Subject : GCC Telecom Sector Quarterly
Prepared by : Global Investment House “Global”
Date : November 2009
Global Investment House – Kuwait – GCC Telecom Sector Quarterly
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$37 in Q3-2009.
Zain Stake Sale Deals
With regard to selling of 46% stake in Zain by Al-Khorafi group to Vavasi group and selling of 24.6% stake by
KIA (in a separate transaction) at KD2 per share, the deals are valued at 2009E earnings multiple of 24.5x and
2009E EV/EBITDA of 10.0x. In our view, transaction multiple looks expensive. At the same time, the deal
provides good exit opportunity to the sellers but there is no clarity on minority shareholders. Ideally, both the
stake selling deals should entail an open offer by the acquirer.
Regional Companies P/E & EV/EBITDA (2010E) Regional Companies P/E & P/BV (2010E)
Etihad 10.5 Zain
10.0 Etisalat Etihad
8.5 Wataniya Etisalat
P/E 8.5 P/E Saudi Telecom
8.0 Telecom 7.5
Batelco Qtel Omantel
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6
Source: Company Reports & Global Research Source: Company Reports & Global Research
In the telecom sector all the GCC countries have different operational metrics and each company in the region
has different operational dynamics depending on its reach in the domestic market, its strategy for overseas
expansions and funding strategy. In the GCC telecom space we remain overweight on Etisalat and Omantel.
Global Research Telecom Coverage
Ticker Country Mkt Cap Price* Stock Performance Div. Yield P/E (x) P/BV (x) Earnings Growth
(US$mn) (in LC) 1m 3m 12m 2009E 2010E 2009E 2010E 2009E 2010E
Zain Kuwait 16,731 1.12 -20.0% -12.5% 5.7% 0.0% 13.7 10.7 2.0 1.8 8.5% 28.2%
Wataniya Telecom Kuwait 2,608 1.48 -5.1% -10.8% -15.9% 3.4% 6.4 8.7 1.8 1.6 43.4% -25.6%
Saudi Telecom KSA 24,104 45.3 -9.9% -8.9% -24.5% 7.2% 8.7 8.1 2.3 2.2 -5.7% 8.4%
Etihad Etisalat KSA 8,306 44.5 9.9% 16.8% 57.2% 1.7% 11.3 10.0 2.6 2.2 31.7% 13.6%
Etisalat UAE 22,601 11.55 -5.7% 11.6% -23.3% 4.7% 9.2 8.8 2.1 1.8 3.5% 5.5%
Qatar Telecom Qatar 6,276 155.8 5.4% 5.8% 11.8% 6.4% 7.6 7.0 1.6 1.4 31.4% 10.0%
Omantel Oman 2,543 1.306 -6.7% -6.6% -25.6% 7.7% 7.2 7.1 2.3 2.1 14.2% 1.8%
Batelco Bahrain 2,330 0.61 -5.4% 8.0% 0.8% 8.2% 8.0 7.8 1.7 1.5 4.5% 3.3%
Source: Zawya & Global Research
* Market Price as of 8th November 2009
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 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.
Sector Universe Outlook & Recommendations
2009 Quartely Performance Key Long-Term Factors
Wataniya Telecom’s revenue declined by 1.0% from The company’s core operation, Kuwait, were hurt
KD355.3mn in 9M-2008 to KD351.7mn in 9M-2009. by regulatory changes as fee charged by mobile
The company's consolidated EBITDA registered a operators to receive calls on their network from
decline of 5.1% in 9M-2009 to KD141.9mn, resulting fixed-line has been scrapped, this resulting into
into EBITDA margin of 40.3%. It reported a net profit loss of revenue for mobile operators in Kuwait.
of KD97.3mn in 9M-2009, an increase of 42.7% over On the back of this ARPU and margins have been
the same period of 2008. This significant growth in negatively impacted for Kuwait operation.
profit for 9M-2009 is mainly attributable to one-off gain Going forward, in Kuwait, we expect that margins
from the reversal of provisions of KD49.9mn (net of are likely to remain under pressure due to the shift
expenses). In Q3-2009, the company’s revenue declined in call traffic and increasing competitive pressure.
by 5.1% to KD118.9mn over Q3-2008, while its net Strong EBITDA margin in Tunisian and Algerian
profit declined by 27.7% to KD18.5mn. operations.
Qatar Telecom (Qtel) recorded consolidated revenue Core operations, Kuwait and Qatar are under
of QR17.5bn for the first nine months of 2009, an pressure.
increase of 22.1% over QR14.3bn reported in 9M-2008. Wireless ARPU pressure in Qatar and Kuwait due
The company's consolidated EBITDA increased by to increasing competition and shift in call traffic in
19.4% in 9M-2009 to QR8.3bn, resulting into EBITDA Kuwait.
margin of 47.7%. Consolidated net profit attributable to Going forward we are positive on Iraq and Oman
shareholders increased by 27.7% from QR1.8bn in 9M- operations as both are performing well with
2008 to QR2.3bn in 9M-2009. In Q3-2009, the growing revenues and strong margins.
company’s revenue declined by 4.1% to QR5.9bn over Indosat reported declining customer base with
Q3-2008, while its net profit grew by 8.6% to volatile wireless ARPU.
Etisalat’s revenue increased by 6.3% from AED20.8bn Introduction of high ARPU iPhones in UAE is
in 9M-2008 to AED22.1bn in 9M-2009. It reported a likely to help in maintain wirless ARPU.
net profit of AED6.8bn, a decrease of 4.8% over the We see Saudi Arabia and Egypt as key growth
same period of 2008. The decline in profits was due to drivers among international operations.
the gain made by the partial sale of Mobily in 2008. Acquired 100% stake in Tigo, the second largest
Excluding the extraordinary gain of Mobily mobile operator in Sri Lanka from Millicom
(AED892mn) in 9M-2008, the profits earned in the nine International Cellular SA, for US$207mn
months of this year has actually risen 8.8%. In Q3-2009, (AED759.7mn). Tigo had around 2.25mn mobile
the company’s revenue declined by 0.5% to AED7.4bn subscribers and a market share of approximately
over Q3-2008, while its net profit grew by 5.1% to 21% as of Sept. 30, 2009.s
Saudi Telecom Company (STC) announced 9M2009 Entry into overseas markets thorugh acquisitions.
net profit of SR7.9bn (EPS: SR3.94) as compared to the 25% stake in Binariang will give STC exposure to
net profit of SR9.9bn (EPS: SR4.94) in 9M2008. On a growth markets in Malaysia, India and Indonesia.
quarterly basis, the company registered earnings of Expansion of 3G services to encourage use of
SR2.4bn (SR1.2 EPS) in 3Q2009 which is down value added services which will provide support to
20.2%YoY and down 19.7% QoQ. According to the ARPUs.
company the decline in net profits was due to a rise in Tapping into the high growth broadband market in
capital expenditure in its overseas investments in Saudi Arabia. Low broadband penetration along
Turkey, Kuwait, India and Indonesia. In addition, a rise with advent of wireless technology will see a
in inter-connection charges with other networks also further boost in this segment.
contributed to the decline in net profit.
Etihad Etisalat, also known as Saudi Mobily, Acquisitions in the broadband market, such as that
announced its 9M-2009 results. Net Profits witnessed a of Bayanat Al-Oula will provide exposure to the
healthy growth of 49.3% YoY in 9M-2009 to SR1.9bn high-growth broadband market in Saudi Arabia.
while revenues increased by 23.9% YoY to SR9.5bn. On Tie-ups with popular international cell phone
a quarterly basis, the company registered earnings of brands such as Blackberry and I-Phone will
SR807mn (SR1.15 EPS) in 3Q2009 which is up 49.7% continue to prop up mobile subscriber base.
YoY and up 19.6% QoQ. Revenues are SR3,511 for Expansion of netowrk coverage along with focus
3Q2009 which is up 23.9% YoY and 9.8% QoQ. The on quality. Mobily has invested heavily to increase
company has cited significant growth in High Speed its coverage area.
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.
Bahrain Telecommunications Co. (Batelco) With the entry of STC as third mobile operator in
recorded consolidated revenue of BD256.2mn for the Bahrain, both Batelco and Zain will face new
first nine months of 2009, an increase of 4.4% over challenges as Baharain has one of the highest
BD245.4mn reported in 9M-2008. The company's penetration rates in GCC.
consolidated EBITDA increased by 6.5% in 9M-2009 to ARPU and margins are likely to come under
BD111.6mn, resulting into EBITDA margin of 43.5%. pressure in Baharin.
Consolidated net profit attributable to shareholders In Jrodan Umniah (Batelco’s brand) is likely to
increased by 1.5% from BD78.3mn in 9M-2008 to face stiff competition because of Zain Jordan’s
BD79.5mn in 9M-2009. In Q3-2009, the company’s takeover of Paltel and awarding of 3G license to
revenue improved by 1.0% to BD85.6mn over Q3-2008, Jordan Telecom group.
while its net profit declined by 8.2% to BD25.3mn. 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
Zain (Mobile Telecommunications Company) recorded The company’s core operation, Kuwait, were hurt
consolidated revenues of KD1.16bn in H1-2009, an by regulatory changes as fee charged by mobile
increase of 24.1% over KD935.8mn reported in H1- operators to receive calls on their network from
2008. The company's consolidated EBITDA increased fixed-line has been scrapped, this resulting into
by 46.3% for the same period to reach KD512.2mn, loss of revenue for mobile operators in Kuwait.
resulting into EBITDA margin of 44.2%. Consolidated Going forward, in Kuwait, we expect that margins
net profit increased by 4.4% from KD148mn in H1- are likely to remain under pressure due to the shift
2008 to KD154.5mn in H1-2009. While making Y-o-Y in call traffic and increasing competitive pressure.
comparison for H1-2009 results one needs to consider In Jordan Zain regained market share from 39% in
that in H1-2008 there was an extraordinary gain of H1-2008 to 44% in H1-2009, however, revenue is
KD26.6mn from the IPO of its Zambia operations. On not catching up with increasing market share as
Q-o-Q basis, the group has achieved a growth of 4.8% ARPU is under pressure, affecting profitability
in total revenues, EBITDA growth of 9.1% and net growth.
profit growth of 4.0%. 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
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
Oman Telecommunication Co. (Omantel) reported Omantel has signed an agreement with two mobile
a net income of RO73.0mn (US$189.7mn), a decrease of resellers, Friendi and Renna, which would use
2.3% over the same period of 2008 (RO74.8mn). Omantel’s netwrok and bring wholesale revenues
Revenues declined by 1.3% from RO201.1mn in 1H- from local interconnect. The wholesale revenue
2008 to record RO198.5mn in 1H-2009. The most will partially offset the expected decline in market
impacted source of revenue was the international calling share in the mobile segment.
segment. Mobile segment is still the major source of The award of the second fixed-line license to
revenues with 66% (RO56mn) of total revenue coming Nawras ended the monopoly that Omantel
in the second quarter. On the other hand, operating enjoyed for many years. The entry of a second
expenses increased from RO118.4mn in 1H-2008 to fixed-line operator will intensify competition.
reach RO119.9mn in 1H-2009, up by 1.3%. Net profit Pricing strategy of international calls would be the
margin was slightly lower in 1H-2009 with 36.8%, as key as now Nawras has been awarded the right to
compared to 37.2% in 1H-2009. use its own international gateway, which is likely to
operate from 2010.