Telecom Egypt faces challenging times

What's Down: Telecom Egypt's recent rally has lagged the wider Egypt market - and even that may be overdone, warn analysts.

A rising tide lifts all ships, or so traders like to say. But to hear analysts tell it, Telecom Egypt is looking like a rusty, leaking trawler drifting down the Suez Canal.

The company's shares have risen 17.6 per cent so far this year, but fell 1.2 per cent to 15.54 Egyptian pounds each yesterday.

That has been a poorer performance than the wider EGX30 index, which is up 44.1 per cent during the same period.

The Egyptian fixed-line monopoly has, as with many state-owned monopolies, failed to accept that the waters around it have grown. Times are changing - Telecom Egypt reported a 3.1 per cent decline in annual revenues last year as customers switched to smartphones, and lower earnings after Egypt's cash-strapped government hiked corporate taxes.

The company continues to suffer from service disruption and thefts of copper cable, causing maintenance expenses to increase in the wake of the country's revolution.

Telecom Egypt generated full-year profits of 2.9bn pounds for last year, a 6.8 per cent decrease from a year earlier.

The results were in line with analysts' estimates, but the recent surge in its share price is convincing some that its recent buoyancy is more barnacles than boat.

The company's profits and proposed dividend of 1.1 pound per share were "uninspiring," said analysts at Bank of America Merrill Lynch, which slapped the stock on their "least preferred list" of Middle East equities.

"While the core business continues to shrink, the only positive news stemmed from lower capex spending," analysts wrote in a research note.

Telecom Egypt is cash-rich, but in a country where inflation is running at 9.9 per cent, the pressure to spend its 4.8bn pounds cash pile is growing. It invested less in its future expansion as the country's revolution unfolded. That might have been prudent, but will make it hard to continue its dividend payouts, which the bank report notes are unlikely to rise.

"The company is now paying out more than 90 per cent of parent company earnings and we see little scope for greater returns, irrespective of the net cash position."