etisalat rating neutral 06 March 2011

Analyst Day: Etisalat Still Interested in Zain Deal, Zain

KSA Sale is A Deal Breaker

initial opinion diversified telecommunications │ uae Omar Maher

+20 2 3535 6388
omaher@efg-hermes.com
Deal Update: KWD1.7/share is Final Price, Zain KSA Could be Deal Breaker
Etisalat management has confirmed that failure to sell Zain Group’s Saudi unit, Zain Marise Ananian
KSA, would prevent the acquisition of the Kuwaiti group as regulatory authorities in +20 2 3535 6152
Saudi Arabia will not allow Etisalat to concurrently own Mobily and Zain KSA. The mananian@efg-hermes.com
offered deal price of KWD1.70 per Zain Group share is the maximum that Etisalat will
STOCK DATA
pay. Etisalat is currently negotiating with Zain Group following the due diligence
process expiry, as per previous management guidance. Price AED10.75
Fair Value AED12.54
A Successful Deal is Looking Less Likely, Maintain Neutral on Etisalat
Last Div / Ex Date AED0.25 on 1 Apr 2010
Considering the recent rejection of all offers for Zain KSA by Zain’s BOD, as well as the
Mkt. Cap / Shares (mn) AED84,991 / 7,906
expiry of due diligence period, the likelihood of the deal going through is further
Av. Mthly Liqdty (mn) AED251.8
reduced, in our view. While NIC announced that it has cancelled its commitment to
52-Week High / Low AED11.85 / AED10.00
collect Zain shares for Etisalat ahead of its proposed acquisition, Etisalat said that it
Bloomberg / Reuters ETISALAT UH / ETEL.AD
remains interested in the deal. We keep our Neutral rating on Etisalat and our FV of
Est. Free Float 40%
AED12.54/share based on fundamentals and not taking into account the potential deal.

UAE Weakness on International Traffic Slowdown SHARE PRICE PERFORMANCE RELATIVE

During 2010, Etisalat’s UAE operation, the largest contributor to total revenue and TO ADI REBASED
valuation, saw its revenue and EBITDA margin pressured mainly as a result of pressure
on international voice traffic (from both mobile and fixed-line). UAE mobile revenue Price (AED)
declined 12.7% Y-o-Y in 2010, while fixed-line revenue declined 13.3% Y-o-Y. The 12.5 ADI (Rebased)
EBITDA margin was at 62% versus 70% in 2009.
11.5
Cash DPS of AED0.60 for 2010, 5.6% Yield; No Bonus Shares in 2011
The company has announced a AED0.60 cash DPS for FY2010 (5.6% yield) versus our
10.5
estimated AED0.37/share. Etisalat has already distributed AED0.25/share in 1H2010,
while the remaining AED0.35/share has an ex-date of 30 March 2011. There will be no
9.5
bonus shares this year, unlike in previous years.
03-Dec-10
03-Mar-10

03-Mar-11
03-Jun-10

03-Sep-10

KEY FINANCIAL HIGHLIGHTS

December Year End (AED mn) 2010a 2011e 2012e 2013e
Revenue 31,929 32,149 33,234 33,852
EBITDA 16,561 17,287 18,114 18,440
EBITDA Margin 51.9% 53.8% 54.5% 54.5%
Net Profit 7,631 7,605 8,056 8,174
EPS (AED) 0.97 0.96 1.02 1.03
DPS (AED) 0.60 0.37 0.39 0.39

Net Debt (Cash) (3,877) (5,236) (4,079) (3,568)

P/E* (Attrib.) (x) 11.1 11.2 10.6 10.4
EV EBITDA* (x) 4.9 4.7 4.5 4.4
Dividend Yield (%) 5.6% 3.4% 3.6% 3.7%
*Price as at 03 March 2011
Source: Etisalat, EFG Hermes estimates

1 / 6 pages kindly refer to the important disclosures and disclaimers on back page
etisalat 06 March 2011

diversified telecommunications │ uae

ROYALTY: NO NEWS YET, BUT TALKS UNDERWAY

Etisalat has not received any updates on its royalty fees; however, discussions have begun and
the government has appointed an advisor on the issue. Management has expressed it
optimism regarding the final outcome, given du’s royalty cut. Options could include: i)
reducing the current 50% royalty, ii) charging royalty fees to the UAE operation only, iii)
splitting the taxable base between the top line and earnings, and iv) fixing an absolute amount.
Any reduction in royalties would be positively reflected in our fair value (FV) and would be a
major share price performance catalyst, in our view.

UAE OPERATION UNDER PRESSURE; WILL REMAIN PRESSURED IN THE SHORT TERM
The UAE operation’s contribution to total revenue fell by AED1.7 billion in 2010, mainly as a
result of pressure on international voice calls from: i) competition; and ii) illegal voice over
internet protocol (VoIP) providers. We do not see a reason for competition on international
tariffs coming to an end in the short term, nor do we see a significant crackdown on illegal
VoIP traffic in the UAE. We therefore expect pressure on UAE revenues to carry on for at least
one more quarter.

Management stated that consolidated EBITDA fell 15% Y-o-Y in 2010, mainly on the back of
the decline in UAE revenue, an increase in costs, and the revision of a provision that was
booked in FY2010. Although the size of the provision was not provided, we understand that
the majority of it was charged to the UAE operation and therefore UAE EBITDA margin fell
from 70% in 2009 to 62% in 2010. We however expect some improvement in the UAE
EBITDA margin but we do not expect it to return to the 60s% level.

EGYPT UNIT PERFORMANCE SHINES

Etisalat Misr’s 2010 performance exceeded management expectations, with revenue up 57%
Y-o-Y, EBITDA nearly double Y-o-Y, margin up to 35% from 29% in 2009 (expecting c40% in
the long run), and subscribers up 38% Y-o-Y. Management saw little impact from the service
cut-off during recent events in Egypt, and expects another strong year in 2011.

FIGURE 1: EGYPTIAN OPERATORS' REVENUES & SHARES

2009a 2010a
Vodafone Egypt
Revenue (USD mn) 2,160 2,152
Revenue Share 44.8% 41.8%
Subscribers Market Share 37.9% 38.5%
Mobinil
Revenue (USD mn) 1,946 1,877
Revenue Share 40.4% 36.4%
Subscribers Market Share 41.2% 37.2%
Etisalat Misr
Revenue (USD mn) 716 1,121
Revenue Share 14.9% 21.8%
Subscribers Market Share 20.9% 24.3%
Source: Etisalat, Mobinil, Vodafone Group, EFG Hermes estimates

2 / 6 pages
 etisalat 06 March 2011

diversified telecommunications │ uae

Impact on Egyptian Telcos

Etisalat Misr’s debt position stands at USD984 million (56% of group consolidated gross debt),
59% of which is USD-denominated. We calculate annual interest expense of around USD86
million in 2010. With the USD-EGP weakening, we expect interest expense to increase by
around USD10 million, at least in 2011. We therefore believe that Etisalat Misr will start to
focus more on profitability than increasing its subscriber base, which reinforces our view that
competition will continue to slow down and that no more competition on headline tariffs and
price cuts will be seen.

SUDAN COULD HAVE LARGE POTENTIAL IF GSM LICENCE IS OBTAINED

Management has highlighted that the Sudanese operation, Canar (89% owned), has great
potential if it is able to obtain a GSM licence (it currently operates a CDMA network). Canar
has the most advanced fibre optic network in Sudan, with an approximate length of 1,800
kilometres (km). Management has confirmed that talks were ongoing with the government
regarding the GSM licence, but were recently suspended on the back of the Zain deal
discussions (Zain owns an operation in Sudan). Etisalat maintains a healthy relationship with
Sudan’s North and South governments, and is not worried about the separation issue. Etisalat
might, however, exit its investment in the country if it fails to obtain the GSM licence.
Management has blamed the decline in Canar’s revenue in 2010 on the fact that the licence is
a CDMA versus a GSM licence.

INDIA: NO LEGAL LIABILITY ON ETISALAT

Etisalat is not legally accountable for any of the issues surrounding its Indian subsidiary,
Etisalat DB, according to management, since these issues relate to the company’s local partner
and date back to before Etisalat decided to take part in the joint venture. The issues around
the Indian operation have caused management to decide to intentionally slow down the
growth of the operation and its investments (hence the Y-o-Y decline in EBITDA), keeping a
low profile until more clarity on the issues is available.

3 / 6 pages
etisalat 06 March 2011

diversified telecommunications │ uae

FIGURE 2: FY2010 OPERATIONS' RESULTS

2009a 2010a Y-o-Y 2010e Var.
Subscribers (mn)
Etisalat UAE 7.7 7.8 0.3% 7.8 -1.0%
Atlantique Telecom 4.8 5.8 20.6% 6.1 -4.9%
Etisalat Misr (Egypt) 14.3 19.7 38.3% 17.9 9.9%
Zantel (Tanzania) 1.4 1.7 24.0% 1.6 11.5%
Canar (Sudan) 0.1 0.1 -29.2% 0.1 -3.0%
Etisalat Afghan 1.5 2.5 61.2% 3.3 -25.2%

ARPU (AED)
Etisalat UAE 139 112 -19.4% 130 -13.7%
Atlantique Telecom 25 28 12.0% 18 56.2%
Etisalat Misr (Egypt) 21 21 -2.0% 23 -9.8%
Zantel (Tanzania) 15 14 -6.7% 14 -1.4%
Canar (Sudan) 187 210 12.3% 190 10.5%
Etisalat Afghan 20 28 40.0% 9 213.6%

Revenue (AED mn)

Etisalat UAE 26,060 24,294 -6.8% 24,462 -0.7%
Atlantique Telecom 1,378 1,594 15.7% 1,164 36.9%
Etisalat Misr (Egypt) 2,628 4,114 56.5% 4,237 -2.9%
Zantel (Tanzania) 215 233 8.4% 221 5.4%
Canar (Sudan) 375 314 -16.3% 377 -16.7%
Etisalat Afghan 293 623 112.6% 329 89.4%

EBITDA (AED mn)

Etisalat UAE 18,195 15,168 -16.6% 14,017 8.2%
Atlantique Telecom 367 439 19.6% 419 4.8%
Etisalat Misr (Egypt) 753 1,458 93.6% 1,296 12.5%
Zantel (Tanzania) (63) (87) 38.1% (55) N/M
Canar (Sudan) 54 9 -83.3% 32 -71.9%
Etisalat Afghan (16) 69 N/M 21 N/M

EBITDA Margin
Etisalat UAE 69.8% 62.4% 57.3%
Atlantique Telecom 26.6% 27.5% 36.0%
Etisalat Misr (Egypt) 28.7% 35.4% 30.6%
Zantel (Tanzania) -29.3% -37.3% -24.9%
Canar (Sudan) 14.4% 2.9% 8.5%
Etisalat Afghan -5.5% 11.1% 6.5%

Capex (AED mn)

Etisalat UAE 2,465 2,197 -10.9% 2,425 -9.4%
Atlantique Telecom 593 451 -23.9% 396 14.0%
Etisalat Misr (Egypt) 1,625 1,618 -0.4% 1,652 -2.0%
Zantel (Tanzania) 91 31 -65.9% 50 -38.0%
Canar (Sudan) 22 8 -63.6% 13 -38.5%
Etisalat Afghan 246 257 4.5% 132 95.4%
Source: Etisalat, EFG Hermes estimates

4 / 6 pages
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Gulf HNW Sales

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UAE Retail Sales

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DISCLOSURES
We, Omar Maher and Marise Ananian, hereby certify that the views expressed in this document accurately reflect our personal views about the securities and
companies that are the subject of this report. We also certify that neither we nor our spouses or dependants (if relevant) hold a beneficial interest in the securities
that are traded in the UAE stock exchanges. EFG Hermes Holding SAE hereby certifies that neither it nor any of its subsidiaries owns any of the securities that are
the subject of this report.

Funds managed by EFG Hermes Holding SAE and its subsidiaries (together and separately, "EFG Hermes") for third parties may own the securities that are the
subject of this report. EFG Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. The authors of this report
may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which they have no
discretion. The Investment Banking division of EFG Hermes may be in the process of soliciting or executing fee earning mandates for companies that are either the
subject of this report or are mentioned in this report.

DISCLAIMER
This Research has been sent to you as a client of one of the entities in the EFG Hermes group. This Research must not be considered as advice nor be acted upon by
you unless you have considered it in conjunction with additional advice from an EFG Hermes entity with which you have a client agreement.

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