Flash BMCE Capital Bourse MAROC TELECOM

TELECOMS
Price on 09 13 2010: MAD 148
MAD m
Sales

September 15th, 2010

Accumulate (unchanged)
Target price: MAD 166 unchanged on 03 31 2010

Business in the consolidation phase,...

2011
P

2008
29 521,0 7,2% 13 889,0 13,5% 47,0% 9 520,0 18,5% 32,2% 50,9% 48,5% 13,7 7,0x 7,3%

2009

2010

% change Op profit % change OM RNPG % change Net margin ROE ROCE P/E P/B Dividend yield

30 339,0 30 794,1 30 640,1 2,8% 1,5% -0,5% 14 008,0 13 852,1 13 782,8 0,9% 46,2% -1,0% 31,1% 50,8% 36,6% 13,8 7,0x 7,0% -1,1% 45,0% -3,1% 29,7% 49,0% 42,9% 14,2 7,0x 6,1% -0,5% 45,0% 9 012,5 -1,4% 29,4% 45,7% 38,9% 14,4 6,6x 6,1%

9 425,0 9 136,1

At the end of the first half of 2010, MAROC TELECOM records consolidated sales of MAD 15,465m (17.5% generated by the African subsidiaries), up 6.0% compared with the same period in 2009. This improvement is essentially down to the performance of the African subsidiaries, confirmed by the expansion of the reporting entity as a result of the consolidation of SOTELMA. Domestic activity, still the most important in terms of contribution, records net revenues of MAD 12,763m, up 1.5% compared with the end of June 2009. The mobile segment shows growth in its gross revenues of 5.6% to MAD 9,519m with (i) a subscriber base of 15.9 million (+11.2% compared with June 2009), (ii) mixed ARPU at MAD 94 and (iii) mixed MOU down by 9.1% to 49 minutes. Fixed line and internet business totals gross sales of MAD 4,312m, (a drop of 9.4% compared with H1 2009) for a base of (i) 1.237 million fixed lines (-4.1% compared with H1 2009) and (ii) 479,000 internet subscribers. In terms of market shares, MAROC TELECOM consolidates its position as leader on the mobile market with a share of 57% at the end of June 2010 (against 60.7% in H1 2009) while on the fixed line and internet market, the group has respective market shares of 33.6% (against 39.5% in H1) and 53.8% (against 59.4% in H1 2009).
Market shares Mobile Fixed Internet H1 2008 66,4% 48,1% 76,7% H2 2008 63,4% 43,4% 67,3% H1 2009 60,7% 39,5% 59,4% H2 2009 60,3% 35,1% 54,0% H1 2010 57,0% 33,6% 53,8%

Source: BMCE Capital estimates

MAROC TELECOM and the MADEX

230 210 190 170 150 130 110 90 70 sept.-07

mars-08

sept.-08

mars-09

sept.-09

mars-10

sept.-10

Source: ANRT

, while awaiting the African growth drivers

Analyst(s): Hicham Sadani h.saadani@bmcek.co.ma Amine Bentahila a.bentahila@bmcek.co.ma

On the international scene, MAURITEL records net consolidated sales of MAD 595m, up 5.3% year on year. Benefiting from the growth of 17.6% in the subscriber base to 1.547 million subscribers, mobile segment gross revenues have expanded 7.8% to MAD 509m. On the other hand, fixed line and internet segment revenues have dropped 2.7% to MAD 110m, with a base of 42,000 fixed lines and 7,000 accesses.

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September 15th, 2010 ONATEL shows net sales of MAD 934m, a rise of 12.1%. Benefiting from the expansion of 51.5% in the customer base to 1.994 million customers, gross mobile revenues have improved by 21.3% to MAD 677m. Gross fixed and internet revenues have declined 2.0% to MAD 391m, despite a 2% rise in the fixed line base to 154,000 lines and an increase of 19% in the internet subscriber base to 25,000 subscribers. Net sales of GABON TELECOM amount to MAD 512m, down 13.7%. According to segment, the mobile segment records gross revenues down 15.0% to MAD 277m, despite a rise of 8.3% in the customer base to 577,000 customers. The Gabonese subsidiarys fixed and internet business totals gross revenues of MAD 281m for a fixed line base of 36,000 lines and 21,000 internet subscribers. SOTELMA, acquired in July 2009, records net sales of MAD 703m. By segment, the mobile segment generates gross revenues of MAD 538m against MAD 172m for the fixed and internet segment. At the end of June 2010, the Malian subsidiary totaled 1.464 million mobile customers, 72,000 fixed lines and 14,000 internet customers.

Margins generally preserved

In operational terms, consolidated operating profit is slightly up, by 1.8% to MAD 6,667m (8.5% of which was achieved by the African subsidiaries), limited by (i) an increase in special offers and (ii) the burden of depreciation resulting from network development investment. The operating margin thus contracts by 1.8 percentage points to 43.1%.
Operating margin H1 2008 46,6% H2 2008 47,0% H1 2009 44,9% H2 2009 46,2% H1 2010 43,1%

Source: BMCE Capital

As a result of this and the burden of financial expenses, net profit attributable to equity holders of the parent drops 5.7% to MAD 4,361m, bringing the net margin down to 30.1% against 31.7% the year before. After payment of MAD 9.4bn in 2009 dividends and network investment of over MAD 2.4bn, as well as the acquisition of SOTELMA for MAD 3.1bn, the groups net debt amounts to MAD 8.9bn, representing gearing of 48.9% at the end of June 2010. Net cash flow from operating activities stands at MAD 7,366m, up 20% compared with June 2009.

Public share offer in view for MAROC TELECOM

As part of the ongoing MAROC TELECOM privatization process, the government plans to make a public share offer of 8% of the share capital, reserved exclusively for Moroccan institutional investors. The stake of the second main shareholder would thus drop to 22%, against 30% at present.

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With reference to the latest methods used for the valuation of recent stock market transactions (ONA, SNI, BCP, etc), based on the average weighted price calculated over the last six months, the MAROC TELECOM public share offer should be made on the basis of a price excluding upside of MAD 155.
1 month 3 months 6 months 12 months Average weight price 146,52 150,34 155,00 149,22 Highest 150,55 159,00 163,90 163,90 Lowest 145,50 145,50 143,00 133,00

Source: The Casablanca Stock Exchange

It should also be pointed out that IAM shares are not very volatile (3 month volatility of 12.54%) despite the shares high liquidity.

A strategy designed to maintain margin levels

In terms of prospects, the VIVENDI group's Moroccan subsidiary should continue its development strategy designed to maintain its lead over its various preferred segments while controlling its margin levels. To achieve this, MAROC TELECOM should capitalize on: The development of high added value segments, through consolidation of its position on the post-paid segment and enhancement of its content offering; The triple play launch with an offering starting at MAD 300/month; And the continuation of external growth by identifying new opportunities in Africa. To this end, MAROC TELECOM has put in a bid for the acquisition of BENIN TELECOM.

The BMCE CAPITAL scenario for MAROC TELECOM forecasts continuing erosion of market shares in 2010, once the WANA GSM license comes into service, which should further affect the historic operators margins. This prospect was confirmed by the decision of the regulator (ANRT) on April 27, 2010 to gradually reduce fixed line and mobile network interconnection traffic terminal tariffs between 2010 and 2013 (a drop of 65% for IAM and MEDITELECOM and 70% for WANA CORPORATE on the mobile segment, while on the fixed segment, the average target reduction should be between 24% and 40% by 2013), also establishing the principle of tariff asymmetry to MAROC TELECOMs disadvantage.

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Mobile interconnection tariffs (MAD / minute)
0,923

0,749 0,624

0,303 S1 2010 2011 2012 2013

IAM

MEDITELECOM

WANA

Source: MAROC TELECOM

However, given the small weight of this segment in MAROC TELECOMs, consolidated sales, the reduction in interconnection tariffs should not make a noticeable difference to the development prospects for the groups consolidated activity. Impact simulation on IAMs sales
BMCE Capital initila forecasts Mobile Weight/conso sales Interconnection Weight/conso sales Fixed (adjusted for internet sales) Weight/conso sales Interconnection Weight/Fixed line sales Consolidated sales 2007 17 096 62% 8 432 31% 27 532 2008 18 529 63% 8 611 29% 29 521 2009 18 866 62% 350 2% 8 273 27% 39 0,5% 30 339 2010E 19 200 62% 356 2% 8 937 29% 42 0,5% 30 794 2011P 19 129 62% 355 2% 8 728 28% 41 0,5% 30 640 2012P 19 286 62% 358 2% 8 745 28% 41 0,5% 30 947 227 -15,0% 34 -10,0% 7 0,0% 2013P 19 494 62% 362 2% 8 936 29% 42 0,5% 31 256 204 -10,0% 31 -10,0% 11 0,0%

Estimated impact of the reduction in interconnection tariffs on MAROC TELECOM's consolidated sales Mobile interconnection sales 350 356 267 % change -25,0% Fixed interconnection sales 39 42 38 % change -10,0% Difference 0 0 3 Impact conso sales 0,0% 0,0% 0,0%

Source: BMCE Capital

This reduction in interconnection tariffs should cause erosion in the prices billed to customers, competitors having more latitude to take advantage of tariff asymmetry. The increase in special offers which will result reflects the entry of the domestic telecoms market into a phase of fierce competition which should lead to a fall in prices, difficult to offset by the expansion of the customer base, given the level of maturity of the market. BMCE CAPITAL assumptions concerning IAM drivers
Drivers Tariff erosion MOU Customer base Impact ARPU 2007 2008 2009 2010E -5% 0% 2% -3% 2011P -5% 1% 2% -3% 2012P -5% 1% 2% -3% 2013P -5% 1% 2% -2%

Source: BMCE Capital

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September 15th, 2010 On the fixed segment, MAROC TELECOM should, at best, display weak growth in its present revenues, given the rising competition from WANA on this segment with its BAYN offering. At the same time, in order to boost consumption by the Moroccan public, IAM should be reducing broadband prices. For 3G, considerable efforts is needed to secure positions on this segment, generally dominated by WANA. Concerning high added value products, triple play is getting off to a slow start, with stiff competition from pirating and free satellite channels and does not fulfill Moroccan users expectations in terms of price and content. Finally, considered as new growth drivers, the African subsidiaries should continue to make a positive contribution to the groups performance, with the ongoing prospect of identification of new targets to acquire in Africa.

Shares still with growth potential on the stock market

Given the above-mentioned items, based on the following assumptions: Average annual growth rate in sales of 1.2% over the period 2010-2019; An average EBITDA margin of 58.3% over the period 2010-2019, stabilizing at 56.1% in the final year; A discount rate of 8.1%, based on: 10-year risk-free rate: 4.18%; Share market risk premium: 6.5%; Target gearing: 30%; And an infinite growth rate of 1.5%. We used the discounted cash flow method (after a slight adjustment in the forecasts compared with those we drew up in Q1 2010), which results in a target price of MAD 166, giving an upside of 12% against the price of MAD 148 recorded on September 13,2010. Our target price gives the following stock market ratios: P/E and EV/EBITDA of 16.0 and 8.0 in 2010. International comparables
Data 2009 Data in USD m MAROC TELECOM VODACOM GROUP LTD CHINA UNITED NETWORK TELEFONO DE MEXICO EMIRATE TELECOMMUNICATIONS TELEKOM AUSTRIA ORASCOM TELECOM TURK TELEKOMUNIKASYON PORTUGAL TELECOM Origin Morocco South Africa China Mexico UAE Austria Egypt Turkey Portugal Cap on 09/13/2010 14 848,0 12 989,0 15 893,4 6 951,0 21 743,7 5 875,7 4 904,0 14 133,7 10 416,3 ROCE 43,0% 44,1% 3,8% 24,7% 90,1% 6,2% 16,6% 19,3% 9,4% Gross margin 59,8% 33,8% 38,5% 43,9% 65,5% 37,3% 43,6% 33,2% 35,2% Operating margin 45,0% 19,2% 7,2% 27,7% 57,3% 7,1% 22,7% 18,5% 13,6% Gearing 10,8% 88,0% 91,0% 201,0% ns 195,0% 510,0% 71,0% 423,0% Net debts / EBITDA 0,1x 0,6x 1,1x 1,5x ns 1,8x 2,8x 1,1x 2,4x 2010 stock market multiples P/E 14,2x 10,1x 45,1x 10,1x 9,0x 15,7x 21,3x 9,8x 16,2x EV/Sales EV/EBITDA 4,3x 1,8x 1,9x 1,5x 2,4x 1,7x 2,5x 2,4x 2,0x 7,4x 5,2x 5,2x 3,6x 4,1x 4,7x 5,9x 5,6x 5,7x

Source: BMCE Capital and INFINANCIALS

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Conclusion
Despite increased competitive pressure on the different markets where MAROC TELECOM operates, the company seems to have strong resilience capability to maintain its lead as well as its margins, capitalizing on its business expertise as well as a generally sound financial base. Consequently, we maintain our recommendation to accumulate MAROC TELECOM shares.

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System of recommendation:
The recommendation adopted by the Analysis & Research Division of BMCE Capital is determined according to the potential for increase or decrease of the stock in question within 12 months. The Analysis & Research Division uses five recommendations: Buy, Accumulate, Hold, Lighten and Sell. In specific cases, for a short period, the analyst can choose to suspend his opinion, in which case he uses Suspended. Definition of the different recommendations:

Buy: for an upside above 15%; Accumulate: for an upside ranging from +6% to +15%; Hold: for spreads between 6% and +6%; Lighten: for a downside ranging from 6% to 15%; Sell: for a downside above 15%; Suspended: the recommendation is suspended due to a capital transaction (takeover bid, exchange offer, or other) or as a result of uncertainty concerning its future ;
Accumu+6% +15%

Sell -15%

Lighten -6%

Hold

Buy

Disclaimer:
The Analysis & Research Division of BMCE Capital is designated by BMCE Capital Bourse, a broking company in the form of socit anonyme (limited company) with share capital of MAD 10,000,000, headquartered at 140, Avenue Hassan II, Tour BMCE, Casablanca, registered in the Casablanca Trade Register under the number 77 971, authorized by approval of the Ministry of Finance number 3/26, as the entity in charge of the production of all stock market publications of BMCE Capital Bourse. The Analysis & Research office was detached from the broking company in fiscal year 2000, in order to guarantee greater editorial independence in exercising the functions of production and thus avoid, as far as possible, the occurrence of conflict of interest risks. The Analysis & Research Division has established an organizational structure and procedures (or Chinese wall) designed to guarantee the independence of the financial analysts and the priority of customers interests. A black-out period is stipulated, running from the date of the beginning of drafting of the research memorandum until 3 months after its publication, during which time the financial analysts refrain from trading on their own account in shares in relation with the issuers and sectors they are studying. Any unauthorized use, communication, reproduction or distribution of this document is forbidden. The information and explanations given in this study are the expression of an opinion; they are given in good faith and may be changed without notice. It is strictly forbidden to reproduce this document entirely or partially or pass it on to third parties without authorization. This document was drawn up by the Analysis & Research Division and published in accordance with current procedures. The information contained in this document comes from reliable sources, but is not binding on us. The information contained in this document and any opinion expressed in it do not under any circumstances encourage investment on the Stock Exchange. This document is intended for investors aware of the risks related to financial markets. This document was drawn up only for clients of BMCE Capital, BMCE Capital Bourse and Medicapital Bank and the Commercial, Marketing, Communication Division of BMCE Capital. It does not meet the investment objectives, the financial situation or specific needs of any individual who might receive it. It is not recommended to take a decision based only on this document. Investors should seek financial advice to make sure that it is appropriate to buy securities or that the investment strategies examined or recommended in this document are appropriate and should understand that the opinions on the future prospects may not materialize. Investors should note that any revenue from these securities may fluctuate and that the prices of securities may rise or fall. Investors may thus get back less than their initial investment. Past performance is no guide to future performance. Currency exchange rates can have a negative effect on the value, price or revenues of the securities mentioned in this document. In addition, foreign investors who hold securities assume a foreign currency risk. This research is destined only for the recipients internal use, unless our prior approval is given. If a private individual should come into possession of this document, he should not base any investment decision only on the basis of the said document but should consult his own advisors.

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Sales Youssef Benkirane - Chairman of the Board Mehdi Bouabid, Anass Mikou, Mamoun Kettani Abdelilah Moutasseddik

Analysis & Research Fadwa Housni - Director Hicham Sadani Economic Intelligence Center Manager Zahra Lazrak, Zineb Tazi, Ada Mejatti Alami, Ghita Benider, Hajar Tahri, Amine Bentahila, Nasreddine Lazrak, Ismail El Kadiri

Electronic Trading Badr Tahri Directeur Hamza Chami

BMCE CAPITAL BOURSE Socit de Bourse S.A.

www.bmcecapitalbourse.com
Septembre 2009

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