Telecom Sector Quarterly 19 Nov

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					                                                                                                                                                                   Sector Report


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)
    11.0
                                                                         Zain
                                                                                                      11.5
    10.5
                                                                                      Etihad          10.5                                            Zain
    10.0                                                                         Etisalat                                                                                     Etihad
                                                                                                                                                                           Etisalat
     9.5                                                                                               9.5
     9.0                                     Etisalat
                                                                                                       8.5                          Wataniya         Etisalat
                                                         Wataniya
 P/E 8.5                                                                                        P/E                                                                         Saudi Telecom
                              Saudi                                                                                               Batelco
     8.0                  Telecom                                                                      7.5
                                                                    Batelco                                                Qtel                                      Omantel
     7.5                                                                                               6.5
     7.0                                    Omantel
                                                           Qtel
                                                                                                       5.5
     6.5

     6.0                                                                                               4.5
           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
                                               EV/EBITDA                                                                                             P/BV

   Source: Company Reports & Global Research                                                                       Source: Company Reports & Global Research




                                                                                                                                                                                              1
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.

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

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.

         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.


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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.
QR710.9mn.
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
AED2.3bn.
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

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                                                              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           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
                                                             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               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.

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