Jordan Telecom Group Equity Research Update Report
A member of the Arab Jordan Investment Bank Group
Jordan Telecom Group
Jordan Telecom Group sustains its profit growth in 2008
Reuters (JTEL.AM)
Equity Research Update Report
February 2009
Research Analyst Ahmad Dia [email protected]
Financial Markets Research
Jordan Telecom Group’s financial results registered healthy growth in profits during 2008, where net income came in at JD 100.3 million, a JD 5.8 million (6.1%) increase over the 2007 year-end figure. Revenues grew by a mere 0.9% (JD 3.50 million) which underlines that the bulk of the net profit increase resulted from cost savings and interest income gains. Orange Fixed external revenues formed 49.9% of the group’s total (post inter-company eliminations) revenues of 2008, down from 52.8% in 2007. This is a direct result of the JD 9.9 million drop in fixed line external revenues which coincided with JD 6.1 million and JD 6.6 million respective increments in mobile and Internet external revenues. Orange Mobile contributed 44.8% of total revenues in 2008 year-end results up from of 43.7% in 2007. On the operational front, the fixed line and internet segments improved their EBITDA margins (from 42.9% to 46.2%) and (from 14.9% to 24.7%) respectively. However, the mobile segment registered a drop in its EBITDA margin to come in at 37.2% compared to 36.1% for the yearly period of 2007. The three segments registered increments in their subscribers' bases in 2008. The fixed-line segment, which is composed of PSTN (residential and business), ADSL and leased lines, registered a 0.5% increase. The 11.0% decline in the PSTN residential base was offset by the respective growth of 45.6% and 8.2% in ADSL and leased lines. Orange Mobile lines increased by 44,300 (2.6%) and Orange Internet registered a significant 36,500 (55.6%) growth in 2008. On November 26, 2008 the Telecommunication Regulatory Commission (TRC) of Jordan issued the statement on licensing the use of 3G. The release of the public tender was initially set on December 14, 2008; this date was postponed by the TRC till further notice. Despite its reservations on the mechanism of the tender, Jordan Telecom Group is planning to participate in the tender where the reserve price of the spectrum is set at JD 25 million for a paired block of the FDD/3G (5+5) MHz spectrum. The commission will request the cabinet to grant the companies that acquire 3G frequencies and any new company that acquires 2G frequencies an exemption from custom duties for a period of four years in the same way that was granted to mobile telecommunication companies previously.
Tel +962.6.5828849 Fax +962.6.5828809 P.O.Box 2374 Amman 11821 Jordan arabadvisors.com [email protected] Copyright notice and disclaimer: Copyright 2009 by Arab Advisors Group. All rights reserved. No material contained in this report may reproduced in whole or in part without the prior written permission of the publisher. The information contained in this report has been obtained from sources we believe to be reliable, but the Arab Advisors Group and Arab Jordan Investment Bank (AJIB) do not warrant its completeness or accuracy. Opinions expressed and estimates represent our own judgment and interpretation of the available information and are subject to change without notice. The recipient of this report must make its independent decisions regarding and securities or financial instruments mentioned and the Arab Advisors Group and Arab Jordan Investment Bank (AJIB) accepts no responsibility or liability regarding such decisions. Feedback: Our clients’ satisfaction is of our utmost concern. We welcome all feedback regarding our research and products. Please send us your notes on this report, what you found useful in it and future research directions that would help you in your business. Send feedback emails to: [email protected]
Jordan Telecom Group Update Report – February 2009
Table of Contents
1.
2.
Jordan Telecom Group................................................................................... 8 1.1 Fixed Line ...................................................................................................... 12 1.2 Mobile............................................................................................................ 13 1.3 Data & Internet............................................................................................... 14
Group Performance..................................................................................... 15 2.1 Performance Ratios ......................................................................................... 15 2.2 Stock Performance .......................................................................................... 17
3. Peer Group Analysis .................................................................................... 18 4. Company Valuation update ............................................................................. 20
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Jordan Telecom Group Update Report – February 2009
Jordan Telecom Group 2008 - Overview JTG maintains its momentum during 2008, with JD 401.4 million external revenues
Jordan Telecom Group (JTG) announced its 2008 year-end results during its quarterly analysts’ meeting held on February 1, 2008. The meeting discussed JTG’s financial position and results in broad terms alongside selected operational and technical achievements. Despite the intensity of competition in the market, JTG was still able to record growth in its subscribers, revenues, EBITDA and net income for the twelve-month period ending December 31, 2008. JT Group 2008 Financial Highlights JD million
2007
2008
Growth %
Revenues
397.9
401.4
0.9%
EBITDA
173.6
183.2
5.5%
94.5
100.3
6.1%
Net Income Source: Jordan Telecom Group
The group’s external (post intercompany eliminations) revenues grew marginally (0.9%, JD 3.5 million) during 2008 and when compared with 2007. This increment came as an outcome of growth registered by all of the group's segments except for the fixed line segment where its revenues recorded a 4.7% decline. Mobile revenues grew by 3.5% (JD 6.1 million), Data revenues by 49.2% (JD 6.6 million), and LightSpeed recorded revenues of JD 1.1 million. Group External Revenues JD million
2007
2008
Growth %
Orange Fixed Lines
210.2
200.3
-4.7%
Orange Mobile
173.9
180.0
3.5%
13.4
20.0
49.2%
0.4
1.1
175.0%
397.9
401.4
0.9%
Data LightSpeed Total Source Jordan Telecom Group
Despite the fierce competition taking place in the International Long Distance (ILD) market and the cannibalization effect of mobile services on fixed line traffic, JTG was successful in maintaining its leading position in the fixed line market as it managed to keep these negative effects at a minimum. The pie charts below depicts JT Group’s external revenue split for the FY 2007 and FY 2008 periods. As noted before, the trend is geared towards greater mobile and data shares.
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Jordan Telecom Group Update Report – February 2009
JTG’s fixed line segment still represents the majority (49.9%) of the group’s external revenue
Source: Jordan Telecom Group
Total cost of services and operating expenses registered a 2.7% decrease compared to 2007 figures to arrive at JD 218.2 million by yearend 2008. In addition, a healthy growth of 5.55% in EBITDA took place during 2008 to arrive at JD 183.2 million, compared to the JD 173.6 million achieved a year earlier. EBITDA margin, as well, recorded an increase when it came in at 45.6% compared to the 43.6% achieved in 2007. As a result, Jordan Telecom Group’s 2008 net income came in at JD 100.3 million, pointing to a 6.1% increase over the 2007 level of JD 94.5 million, while net profit margin increased from 23.7% in 2007 to 24.9% in 2008. JTG reported its fixed line segment subscribers to stand at 663,400 by the end of December 2008, representing a market share of 98.5%. This segment constituted 49.9% of the group’s total external revenues during 2008. The increase in Internet penetration, ADSL and leased lines is expected to continue to drive demand for the fixed line service.
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Jordan Telecom Group Update Report – February 2009
Orange mobile continues its upward subscriber acquisition trend, posting a 2.6% increase in subscribers during the year
Orange Mobile’s total subscriber base reached 1.75 million at Decemberend 2008, marking a 2.6% increase over the 2007 year-end figure of 1.71 million subscribers. According to JTG, Orange mobile came in second in the Jordanian mobile market with 32.3% share of the total market. However, certain discrepancies are involved in arriving at such an estimate since different operators use different methods in accounting for active subscribers.
Meanwhile, the Internet service increased its subscriber base by 55.6% or 36,500 subscribers and managed to generate JD 20.0 million in revenues during 2008. Orange Internet, as it was re-branded was able to maintain more than a 50.0% market share in the data segment, according to JTG estimates. JT Group stock price movement on the Amman Stock Exchange ranged between JD 4.41 and JD 6.95 per share over the one-year period ending December 31, 2008, with a closing price of JD 4.82 per share. The following table depicts JTG's stock statistics as at September 30, 2008: Stock Statistics Market Capitalization Shares Outstanding Free Float TTM closing range TTM average closing price TTM average daily trading P/E Ratio
2007 JD 1.405 billion 250 million 6.70% JD 4.13-5.87 JD 4.57 JD 461,290 14.9
2008 JD 1.205 billion 250 million 7.00% JD 4.41-6.95 JD 5.92 JD 1,306,601 12.70
Source: ASE Provided Information
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Jordan Telecom Group Update Report – February 2009
The graph structure:
below
illustrates
Jordan
Telecom
current
Shareholders’
Jordan Telecom Shareholders' Structure as of August 3, 2008 Jordan Telecom Group
Free Float 7.0%
JITCO 51.0%
Noor Telecom 10.0%
Social Security 29.0%
France Telecom
Jordanian Government 3.0%
Source: Jordan Telecom Group
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Jordan Telecom Group Update Report – February 2009
Jordan Telecom Group 2008 – Management Perspective
In November 2008, Orange Mobile launched a special offer for its Pay Monthly and Pay As You Go subscribers, enabling Pilgrims to receive freeof-charge mobile calls from any place in the World during their stay in Saudi Arabia. The Hajj offer increased roaming traffic to Saudi Arabia significantly but that revenue loss was off set by increased calls within Saudi Arabia and enhanced customer retention.
The group set the guidance for 2009; while the year will clearly be a challenging year, the group will depend on the continuing strength of its balance sheet, ample liquidity and expected record cash flow from operations. The group also expects to maintain its revenues' growth and optimize its costs. Therefore, improve its efficiency and bottom-line.
The group has not finalized its 3G license tender bid as it hasn't reached to any agreements yet.
According to Jordan Telecom Group, (89.0%) of the group's cellular prepaid lines are active by the TRC definition of the 3-month rule.
The potential projects for 2009 to be financed by the group's excessive cash balance include: o o o
Real estate investments related to the ICT industry e-Health Information security
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Jordan Telecom Group Update Report – February 2009
1. Jordan Telecom Group With total revenues for the year period ended December 31, 2008 standing at JD 401.4 million, Jordan Telecom Group managed to outperform the corresponding period of the prior year by 0.9% or JD 3.5 million. Operating expenses, on their part, were down by 2.7%, to reach JD 218.2 million. EBITDA showed a 5.5% increase up from JD 173.6 for 2007 to JD 183.2 million for 2008. The group also improved its profit before income tax by 7.3% against the same period of 2007 to arrive at JD 137.2 million. Net profit for the year ending December 30, 2008 grew by 6.1% to reach JD 100.3 million as compared to the JD 94.5 million achieved a year earlier. Net profit margin, as well, increased as can be noted from the graph below.
Source: Jordan Telecom Group
Total number of lines for the group grew by 3.4% during 2008 as compared to the year-end figure of 2007.
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Jordan Telecom Group Update Report – February 2009
Source: Jordan Telecom Group
With the market quickly shifting towards mobile and internet based services, JTG’s forecasts and strategies were built around the concept of increasing revenues while gradually replacing traditional fixed-line-based voice services with mobile and state-of-the-art Internet services. Jordan Telecom has invested heavily in these segments paving the way for the future deployment of new products including third generation mobile services.
Source: Jordan Telecom Group
The resulting profit margins and Earnings per Share (EPS) also fared well. 2008 EPS reached JD 0.401; a 6.1% improvement over the JD 0.378 recorded a year earlier.
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Jordan Telecom Group Update Report – February 2009
Source: Jordan Telecom Group
Noted from the Group's cash flow statement, cash from operating activities came in at JD 152.0 million compared to the JD 167.8 million achieved for the corresponding period of 2007. Net cash used in investing activities decreased during the year 2008 compared to 2007, from JD 46.9 million to JD 37.6 million. Cash used in financing activities, on its part, grew when comparing 2008 and 2007 figures to come in at JD 95.9 million. These funds were used primarily in dividend payments and long term loan repayments.
Net cash from operating activities
2007 167.8
2008 152.0
Net cash used in investing activities
(46.9)
(37.6)
Net cash used in financing activities
(86.9)
(95.9)
JD million
Source: JT Group Analysts Presentation
As for the group's capital expenditures (CAPEX), judicious planning and implementation prior to year 2002 had a major influence on the development of a high quality state-of-the-art network. This initiative lowered the following years' maintenance expenditures, enabling third generation services to be offered when required. Moreover, it allowed Jordan Telecom to benefit from favorable customs duties prevailing at the time, and insured that the following years’ CAPEX remained relatively low.
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Jordan Telecom Group Update Report – February 2009
Source: Jordan Telecom Group
JTG's number of employees stood at 2,520 by December-end 2008 compared to 2,686 at year-end 2007. Accordingly, and in addition to the increase in mobile and data subscribers, the group efficiency indicators improved positively. Lines per employee and revenue per employee were up by 10.2% and 7.5%, respectively.
Source: Jordan Telecom Group
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Jordan Telecom Group Update Report – February 2009
1.1 Fixed Line Jordan Telecom Group’s fixed line segment, or Orange fixed, has come under severe pressure following the introduction of competition into the fixed line market at the beginning of 2005 in addition to the effects of the escalating traffic, and to a certain extent, subscriber cannibalization to mobile services. Nevertheless, and according to JTG, their fixed line service still dominates 98.5% of the fixed line market. This constitutes 49.9% of the group's total revenues, a decline from the 52.8% recorded in 2007, which translates into a 0.3% drop in the fixed line revenues. Thus, the segment's revenue dropped from JD 243.5 million in 2007 to JD 242.8 million for 2008, prior to inter-company eliminations. Fixed line EBITDA grew at a rate of 7.3% during 2008 as compared to the previous year’s results to arrive at JD 112.1 million. This growth was recorded despite the fierce competition in the international dialing market that affected traffic negatively. Consequently, fixed line 2008 EBITDA margin came in at 46.2% compared to 42.9% a year earlier. Orange Fixed Line Summary Income Statement JD million 2007 Total Revenues 243.5
2008 242.8
Variance% -0.3%
Operating Expenses Cost of Service Sales, General & Administrative expenses Government & Management fees
139 95.9 39.9 3.2
130.7 93.7 32.5 4.5
-6.0% -2.3% -18.5% 40.6%
104.5 42.9%
112.1 46.2%
7.3% 7.6%
EBITDA EBITDA Margin % Source: Jordan Telecom Group
Jordan Telecom’s strategy is clearly geared towards increasing data penetration by providing ADSL and leased lines, an effort aimed at enhancing fixed line demand and services and offsetting the diminishing demand for conventional fixed line voice services. This approach has so far proved quite successful, with ADSL and leased line subscribers growing significantly over the past three years. Fixed Line Subscribers Subscribers 000s Residential Business PSTN Growth % ADSL Leased Lines ADSL & Leased Lines Growth %
2006 446.0 168.0 614.0
2007 384.2 174.3 558.5 -9.05%
2008 340.9 178.1 518.9 -7.07%
54.8 7.7 62.5
92.1 8.8 100.9 61.4%
134.1 9.6 143.7 42.4%
Source Jordan Telecom Group
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Jordan Telecom Group Update Report – February 2009
1.2 Mobile By the end of 2008, Orange mobile’s contribution to the group revenues came in at 44.8%. The JD 187.0 million in revenue achieved prior to intercompany eliminations, marked a healthy growth of 1.9%, or JD 3.5 million over the prior year’s corresponding JD 183.5 million. The results have put Orange mobile in the second place as a provider of mobile services in Jordan exceeding the 1.7 million subscriber mark with a grand total of 1.75 million subscribers by December-end 2008, amounting to 32.3% of the total market share according to JT’s own estimates. Orange mobile’s strategy is clearly aimed towards revenue enlargement by boosting their subscriber base, in addition to concentrating on providing advanced data products that would safeguard against Average Revenue per User (ARPU) erosion resulting from competition in the conventional voice services. Future outlook concentrates on capturing the positive influences of macroeconomic development on personal disposable incomes as a means for driving Value Added Services (VAS) and roaming services usage, in turn enhancing both ARPU's and margins. Orange mobile’s EBITDA declined by 0.9%, decreasing from JD 68.2 million for FY 2007 to JD 67.6 million for FY 2008. EBITDA margin, in its part, went down from 37.2% to reach 36.1% over the same period due to the increase in mobile operating expenses. Orange Mobile Summary Income Statement JD million 2007 Total Revenues 183.5
2008 187
Variance% 1.9%
Operating Expenses Cost of Service Sales, General & Administrative expenses Government & Management fees
115.3 73.5 18.7 23.1
119.4 79.8 23.2 16.4
3.6% 8.6% 24.1% -29.0%
EBITDA EBITDA Margin %
68.2 37.2%
67.6 36.1%
-0.9% -2.7%
Source: Jordan Telecom Group
Orange mobile is still largely benefiting from its pre-paid subscribers base, which expanded notably during 2008 to reach 1.64 million subscribers, marking a 2.2% increase when compared to the 2007 year-end balance of 1.60 million subscribers. Post-paid subscribers recorded a growth of 8.3% from 109.5 thousand subscribers at year-end 2007 to 118.6 thousand by December 31, 2008. Orange Mobile Subscribers Subscribers 000s Prepaid Growth % Postpaid Growth % Total Growth %
2006 1,280.6 124.9 1,405.50
2007 1,601.7 25.1% 109.5 -12.3% 1,711.20 21.8%
2008 1,636.9 2.2% 118.6 8.3% 1,755.5 2.6%
Source: Jordan Telecom Group
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Jordan Telecom Group Update Report – February 2009
1.3 Data & Internet Orange Internet succeeded in raising its subscriber base by 55.6% at the end of 2008 to reach 102.2 thousand subscribers as compared to 65.7 thousand subscribers by year-end 2007. This generated JD 20.0 million in revenues reported by Orange Internet by the end of 2008, which offsets the decline in the fixed line segment revenue. The figure registers a noteworthy 49.3% growth over the JD 13.4 million generated during the same period in 2007, and in turn represents 5.0% of the group’s total post-intercompany revenues. Orange Internet currently maintains its grip on over 50.0% of the Internet services market (according to JTG’s estimates) with continuous growth foreseen in the near future as the highend leased lines and ADSL subscriber bases continue to grow rapidly. EBITDA for Orange Internet went up from JD 2.0 million in 2007 to reach JD 4.9 million in 2008, while EBITDA margin came at 24.6% for 2008 up from the 14.9% registered in 2007. Orange Internet Summary Income Statement JD million 2007 Total Revenues 13.4 Operating Expenses Cost of Service Sales, General & Administrative expenses Government & Management fees EBITDA EBITDA Margin %
2008 20.0
Variance% 49.3%
11.4 8.5 2.6 0.3
15 11.5 3.1 0.4
31.6% 35.3% 19.2% 33.3%
2.0 14.9%
4.9 24.6%
145.0% 65.0%
Source: Jordan Telecom Group
Additionally, Orange Internet launched the national IPVPN-MPLS data network that will integrate its offerings with international data and other integration offerings. Moreover, Orange Internet remains the exclusive reseller of Orange Business services. Orange Internet subscribers vary according to its provided services which consist of postpaid dial up, prepaid dial up, “0900” Internet, leased lines, and ADSL. Orange Internet Subscribers Subscribers 000s Total subscribers Growth %
2006 38.6
2007 65.7 70.2%
2008 102.2 55.6%
Source Jordan Telecom Group
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Jordan Telecom Group Update Report – February 2009
2. Group Performance 2.1 Performance Ratios Jordan Telecom maintained favorable performance ratios during the first nine months of 2008 and indeed managed to make improvements in a number of its key financial ratios as shown in the tables below. Profitability EBITDA Margin Net Profit Margin Sales-to-Assets Ratio Return on Assets Return on Owner's Capital Employed Return on Equity Leverage Ratio Debt Burden Liquidity Current Ratio Net Working Capital to Total Assets Ratio Efficiency Asset Turnover (Utilization Ratio) Sales to Net Working capital Invested Capital Turnover Leverage Debt-to-Equity Ratio Equity Multiplier Total Debt Ratio
2007 43.6% 23.7% 59.9% 14.2% 18.0% 23.0% 8.4% 5.2%
2008 45.6% 24.9% 59.4% 14.8% 18.8% 24.1% 8.1% 5.0%
2007 1.97 30%
2008 2.01 31%
2007 0.60 1.98 86.8%
2008 0.59 1.89 86.2%
2007 8.4% 1.62 5.2%
2008 8.1% 1.63 5.0%
Source: Jordan Telecom Group, Arab Advisors Group calculations
By obtaining low cost financing, Jordan Telecom was able to maintain a low debt structure. The graph below illustrates JT’s debt composition:
Source: Jordan Telecom Group
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Jordan Telecom Group Update Report – February 2009
Source: Jordan Telecom Group
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Jordan Telecom Group Update Report – February 2009
2.2 Stock Performance The graph below depicts Jordan Telecom stock performance (ASE:JTEL) alongside with the Amman Stock Exchange General index starting from January 4, 2006 through December 31, 2008. Note that the stock has stopped trading during the third quarter of 2006 due to ownership restructuring, and resumed trading on October 8, 2006.
Source: ASE Provided Information
Stock Statistics Market Capitalization Shares Outstanding Free Float TTM closing range TTM average closing price TTM average daily trading P/E Ratio
2007 JD 1.405 billion 250 million 6.70% JD 4.13-5.87 JD 4.57 JD 461,290 14.9
2008 JD 1.205 billion 250 million 7.00% JD 4.41-6.95 JD 5.92 JD 1,306,601 12.70
Source: ASE Provided Information
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Jordan Telecom Group Update Report – February 2009
3. Peer Group Analysis Following is an illustration of Jordan Telecom’s peer companies operating in the Middle East and GCC. It should be noted however that the difference in multiples generated by telecoms in the different regions reflects the differing business environments in the Middle East in general, and the GCC region in particular. Consideration can be given to the vast differences in population, market segmentation, income levels, customer orientation, etc… Income Statement Main Highlights US$ 000 Revenue Operating Income (Loss) Net Income (Loss)
Batelco 2008 846,253 401,464 276,378
JT Group 2008 565,352 258,028 141,268
Mobily 2008 2,878,008 1,022,588 557,705
STC 2008 12,649,643 4,402,825 2,945,333
DU 2008 1,075,670 165,303 1,123
Batelco 2008
JT Group 2008
Mobily 2008
STC 2008
DU 2008
1.14 74,596
2.01 299,718
0.62 (1,100,471)
0.83 (1,050,275)
0.94 (37,773)
16% 25% 1.00 1.29
5% 8% 0.18 4.51
31% 87% 2.22 0.42
32% 84% 1.93 0.66
36% 111% 4.58 0.18
14.6%
14.8%
7.7%
11.1%
0.1%
23.0% 0.45 32.7% 1.58
24.1% 0.59 25.0% 1.63
21.4% 0.40 19.4% 2.79
29.3% 0.47 23.3% 2.65
0.2% 0.51 0.1% 3.10
Batelco 2008
JT Group 2008
Mobily 2008
STC 2008
DU 2008
8.69 2.83 1.99 6.17 5.96
12.70 3.00 2.90 7.93 6.58
7.75 2.01 2.22 6.12 5.66
8.89 2.07 2.60 4.63 5.95
2,210 2.24 3.52 17.40 14.56
2,405 2.67
1,531 1.27
7,107 0.33
29,037 0.30
3,025 0.34
Source: Reuters, Companies' Financials
Ratios Analysis YTD Q3 2008 US$ Liquidity Analysis Current Ratio (times) Working Capital (US'000) Debt Factor Analysis Total Debt/Total Cap % Total Debt/Equity % Total Debt/EBITDA (times) Cash flow to Total Debt Ratio Profitability Analysis Return on Assets % Return on Equity % Total asset turnover Net Profit Margin Financial Leverage Ratios Analysis YTD Q3 2008 US$ Price Ratio Analysis P/E Price/Sales Price/Book Price/Cashflow Price/EBITDA Enterprise Value Analysis Enterprise Value (US$ million) EV/Market Cap (Times) Source: Reuters, Companies' Financials
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Jordan Telecom Group Update Report – February 2009
Source: Reuters'
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Jordan Telecom Group Update Report – February 2009
4. Company Valuation update The valuation update for Jordan Telecom Group uses two different models; the Dividend Discount Model (DDM) and the Residual Income Model (RIM). The DDM has a greater weight, 65.0% of total value, in deriving the final per share value of the company since JTG has a strong and consistent dividend policy. The company's policy is to distribute most of its earnings to shareholders'. Its calculated dividend payout ratio over the past three years amounted to 98.0% of earnings. Thus, the DDM provides a better reflection of the company's distribution of cash flows. In the DDM, we will use a two-stage Gordon Growth Model which values a stock with the main assumption that JTG will operate indefinitely and distribute dividends that grow in perpetuity. The first stage of the model, however, takes the forecast of earnings for a finite period, specifically till 2013, and calculates the present value of all dividends paid during that period. In the second stage, the Gordon Growth Model is applied. The model assumes that year 2013 is the terminal year, in which the dividends beyond that period will grow into perpetuity at an assumed growth rate. After that, the terminal value found is discounted back to the present in order to find the final value of JTG's stock. The DDM assumes the following: • The earnings estimation period extends until 2013 • The terminal value is the value of the dividend at year 2013 • Dividend payout ratio is 95.0% • The required rate of return, using CAPM, is 11.44% • Model weight 65.0% The strength of using the DDM for Jordan Telecom Group arises from the fact that JTG is considered a stable-growth, dividend-paying company. On the other hand, the weaknesses of the model come as a result of the high sensitivity of value to the growth rate assumed, and the fact the most of the stock value is realized from the present value of the terminal value, which gives rise to uncertainty risk. Thus, we have also incorporated another valuation approach to find JTG's value per share, the Residual Income Model (RIM). RIM looks at the economic profit that the company is able to generate over the long run. It is looked at as the excess earnings made over the investors' required rate of return, opportunity cost, for accepting to invest in the company. The RIM explicitly deducts the cost of equity capital, equity charge, from net income. Thus the concept of residual income analyzes net income per share, book value of equity per share, and the cost of equity capital. The model structure is similar to the DDM, where it uses the same earnings forecast period as stage one, while stage two assumes an indefinite growth for the company. It is important to note that this model does not assume an indefinite growth rate, but rather uses a persistence factor, w. The persistence factor is a value between 0 and 1 that specifies how far in the future the company would be able to sustain its residual income (have a positive residual income); with 1 representing perpetual income and 0 if the company stops generating residual income beyond the projection period.
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Jordan Telecom Group Update Report – February 2009
The RIM assumes the following: • The estimation period extends until 2013 • Cost of equity, using CAPM, is 11.44% • Persistence factor, w, of 1 • Equity does not constitute preferred stocks and/or any instruments that are senior to common stock • Model weight 35.0% The strengths of this model is that terminal values does not make up a large portion of total value, hence lowering uncertainty risk and presents the economic profitability of the company. On the other hand, the model uses accounting data found on the company's statements, which could be subject to management manipulation. Applying the models explained above, we derive the following results: Total Value Under DDM Total Value Under RIM DDM weight RIM weight Final Value of the Company (JD/Share)
4.413 3.907 65% 35% 4.24
JTG's fair value stands at JD 4.24 per share, which is slightly below the market closing share price of JD 4.83 on February 12, 2009.
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Jordan Telecom Group
Jordan Telecom Group sustains its profit growth in 2008
Reuters (JTEL.AM)
Equity Research Update Report
February 2009
Research Analyst Ahmad Dia [email protected]
Financial Markets Research
Jordan Telecom Group’s financial results registered healthy growth in profits during 2008, where net income came in at JD 100.3 million, a JD 5.8 million (6.1%) increase over the 2007 year-end figure. Revenues grew by a mere 0.9% (JD 3.50 million) which underlines that the bulk of the net profit increase resulted from cost savings and interest income gains. Orange Fixed external revenues formed 49.9% of the group’s total (post inter-company eliminations) revenues of 2008, down from 52.8% in 2007. This is a direct result of the JD 9.9 million drop in fixed line external revenues which coincided with JD 6.1 million and JD 6.6 million respective increments in mobile and Internet external revenues. Orange Mobile contributed 44.8% of total revenues in 2008 year-end results up from of 43.7% in 2007. On the operational front, the fixed line and internet segments improved their EBITDA margins (from 42.9% to 46.2%) and (from 14.9% to 24.7%) respectively. However, the mobile segment registered a drop in its EBITDA margin to come in at 37.2% compared to 36.1% for the yearly period of 2007. The three segments registered increments in their subscribers' bases in 2008. The fixed-line segment, which is composed of PSTN (residential and business), ADSL and leased lines, registered a 0.5% increase. The 11.0% decline in the PSTN residential base was offset by the respective growth of 45.6% and 8.2% in ADSL and leased lines. Orange Mobile lines increased by 44,300 (2.6%) and Orange Internet registered a significant 36,500 (55.6%) growth in 2008. On November 26, 2008 the Telecommunication Regulatory Commission (TRC) of Jordan issued the statement on licensing the use of 3G. The release of the public tender was initially set on December 14, 2008; this date was postponed by the TRC till further notice. Despite its reservations on the mechanism of the tender, Jordan Telecom Group is planning to participate in the tender where the reserve price of the spectrum is set at JD 25 million for a paired block of the FDD/3G (5+5) MHz spectrum. The commission will request the cabinet to grant the companies that acquire 3G frequencies and any new company that acquires 2G frequencies an exemption from custom duties for a period of four years in the same way that was granted to mobile telecommunication companies previously.
Tel +962.6.5828849 Fax +962.6.5828809 P.O.Box 2374 Amman 11821 Jordan arabadvisors.com [email protected] Copyright notice and disclaimer: Copyright 2009 by Arab Advisors Group. All rights reserved. No material contained in this report may reproduced in whole or in part without the prior written permission of the publisher. The information contained in this report has been obtained from sources we believe to be reliable, but the Arab Advisors Group and Arab Jordan Investment Bank (AJIB) do not warrant its completeness or accuracy. Opinions expressed and estimates represent our own judgment and interpretation of the available information and are subject to change without notice. The recipient of this report must make its independent decisions regarding and securities or financial instruments mentioned and the Arab Advisors Group and Arab Jordan Investment Bank (AJIB) accepts no responsibility or liability regarding such decisions. Feedback: Our clients’ satisfaction is of our utmost concern. We welcome all feedback regarding our research and products. Please send us your notes on this report, what you found useful in it and future research directions that would help you in your business. Send feedback emails to: [email protected]
Jordan Telecom Group Update Report – February 2009
Table of Contents
1.
2.
Jordan Telecom Group................................................................................... 8 1.1 Fixed Line ...................................................................................................... 12 1.2 Mobile............................................................................................................ 13 1.3 Data & Internet............................................................................................... 14
Group Performance..................................................................................... 15 2.1 Performance Ratios ......................................................................................... 15 2.2 Stock Performance .......................................................................................... 17
3. Peer Group Analysis .................................................................................... 18 4. Company Valuation update ............................................................................. 20
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Jordan Telecom Group Update Report – February 2009
Jordan Telecom Group 2008 - Overview JTG maintains its momentum during 2008, with JD 401.4 million external revenues
Jordan Telecom Group (JTG) announced its 2008 year-end results during its quarterly analysts’ meeting held on February 1, 2008. The meeting discussed JTG’s financial position and results in broad terms alongside selected operational and technical achievements. Despite the intensity of competition in the market, JTG was still able to record growth in its subscribers, revenues, EBITDA and net income for the twelve-month period ending December 31, 2008. JT Group 2008 Financial Highlights JD million
2007
2008
Growth %
Revenues
397.9
401.4
0.9%
EBITDA
173.6
183.2
5.5%
94.5
100.3
6.1%
Net Income Source: Jordan Telecom Group
The group’s external (post intercompany eliminations) revenues grew marginally (0.9%, JD 3.5 million) during 2008 and when compared with 2007. This increment came as an outcome of growth registered by all of the group's segments except for the fixed line segment where its revenues recorded a 4.7% decline. Mobile revenues grew by 3.5% (JD 6.1 million), Data revenues by 49.2% (JD 6.6 million), and LightSpeed recorded revenues of JD 1.1 million. Group External Revenues JD million
2007
2008
Growth %
Orange Fixed Lines
210.2
200.3
-4.7%
Orange Mobile
173.9
180.0
3.5%
13.4
20.0
49.2%
0.4
1.1
175.0%
397.9
401.4
0.9%
Data LightSpeed Total Source Jordan Telecom Group
Despite the fierce competition taking place in the International Long Distance (ILD) market and the cannibalization effect of mobile services on fixed line traffic, JTG was successful in maintaining its leading position in the fixed line market as it managed to keep these negative effects at a minimum. The pie charts below depicts JT Group’s external revenue split for the FY 2007 and FY 2008 periods. As noted before, the trend is geared towards greater mobile and data shares.
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JTG’s fixed line segment still represents the majority (49.9%) of the group’s external revenue
Source: Jordan Telecom Group
Total cost of services and operating expenses registered a 2.7% decrease compared to 2007 figures to arrive at JD 218.2 million by yearend 2008. In addition, a healthy growth of 5.55% in EBITDA took place during 2008 to arrive at JD 183.2 million, compared to the JD 173.6 million achieved a year earlier. EBITDA margin, as well, recorded an increase when it came in at 45.6% compared to the 43.6% achieved in 2007. As a result, Jordan Telecom Group’s 2008 net income came in at JD 100.3 million, pointing to a 6.1% increase over the 2007 level of JD 94.5 million, while net profit margin increased from 23.7% in 2007 to 24.9% in 2008. JTG reported its fixed line segment subscribers to stand at 663,400 by the end of December 2008, representing a market share of 98.5%. This segment constituted 49.9% of the group’s total external revenues during 2008. The increase in Internet penetration, ADSL and leased lines is expected to continue to drive demand for the fixed line service.
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Jordan Telecom Group Update Report – February 2009
Orange mobile continues its upward subscriber acquisition trend, posting a 2.6% increase in subscribers during the year
Orange Mobile’s total subscriber base reached 1.75 million at Decemberend 2008, marking a 2.6% increase over the 2007 year-end figure of 1.71 million subscribers. According to JTG, Orange mobile came in second in the Jordanian mobile market with 32.3% share of the total market. However, certain discrepancies are involved in arriving at such an estimate since different operators use different methods in accounting for active subscribers.
Meanwhile, the Internet service increased its subscriber base by 55.6% or 36,500 subscribers and managed to generate JD 20.0 million in revenues during 2008. Orange Internet, as it was re-branded was able to maintain more than a 50.0% market share in the data segment, according to JTG estimates. JT Group stock price movement on the Amman Stock Exchange ranged between JD 4.41 and JD 6.95 per share over the one-year period ending December 31, 2008, with a closing price of JD 4.82 per share. The following table depicts JTG's stock statistics as at September 30, 2008: Stock Statistics Market Capitalization Shares Outstanding Free Float TTM closing range TTM average closing price TTM average daily trading P/E Ratio
2007 JD 1.405 billion 250 million 6.70% JD 4.13-5.87 JD 4.57 JD 461,290 14.9
2008 JD 1.205 billion 250 million 7.00% JD 4.41-6.95 JD 5.92 JD 1,306,601 12.70
Source: ASE Provided Information
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Jordan Telecom Group Update Report – February 2009
The graph structure:
below
illustrates
Jordan
Telecom
current
Shareholders’
Jordan Telecom Shareholders' Structure as of August 3, 2008 Jordan Telecom Group
Free Float 7.0%
JITCO 51.0%
Noor Telecom 10.0%
Social Security 29.0%
France Telecom
Jordanian Government 3.0%
Source: Jordan Telecom Group
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Jordan Telecom Group 2008 – Management Perspective
In November 2008, Orange Mobile launched a special offer for its Pay Monthly and Pay As You Go subscribers, enabling Pilgrims to receive freeof-charge mobile calls from any place in the World during their stay in Saudi Arabia. The Hajj offer increased roaming traffic to Saudi Arabia significantly but that revenue loss was off set by increased calls within Saudi Arabia and enhanced customer retention.
The group set the guidance for 2009; while the year will clearly be a challenging year, the group will depend on the continuing strength of its balance sheet, ample liquidity and expected record cash flow from operations. The group also expects to maintain its revenues' growth and optimize its costs. Therefore, improve its efficiency and bottom-line.
The group has not finalized its 3G license tender bid as it hasn't reached to any agreements yet.
According to Jordan Telecom Group, (89.0%) of the group's cellular prepaid lines are active by the TRC definition of the 3-month rule.
The potential projects for 2009 to be financed by the group's excessive cash balance include: o o o
Real estate investments related to the ICT industry e-Health Information security
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Jordan Telecom Group Update Report – February 2009
1. Jordan Telecom Group With total revenues for the year period ended December 31, 2008 standing at JD 401.4 million, Jordan Telecom Group managed to outperform the corresponding period of the prior year by 0.9% or JD 3.5 million. Operating expenses, on their part, were down by 2.7%, to reach JD 218.2 million. EBITDA showed a 5.5% increase up from JD 173.6 for 2007 to JD 183.2 million for 2008. The group also improved its profit before income tax by 7.3% against the same period of 2007 to arrive at JD 137.2 million. Net profit for the year ending December 30, 2008 grew by 6.1% to reach JD 100.3 million as compared to the JD 94.5 million achieved a year earlier. Net profit margin, as well, increased as can be noted from the graph below.
Source: Jordan Telecom Group
Total number of lines for the group grew by 3.4% during 2008 as compared to the year-end figure of 2007.
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Source: Jordan Telecom Group
With the market quickly shifting towards mobile and internet based services, JTG’s forecasts and strategies were built around the concept of increasing revenues while gradually replacing traditional fixed-line-based voice services with mobile and state-of-the-art Internet services. Jordan Telecom has invested heavily in these segments paving the way for the future deployment of new products including third generation mobile services.
Source: Jordan Telecom Group
The resulting profit margins and Earnings per Share (EPS) also fared well. 2008 EPS reached JD 0.401; a 6.1% improvement over the JD 0.378 recorded a year earlier.
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Source: Jordan Telecom Group
Noted from the Group's cash flow statement, cash from operating activities came in at JD 152.0 million compared to the JD 167.8 million achieved for the corresponding period of 2007. Net cash used in investing activities decreased during the year 2008 compared to 2007, from JD 46.9 million to JD 37.6 million. Cash used in financing activities, on its part, grew when comparing 2008 and 2007 figures to come in at JD 95.9 million. These funds were used primarily in dividend payments and long term loan repayments.
Net cash from operating activities
2007 167.8
2008 152.0
Net cash used in investing activities
(46.9)
(37.6)
Net cash used in financing activities
(86.9)
(95.9)
JD million
Source: JT Group Analysts Presentation
As for the group's capital expenditures (CAPEX), judicious planning and implementation prior to year 2002 had a major influence on the development of a high quality state-of-the-art network. This initiative lowered the following years' maintenance expenditures, enabling third generation services to be offered when required. Moreover, it allowed Jordan Telecom to benefit from favorable customs duties prevailing at the time, and insured that the following years’ CAPEX remained relatively low.
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Jordan Telecom Group Update Report – February 2009
Source: Jordan Telecom Group
JTG's number of employees stood at 2,520 by December-end 2008 compared to 2,686 at year-end 2007. Accordingly, and in addition to the increase in mobile and data subscribers, the group efficiency indicators improved positively. Lines per employee and revenue per employee were up by 10.2% and 7.5%, respectively.
Source: Jordan Telecom Group
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1.1 Fixed Line Jordan Telecom Group’s fixed line segment, or Orange fixed, has come under severe pressure following the introduction of competition into the fixed line market at the beginning of 2005 in addition to the effects of the escalating traffic, and to a certain extent, subscriber cannibalization to mobile services. Nevertheless, and according to JTG, their fixed line service still dominates 98.5% of the fixed line market. This constitutes 49.9% of the group's total revenues, a decline from the 52.8% recorded in 2007, which translates into a 0.3% drop in the fixed line revenues. Thus, the segment's revenue dropped from JD 243.5 million in 2007 to JD 242.8 million for 2008, prior to inter-company eliminations. Fixed line EBITDA grew at a rate of 7.3% during 2008 as compared to the previous year’s results to arrive at JD 112.1 million. This growth was recorded despite the fierce competition in the international dialing market that affected traffic negatively. Consequently, fixed line 2008 EBITDA margin came in at 46.2% compared to 42.9% a year earlier. Orange Fixed Line Summary Income Statement JD million 2007 Total Revenues 243.5
2008 242.8
Variance% -0.3%
Operating Expenses Cost of Service Sales, General & Administrative expenses Government & Management fees
139 95.9 39.9 3.2
130.7 93.7 32.5 4.5
-6.0% -2.3% -18.5% 40.6%
104.5 42.9%
112.1 46.2%
7.3% 7.6%
EBITDA EBITDA Margin % Source: Jordan Telecom Group
Jordan Telecom’s strategy is clearly geared towards increasing data penetration by providing ADSL and leased lines, an effort aimed at enhancing fixed line demand and services and offsetting the diminishing demand for conventional fixed line voice services. This approach has so far proved quite successful, with ADSL and leased line subscribers growing significantly over the past three years. Fixed Line Subscribers Subscribers 000s Residential Business PSTN Growth % ADSL Leased Lines ADSL & Leased Lines Growth %
2006 446.0 168.0 614.0
2007 384.2 174.3 558.5 -9.05%
2008 340.9 178.1 518.9 -7.07%
54.8 7.7 62.5
92.1 8.8 100.9 61.4%
134.1 9.6 143.7 42.4%
Source Jordan Telecom Group
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1.2 Mobile By the end of 2008, Orange mobile’s contribution to the group revenues came in at 44.8%. The JD 187.0 million in revenue achieved prior to intercompany eliminations, marked a healthy growth of 1.9%, or JD 3.5 million over the prior year’s corresponding JD 183.5 million. The results have put Orange mobile in the second place as a provider of mobile services in Jordan exceeding the 1.7 million subscriber mark with a grand total of 1.75 million subscribers by December-end 2008, amounting to 32.3% of the total market share according to JT’s own estimates. Orange mobile’s strategy is clearly aimed towards revenue enlargement by boosting their subscriber base, in addition to concentrating on providing advanced data products that would safeguard against Average Revenue per User (ARPU) erosion resulting from competition in the conventional voice services. Future outlook concentrates on capturing the positive influences of macroeconomic development on personal disposable incomes as a means for driving Value Added Services (VAS) and roaming services usage, in turn enhancing both ARPU's and margins. Orange mobile’s EBITDA declined by 0.9%, decreasing from JD 68.2 million for FY 2007 to JD 67.6 million for FY 2008. EBITDA margin, in its part, went down from 37.2% to reach 36.1% over the same period due to the increase in mobile operating expenses. Orange Mobile Summary Income Statement JD million 2007 Total Revenues 183.5
2008 187
Variance% 1.9%
Operating Expenses Cost of Service Sales, General & Administrative expenses Government & Management fees
115.3 73.5 18.7 23.1
119.4 79.8 23.2 16.4
3.6% 8.6% 24.1% -29.0%
EBITDA EBITDA Margin %
68.2 37.2%
67.6 36.1%
-0.9% -2.7%
Source: Jordan Telecom Group
Orange mobile is still largely benefiting from its pre-paid subscribers base, which expanded notably during 2008 to reach 1.64 million subscribers, marking a 2.2% increase when compared to the 2007 year-end balance of 1.60 million subscribers. Post-paid subscribers recorded a growth of 8.3% from 109.5 thousand subscribers at year-end 2007 to 118.6 thousand by December 31, 2008. Orange Mobile Subscribers Subscribers 000s Prepaid Growth % Postpaid Growth % Total Growth %
2006 1,280.6 124.9 1,405.50
2007 1,601.7 25.1% 109.5 -12.3% 1,711.20 21.8%
2008 1,636.9 2.2% 118.6 8.3% 1,755.5 2.6%
Source: Jordan Telecom Group
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Jordan Telecom Group Update Report – February 2009
1.3 Data & Internet Orange Internet succeeded in raising its subscriber base by 55.6% at the end of 2008 to reach 102.2 thousand subscribers as compared to 65.7 thousand subscribers by year-end 2007. This generated JD 20.0 million in revenues reported by Orange Internet by the end of 2008, which offsets the decline in the fixed line segment revenue. The figure registers a noteworthy 49.3% growth over the JD 13.4 million generated during the same period in 2007, and in turn represents 5.0% of the group’s total post-intercompany revenues. Orange Internet currently maintains its grip on over 50.0% of the Internet services market (according to JTG’s estimates) with continuous growth foreseen in the near future as the highend leased lines and ADSL subscriber bases continue to grow rapidly. EBITDA for Orange Internet went up from JD 2.0 million in 2007 to reach JD 4.9 million in 2008, while EBITDA margin came at 24.6% for 2008 up from the 14.9% registered in 2007. Orange Internet Summary Income Statement JD million 2007 Total Revenues 13.4 Operating Expenses Cost of Service Sales, General & Administrative expenses Government & Management fees EBITDA EBITDA Margin %
2008 20.0
Variance% 49.3%
11.4 8.5 2.6 0.3
15 11.5 3.1 0.4
31.6% 35.3% 19.2% 33.3%
2.0 14.9%
4.9 24.6%
145.0% 65.0%
Source: Jordan Telecom Group
Additionally, Orange Internet launched the national IPVPN-MPLS data network that will integrate its offerings with international data and other integration offerings. Moreover, Orange Internet remains the exclusive reseller of Orange Business services. Orange Internet subscribers vary according to its provided services which consist of postpaid dial up, prepaid dial up, “0900” Internet, leased lines, and ADSL. Orange Internet Subscribers Subscribers 000s Total subscribers Growth %
2006 38.6
2007 65.7 70.2%
2008 102.2 55.6%
Source Jordan Telecom Group
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2. Group Performance 2.1 Performance Ratios Jordan Telecom maintained favorable performance ratios during the first nine months of 2008 and indeed managed to make improvements in a number of its key financial ratios as shown in the tables below. Profitability EBITDA Margin Net Profit Margin Sales-to-Assets Ratio Return on Assets Return on Owner's Capital Employed Return on Equity Leverage Ratio Debt Burden Liquidity Current Ratio Net Working Capital to Total Assets Ratio Efficiency Asset Turnover (Utilization Ratio) Sales to Net Working capital Invested Capital Turnover Leverage Debt-to-Equity Ratio Equity Multiplier Total Debt Ratio
2007 43.6% 23.7% 59.9% 14.2% 18.0% 23.0% 8.4% 5.2%
2008 45.6% 24.9% 59.4% 14.8% 18.8% 24.1% 8.1% 5.0%
2007 1.97 30%
2008 2.01 31%
2007 0.60 1.98 86.8%
2008 0.59 1.89 86.2%
2007 8.4% 1.62 5.2%
2008 8.1% 1.63 5.0%
Source: Jordan Telecom Group, Arab Advisors Group calculations
By obtaining low cost financing, Jordan Telecom was able to maintain a low debt structure. The graph below illustrates JT’s debt composition:
Source: Jordan Telecom Group
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Jordan Telecom Group Update Report – February 2009
Source: Jordan Telecom Group
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Jordan Telecom Group Update Report – February 2009
2.2 Stock Performance The graph below depicts Jordan Telecom stock performance (ASE:JTEL) alongside with the Amman Stock Exchange General index starting from January 4, 2006 through December 31, 2008. Note that the stock has stopped trading during the third quarter of 2006 due to ownership restructuring, and resumed trading on October 8, 2006.
Source: ASE Provided Information
Stock Statistics Market Capitalization Shares Outstanding Free Float TTM closing range TTM average closing price TTM average daily trading P/E Ratio
2007 JD 1.405 billion 250 million 6.70% JD 4.13-5.87 JD 4.57 JD 461,290 14.9
2008 JD 1.205 billion 250 million 7.00% JD 4.41-6.95 JD 5.92 JD 1,306,601 12.70
Source: ASE Provided Information
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3. Peer Group Analysis Following is an illustration of Jordan Telecom’s peer companies operating in the Middle East and GCC. It should be noted however that the difference in multiples generated by telecoms in the different regions reflects the differing business environments in the Middle East in general, and the GCC region in particular. Consideration can be given to the vast differences in population, market segmentation, income levels, customer orientation, etc… Income Statement Main Highlights US$ 000 Revenue Operating Income (Loss) Net Income (Loss)
Batelco 2008 846,253 401,464 276,378
JT Group 2008 565,352 258,028 141,268
Mobily 2008 2,878,008 1,022,588 557,705
STC 2008 12,649,643 4,402,825 2,945,333
DU 2008 1,075,670 165,303 1,123
Batelco 2008
JT Group 2008
Mobily 2008
STC 2008
DU 2008
1.14 74,596
2.01 299,718
0.62 (1,100,471)
0.83 (1,050,275)
0.94 (37,773)
16% 25% 1.00 1.29
5% 8% 0.18 4.51
31% 87% 2.22 0.42
32% 84% 1.93 0.66
36% 111% 4.58 0.18
14.6%
14.8%
7.7%
11.1%
0.1%
23.0% 0.45 32.7% 1.58
24.1% 0.59 25.0% 1.63
21.4% 0.40 19.4% 2.79
29.3% 0.47 23.3% 2.65
0.2% 0.51 0.1% 3.10
Batelco 2008
JT Group 2008
Mobily 2008
STC 2008
DU 2008
8.69 2.83 1.99 6.17 5.96
12.70 3.00 2.90 7.93 6.58
7.75 2.01 2.22 6.12 5.66
8.89 2.07 2.60 4.63 5.95
2,210 2.24 3.52 17.40 14.56
2,405 2.67
1,531 1.27
7,107 0.33
29,037 0.30
3,025 0.34
Source: Reuters, Companies' Financials
Ratios Analysis YTD Q3 2008 US$ Liquidity Analysis Current Ratio (times) Working Capital (US'000) Debt Factor Analysis Total Debt/Total Cap % Total Debt/Equity % Total Debt/EBITDA (times) Cash flow to Total Debt Ratio Profitability Analysis Return on Assets % Return on Equity % Total asset turnover Net Profit Margin Financial Leverage Ratios Analysis YTD Q3 2008 US$ Price Ratio Analysis P/E Price/Sales Price/Book Price/Cashflow Price/EBITDA Enterprise Value Analysis Enterprise Value (US$ million) EV/Market Cap (Times) Source: Reuters, Companies' Financials
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Jordan Telecom Group Update Report – February 2009
Source: Reuters'
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Jordan Telecom Group Update Report – February 2009
4. Company Valuation update The valuation update for Jordan Telecom Group uses two different models; the Dividend Discount Model (DDM) and the Residual Income Model (RIM). The DDM has a greater weight, 65.0% of total value, in deriving the final per share value of the company since JTG has a strong and consistent dividend policy. The company's policy is to distribute most of its earnings to shareholders'. Its calculated dividend payout ratio over the past three years amounted to 98.0% of earnings. Thus, the DDM provides a better reflection of the company's distribution of cash flows. In the DDM, we will use a two-stage Gordon Growth Model which values a stock with the main assumption that JTG will operate indefinitely and distribute dividends that grow in perpetuity. The first stage of the model, however, takes the forecast of earnings for a finite period, specifically till 2013, and calculates the present value of all dividends paid during that period. In the second stage, the Gordon Growth Model is applied. The model assumes that year 2013 is the terminal year, in which the dividends beyond that period will grow into perpetuity at an assumed growth rate. After that, the terminal value found is discounted back to the present in order to find the final value of JTG's stock. The DDM assumes the following: • The earnings estimation period extends until 2013 • The terminal value is the value of the dividend at year 2013 • Dividend payout ratio is 95.0% • The required rate of return, using CAPM, is 11.44% • Model weight 65.0% The strength of using the DDM for Jordan Telecom Group arises from the fact that JTG is considered a stable-growth, dividend-paying company. On the other hand, the weaknesses of the model come as a result of the high sensitivity of value to the growth rate assumed, and the fact the most of the stock value is realized from the present value of the terminal value, which gives rise to uncertainty risk. Thus, we have also incorporated another valuation approach to find JTG's value per share, the Residual Income Model (RIM). RIM looks at the economic profit that the company is able to generate over the long run. It is looked at as the excess earnings made over the investors' required rate of return, opportunity cost, for accepting to invest in the company. The RIM explicitly deducts the cost of equity capital, equity charge, from net income. Thus the concept of residual income analyzes net income per share, book value of equity per share, and the cost of equity capital. The model structure is similar to the DDM, where it uses the same earnings forecast period as stage one, while stage two assumes an indefinite growth for the company. It is important to note that this model does not assume an indefinite growth rate, but rather uses a persistence factor, w. The persistence factor is a value between 0 and 1 that specifies how far in the future the company would be able to sustain its residual income (have a positive residual income); with 1 representing perpetual income and 0 if the company stops generating residual income beyond the projection period.
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The RIM assumes the following: • The estimation period extends until 2013 • Cost of equity, using CAPM, is 11.44% • Persistence factor, w, of 1 • Equity does not constitute preferred stocks and/or any instruments that are senior to common stock • Model weight 35.0% The strengths of this model is that terminal values does not make up a large portion of total value, hence lowering uncertainty risk and presents the economic profitability of the company. On the other hand, the model uses accounting data found on the company's statements, which could be subject to management manipulation. Applying the models explained above, we derive the following results: Total Value Under DDM Total Value Under RIM DDM weight RIM weight Final Value of the Company (JD/Share)
4.413 3.907 65% 35% 4.24
JTG's fair value stands at JD 4.24 per share, which is slightly below the market closing share price of JD 4.83 on February 12, 2009.
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