Palestine Telecommunications (PALTEL)

Transcription

1 February 25, 2015 Sahem Insight Profitable investments are paying off Palestine Telecommunications PALTEL the largest company by market capitalization - posted JD85.07 million net profits for the full year of 2014; down by 7.36% compared to the corresponding year of Accordingly, Earnings per share dropped from JD0.698 in 2013 to JD0.646 in This performance came following a drop of 5.17% in revenues and a consequent decline of 14.84% in operating profit. On the other hand, lower part of the income statement for PALTEL reported relatively balancing elements to the net bottom line figure. PALTEL has been affected directly by political events in Palestine, especially during the war on the Gaza Strip in the period of July and August that has resulted in a drop in operating revenues and losses from the damage to the company s equipment and infrastructure. According to PALTEL, estimates yielded $32.6 million of total loss including $10 million as actual damage to fixed and mobile network elements, $14.8 million revenue loss and around $7.8 million for especial philanthropic campaigns and free minutes for the affected people of Gaza. Along with the extraordinary losses for 2014, operating indicators for PALTEL showed a total growth of 1.9% in subscribers base. While on the other hand, investment strategy of the group has been adding up to the income statement noticeably for the past two years. In the year 2014, investment gains were a balancing factor given the unexpected drop in revenues resulting from external factors. In this matter, the Group allocated a major investment portion for recovering the damaged network in order to maintain services that meet subscribers expectations. Moreover, PALTEL s return to benefit from the tax exemption has significantly added positively to reduce the effect of the damage losses. Risk management opposes other unexpected factors Historically, Palestinian companies endure currency exchange losses given the fact of currency variation in operations and financial reporting in addition to lack of one national currency. PALTEL is one of the rare companies that are pursing strategies to control some of the unexpected weakening/strengthening of the US dollars versus the Israeli Shekel. In this context, PALTEL has signed currency forward contracts with maturities extending H in order to decrease the foreign currency translation risk that is related to its operations. 1

2 Company Background Overview Board of Directors Palestine Telecommunication Company PalTel is an integrated telecom operator offering fixed, mobile, Internet and data services throughout Palestine. Paltel owns a majority equity ownership in Paltel (fixed line operator), Jawwal (Mobile Operator), Reach (Call Centre services), Palmedia (Media Services Provider), Hulul (Business Solutions Provider) and Hadara (ISP Services). Paltel also owns equity in Vtel Holdings a Dubai-based multinational telecommunications company with interests in Middle East, Asia and Europe. Paltel Group shares are listed on the Palestine Exchange Market (PEX) since May 6th, 1997, under the ticker symbol PALTEL. The issued share capital of Paltel Group consists of 131,625,000 shares with a nominal value of JD Paltel shares became a member of the S&P-AFE 40 of the union of Arab Exchanges and a member of the Dow Jones-FEAS 50 of the Euro Asian Exchanges, giving the Paltel Share both Sabih Taher Masri- Chairman Arab Supply & Trading Company - Ammar Aker GMS Holdings - Ghiath Munir Sukhtian Cairo Amman Bank - Farouq A. Zuaiter Arab Bank - Basel Abdel Nabi Aswaq for Investment Portfolios L.L.C -. Bassem Abd Alhaleem Palestine Development and Investment - Sharhabil Al-Zaim Birzeit Pharmaceutical Co. - Talal Nasiruddin Palestine Development & Investment - Laith Muneeb Rashid Al Masri Palestine Development & Investment - Samir Othman Halileh regional and international visibility. Paltel remains the most active stock on the Palestine Exchange during 2014, constituting 33.20% of the overall market capitalization of PEX, whereby 79.01% of the services sector. It also constituted 28.24% of the total traded value in Palestine Exchange (PEX) and 83.76% of the total services sector, 6.47% of the total traded volume of the PEX, while 38.38% of the services sector,. The Group has enjoyed a reliable and consistent history of dividends payout over the previous years making it an attractive company for those investors looking at acquiring its stock. The number of shareholders at the end of 2014 reached 7,755 The Group provides fixed line, cellular and data services, making it the most integrated service provider and a provider of choice for added value services.across its service lines, the Group operates in a market with a youthful population with 80% penetration rate for mobile services as end of Q3, 2014; allowing more room for growth and yields. 2

3 Major Shareholders Shareholder as of Sep 30th, 2014 % PADICO 30.63% PIF 9.45% Arab Bank Investments 4.69% Cairo-Amman Bank 3.93% Rasmala Investment Bank 2.64% Subscribers base hit 3.31 million; growth rate of 1.91% Palestine Telecommunications PALTEL reported a growth of 1.91 % in its total number of subscribers to reach 3.31 million as of December 31, 2014 including fixed line, wireless (Mobile) and data services compared to 3.25 million at the end of Wireless services subscribes - which account for 80.71% of the total figure -, increased by 1.52% to reach 2.67 million in 2014 compared to Sustaining the strong performance in the wireless subscribers came amid raising the competition in the Palestinian Telecommunications sector. Fixed line subscribers- the second contributor by 12.18%- reached 0.40 million at the end of 2014, with no increase to the end of Data services (ADSL) subscribers - which contributed the least to the total base by 7.10%-, increased 10.33%, standing at 0.23 million in ,670, , ,000 2,630,000 Wireless 403,000 Fixed lines 213,000 Data services

4 Financial performance in 2014 Lower Bottom line figure on extraordinary events Palestine Telecommunications PALTEL the largest Net income company by market capitalization- posted JOD million net profits for the financial year of 2014 down by 7.36% compared to JOD million in Accordingly, Earnings per share dropped from JD0.698 in 2013 to 85,068,000 91,827,000 JD0.646 in This decrease came following 14.84% decrease in operating profits. PALTEL has been affected directly by political events in Palestine especially during the war in Gaza. Net margin recorded 23.90% in 2014 versus % in Operating margin down to 28.97% PALTEL recorded a decrease of 5.17% in its revenues to stand at JD million in 2014 compared to JD million in the same period of The revenues from external customers generated by the data, fixed and media operating segments have increased by 0.17%, 1.39% and 26% respectively, whereas the revenues generated from mobile segment have decreased compared to The average revenues per user ARPU for the wireless mobile subscribers per month reached JD8.1 in 2014 compared to JD8.8 in the same period of 2013; down by 8.5% affected by larger customer base, low ARPU of new customers in addition to offering larger discounts to the customers and exchange rate differentiations. Moreover, the fixed line ARPU hit JD11.50 in 2014 compared to JD13.40 in the same period of 2013; down by 13.90%. While data services reported an increase of 4.1% in ARPU which reached JD10.5 in 2014 compared to JD10.1 in the same period of

5 Financial performance in 2014 Cost of revenues which represents: telecommunications services costs, license fees and other costs decreased by 12.21% to hit JD62.71 million in Telecommunication services costs that mainly comprise of interconnection costs and international roaming due to other telecommunications companies declined by 17.48% hitting JD21.99 million in 2014 and accounting for 35.06% of total cost of revenues. On the other hand, license fees increased by 0.85% hitting JD27.80 million, accounting for 44.33% of total cost of revenues. whereby PALTEL pays the Palestinian National Authority PNA a license fee of 7% on all wireline and wireless operating revenues, while other costs that represent mainly: commissions paid to employees and dealers, cost of mobile handsets sold, cost of SIM cards and prepaid scratch cards, cost of media services and others decreased by 24.96% standing at JD12.92 million in In aggregate a gross profit reached JD million in 2014, down by 3.51% recording gross margin of 82.38% in 2014 compared to 80.97% in Administrative and operating expenses increased by 4.00% reaching JD million in 2014, recording an operating profit of JD million with an operating margin of 28.97% lower than 2013 by 10.20%. 12,923,000 27,796,000 27,561,000 21,988,000 26,647, ,163, ,086, ,054, ,827,000 17,222,000 Other costs License fees Telecommunications services cost Gross Profit Operating Profit Investment gains strengthen the bottom line PALTEL has a portfolio of financial securities that mainly consists of highly liquid stocks with growth potential. The company invests its excess cash in those securities with the aim of achieving price appreciation. During 2014, PALTEL recorded investment gains that reached JD3.03 million compared to JD3.87 million in Investment strategy of the group has been adding up to the income statement noticeably for the past two years. In the year 2014, investment gains were a balancing factor given the unexpected drop in revenues resulting from external factors. In this matter, the Group allocated a major investment portion for recovering the damaged network in order to maintain services that meet subscribers expectation. 5

6 Financial performance in 2014 Tax exemption takes inforce in 2014 EBIT reached JD97.06 million in 2014; down by 19.79% Item (JD) compared to Interest expense increased following the higher debt position for the company, recording EBIT margin of Revenues 27.27% in 2014 compared to 32.25% in EBT reached JD 375,257, ,870, % Gross Profit 303,827, ,163, % million in 2014 compared to JD million in 2013, down by 19.23%, recording an EBT Margin of 27.79% in Operating Profit 121,054, ,086, % Tax expense decreased by 54.83% to record JD13.83 million in 2014 recording an effective tax rate of 13.91% in 2014 EBIT 121,003,000 97,059, % compared to 25.01% in In 2014, the company is back to benefit from 50% tax exemption after it s BOD decision to Net Income postpone it for the years of 2012 and 2013 has expired. Income tax rate for PALTEL records 10%. 91,827,000 85,068, % Financial and real estate investments enrich assets PALTEL s total assets increased by 12.68% in 2014 to aggregate at JD million compared to JD million at the end of This came as a result of an increase by 16.24% in the major contributor to total assets by 75.02%- noncurrent assets- in addition to an increase of 3.19% in current assets. Noncurrent assets stood at JD million in 2014 compared to JD million at the end of 2013, following an increase of 4.94% in the available for sale investments that contribute about 27.94% from noncurrent assets to record JD million in 2014 compared to JD million in 2013 divided by local investments that worth JD55.78 million and regional investments worth JD million. Real estate investments witnessed a growth of % to record JD23.01 million in 2014 compared to JD7.61 million in PALTEL owns 50% stake in Jericho Gate Real Estate Investment Company. 6

7 Financial performance in 2014 Item (JD) Property, Plant and equipment 187,091, ,334, % Available-for-sale investments 149,927, ,332, % Cash and cash equivalents 42,600,000 31,097, % Total assets 666,212, ,705, % Loans 7,090,000 61,098, % Total Liabilities 163,525, ,366, % Paid in capital 131,625, ,625, % Retained earnings 312,575, ,830, % Shareholders' equity 502,687, ,339, % Investment in associates and Property, Plant and Equipment decreased by 7.67% and 12.83% to settle at JD35.68 million and JD million in 2014 respectively. On the other hand, an increase was witnessed in materials and project in progress, by 17.29% and 7.14% to aggregate at JD14.30 million and JD2.67 million respectively. Current assets second contributor to total assets by 24.98%- increased by 3.19% to record JD million in 2014 compared to JD million at the end of 2013, following an increase in inventories and accounts receivables by 19.50% and 12.78% respectively to record JD3.62 million and JD90.77 million in 2014 respectively. Moreover, other current assets increased by 13.88% to settle at JD53.18 million in 2014compared JD46.70 million in On the other hand, cash and cash equivalents decreased by 27.00% to record JD31.09 million in 2014 compared to JD42.60 million in Moreover, financial assets held for trading slightly decreased by 0.67% to settle at JD8.85 million in 2014 divided to local investments that amounted JD4.13 million and regional investments that settled at JD4.72 million. Higher debt financing on new long- term loan agreements Total liabilities increased by 39.65% to aggregate at JD million in the 2014 compared to JD compared to the end of This was attributable to an increase of 25.03% in current liabilities- the major contributor to total liabilities by 72.75%- to stand at JD million in 2014 compared to JD million at the end of 2013 in addition to an increase of % in noncurrent liabilities the contributor to total liabilities by 27.25%- to hit JD62.23 million in 2014 compared to JD30.65 million at the end of

8 Financial performance in 2014 During 2014, the company signed new long term loan agreements with local and regional banks with a total of JD53.2 million. Additionally, the group utilized a total amount of JD16.7 million of the overdraft ceiling of JD21.3 million. Total interest bearing debts recorded JD61.09 million at the end of 2014; increasing by % compared to the end of Interest bearing debts to assets ratio increased from 1.06% to 8.14% at the end of 2014, and interest bearing debts to equity ratio increased from 1.41% to 11.70%. In general PALTEL maintains low debt position but higher than 2013 s. Equity ratio recorded 69.58% at the end of 2014 Book value stands at JD3.97 per share PALTEL s shareholders equity increased by 3.91% to aggregate at JD million in 2014 compared to JD million at the end of 2013 supported by an increase of 6.16% in retained earnings to amount for JD million in 2014 compared to JD million in Available-for-sale reserve increased by 3.09% to record JD11.31 million in 2014 compared to JD10.96 million in Book value per share increased accordingly from JD3.82 at the end of 2013 to JD3.97 at the end of ,306,000 10,967,000 Available-for-sale reserve 131,625, ,625,000 Paid up Capital ,830, ,575,000 Retained earnings 8

9 Key financial ratios Item Current Ratio % Quick Ratio % Cash Ratio % Net Working Capital % Debt to Equity Ratio 32.53% 43.72% 34.40% Equity Ratio 75.45% 69.58% -7.79% Loans to equity 1.41% 11.70% % Loans to assets 1.06% 8.14% % Fixed Assets to Equity 36.82% 30.89% % Interest Coverage % Total Assets Turnover Ratio 58.51% 50.23% % Fixed Assets Turnover Ratio % % 5.05% Working Capital Turnover % % % Gross Margin 80.97% 82.38% 1.75% Operating Margin 32.26% 28.97% % Net Margin 24.47% 23.90% -2.31% ROaA 14.32% 12.01% % ROaE 19.11% 16.60% % 9

10 Fundamentals History Item Price EPS BV P/BV Market cap 652,860, ,911, ,227, ,552, ,980, ,296, ,091,166 1,076,762,867 1,058,197,990 Trading volume 34,553,532 29,285,441 50,671,360 19,622,320 23,510,626 18,191,089 13,731,826 13,223,413 11,737,422 Turnover 5.29% 4.51% 7.79% 2.90% 3.38% 2.61% 1.44% 1.73% 1.11% PE Dividends * Dividend yield 1.72% 2.52% 5.49% 3.64% 4.97% 5.21% 5.45% 5.99% 5.10% Dividend Payout 46.87% 50.22% 59.04% 65.50% 60.98% 58.02% 72.12% 71.67% 69.63% *proposed cash dividends for the year

11 PALTEL's Return Earnings Report FY2014 Key market ratios Item EPS % BV % Earnings Yield 11.99% 11.34% -5.41% Price to Sales % Q Ratio % Cash to Market Cap 6.72% 5.32% % Stock s performance in 2014 PALTEL's Characteristic Line y = 1.261x % Item 2014 Beta 1.26 High % Low % 2.00% 1.00% 2.00% 0.00% 0.00% -1.00% -2.00% -3.00% -4.00% -2.00% -4.00% -6.00% Closing 5.7 Discount to high % Premium to low 7.55% Moving Average Price MAP % % Al Quds Index Return Closing to MAP -0.30% Volume Weighted Price VWP 6.04 Closing to VWP -5.60% 1,200,000 1,000, , , , , /2/2014 2/2/2014 3/2/2014 4/2/2014 5/2/2014 6/2/2014 7/2/2014 8/2/2014 9/2/ /2/ /2/ /2/

12 Common size balance sheet Item Current assets Inventories 8,881, % 3,031, % 3,622, % Accounts receivable 89,500, % 80,490, % 90,775, % Prepayments and other current assets 30,296, % 46,701, % 53,183, % Financial assets held for trading 7,414, % 8,909, % 8,849, % Cash and cash equivalents 46,213, % 42,600, % 31,097, % Total Current assets 182,304, % 181,731, % 187,526, % Noncurrent assets Property, Plant and equipment 198,651, % 185,087, % 161,334, % Intangible assets 34,264, % 32,552, % 30,222, % Projects in progress 3,503, % 2,492, % 2,670, % Materials 15,827, % 12,199, % 14,308, % Investment in associates 38,290, % 38,676, % 35,676, % Available-for-sale investments 84,718, % 149,927, % 157,332, % Real-Estate Investment 7,138, % 7,610, % 23,009, % Other non current assets 51,826, % 55,938, % 138,628, % Total Noncurrent assets 434,217, % 484,481, % 540,170, % Total assets 616,521, % 666,212, % 571,267, % Current Liabilities Accounts payable 41,907, % 35,615, % 43,973, % Current interest-bearing loans 15,198, % 7,090, % 34,448, % Income Tax impairments 4,373, % 12,552, % 14,394, % Other current liabilities 60,229, % 77,613, % 73,318, % Total Current Liabilities 121,707, % 132,870, % 166,133, % Noncurrent liabilities Long Term Loans( non current interest - bearing loans) 7,090, % ,650, % Provisions for employees indemnity 29,151, % 30,655, % 35,583, % Total Noncurrent liabilities 36,241, % 30,655, % 62,233, % Total liabilities 157,948, % 163,525, % 228,366, % Paid in capital 131,625, % 131,625, % 131,625, % statutory reserve 32,906, % 32,906, % 32,906, % voluntary reserve 6,756, % 6,756, % 6,756, % special reserve 7,950, % 7,950, % 7,950, % foreign currency translation -50, % -92, % -34, % Available-for-sale reserve -593, % 10,967, % 11,306, % Retained earnings 279,979, % 312,575, % 331,830, % Shareholders' equity 458,573, % 502,687, % 522,339, % 12

13 Common size income statement Item Revenues 365,852, % 375,257, % 355,870, % Telecommunication Services Costs 32,374, % 26,647, % 21,988, % License Fees 26,636, % 27,561, % 27,796, % Other Costs 23,085, % 17,222, % 12,923, % Gross Income 283,757, % 303,827, % 293,163, % Operating & Administrative Expenses 171,698, % 182,773, % 190,077, % Operating Income 112,059, % 121,054, % 103,086, % Finance cost 1,478, % 1,450, % 1,843, % Loss from Investments 6,845, % 3,866, % 3,031, % Other Expenses 1,903, % 1,017, % 5,372, % Profit before income tax 105,639, % 122,453, % 98,902, % Income Tax Expense 23,507, % 30,626, % 13,834, % Net Income 82,132, % 91,827, % 85,068, % 13

14 Disclaimer This report is not an offer to buy or sell nor a solicitation to buy or sell any of the securities mentioned within. The information contained in this report were prepared using information available to the public and sources Sahem Trading & Investment Co believes to be reliable. Sahem Trading & Investment Co does not guarantee the accuracy of the information contained within this report and accepts no responsibility or liability for losses or damages incurred as a result of investment decisions taken based on information provided or referred to in this report. Any analysis of historical facts and data is for information purposes only and past performance of any company or security is no guarantee or indication of future results. Contact Details Sahem Trading & Investment Co, Ramallah, Palestine P.O.Box 2187 Direct line: or Research@sahem-inv.com Head of Research Majd Khalifeh mkhalifeh@sahem-inv.com Research Analyst Dima Razzouk drazzouk@sahem-inv.com Research Analyst Maha Tarazi mtarazi@sahem-inv.com 14