MENA distress makes telecoms especially attractive

Though Etisalat remains in our view the head and shoulders frontier market telecom equity to hold from both a value (2011e EPS of 6.8x is a 30% discount to EEMEA peers at 9.6x/3-year average of 10.4x per Morgan Stanley) and growth standpoint (despite the latest Zain-pullout) given its relatively high EBITDA margin (despite intense pressue from du), wide geographical footprint (though its foothold in Saudi Arabia remains the foundation) and strong net cash position, Egypt's hitherto distressed domestic sector presents its own opportunities.  Ahead of tomorrow's stock exchange ropening, and while reiterating his long-term confidence in Egypt to Bloomberg yesterday, Templeton Asset Management's Mark Mobius underscored telecoms in particular as one of his favorite sectors.  To that end, both Orascom Telecom (OT) and Telecom Egypt (TE), which trade at a relatively low 7.3 and 8.5x earnings respectively and are down 16.2 and 11.3 percent YTD, look attractive at current levels.  In regards to the latter, wholesale services–including bandwidth capacity leasing to ISPs, and national and international interconnection services–continues to be the crucial growth driver, as declining retail revenues are likely indicative of an increasingly competitive landscape (though while the firm's fixed subscriber base declined to 9.3 million, from 9.6 million at the end of 2009, the market share for data subscription now sits at 63% versus 61% at the end of 2009).  While overall revenues grew by 4% y/y in 2010 (4x estimates), for instance, full year wholesale revenues for TE grew by 18% YoY to EGP 4.9 billion, representing 48% of total group revenues.  Finally, the company's net cash position is strong, rising to EGP 4.1 billion (from EGP 1.4 billion at the end of FY2009) and leading the Board to recommend a cash dividend of EGP 1.3 per share–equating to a dividend yield of 8% and a payout ratio of 67% (versus 74% in FY2009).  Meanwhile, the former continues to be considered a strong value play by many analysts given its leading position in core markets aside from Egypt such as Algeria, Pakistan and Sub-Saharan Africa.  That said, J.P. Morgan noted last month the firm's equity remains “very speculative” given the uncertainty underlying the current row in Algeria.