2005 May Beltone

8/9/2019 2005 May Beltone

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15 May 2005

Recommendation

Buy*Upside/Downside

32%Target Price

EGP35.64Current Price

EGP27.00 **

Reuters Code

RAYA.CA

Market Cap

EGP599.4 mil. (prior to capital increase)

Enterprise Value

EGP699.0 mil. (prior to capital increase)

Number of Shares Outstanding

22.2 mil. (prior to capital increase)

Pre-Offering Shareholders Structure12.0% | Financial Holdings11.1% | Medhat Khalil & family8.3% | Suliman Aba-Numay8.1% | Keystone Financial7.0% | Mohammed El Tawil6.5% | Injazat Tech. Fund5.3% | Ahmed El Tawil4.3% | Al Watany Bank4.1% | ICD3.1% | United Bank of Egypt

2.3% | Amr El Tawil27.8% | Others

Post-Offering Shareholders Structure12.0% | Financial Holdings9.4% | Medhat Khalil & family8.3% | Suliman Aba-Numay8.1% | Keystone Financial5.2% | Ahmed El Tawil4.1% | ICD3.1% | United Bank of Egypt2.3% | Amr El Tawil

2.2% | Mohammed El Tawil45.3% | Others

* Refer to back cover for investment ratings** Offering price

Karim [email protected]: +20 (2) 336 0101

Sales and Trading:

Trust Group forSecurities2 Ahmed Ragheb Street, Garden CityTel: +20 (2) 792 4026Fax: +20 (2) 792 5884

Mohamed Choucri+20 (10) 240 5222

Aly Allouba+20 (12) 228 0989

Raya Holding Technology &TelecommunicationsCIT sector | Egypt

Aiming high

A leading player in the CIT market in Egypt, with strong regional presence

Raya Holding Technology & Telecommunications, Raya, is a leading company in Egypts

Communication and Information Technology (CIT) sector. Raya operates in three lines of

business, namely retail and distribution, Information Technology (IT) and telecommunications.

Generating the largest portion of the companys revenues, the retail and distribution line ofbusiness is involved in the distribution of a variety of products, including mobile handsets and IT

products, and owns an extensive portfolio of mobile phone retail outlets. The IT line of business

caters to the needs of government and corporate clients through a range of IT solutions. Finally,

the telecommunication line of business offers internet and data connectivity for retail and

corporate clients. Having achieved a strong national presence, Raya has expanded into regional

markets.

Steady sales growth and improvement in profitability

Since its establishment in May of 1999 through a merger between eight medium-sized companies

operating in Egypts IT market, Raya has been growing at exponential rates and has gone trough

a series of restructuring phases that resulted in streamlined operations, boosted productivity, and

strong organizational infrastructure. This was reflected in material progression in the companys

financial performance with sales more than doubling from EGP545 million in 2002 to EGP1,138

million in 2004. Net income followed, with the companys net loss of EGP8.9 million in 2002

reversed to a net income of EGP28.9 million in 2004. Having set up solid foundations, Rayas three

lines of business are poised for substantial growth moving forward. We expect forthcoming

growth rates in revenue, EBITDA and net income during our five-year forecast period to achieve

CAGRs of 26%, 31% and 48%, respectively.

We valued Raya at EGP35.64/share, 32% higher than offering price

We valued Raya using DCF and a comparison-based valuation vs. international peers on the basis

of 2005e and 2006e PE multiples. Our DCF valuation yielded a fair value of EGP37.28/share,

whereas the comparison-based valuation generated a fair value of EGP34.00 . By taking an

average of the two fair values, we arrived at a target price per share of EGP35.64, 32% higher

than the offering price of EGP27/share. Accordingly, we assigned Raya a Buy recommendation.

Selected Indicators*

2003a 2004a 2005e 2006e 2007e 2008e 2009e

Revenues (EGP mil.) 774.1 1,138.3 1,737.1 2,179.0 2,642.0 3,107.7 3,642.0

EBITDA (EGP mil.) 136.5 196.8 276.3 344.5 412.7 478.5 548.9

EBITDA margin 5.4% 7.8% 7.5% 8.3% 9.0% 9.3% 9.5%

Net income (EGP mil.) 5.0 28.9 57.5 96.4 132.3 167.2 206.1

EPS (EGP) 0.3 1.3 1.3 1.7 2.3 2.9 3.6

P/E (x) 54.0 10.4 9.4 8.0 5.9 4.6 3.8

P/BV (x) 2.4 1.6 1.3 1.6 1.4 1.2 1.0

P/FCF (x) - - 4.4 11.8 6.8 4.7 3.7

EV/EBITDA (x) 8.9 4.5 4.2 4.1 2.9 2.2 1.6

DPS (EGP) - - - 0.4 0.9 1.3 1.8

Dividend yield - - - 3.1% 6.8% 9.7% 13.3%

Source: Raya, Beltone Financial. *EPS, P/E and P/BV of 2005 are based on average number of shares in 2005 (pre and post capitalincrease).


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Raya Holding Technology and Telecommunications

2

Contents

Summary 3

Valuation 4

DCF valuation 4Comparison-based valuation 5

Valuation summary 6

Raya: an overview 7

Scope of business 10

Financial analysis and projections 15

Financial statements 18


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3

Summary

Major player in the Egyptian CIT market

Raya is the product of a merger of eight local, medium-sized companies in the Egyptian Communications

and Information Technology (CIT) market that was concluded in May 1999. The companys establishmentcame in reaction to its founders view that the local CIT market is dominated by international players and

lacks local ones backed up by sizable operations and a reputation that enables them to compete with

international players. After the merger Raya went through a series of diversification, streamlining and

expansion phases that resulted in developing three Lines of Business (LoB), namely Retail & Distribution,

Information Technology, and Telecommunications. Raya currently employs about 1.7k employees with

operations spanning the Middle East and North Africa regions and generated sales in excess of EGP1.1

billion in 2004.

An impressive growth story

The restructuring phases that Raya has gone through has resulted in developing a strategy that is focused

on growing regional operations, increasing sales of high value added services, increasing retail-focused

operations where profit margins are relatively high and maximizing synergies among its three LoBs. This

resulted in impressive growth in the companys size of operations with sales growing from EGP545 millionin 2002 to EGP1,138 million in 2004. The growth in the companys EBITDA was even more impressive,

jumping from a low EGP15.5 million in 2002 to EGP88.3 million in 2004, and net income growing over the

same period from a loss of EGP8.9 million to a net income of EGP28.9 million.

with much more growth to come

We expect Raya to maintain its growth both by acquisitions and organically. The company has finalized

the acquisition of 51% of SAMA, the larger of two distributors of Samsung mobile phones in Egypt. Raya is

also in the process of setting up a joint venture with National Bank of Egypt to be specialized in the

provision of IT services to the banking sector and is currently launching a retail and distribution business

in the fast growing Algerian market. Moreover, Raya continues to strengthen its regional presence and

capitalize on its strong local base to grow its existing operations. This shall translate into sales, EBITDA

and net income growing at a CAGR of 26%, 31% and 48% respectively over the coming five years.

A target price of EGP35.64/share, offering an upside potential of 32%

We have valued Raya using the following two methodologies: Discounted Cash Flow (DCF) and a

comparison-based valuation on the basis of 2005e and 2006e PE multiples. In the comparison-based

valuation we used three peer groups, comparable to the companys three LoB, based in several

developed/emerging markets. We arrived to the following valuation:

The DCF valuation yielded a fair value of EGP37.28/share. The comparison-based valuation yielded a fair value of EGP34.00/share.

By taking an average of the two fair values we arrived at a target price of EGP35.64/share, which

translates to an upside potential of 32% compared to the offering price of EGP27.00/share. Accordingly,

we assigned Raya a Buy recommendation.


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5

Comparison-Based Valuation

Raya looks attractively priced compared to international peers

Due to the absence of a sizable sample of companies that share Rayas diversified operations, we have opted to

develop our comparison-based valuation using three peer groups; the operations of the companies belonging to

each group are comparable to one of Rayas three LoBs, namely Retail & Distribution, IT, andTelecommunication. We could not identify enough listed companies in emerging markets within each group, so

we have included companies operating in developed markets in our peer groups. However, we accounted for the

higher risks inherent in investing in emerging markets vs. developed markets by applying a discount of 20% to

the valuation we arrived at using these, predominantly, developed market multiples.

The weights assigned to the multiples of each LOB peer group are equivalent to the forecast contribution

of Rayas three LoBs to Rayas consolidated EBITDA. This resulted in a weighted average PE multiple for

the peer group of 16.0x in 2005 and 13.7x in 2006. After taking into consideration the 20% discount to

account for the risk factor referred to above, we arrived at a comparison-based valuation of

EGP34.00/share, offering an upside potential of 26%.

Figure 3 | Comparison-based valuation

PE (x)Company Country* 2005e 2006e

Retail & Distribution peer group

V Tech Hong Kong 16.2 9.8

Lite-on-Technology Taiwan 12.0 10.5

IDT international Hong Kong 16.4 13.1

Compal Portugal 14.9 12.1

TCL communications technology Hong Kong 10.5 N/A

Average 14

IT peer group

Autron Corporation Singapore 7.1 4.8

D-Link Taiwan 8.7 10.9

Computer Sciences Corporation U.S.A 13.6 12.7

Tieto Enator Spain 15.9 13.8

Nortel Canada N/A 19.5Lucent U.S.A 16.8 14.8

Tech Data U.S.A 12.8 11.7

Atos Origin France 12.6 10.5

Accenture Ltd. Germany 15.2 13.4

Satyam U.S.A 15.4 12.7

Infosys India 20.8 17.0

Electronic Data Systems U.S.A 32.3 21.3

ComArch Poland 26.9 22.9

Average 16.5 14.3

Telecom peer group

Brocade Communications Systems Inc. U.S.A 12.4 10.8

AT&S Austria 14.2 14

Tellabs Inc. U.S.A 21.1 17.4

Freenet.de Germany 15.0 11.4

Commscope U.S.A 23.9 17.7Mcdata U.S.A 21.3 15.2

Qualcomm U.S.A 31.4 26.1

Juniper Networks U.S.A 33.3 27.9

Average 21.6 17.6

EBITDA-weighted average PE 15.97 13.69

Emerging markets discount 20% 20%

EBITDA-weighted average PE (post discount) 12.6 10.6

Source: Beltone Financial, Smith Barney. * Many of these companies have operations in more than one country


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6

A local perspective on PE multiples

It is worth noting that the Hermes Financial Index is currently trading at 14.9x 2005e earnings. At the

offering price of EGP27.00/share, Raya is being offered at 9.4x 1 2005e earnings, which translates to an

upside potential of 59% compared to average local 2005e PE multipes.

Valuation Summary

We calculated an arithmetic mean of the two fair values arrived at using the two valuation methodologies

referred to above, namely the DCF and PE-based valuation compared to international peers. We arrived at

a fair value per share of EGP35.64, implying an upside potential of 32% compared to the offering price of

EGP27.00/share. Accordingly, we assigned Raya a Buy recommendation.

Figure 4 | Valuation summary

Source: Beltone Financial

1 Based on average number of shares outstanding in 2005

DCF ValuationDCF Fair Value 50%

EGP37.28

Comparison-based valuationUsing 2005e P/E multiple 50%

EGP26.76 Upside potential of 32.0%Comparison-Based Valuation

EGP34.00 50%

Using 2006e P/E multipleEGP41.24 50%

Private Placement PriceEGP27.00

Fair ValueEGP35.64


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7

Raya: An Overview

Rayas history in brief

Rayas establishment in May 1999 came in reaction to its founders view that the local CIT market is

dominated by international players, while local companies were mostly small- and medium-sized andcommanded insignificant market shares. Very few of those local companies had sizable operations or a

reputation that enabled them to compete with international companies operating in Egypt. Raya was then

conceptualized as a product of a merger of eight local, medium-sized companies in the Egyptian CIT

market. The eight companies, namely Tritech, Protech, Oratech, Oratech Horizons, InFocus, Mega Trade &

Engineering, Unitec, and Triangle Information Systems, had operations spanning the distribution of mobile

phones and IT products, network equipment, and software applications. The companies also provided IT

services including hardware and network installation, integration services, and custom software

development. By merging the eight companies Raya benefited from the synergies of combining various

disciplines, thereby establishing a foundation upon which to address the spectrum of information

technology in its entirety. After the merger, Raya embarked on an ambitious strategy whereby the

companys operations were restructured, streamlined and expanded. Throughout that period alliances

were developed with the most prominent technology providers. This resulted in growing the companys

consolidated revenues from EGP276 million in 1999 to EGP1,138 million in 2004.

Strong management team

Raya is run by an experienced team of professionals that was able to steer it through a series of

restructuring phases and growth strategies that resulted in the creation of a regional CIT company. Behind

this strong management team is a strong workforce of 1,697 people, of which more than 730 are technical

professionals.

Figure 5 | Rayas organizational chart

Source: Raya

Financial highlights

The last three years have witnessed significant growth in Rayas performance with sales growing from

EGP544.6 million in 2002 to reach an impressive EGP1,138.3 million in 2004. The same trend was evident

at the EBITDA and net income levels, yet the growth was even steeper: EBITDA grew from EGP15.5

million in 2002 to EGP88.3 million in 2004, and net income followed, leaping from a net loss of EGP8.9

million to an impressive net income of EGP28.9 million in 2004. This was attributed to an improvement in

operating indicators across the companys three LoBs.

Mr. Medhat KhalilChief Executive Officer

Mr. Amr AbdallahChief Financial Officer

Ms. Magda HabibDirector of Marketing &

Communications

Mr. Ashraf SabryVice President & Chief Operating Officer

Mr. Sameh MontasserVice President of Information Technology

Mr. Hisham SanadRegional Director GCC

Mr. Khalid ShashDirector of Raya Contact Center

Mr. Ayman El BazManaging Director Raya Distribution

Mr. Mohamed FaresManaging Director Raya Telecom

Mr. Wael SaidDirector of Human Resources

Mr. Ibrahim SarhanRegional Director North Africa


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8

Figure 7 | Historical development of revenues, EBITDA and net income

0

20 0

40 0

60 0

80 0

1,00 0

1,20 0

Sales

2002 2003 2004

0

20

40

60

80

100

EBITDA

2002 2003 2004

-10

0

10

20

30

40

Net income

2002 2003 2004

Source: Beltone Financial and Raya

Capital and shareholders structure

Since its establishment Raya has gone through a series of capital increases that resulted in increasing its

capital to its current level of EGP111 million (22.2 million shares with a par value of EGP5/share). The

company has a diverse shareholder structure with strong institutional representation. Raya is currently

being listed on the Cairo and Alexandria Stock Exchanges (CASE), which will coincide with a secondary

offering of 6.0 million shares by selected existing shareholders. It is worth noting that the offering was

subscribed by 3x, thus resulting in an allocation rate of 34%. After the listing Raya will increase its paid in

capital to EGP286 million through a rights issue of 35 million shares at the par value of EGP5 per share.

We estimate that Rayas free float will reach 53% after the post the secondary offering.

Figure 6 | Pre-listing shareholder structure

Shareholder Number of Shares Ownership (%)

Financial Holdings International, Ltd. 2,659,187 11.98%

Medhat Khalil & Family 2,466,315 11.11%

Suliman Abdullah Aba-Numay 1,833,673 8.26%

Keystone Financial Holding Inc. 1,805,611 8.13%

Mohammed El Tawil 1,561,027 7.03%

Injazat Technology Fund 1,446,926 6.52%

Ahmed El Tawil 1,168,718 5.26%

Al Watany Bank of Egypt 959,691 4.32%

Islamic Corporation for Development of the Private Sector 913,848 4.12%

United Bank of Egypt 692,595 3.12%

Amr El Tawil 515,884 2.32%

Others 6,176,551 27.82%

Total 22,200,026 100.00%

Source: Raya

Capital increase proceedsRaya is expected to raise EGP175 million in equity through the previously mentioned capital increase of 35

million shares. The proceeds of the capital increase will be used in the following:

Acquisition of SAMA:Raya concluded a contract for the acquisition of 100% of SAMA Trading andDistribution Company at a total value of EGP55 million. The contract allows for the immediate

purchase of 51%, with an option to purchase the balance before the end of 2005.

Launching a mobile retail and distribution operation in Algeria: In line with its strategy ofregional expansion, Raya is in the process of creating a mobile Retail and Distribution operation in

the rapidly growing Algerian market. Raya Algeria will trade in Nokia products and provide

maintenance services. The Algerian operation will have 5 outlets by the end of 2005 and is projected

to reach 12 outlets by 2008. Investment in the Algerian operation are estimated at EGP30 million.


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A joint venture with the National Bank of Egypt:Raya signed a deal with the National Bank ofEgypt to create an organization specialized in deploying state-of-the-art IT infrastructure solutions,

business applications, and outsourced IT services specifically tailored to the banking sector in Egypt.

The joint venture will have a paid-in capital of EGP60 million, of which 60.0% is owned by Raya

amounting to EGP36 million. NBE will also be the ventures first client, however no restrictions are

imposed on the new venture on offering its services to any other bank.

Maintain Rays organic growth: The balance of the proceeds amounting to EGP54 million will beused to maintain Rayas organic growth, and finance future acquisitions.

Figure 13 | Capital increase proceeds

Sources of Funds EGP mil. Uses of Funds EGP mil.

Capital Increase 175.0 Acquisition of Sama 55.0

Establishment of Raya 30.0

Joint Venture with NBE 36.0

Organic Company Growth 54.0

Total Sources 175.0 Total Uses 175.0

Source: Raya


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Retail and Distribution LoB

The companys Retail and Distribution LoB operates in two product categories: mobile phones and IT

products. The mobile operations involve retail, distribution and maintenance services, while the IT

operations are currently limited to distribution only.

Figure 10 | Breakdown of retail and distribution LoB sales

EGP million 2002 2003 2004

Mobile operations

Distribution 269.2 366.5 530.9

Retail 47.9 63.5 106.3

Maintenance 5.2 14.9 18.8

Total 322.4 444.9 656.0

IT operations 34.1 69.1 116.7

Total 356.4 514 772.7

Source: Raya

Mobile operations

Raya was the first and principal importer and distributor of Nokia mobile handsets in Egypt, initiated in

1996 by Protech (one of Rayas predecessor companies). The retail, distribution and maintenance of Nokia

phones in Egypt was, and still is, the backbone for Rayas Retail and Distribution LoB. Raya remains

Nokias largest distributor in the Egyptian mobile handsets market, the other two being Ring (a subsidiary

of Orascom Telecom Holding) and, recently, Itsalat (a regional mobile distribution network). The Raya-

Nokia alliance has enabled Raya to build an extensive distribution network and utilize this extensive

distribution network to expand its product offerings to include IT products under multiple brand names.

The companys distribution network, now consists of over 300 dealers and 800 points of sale, and covers

most of Egypts population centers. As for the retail operations, Rayas network is comprised of 14 Nokia

stores. The companys maintenance services are provided through technical support staff situated in the

retail network, with the bulk of technical operations performed in a central maintenance hub.

Raya announced recently a decision to buy 51% of SAMA Trading and Distribution Co. while having an

option to increase its stake to 100% before the end of 2005. SAMA is the larger of two Samsung dealers in

Egypt (the other being Connect) with 2 Samsung stores, and 11 Phono stores selling various mobile

handset brands and MobiNil recharge cards. The acquisition solidifies Rayas market position by adding

Samsung, one of the leading local brands, to its product portfolio and expanding its network of retail

outlets.

IT operations

As for the IT distribution operations, Raya trades in computers, peripherals, IT components, software, and

other accessories under various brands including HP, Dell, Xerox, 3Com, D-Link, Intel, and Microsoft. Raya

also sells assembled PCs under the brand name IQ (a brand name owned by Raya). It is worth noting thatRaya succeeded in being a partner to the government in its initiative of providing a PC to each house,

which Raya is capitalizing on to boost its sales of assembled PCs. By the end of 2005 Raya will open two

stores specialized in the sales of IT products which will expand this divisions operations to include retail,

in addition to its existing distribution operations.

IT LoB

The IT business is predominantly project-based, and addresses clients IT-related needs, whether in the

government or corporate sectors. Through its IT LoB, Raya provides a broad spectrum of technology

products and services to cater to the IT needs of that market. The integrated solutions sold by Raya can

be broken down into two main components:


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Infrastructure Solutions:This segment is comprised of networks, hardware, and systems softwaresourced from international technology providers. This category also includes the services related to

the installation, implementation, operability, and after-sales support of these products.

Business Applications & Solutions: This segment is comprised of packaged software, customsoftware development, software-related consultancy, and training services.

One of Rayas key strengths in the IT LoB is being vendor independent unlike many of its competitors,

which gives it a significant competitive advantage. The company is supported by strong partnerships with

leading software companies and infrastructure vendors, including:

Software companies: Microsoft, Oracle, Business Objects, i-flex, Hummingbird; and PopkinSoftware.

Infrastructure vendors: Cisco Systems, Nortel Networks, Sun Microsystems, Diebold, HP, 3Com,Avaya Communications and Dell.

The IT market in Egypt is fragmented with no single company commanding significant market share.

However, Raya is one of the leading players in the IT market, among companies such as IBM, NCR and

Prosylab.

Raya was successful in developing a strong client base that span the corporate and government sectors,

both locally and regionally. In the corporate sector Raya was successful in creating a track record in

almost every industry including the banking, oil & gas, IT & telecom, hospitality, fast moving consumer

goods, distribution and manufacturing sectors. In the government sector, Raya catered to the IT needs of

several ministries in Egypt as well as Saudi Arabia and the UAE.

Raya also provides outsourced services that fall under the umbrella of the IT LoB which include:

Outsourced software engineering:Raya has formed a joint venture with Foxboro, a global leaderin production automation technology catering to various industries. Raya is one of three companies

worldwide that has a partnership with Foxboro, whereby Foxboro outsources the development of

production automation software to its partners.

Outsourced contact center services: Raya offers call center services to local and internationalcompanies through its contact center, which has a capacity of 460 agents. The Egyptian market for

outsourced call center services consists mainly of four players, namely Raya, Xceed, C3, and Ecco.

Xceed has the biggest call center in Egypt and grabs the highest market share, closely followed by

Raya, which has a strong client base including McDonalds, Vodafone, Arab Bank, Microsoft, Intel, HP,

MIBank, Novartis, Aventis, Mercedes-Benz and Fedex.

Figure 11 | Breakdown of IT LoB sales

EGP million 2002 2003 2004

Infrastructure solutions

Hardware sales 79.5 96.4 117.3

Solutions sales 22.5 27.6 41

Services sales 15.6 20.1 26.2

Total 120.6 144.1 184.5

Business applications and solutions

Licensed software sales 36.5 50.8 68.2

Software consulting sales 6.9 19.8 38.8

Software custom development 5.5 7.3 9.5

Training revenue 2.2 1.6 2.0

Total 51.1 79.5 118.5

Outsourced services

Outsourced software engineering 9.5 15.9 23.3

Outsourced contact center services 4.1 8.7 15.5

Total 13.6 24.6 38.8

Total 185.3 248.1 341.6

Source: Raya


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Telecommunications LoB

Raya Telecom is a leading data communications company and internet service provider in Egypt, with a

nation-wide network supporting both data transmission and Voice Over Internet Protocol (VoIP)

telephony. Raya data communication services can be grouped into two main categories: internet

connectivity and corporate Virtual Private Network (VPN), internet connectivity means providing access tothe internet with various downloading speeds that cater to consumers and corporate needs. As for

corporate VPN, Raya provides communication for companies between multiple branches/locations inside

Egypt, or outside Egypt through a partnership with British Telecom.

Figure 12 | Breakdown of Telecommunication LoB sales

EGP million 2002 2003 2004

Internet connectivity

Dial-up revenue 3.6 8.9 9.8

ADSL 0.0 0.9 2.8

DSL 1.6 5.3 13.9

Total 5.2 15.1 26.5

Corporate VPN

Local VPN 0.1 1.7 5.7

International VPN (BT) 1.9 3.8 4.4

Total 2.0 5.5 10.1

Total 7.2 20.6 36.6

Source: Raya

Built on state-of-the-art technology, Rayas network was operational in May 2002 and is highly resilient,

offering superior service, wide coverage, while creating a strong foundation upon which to grow in future

years. By selecting technology pioneer Cisco Systems as its sole network vendor, Raya eliminated

interoperability issues and facilitated the integration and management of its network.

Internet connectivity

In the consumer market Raya offers internet connectivity through the provision of internet dialup services

and Asymmetric Digital Subscriber Line (ADSL). ADSL offers higher download speeds and reliability at a

higher price, thus catering to the higher end of the consumer market and small to medium enterprises.

Raya has two dialup numbers; Starnet which is branded to target young users, and Raya which is

branded to target older, more sophisticated users.

For larger corporations, Raya provides Digital Subscriber Lines (DSL), which offers higher download

speeds and reliability compared to ADSL.

Corporate VPN

Virtual Private Networks (VPNs), link geographically distant branches into a single virtual working place.

Over a VPN corporate branches can transmit data, voice and video between a branch network. This

enables the provision of local VoIP and teleconferencing within a corporate intranet. Furthermore, Raya

offers complementary high value-added services to corporate clients such as management of their VPNs

and other outsourced services.

Raya has a partnership with British Telecom, through which it provides international VPN connectivity to

companies with branches outside Egypt, or between multinationals abroad and their local partners. Rayas

network also supports international VoIP, which is prohibited by the current regulatory environment.

The regulatory framework in Egypt allows for three classes of data communications licenses:

Class A:This gives its holder the right to construct its own network infrastructure and establish aninternational gateway leased from Telecom Egypt. Class A companies can sell their services to

resellers as well as directly to their clients.


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Class B:This gives its holder the right to construct its own network infrastructure and establish aninternational gateway leased from Telecom Egypt. Class B companies can sell to end users only.

Class C: Holders of this license do not invest in any network and basically use the networks of ClassA or B licensees on a revenue sharing basis. Class C licensees are also referred to as virtual ISPs.

There are 12 operators authorized to build and operate their own data networks. Four of these operatorsare Class A licensees while the other 8 are Class B licensees. Raya is one of the eight Class B licensees.

Currently there are 186 Class C licensees in Egypt.

Rayas network consists of 2 core nodes, 6 distribution nodes and around 320 access nodes. The network

utilizes 3 STM1 Flag connections with a capacity of 1.55 Mbps each. Rayas network is relatively mature

and passed the phase of extensive CAPEX requirements. Accordingly, any further expansions in the

network capacity will be achieved with minimal cash outlays.


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Financial Analysis and Projections

Retail and Distribution LoB revenues

Rayas management announced that it plans to increase its outlets to around 53 outlets by 2008 (including

Nokia, Samsung, Phono, Algeria and IT outlets) compared to a total of 14 as of 2004 excluding SAMAstores (23outlets including SAMA stores. This is driven by the fact that gross profit margins are higher in

the retail business compared to the distribution business (19% vs. 10% respectively, during 2004). Our

forecast for retail outlets is based on a revenue-per-store model. It is worth noting that new stores tend to

have lower revenue compared to older ones, which would gradually pick up as the store ages and

becomes more recognized in its neighborhood.

As for the distribution revenues, we expect them to be highly correlated with the progression in mobile

subscribers, taking into account a replacement rate of 25% by old handset owners on an annual basis.

Rayas share of the estimated total mobile handsets sales in Egypt was adjusted downwards going forward

to reflect the advent of Itsalat to the Egyptian market during 1Q05.

As for the maintenance revenues it is expected to increase in line with the growth of total retail and

distribution sales.

We expect Retail and Distribution LoB revenues to gain huge momentum in 2005 due to the acquisition of

SAMA: revenues are expected to increase dramatically by 62% from EGP763 million as of 2004 to reach

EGP1,233 million as of 2005. Going forward growth will be impressive, yet naturally less significant,

recording a CAGR of 24% over the following four years and reaching EGP2,577 million by 2009.

Figure 14 | Forecast outlets and contribution of each activity to revenues

0

5

10

15

20

25

30

35

0 2a 0 3a 0 4a 0 5e 0 6e 0 7e 0 8e 0 9e

IT Algeria Sama Nokia

0

500

1000

1500

2000

2500

3000

0 2a 0 3a 0 4a 0 5e 0 6e 0 7e 0 8e 0 9e

Maintenance Retai l Dist r ibut ion

Source: Beltone Financial

IT LoB revenues

In line with the companys strategy of increasing sales of high value added services to boost profitability,

Raya sales of application solutions and outsourced services, as opposed to infrastructure sales, has been

on the rise over the last three years. This caused the contribution of infrastructure revenues to total ITrevenues to decrease from 65% as of 2002 to 54% as of 2004. We expect this trend to prevail causing the

contribution of infrastructure revenues to total IT revenues to gradually drop to 49% by the end of our

forecast period. We also expect Raya to maintain its regional expansions, which would bolster IT

revenues. We expect total IT revenues to grow at a CAGR of 21% over the coming five years, reaching

EGP890.4 million as of 2009, compared to 2004 revenues of EGP342 million.

Telecommunications LoB revenues

Dial up internet revenues have been the largest contributor to Rayas telecommunications LoB in 2002 and

2003. This trend started to change in 2004 due to an initiative by the government to reduce the prices of

ADSL, which caused dial up contribution to drop from 46% as of 2003 to 29% as of 2004. We expect the

dial up market to grow at lower rates compared to the last three years due to the ADSL initiative which

resulted in a migration of heavy dialup internet users to ADSL. We expect dial up revenues to grow at a

CAGR of 13% to reach EGP18 million by 2009 compared to EGP10 million in 2004. As for the ADSL, we

expect Rayas subscribers to increase from 3,024 as of the end of 2004 to reach 58,968 by 2009,

Outlets Sales (EGP mil)


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translating to an estimatedmarket share of 20%. This will result in ADSL revenues reaching an estimated

EGP87 million in 2009, up from EGP2.8 million in 2004.

As for the corporate VPN sales we expect it to grow at a CAGR of 31% over the following five years

reaching EGP22 million, up from EGP5.7 million in 2004.

The deregulation of VoIP is expected to take place by the end of 2005. Rayas network is equipped to

handle voice transmission and capitalize on the growth potential that the deregulation of the

telecommunication sector will offer. However, due to the lack of information on the licensing of VoIP we

couldnt quantify this potential and it was not reflected in our projections.

Total telecommunications revenue shall grow by 63% during 2005 to reach EGP54 million compared to

EGP33 million recorded at 2004, and grow at a CAGR 39% over the following four years to reach EGP175

million as of 2009.

Total revenues

Total revenues are expected to increase by 53% in 2005 to reach EGP1,737 million compared to EGP1,138

million in 2004. This trend will be maintained in the four following years, with revenues growing at a CAGR

of 20%, reaching EGP3,642 million by 2009.

Figure 15 | Forecast total sales (EGP mil)

0

40 0

80 0

1200

1600

2000

2400

2002a 2003a 2004a 2005e 2006e 2007e 2008e 2009e

Telecom IT Distribut ion

Source: Raya, Beltone Financial

Gross profit and EBITDA margins

During 2004 Rayas GPM dropped from 17.63% to 17.29% due to advent Ring, Nokias second dealer in

Egypt. However, EBITDA margin improved, reaching 7.76% in 2004 compared to 5.36% in 2003. This was

due to slower growth of G&A expenses compared to the growth in the companys sales.

We expect Rayas GPM to decline over our forecast period. We expect Rayas GPM to decline going

forward due to the advent of Itsalat in the Egyptian mobile market. However, negative effect will be

partially offset by the managements focus on services that command higher margins. Accordingly, we

expect the GPM to drop to 15.9% in 2005 and reach 15.07% by 2009.

The drop in 2005 GPM will result in a drop in EBITDA margin, which is expected to decline from 7.7% in

2004 to 7.45% in 2005. However, we expect the EBIDA margin to gradually improve due to higher

efficiency that would result in the companys general and administrative expenses growing at a slower

pace than the companys top line. This will translate to an EBITDA margin of 8.35% in 2006, which shall

keep on improving, reaching 9.48% by the end of the forecast period.

Net income

During 2002 Raya witnessed a net loss of EGP8.8 million which was attributed to its telecommunication

LoB, which was in an early stage of development in terms of client base (yet fully developed in terms of

network infrastructure). However, the growth in Rayas top line along with an improvement in margins and

efficiency resulted in generating a net income of EGP5 million and EGP29 million in 2003 and 2004

respectively.


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Financial Statements

Balance Sheet

All figures in EGP 000s unless stated otherwise 2003a 2004a 2005e 2006e 2007e 2008e 2009e

Cash and cash equivalents 54,055 99,337 232,184 291,090 366,634 454,495 557,813

Accounts receivable, net 118,112 186,817 279,861 351,062 425,656 500,688 586,773

Inventories, net 69,601 90,894 133,906 168,159 204,351 241,014 283,534

Prepayments and other current assets 59,924 67,858 74,548 82,151 90,502 99,663 109,754

Total current assets 301,693 444,906 720,499 892,462 1,087,142 1,295,860 1,537,874

Property, plant and equipment, net 73,097 77,973 141,934 141,292 137,983 131,674 122,031

Investments in associates 2,373 6,191 1,970 1,970 1,970 1,970 1,970

Other non-current assets 35,991 32,183 37,481 49,691 60,837 70,920 79,939

Total non-current assets 111,461 116,347 181,386 192,953 200,790 204,564 203,941

Total assets 413,154 561,253 901,885 1,085,415 1,287,932 1,500,424 1,741,815

Accounts payable 102,575 136,045 223,176 280,266 340,584 401,689 472,557

Short-term borrowings 78,972 108,953 113,816 116,336 118,994 115,244 98,044

Distributions 277 814 - 24,101 52,920 75,226 103,040

Other current liabilities 80,322 104,885 118,521 135,113 155,381 178,688 205,491

Total current liabilities 262,146 350,698 455,513 555,816 667,879 770,847 879,132

Long-term borrowings 34,544 24,277 17,218 15,084 10,329 9,287 17,530

Provisions - - 10,409 23,465 39,296 57,918 79,741

Other non-current liabilities 3,716 3,124 3,124 3,124 3,124 3,124 3,124

Total non-current liabilities 38,259 27,401 30,750 41,673 52,749 70,329 100,394

Paid-in capital 99,194 111,000 286,000 286,000 286,000 286,000 286,000Legal reserve 929 929 929 929 929 929 929

Other reserves 5,289 7,751 7,751 7,751 7,751 7,751 7,751

Retained earnings 7,336 63,474 120,942 193,245 272,625 364,568 467,608

Total shareholders' equity 112,749 183,154 415,622 487,926 567,305 659,248 762,288

Total liab. and shareholders' equity 413,154 561,253 901,885 1,085,415 1,287,932 1,500,424 1,741,815



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Income Statement


Retail and distribution revenue 506,402 763,424 1,233,211 1,536,893 1,862,268 2,190,821 2,576,747

IT revenue 248,200 341,800 449,632 560,547 666,531 772,472 890,394

Telecommunications revenue 19,448 33,221 54,228 81,565 113,206 144,426 174,900

Total revenue 774,127 1,138,255 1,737,071 2,179,005 2,642,005 3,107,719 3,642,041

COGS 637,618 941,416 1,460,791 1,834,466 2,229,280 2,629,239 3,093,103

Depreciation 14,277 17,899 22,309 26,642 31,309 36,309 41,642

General and administrative expense 94,978 108,556 146,808 162,674 175,990 189,869 203,778

Amortization 2,901 2,914 2,677 3,741 4,804 5,867 6,931

Operating income 24,353 67,470 104,486 151,481 200,622 246,435 296,587

EBITDA 41,531 88,283 129,472 181,864 236,735 288,611 345,160

EBITDA margin 5.36% 7.76% 7.45% 8.35% 8.96% 9.29% 9.48%

Provisions 2,958 5,118 10,409 13,057 15,831 18,621 21,823

Other income and expenses 370 299 457 573 695 817 958Income before non-recurring items & tax 7,671 39,248 80,375 134,831 185,033 233,803 288,224

Non-recurring items -2,243 1,340 0 0 0 0 0

Income before tax 9,827 37,907 80,375 134,831 185,033 233,803 288,224

Tax 5,912 5,925 10,851 18,202 24,979 31,563 38,910

Minority interest -1,063 3,039 12,056 20,225 27,755 35,070 43,234

Net income 4,978 28,944 57,468 96,404 132,299 167,169 206,080



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Cash Flow Statement


Net income 4,978 28,944 57,468 96,404 132,299 167,169 206,080

Adj. to reconcile to net cash from op. act. 23,849 33,196 35,395 43,440 51,944 60,798 70,396

Changes in assets and liabilities -17,590 -37,545 -82,127 -66,048 -66,495 -64,553 -73,274

Net cash flow from operating activities 12,282 11,445 10,736 73,551 117,491 163,156 202,906

Net cash flow from investing activities -54,469 -54,791 -90,025 -41,950 -43,950 -45,950 -47,950

Net cash flow from financing activities 29,998 63,587 171,988 387 -26,198 -57,711 -84,183

Net change in cash & cash equivalents -12,189 20,241 92,700 31,988 47,343 59,495 70,772

BOP cash and cash equivalents 25,629 13,440 33,681 126,380 158,368 205,711 265,206

EOP cash and cash equivalents 13,440 33,681 126,380 158,368 205,711 265,206 335,978


Financial Ratios

2003a 2004a 2005e 2006e 2007e 2008e 2009e

Growth

Revenues 42.1% 47.0% 52.6% 25.4% 21.2% 17.6% 17.2%

Operating profit 394.5% 177.1% 54.9% 45.0% 32.4% 22.8% 20.4%

EBITDA 168.3% 112.6% 46.7% 40.5% 30.2% 21.9% 19.6%

Net profit 156.5% 481.5% 98.6% 67.8% 37.2% 26.4% 23.3%

Profitability

Operating profit margin 3.1% 5.9% 6.0% 7.0% 7.6% 7.9% 8.1%

EBITDA margin 5.4% 7.8% 7.5% 8.3% 9.0% 9.3% 9.5%

Net profit margin 0.6% 2.5% 3.3% 4.4% 5.0% 5.4% 5.7%

EPS (EGP) 0.25 1.30 1.00 1.69 2.31 2.92 3.60

RoAA 1.3% 5.9% 7.9% 9.7% 11.1% 12.0% 12.7%RoAE 4.6% 19.6% 19.2% 21.3% 25.1% 27.3% 29.0%

Leverage

Total debt/Total assets 27.5% 23.7% 14.5% 12.1% 10.0% 8.3% 6.6%

Total debt/Equity 100.7% 72.7% 31.5% 26.9% 22.8% 18.9% 15.2%

Net debt/Equity 52.7% 18.5% -24.3% -32.7% -41.8% -50.1% -58.0%



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