Global’s GCC telecom sector quarterly report 

(MENAFN Press) - Most of the GCC Telco’s have witnessed significant ARPU pressure so far in 2009.

- With high penetration rates in almost all the GCC countries, population growth would be the key growth driver with increasing competition.

Shift in Call Traffic Impacted Revenues of Telecom Operators in Kuwait
Revenue of telecom operators in Kuwait were hurt by regulatory changes as fee charged by mobile operators to receive calls on their network from fixed-line has been scrapped, resulting into a loss of revenue for mobile operators in Kuwait. On the back of this ARPU and margins have been negatively impacted.

This regulatory change has far more consequences as there has been a shift in call traffic with increase in fixed to mobile (F2M) calls and declining calls from mobile to mobile (M2M) and also mobile to fixed (M2F). On the back of this Zain Kuwait’s ARPU declined from US$69 in 1H-2008 to US$54 in 1H-2009 while in case of Wataniya Telecom ARPU declined from US$50 in Q3-2008 to US$37 in Q3-2009.

Zain Stake Sale Deals

With regard to selling of 46% stake in Zain by Al-Khorafi group to Vavasi group and selling of 24.6% stake by KIA (in a separate transaction) at KD2 per share, the deals are valued at 2009E earnings multiple of 24.5x and 2009E EV/EBITDA of 10.0x. In our view, transaction multiple looks expensive.

At the same time, the deal provides good exit opportunity to the sellers but there is no clarity on minority shareholders. Ideally, both the stake selling deals should entail an open offer by the acquirer.

Recommendation

In the telecom sector all the GCC countries have different operational metrics and each company in the region has different operational dynamics depending on its reach in the domestic market, its strategy for overseas expansions and funding strategy. In the GCC telecom space we remain overweight on Etisalat and Omantel.

Top Picks:

Etisalat

Etisalat has strong presence in the domestic as well as international markets. The company continues to expand its international reach with further acquisitions. We believe that UAE would still be the main revenue driver for Etisalat, however, the key growth area in the UAE would be data and internet services.

We see Saudi Arabia and Egypt as key growth drivers among international operations. Etisalat is a net cash positive company, which will enable it to continue pursuing its expansion strategy and eye strategic acquisitions. Among regional players the company is trading at attractive 2010e EV/EBITDA multiple of 3.6x.

Omantel

Omantel is a small player in the GCC telecom space. In the recent past the operational dynamics has changed in Oman. The second fixed-line license has been awarded to the competitor Nawras, which ended the monopoly that Omantel enjoyed for many years. Secondly, Nawras has been awarded the right to use its own international gateway, which is likely to operate from 2010.

However, Omantel has strong presence being an incumbent player. Mobile resellers have started to operate in Oman and Omantel has signed an agreement with two mobile resellers, Friendi and Renna, which would use Omantel’s network and bring wholesale revenues from local interconnect. The wholesale revenue will partially offset the expected decline in market share in the mobile segment.

Recently the company has completed the up gradation of its internet network to 3.5G technology, which will help in enhancing the quality of the internet services. The company strong balance sheet with net cash positive balance.

Wataniya Telecom’s revenue declined by 1.0% from KD355.3mn in 9M-2008 to KD351.7mn in 9M-2009. The company's consolidated EBITDA registered a decline of 5.1% in 9M-2009 to KD141.9mn, resulting into EBITDA margin of 40.3%. It reported a net profit of KD97.3mn in 9M-2009, an increase of 42.7% over the same period of 2008.

This significant growth in profit for 9M-2009 is mainly attributable to one-off gain from the reversal of provisions of KD49.9mn (net of expenses). In Q3-2009, the company’s revenue declined by 5.1% to KD118.9mn over Q3-2008, while its net profit declined by 27.7% to KD18.5mn.

- The company’s core operation, Kuwait, were hurt by regulatory changes as fee charged by mobile operators to receive calls on their network from fixed-line has been scrapped, this resulting into loss of revenue for mobile operators in Kuwait.

- On the back of this ARPU and margins have been negatively impacted for Kuwait operation.

- Going forward, in Kuwait, we expect that margins are likely to remain under pressure due to the shift in call traffic and increasing competitive pressure.

- Strong EBITDA margin in Tunisian and Algerian operations.

Qatar Telecom (Qtel) recorded consolidated revenue of QR17.5bn for the first nine months of 2009, an increase of 22.1% over QR14.3bn reported in 9M-2008. The company's consolidated EBITDA increased by 19.4% in 9M-2009 to QR8.3bn, resulting into EBITDA margin of 47.7%. Consolidated net profit attributable to shareholders increased by 27.7% from QR1.8bn in 9M-2008 to QR2.3bn in 9M-2009. In Q3-2009, the company’s revenue declined by 4.1% to QR5.9bn over Q3-2008, while its net profit grew by 8.6% to QR710.9mn.

- Core operations, Kuwait and Qatar are under pressure.

- Wireless ARPU pressure in Qatar and Kuwait due to increasing competition and shift in call traffic in Kuwait.

- Going forward we are positive on Iraq and Oman operations as both are performing well with growing revenues and strong margins.

- Indosat reported declining customer base with volatile wireless ARPU.
Etisalat’s revenue increased by 6.3% from AED20.8bn in 9M-2008 to AED22.1bn in 9M-2009. It reported a net profit of AED6.8bn, a decrease of 4.8% over the same period of 2008. The decline in profits was due to the gain made by the partial sale of Mobily in 2008. Excluding the extraordinary gain of Mobily (AED892mn) in 9M-2008, the profits earned in the nine months of this year has actually risen 8.8%. In Q3-2009, the company’s revenue declined by 0.5% to AED7.4bn over Q3-2008, while its net profit grew by 5.1% to AED2.3bn.

- Introduction of high ARPU iPhones in UAE is likely to help in maintain wirless ARPU.

- We see Saudi Arabia and Egypt as key growth drivers among international operations.

- Acquired 100% stake in Tigo, the second largest mobile operator in Sri Lanka from Millicom International Cellular SA, for US$207mn (AED759.7mn). Tigo had around 2.25mn mobile subscribers and a market share of approximately 21% as of Sept. 30, 2009.s

Saudi Telecom Company (STC) announced 9M2009 net profit of SR7.9bn (EPS: SR3.94) as compared to the net profit of SR9.9bn (EPS: SR4.94) in 9M2008. On a quarterly basis, the company registered earnings of SR2.4bn (SR1.2 EPS) in 3Q2009 which is down 20.2%YoY and down 19.7% QoQ. According to the company the decline in net profits was due to a rise in capital expenditure in its overseas investments in Turkey, Kuwait, India and Indonesia. In addition, a rise in inter-connection charges with other networks also contributed to the decline in net profit. • Entry into overseas markets thorugh acquisitions. 25% stake in Binariang will give STC exposure to growth markets in Malaysia, India and Indonesia.

- Expansion of 3G services to encourage use of value added services which will provide support to ARPUs.

- Tapping into the high growth broadband market in Saudi Arabia. Low broadband penetration along with advent of wireless technology will see a further boost in this segment.
Etihad Etisalat, also known as Saudi Mobily, announced its 9M-2009 results. Net Profits witnessed a healthy growth of 49.3% YoY in 9M-2009 to SR1.9bn while revenues increased by 23.9% YoY to SR9.5bn. On a quarterly basis, the company registered earnings of SR807mn (SR1.15 EPS) in 3Q2009 which is up 49.7% YoY and up 19.6% QoQ. Revenues are SR3,511 for 3Q2009 which is up 23.9% YoY and 9.8% QoQ. The company has cited significant growth in High Speed Packet Access (HSPA) service as the key factor behind revenue and net profit growth. In addition the increase in area under coverage also weighed in on profitability.

- Acquisitions in the broadband market, such as that of Bayanat Al-Oula will provide exposure to the high-growth broadband market in Saudi Arabia.

- Tie-ups with popular international cell phone brands such as Blackberry and I-Phone will continue to prop up mobile subscriber base.

- Expansion of netowrk coverage along with focus on quality. Mobily has invested heavily to increase its coverage area.

Bahrain Telecommunications Co. (Batelco) recorded consolidated revenue of BD256.2mn for the first nine months of 2009, an increase of 4.4% over BD245.4mn reported in 9M-2008. The company's consolidated EBITDA increased by 6.5% in 9M-2009 to BD111.6mn, resulting into EBITDA margin of 43.5%. Consolidated net profit attributable to shareholders increased by 1.5% from BD78.3mn in 9M-2008 to BD79.5mn in 9M-2009.

In Q3-2009, the company’s revenue improved by 1.0% to BD85.6mn over Q3-2008, while its net profit declined by 8.2% to BD25.3mn.

- With the entry of STC as third mobile operator in Bahrain, both Batelco and Zain will face new challenges as Baharain has one of the highest penetration rates in GCC.

- ARPU and margins are likely to come under pressure in Baharin.

- In Jrodan Umniah (Batelco’s brand) is likely to face stiff competition because of Zain Jordan’s takeover of Paltel and awarding of 3G license to Jordan Telecom group.

- The company expects to launch its operations in India by the end of the year. In May 2009, Batelco, along with Dubai Millennium has acquired 49% of the Indian telecommunication company, S Tel. The acquisition amounted to US$225mn. S Tel has mobile licenses in Bihar, Orissa, Jammu and Kashmir, Himachal Pradesh, North-East and Assam.

Zain (Mobile Telecommunications Company) recorded consolidated revenues of KD1.16bn in H1-2009, an increase of 24.1% over KD935.8mn reported in H1-2008. The company's consolidated EBITDA increased by 46.3% for the same period to reach KD512.2mn, resulting into EBITDA margin of 44.2%. Consolidated net profit increased by 4.4% from KD148mn in H1-2008 to KD154.5mn in H1-2009. While making Y-o-Y comparison for H1-2009 results one needs to consider that in H1-2008 there was an extraordinary gain of KD26.6mn from the IPO of its Zambia operations. On Q-o-Q basis, the group has achieved a growth of 4.8% in total revenues, EBITDA growth of 9.1% and net profit growth of 4.0%.

- The company’s core operation, Kuwait, were hurt by regulatory changes as fee charged by mobile operators to receive calls on their network from fixed-line has been scrapped, this resulting into loss of revenue for mobile operators in Kuwait.

-Going forward, in Kuwait, we expect that margins are likely to remain under pressure due to the shift in call traffic and increasing competitive pressure.

- In Jordan Zain regained market share from 39% in H1-2008 to 44% in H1-2009, however, revenue is not catching up with increasing market share as ARPU is under pressure, affecting profitability growth.

- With regard to Iraq operation, it has high growth potential and its margins are also improving. In Saudi though the penetration level has already crossed 100%, the market has still room for further growth, however, it will have to compete hard with the two existing players, STC and Mobily.

- In Africa the company has much high growth under penetrated markets. Nigeria is an important market in the company’s Africa portfolio in terms of size of its population.

- Apart from these, in Africa the company operates in many high growth potential markets (in terms of penetration) such as Zambia, Tanzania, Niger, Burkina Faso, Democratic Republic of Congo, Malawi, Chad, etc., however, many of these are low-income markets.

Oman Telecommunication Co. (Omantel) reported a net income of RO73.0mn (US$189.7mn), a decrease of 2.3% over the same period of 2008 (RO74.8mn). Revenues declined by 1.3% from RO201.1mn in 1H-2008 to record RO198.5mn in 1H-2009. The most impacted source of revenue was the international calling segment.

Mobile segment is still the major source of revenues with 66% (RO56mn) of total revenue coming in the second quarter. On the other hand, operating expenses increased from RO118.4mn in 1H-2008 to reach RO119.9mn in 1H-2009, up by 1.3%. Net profit margin was slightly lower in 1H-2009 with 36.8%, as compared to 37.2% in 1H-2009.

- Omantel has signed an agreement with two mobile resellers, Friendi and Renna, which would use Omantel’s netwrok and bring wholesale revenues from local interconnect. The wholesale revenue will partially offset the expected decline in market share in the mobile segment.

- The award of the second fixed-line license to Nawras ended the monopoly that Omantel enjoyed for many years. The entry of a second fixed-line operator will intensify competition.

- Pricing strategy of international calls would be the key as now Nawras has been awarded the right to use its own international gateway, which is likely to operate from 2010.