in the last five years, which was supported by growing domination of smartphones in the local market.

Exclusive international gateway supports international carrier affairs business line: The key driver for international carrier affair (ICA) revenues is ETEL's exclusive international gateway, which allows the company to manage the international incoming traffic and mobile interconnection activities. ETEL has more than 70 long-term bilateral commercial agreements with international operators across all international wholesale voice activities. The company is also working on exploring new markets, capitalizing on its global footprint and variety of international customers.

The commercial agreements with VFE and Orange Egypt secure EGP15bn revenues from domestic wholesale business: In January 2015, ETEL had signed long-term commercial agreements with VFE and Orange Egypt with a total value of c.EGP15bn to provide international communication and domestic transmission services. Both agreements are valid for four years, while infrastructure services will be provided to

Orange Egypt and VFE for five years and three years, respectively. These agreements indicate that MNOs prefer to lease ETEL's infrastructure as a commercial option than owning their own international license.

OTT is a major threat to international gateway’s viability: ETEL is facing growing threats of illegal bypass combined with the widespread of over-the-top (OTT) applications. The illegal traffic phenomenon is considered the main factor that put pressure on international carrier affairs (ICA) revenues, which represent 44% of total wholesale revenues. The ICA revenues grew at a 5-year CAGR of 6%. In an attempt to encounter this, ETEL provides commercial incentives to local MNOs and exert efforts to stop the leakage or by deploying detection systems to act as the gate-keeper and mitigate the leakage. The ICA revenues are also affected by the pricing pressure by other operators, mainly EM, which has an international gateway license. Nonetheless, EM has certain regulations and provisions, managing only inbound traffic from its related telecom operators, most importantly Etisalat (ETISALAT.ADX) in the UAE and Mobily (7020.TDWL) in Saudi Arabia, which are operating in high competitive markets. Those operators are offering discounts on international calls to millions of expatriate subs.

ICN business is supported by exponential growth in IP traffic and unique Egypt’s geographic position: International customers & networks (ICN) business (12% of wholesale revenues) depends mainly on intentional cables services. ETEL participates in seven submarine cables through ‘rights of way’ and ‘rights of use’ in addition to the 100% ownership of TE North cable, out of 14 cables crossing Egypt. TE North is a submarine telecommunication cable, which was launched in 2010 linking France to Egypt with a length of 3,100 km and a capacity of up to 1.28 Tbit/second over eight fiber pairs. The cable is expanding the international services footprint of ETEL transit corridor by offering additional transit services in the Mediterranean. The cable was upgraded in 2011 to utilize a technology of 40G channels to become the first cable in the Mediterranean to utilize this technology. TE North has landing points in Marseille France and Abu Talat, Alexandria, Egypt. The cable projects revenues are generated from crossing services and indefeasible right of use (IRUs), which are considered non-recurring revenues stream. However, ancillary services and international capacity sales revenues are considered recurring revenues. ETEL is providing ancillary services including

(operation and maintenance) to the cables having landing points in Egypt. IP wholesale capacity sales is mainly driven by the internet traffic, which is growing exponentially due to the increased demand by broadband and mobile data subs for internet services, online applications, and media contents. The Asia-Pacific region is a leading driver of internet traffic growth, creating a major advantage for the cables linking said region with Europe and America, mostly through crossing Egypt’s land.

Business outlook & future strategy

ETEL is to finally provide mobile services: Given a stagnant growth in fixed-line business, ETEL has an ambition to enter the mobile market, capitalizing on the promising growth opportunity in mobile data. Currently, ETEL indirectly participate in mobile market through its 45% ownership stake in VFE; however the company wanted to directly provide mobile services as an MNO. In June 2016, MCIT announced a tender to provide mobile license and 4G frequencies to ETEL at EGP7bn, VFE at USD335mn, Orange Egypt at USD484mn and EM at USD535.5mn. MCIT also offered virtually fixed-line licenses to MNOs at USD11.3mn each. ETEL is supposed to offer its 4G services after six months from receiving the spectrum, while the 3G services will be provided once ETEL reaches final agreements with MNOs on local roaming services.

Is the mobile business still viable? ETEL plans to introduce mobile services raise a questions about the viability of adding this business in a highly competitive mobile market, which is approaching saturation with a penetration of 110%. As per the corporate governance, ETEL should not compete with its associate (VFE) due to the conflict of interest and assets duplication. ETEL technically has to own a GSM spectrum based on 4G technology and install mobile infrastructure, including mobile towers, landing stations and operation platforms to be able to provide wireless voice and data services. The rollout of 4G network needs an estimated capex of c.EGP4bn (2016-2020). We expect that the huge needed fund would negatively impact ETEL’s dividend payout and would raise its leverage.







ETEL's Mobile Business SWOT Analysis:

Strengths

• Ownership of the telecom infrastructure backbone in Egypt.

• Solid client base in both landline and data services (6.3mn), which is considered potential mobile subs.

Weaknesses

• ETEL does not own a mobile network.

• Huge funds needed for mobile license and infrastructure might affect ETEL's fundamentals, taking into account that EGP4bn is already invested in fiber optic cables.

• The huge cash outflow might also pressure dividend payout.

Opportunities

• A large population exceeding 90mn positions Egypt as an attractive market for telecom players.

• Vast population tends to be tech-savvy.

• Egyptian market is permanently evolving in providing value-added services.

• Expected economic recovery with a political stability would positively impact the telecom sector.

• Introducing 4G/LTE technology would result in higher demand particularly for mobile broadband.

Threats

• High mobile penetration rate recorded 110%, approaching saturation phase.

• Strong competition between the existing operators would be intensified by introducing ETEL’s mobile services.

• Increasing the pricing war between the participants would pressure the operators’ margins.

Expected divestiture of ETEL's stake in VFE once mobile business is operational: Given that ETEL would operate its own mobile business, we expect a divestiture of ETEL's 45% ownership stake in VFE to avoid asset duplication and any conflicts of interest in addition to the need to generate cash to finance the capex of its mobile network and 4G spectrum.

We rule out the distribution of special dividends: We expect that ETEL will use the bulk of selling its stake in VFE to finance the expected capex on mobile infrastructure in addition to the cash needed for the license. Accordingly, we rule out the distribution of special dividend. ETEL has already borrowed EGP2.5bn to partially finance the EGP5.2bn down payment of the tender, while the remaining EGP2bn will be paid over 4 years.

Financial Highlights

1. 2015

More-than-doubled 2015 earnings on tax amendments: ETEL's net profit skyrocketed 112% YoY to record EGP2,997mn in 2015 due to the amendments to the corporate income tax law from 30% to 22.5% retroactively as of 1 January 2015 in addition of changing the basis of taxes on dividends. These changes resulted in recognizing a lower corporate income tax for the period and reversing deferred tax liability to report a tax income of EGP44mn compared to a tax expense of EGP1,664mn in 2014. However, net profits before taxes (NPBT) declined by 6.0% YoYto EGP2,830mn.

Top line remained unchanged as lower wholesale revenues offset retail revenues growth: The consolidated revenues inched up by only 0.2% to reach EGP12.15bn in 2015 due to the 42% drop in international customers and networks revenues to EGP807mn, which were offset by the increase in home units and domestic wholesale revenues by 14% and 8%, respectively.

Source: MCIT, Company reports, and MTRe.

117% 118%110% 106% 110%

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42% 41% 41% 42% 42% 41% 40% 40% 39% 39%35% 35% 35% 35% 34% 33% 33% 32% 32% 32%

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EGP mn Mobile Revenues by Operator

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Retail revenues grew on strong data performance: Retail segment revenues increased 9% YoY to EGP5.5bn in 2015 (45% of total revenues), supported by 14% increase in home units revenues amounting EGP3.6bn (29% of total revenues) with a 40% jump in home data revenues to EGP2.0bn. Meanwhile, home voice revenues declined 9% to EGP1.5bn due to a 7% decline in home voice ARPU to EGP23.5 in spite of 4% increase in home fixed-line subs to reach 5.5mn by end of 2015. Home ADSL subs increased 42% to 2.64mn, driven by the growth in installing MSAN* in new regions. Also, new decentralized sales strategy with the regional sales team contributes significantly to sales growth. Meanwhile, data ARPU increased 8.5% to EGP74.1. Enterprise solution revenues increased 1% YoY to EGP1.9bn in 2015 (16% of total revenues), driven by 21% increase in enterprise data revenues to EGP588mn and 17% rise in other enterprise revenues to EGP89mn. This growth was mainly driven by delivering major projects with high quality and competitive prices to banking and governmental sectors. Though enterprise voice revenues declined 7% to EGP1.2bn, enterprise fixed-line subs and ADSL subs increased by 2% and 51% to 1.07mn and 165,000, respectively, thanks to the attractive offers provided by ETEL. TE Data managed to acquire market share of 74% with a number of subs of 2.8mn by end of 2015.

Wholesale revenues declined on drop in int’l customer networks and int’l carrier affairs revenues: Wholesale revenues declined 6% to EGP6.7bn in 2015 (55% of total revenues) resulted by the abovementioned 42% drop in international

customers and networks revenues to EGP807mn (7% of total revenues) as ETEL reported two irregular transactions with SMW-5 cable system and AAE1 cable systems at EGP881mn in Q2 2014. The international carriers affairs revenues decreased 3% to EGP3.0bn (24% of total revenues) due to ongoing negative impact of OTT applications on the international voice business and traffic being terminated in key markets as well as the continued decline in tourism and the return of most Egyptians working in troubled neighboring countries. On the other hand, domestic wholesale revenues rose 8% to EGP2.9bn in 2015 (24% of total revenues), driven by the continuing and increasing demand from the telecom companies for ETEL’s infrastructure and backhauling services. We note that ETEL managed to secure longer term revenues by signing an agreement with Orange Egypt and VFE for the provision of international communications and infrastructure services.

Higher operating costs stressed margins: Cost of revenues rose 7% to EGP3.2bn in 2015 (26.3% of total revenues vs. 24.6% in 2014) due to higher interconnection costs and higher salaries and wages in addition to 55.4% increase in fuel and power costs. Moreover, general, selling grew 5% to EGP3.2bn resulted from the increase in wages & salaries in addition to the company’s contribution to social insurance, thus EBITDA declined 10% to EGP3.4bn implying a lower EBITDA margin of 28.2%, which came in line with management expectations, compared to 32% in 2014.

Higher investment income from VFE in 2015: Investment income generated mainly from ETEL's ownership stake in VFE jumped 35% to reach EGP1.1bn compared to EGP829mn in 2014. Investment income contributed significantly to ETEL's NPBT by 39.5% in 2015 compared to 27.5% in 2014. Meanwhile, VFE market share inched down to 41.2% (38.7mn subs) in 2015 compared to 41.5% (39.5mn subs) in 2014, mostly due the disconnection of unregistered subs.

2. H1 2016

Earnings surge on higher revenues, margins, and investment income: ETEL reported 148% YoY growth in H1 2016 consolidated earnings to reach EGP2.3bn compared to EGP933mn in H1 2015. The upsurge in earnings was a result of higher investment income by 68%, mostly generated from ETEL’s investment in VFE, amounting to EGP716mn, in addition to lower other expenses. Moreover, consolidated revenues rose 10% to EGP6.4bn in H1 2016 compared to EGP5.8bn in H1 2015. The top-line growth was mainly driven by a 17% increase in home services revenues, 15% rise in domestic wholesale revenues, and 26% higher enterprise revenues. Meanwhile, consolidated EBITDA increased 30% YoY to EGP2.05bn, implying higher margin of 32.3% compared to 27.2% supported by the company’s cost optimization strategy.

Source: Company reports and MTRe.

* A multi-service access node (MSAN) cabins which connect telephone lines to the core network.

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Forecasts Assumptions

Fixed-line business line: We believe that the fixed-line market almost reached saturation in Egypt, and we expect the penetration will stabilize at 7.5% starting 2022. We expect that the fixed-line subs growth will be supported by new residential expansions. We conservatively assume that the enterprise units will grew at a 7-year CAGR of 2.5% to reach 1.27mn in 2022. Meanwhile, we project a 7-year CAGR of 2.1% for home units to reach 6.35mn in 2022. We also assumed that home fixed-line ARPU will reach to the minimum subscription fees of EGP11 in 2025, while we assumed that the enterprise ARPU growth and the other enterprise services revenues growth will be matching the estimated GDP growth (c.4% annually).

Fixed broadband (FBB): We believe that the growing demand for data services will support the ADSL business of ETEL, and we expect that the internet penetration will reach 60% (from 39% in June 2016) with FFB subs to record 6.9mn in 2022. Meanwhile, we anticipate that TE Data will remain dominating the ADSL market with a market share reaching 85% (5.8mn subs) from 77% in June 2016. We assume that TE Data ARPU will increase by 2% annually.

Mobile business line: We expect that ETEL will start introducing its mobile services at the end of H1 2017 to reach a market share of 8.4%, representing mobile subs of 11.9mn in 2022. Meanwhile, we expect mobile ARPU will increase from EGP29.1 in 2017 to reach EGP29.9 in 2019. Starting 2020, we expect a competitive pressure on ARPUs.

Domestic wholesale: We assume that the domestic revenues growth will match the growth of mobile and fixed broadband markets growth. However, we expect a 7-year CAGR of -3% in international revenues as the international outgoing minutes are negatively affected by the weak performance of tourism and business activity.

ICA and ICN: We expect ICA revenues, which are mostly generated from international gateway, to decline by a 7-year CAGR of -8% as a result of OTT application and illegal bypass. Meanwhile, we project a 7-year CAGR of 4% in ICN revenues.




(2015-2022)Comments

Population mn 86.70 88.43 90.20 92.01 93.85 95.72 97.64 99.59 101.58 2.0% According to IMF estimates.

Growth % 2.4% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

1. Revenues Assumptions by Lines of Business

a. Fixed line Revenues

Fixed-line penetration % 7.3% 7.4% 7.4% 7.4% 7.5% 7.5% 7.5% 7.5% 7.5% The lower ADSL subscription fees will drive the growth of …

Home subs mn 5.28 5.48 5.55 5.69 5.82 5.95 6.08 6.22 6.35 2.1% … fixed-line connections. However, the FMS will curb the growth.

Enterprise subs mn 1.05 1.07 1.13 1.15 1.17 1.20 1.22 1.25 1.27 2.5% Enterprise subs growth is correlated to expected economic growth.

Total fixed-line Subs (EoP) mn 6.33 6.55 6.68 6.84 6.99 7.15 7.31 7.46 7.62 2.2%

Growth % -6.6% 3.5% 1.9% 2.4% 2.3% 2.2% 2.2% 2.1% 2.1%

Home ARPU EGP 25.4 23.7 21.3 20.1 18.9 17.7 16.4 15.2 14.0 -7.2% The ARPU will gradually decline to approach the monthly fees of EGP12.

Growth % -2.1% -6.6% -10.0% -5.7% -6.1% -6.5% -6.9% -7.4% -8.0%

Enterprise ARPU EGP 103.9 96.6 106.7 110.9 115.4 120.1 124.9 130.0 133.9 4.8% We based our estimated ARPU growth on IMF estimated GDP growth.

Growth % 22.1% -7.1% 10.4% 4.0% 4.0% 4.0% 4.1% 4.1% 3.0%

Fixed-line revenues EGP mn 2,991 2,759 2,817 2,870 2,911 2,954 2,999 3,046 3,076 1.6%

Growth % 1.3% -7.8% 2.1% 1.9% 1.4% 1.5% 1.5% 1.6% 1.0%

Contribution to retail segment revenues % 59.5% 50.4% 43.8% 39.0% 32.7% 28.7% 25.9% 23.8% 22.0%

Contribution to total revenues % 24.6% 22.6% 21.1% 19.8% 18.0% 16.7% 15.6% 14.8% 14.1%

b. ETEL Mobile Revenues*

Mobile Penteration % 109.9% 106.3% 109.7% 118.8% 125.8% 130.9% 134.6% 137.6% 140.0% We assumed continued growth in penetration but at a slower pace …

ETEL Mobile Subs mn - - - 2.07 4.68 6.87 8.68 10.38 11.94 … due to approaching the market saturation phase.

ETEL Market Share % - - - 1.9% 4.0% 5.5% 6.6% 7.6% 8.4%

Total Mobile Subs (EoP) mn 95.3 94.0 99.0 109.3 118.0 125.3 131.4 137.0 142.2 6.1%

Growth % -4.4% -1.4% 5.3% 10.4% 8.0% 6.2% 4.8% 4.3% 3.8% We expect that TE's 4G mobile services will be launched by end of Q2 2017.

ETEL Net Adds mn - - - 2.07 2.62 2.19 1.82 1.69 1.56 Assuming similar net adds of VFE, to be followed by Orange Egypt and EM.

ETEL Share of Net Adds % - - - 20.0% 30.0% 30.0% 30.0% 30.0% 30.0%

Total Mobile Net Adds mn (4.4) (1.3) 5.0 10.3 8.7 7.3 6.1 5.6 5.2

Estimated ARPU growth: ARPU growth is to be fueled by data revenues growth ...

ETEL Mobile ARPU EGP 29.1 29.5 29.8 29.9 29.9 29.8 0.2% … yet this growth will be muted by the expected discounts …

Growth % 1.5% 1.0% 0.5% 0.0% -0.5% … due to the expected fierce competition.

ETEL Mobile Revenues EGP mn - - - 180 1,195 2,065 2,794 3,424 3,989 35.2%

Annual fees on mobile revenues EGP mn - - - (13) (84) (145) (196) (240) (279) As per mobile license terms, TE will pay 6% of mobile revenues to NTRA ...

ETEL Net Mobile Revenues EGP mn - - - 168 1,111 1,920 2,599 3,185 3,709 35.2% … in addition to 1% to finance scientific research in telecom sector.

Growth % - - - - 562.9% 72.9% 35.3% 22.6% 16.5%

Contribution to Retail Revenues % 2.3% 12.5% 18.6% 22.4% 24.8% 26.5%

Contribution to Total Revenues % 1.2% 6.9% 10.8% 13.6% 15.5% 17.0%

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(2015-2022)Comments

c. Fixed Broadband (FBB)

Internet penetration (%) % 31.7% 37.4% 41.6% 45.9% 49.5% 52.9% 55.8% 58.0% 60.0% Internet market growth will be driven by rising demand for data services …

Internet Users mn 27.5 33.0 37.5 42.2 46.5 50.7 54.4 57.8 60.9 9.1% … yet, we expect the growth will slowdown due to …

Growth % 10.0% 20.2% 13.6% 12.4% 10.2% 9.0% 7.5% 6.1% 5.5% … the expected low penetration in low-income segment and aged people

FBB Sub of Total Fixed-line Subs 47.8% 57.9% 67.0% 70.8% 74.7% 78.5% 82.3% 86.2% 90.0%

Total FBB Subs (EoP) mn 3.0 3.8 4.5 4.8 5.2 5.6 6.0 6.4 6.9 8.8%

Growth % 15.1% 25.2% 18.0% 8.3% 7.9% 7.5% 7.2% 6.9% 6.7%

TE Data market Share % 65.3% 74.1% 79.0% 81.1% 82.9% 83.8% 84.5% 85.0% 85.0%

TE Data Subs (EoP) mn 2.0 2.8 3.5 3.9 4.3 4.7 5.1 5.5 5.8 11.0%

Growth % 18.5% 42.1% 25.8% 11.2% 10.2% 8.6% 8.1% 7.5% 6.7%

TE Data blinded ARPU EGP 89.7 91.4 92.6 94.5 96.4 98.3 100.3 102.3 104.3 1.9% Given the low penetration of internet services …

Growth % 4.0% 1.9% 1.3% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% … ARPU will be supported by rising demand for internet services.

TE Data revenues EGP mn 1,962 2,626 3,525 4,229 4,774 5,328 5,888 6,473 7,068 15.2%

Growth % 25.1% 33.8% 34.2% 20.0% 12.9% 11.6% 10.5% 9.9% 9.2%



d. Other Enterprise Revenues

Other Enterprise Revenues EGP mn 76 89 93 96 100 104 108 113 117 4.0%

Growth % -68.9% 17.1% 4.1% 4.0% 4.0% 4.0% 4.1% 4.1% 4.1% Based IMF estimated GDP growth.



e. Domestic Wholesale Revenues

Domestic revenues EGP mn 1,820 2,142 2,593 2,975 3,329 3,652 3,950 4,233 4,500 11.2% Based on mobile and FBB markets growth.

Growth % 32.7% 17.7% 21.0% 14.7% 11.9% 9.7% 8.2% 7.2% 6.3%

International outgoing revenues EGP mn 862 784 760 738 716 694 673 653 633 -3.0% We expect a negative impact from weak performance in tourism …

Growth % -2.7% -9.0% -3.0% -3.0% -3.0% -3.0% -3.0% -3.0% -3.0% … and business activities.

Total Domestic Wholesale Revenues EGP mn 2,682 2,926 3,353 3,712 4,045 4,346 4,624 4,886 5,133 8.4%

Growth % 18.8% 9.1% 14.6% 10.7% 8.9% 7.5% 6.4% 5.7% 5.0%

Contribution to wholesale segment revenues % 37.6% 43.6% 48.4% 52.2% 55.6% 58.5% 61.1% 63.3% 65.3%


f. International Carriers Affairs (ICA) Revenues

ICA revenues EGP mn 3,067 2,977 2,739 2,520 2,318 2,133 1,962 1,805 1,661 -8.0%

Growth % -2.4% -2.9% -8.0% -8.0% -8.0% -8.0% -8.0% -8.0% -8.0% We anticipate a downtrend in revenues due to competition from …

Contribution to wholesale segment revenues % 43.0% 44.4% 39.5% 35.5% 31.9% 28.7% 25.9% 23.4% 21.1% … OTT applications and illegal bypass.


g. International Customers & Networks (ICN)

ICN revenues EGP mn 1,380 807 840 873 908 945 983 1,023 1,065 4.0%

Growth % 42.1% -41.5% 4.1% 4.0% 4.0% 4.0% 4.1% 4.1% 4.1%

Contribution to wholesale segment revenues % 19.4% 12.0% 12.1% 12.3% 12.5% 12.7% 13.0% 13.3% 13.5%


Total revenues EGP mn 12,158 12,184 13,366 14,468 16,168 17,731 19,163 20,531 21,830 8.7%

Total revenues growth rate % 9.2% 0.2% 9.7% 8.2% 11.7% 9.7% 8.1% 7.1% 6.3%

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Important DisclosuresMETHODOLOGY: We strive to search for the best businesses that trade at the lowest valuation levels as measured by an issuer’s intrinsic value on a per-share basis. In doing so, we follow both top-down and bottom-up approaches. Under the top-down approach, we attempt to study the most important quantitative and qualitative factors that we believe can affect a security's value, includingmacroeconomic, sector-specific, and company-specific factors. Under the bottom-up approach, we focus on the analysis of individual stocks by running our proprietary scoring model, includingvaluation, financial performance, sentiment, trading, risk, and value creation.

COUNTRY MACRO RATINGS: We analyze the four main sectors of a country’s macroeconomics, then we assign , , and star for low risk, Low Risk, and high risk, respectively. We usedifferent weights for each economic sector: (a) Real Sector (30% weight), (b) Monetary Sector (10% weight), (c) Fiscal Sector (25% weight), (d) External Sector (15% weight), and (e) Credit Rating andOutlook (20%).

STOCK MARKET RATINGS: We compare our year-end price targets for the subject market index on a total-return basis versus our calculated required rate of return (RRR). Taking into account ourCountry Macro Rating, we set the “Neutral” borderline (below which is “Underweight”) as 20% of RRR for Country Macro Rating, 40% of RRR for Country Macro Rating, and 60% of RRR for Country Macro Rating. That said, our index price targets are based on the average of two models. Model (1): Estimated index levels based on consensus price targets of all index constituents. Stockswith no price targets are valued at market price. Model (2): Estimated index levels based on our expected re-pricing (whether re-rating, de-rating, or unchanged rating) of the forward price-earningsratio (PER) of each index in addition to consensus earnings growth for the forward year.

SECTOR RATINGS: On the sectors level, we focus on six major sectors, namely (1) Consumer and Health Care, (2) Financials, (3) Industrials, Energy, & Utilities, (4) Materials, (5) Real Estate, and (6)Telecom Services & IT. To assess each sector, we use the SWOT analysis to list the strengths, weaknesses, opportunities, and threats in each country. We then translate our qualitative SWOT analysisinto a quantitative model to evaluate all six sectors across countries. Each of the measures we used, although mostly subjective, is assigned a score as either +1 (high impact), 0 (medium impact), or -1(low impact). At a later stage, when assigning the final rating – Overweight, Neutral, or Underweight – for each sector in each country, we realize that sometimes it is unfair to assign equal weights forthe sub-sectors in each major sector assessed. Hence, some of the sub-sectors are given different weights for their significant profile in each country. Additionally, the final rating for each sector in eachspecific country is assigned based on a relative calculation comparing this sector to all other sectors in this country.

Disclosure Appendix

SECURITY INVESTMENT RATINGS: We combine intrinsic value, relative valuation, and market sentiment into a singlerating. Our three-pronged methodology involves (1) discounted cash flows “DCF” valuation model(s), (2) relativevaluation metrics, and (3) overall sentiment. Whenever possible we attempt to apply all three aspects on the issuers orsecurities under review. In certain cases where we do not have our own financial and valuation models, we attempt toscan the market for other analysts’ value estimates and ratings (i.e. consensus view) on average. We compliment thiswith relative valuation and sentiment drivers, such as positive/neutral/negative news flows. For all issuers/securitiescovered, we have three investment ratings (Buy, Hold, or Sell), comparing the security’s expected total return (includingboth price performance and expected cash dividend) over a 12-month period versus its Required Rate of Return “RRR”as calculated using the Capital Asset Pricing Model “CAPM” and adjusted for the Risk Rating we attach to each security.Our price targets are subjective and are estimates of the analysts where the securities covered will trade within thenext 12 months. Price targets can be derived from earnings-based valuation models (e.g. Discounted Cash Flow “DCF”),asset-based valuation models (e.g. Net Asset Value “NAV”), relative valuation multiples (e.g. PER, PBV, EV/EBITDA, etc.),or a combination of them. In case we do not have our own valuation model, we use a weighted average of marketconsensus price targets and ratings. We review the investment ratings periodically or as the situation necessitates.

SECURITY RISK RATINGS: We assess the risk profile of each issuer/security covered and assign one of three risk ratings(High, Moderate, or Low). The risk rating is weighted to reflect different aspects specific to (1) the sector, (2) the issuer,(3) the security under review, and (4) volatility versus the market (as measure by beta) and versus the security’s averageannualized standard deviation. We review the risk ratings at least annually or as the situation necessitates.

Other DisclosuresMFS does not have any proprietary holding in any securities. Only as a nominee, MFS holds shares on behalf of itsclients through Omnibus accounts. MFS is not currently a market maker for any listed securities.

Low

(1)

Moderate

(2)

High

(3)

Buy

(B)Higher than RRR Higher than RRR Higher than RRR

Hold

(H)

Between RRR

and 20% of RRR

Between RRR

and 40% of RRR

Between RRR

and 60% of RRR

Sell

(S)

Lower than 20%

of RRR

Lower than 40%

of RRR

Lower than 60%

of RRR

Not Rated

(NR)

Not Covered

(NC)

We do not currently cover this stock or we are

restricted from coverage for regulatory reasons.

Inv

es

tme

nt

Ra

tin

g

Risk Rating

We have decided not to publish a rating on the

stock due to certain circumstances related to the

company (i.e. special situations).

If

Total Return

is …

Analyst CertificationI (we), Ahmed Ramadan, Equity Analyst, employed with Mubasher International, a company under the National Technology Group of Saudi Arabia being a shareholder of Mubasher Financial ServicesBSC (c) and author(s) to this report, hereby certify that all the views expressed in this research report accurately reflect my (our) views about the subject issuer(s) or security(ies). I (we) also certify thatno part of my (our) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed in this report. Also, I (we) certify that neither myself (ourselves)nor any of my (our) close relatives hold or trade into the subject securities.

Head of Research CertificationI, Amr Hussein Elalfy, Global Head of Research of Mubasher Financial Services BSC (c) confirm that I have vetted the information, and all the views expressed by the Analyst in this research reportabout the subject issuer(s) or security(ies). I also certify that the author(s) of this report, has (have) not received any compensation directly related to the contents of the Report.

DisclaimerThis document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Mubasher Financial Services BSC (c) (‘MFS’) has basedthis document on information obtained from sources it believes to be reliable but which it has not independently verified; MFS makes no guarantee, representation or warranty and accepts noresponsibility or liability as to its accuracy or completeness. The opinions contained within the document are based upon publicly available information at the time of publication and are subject tochange without notice. This document is not intended for all recipients and may not be suitable for all investors. Securities described in this document are not available for sale in all jurisdictions or tocertain category of investors. The document is not substitution for independent judgment by any recipient who should evaluate investment risks. Additionally, investors must regard this document asproviding stand-alone analysis and should not expect continuing analysis or additional documents relating to the issuers and/or securities mentioned herein. Past performance is not necessarily aguide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. The value of any investment or income may go down as well as up and youmay not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates mayhave an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognized market, it may be difficult for investors to sell their investments or toobtain reliable information about its value or the extent of the risk to which it is exposed. References to ratings/recommendations are for informational purposes only and do not imply that MFSadopts, supports or confirms in any way the ratings/recommendations, opinions or conclusions of the analysts. This document is not directed or intended for distribution to, or use by, any person orentity who is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law, regulation or whichwould subject MFS or its affiliates to any registration or licensing requirements within such jurisdiction. MFS accepts no liability for any direct, indirect, or consequential damages or losses incurred bythird parties including its clients from any use of this document or its contents.

CopyrightCopyright © 2016, Mubasher Financial Services BSC (MFS), ALL RIGHTS RESERVED. No part or excerpt of this document may be redistributed, reproduced, stored in a retrieval system, or transmitted,on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of MFS. MubasherTrade is a trademark of Mubasher FinancialServices BSC. Mubasher Financial Services BSC (c) is an Investment Business Firm Category 1, licensed and regulated by the Central Bank of Bahrain.

Issuer of ReportMubasher Financial Services BSC (c) is an Investment Business Firm Category 1, licensed and regulated by the Central Bank of Bahrain.Website: www.MubasherTrade.comE-mail: [email protected]



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