• Global : GCC Telecom Operators are on an expansion spree
Global Investment House- GCC telecom sector- August 2008 - In the recent years the GCC telecom players are on an expansion spree following measures from Saudi Arabia, Bahrain, Oman, and UAE to allow additional service providers in the respective countries. This should result in inducing higher competition and further drop in ARPUs in the region and resultant contracting profitability of the players. The service providers should aim to increase their market shares by providing differentiated value added services and providing content based services (like mobile video streaming) to enhance the ARPUs.
The GCC region registered a decline of 6.9% in fixed line subscribers from 5.8mn subscribers in 2006 to 5.4mn subscribers in 2007 on account of increasing shift of customer base to the more convenient mobile voice services.
Increasing disposable income and convenience of use is encouraging the cellular penetration in the region. Other important contributing factor to the increased cellular penetration is the relaxation in telecom regulations allowing second or third player in each country apart from the incumbent local carriers (usually the first state run Telco service provider in each country). The GCC region registered a 5 year (2002-07) growth in cellular subscribers at a CAGR of 37.6 %. The MENA region has seen the highest worldwide 5 year (2002-07) growth in cellular subscribers at a CAGR of 52.9% against the worldwide increase of 23.3%. With the country wise cellular markets reaching or crossing the 100% penetration levels within the GCC region, all the six member countries registered double digits CAGR during the 5 year (2002-07) period.
In 2007, Asia and MENA region were the major growth contributors with YoY growth rates of 36.8% and 33.9% respectively. UAE topped the list of high growth contribution with a YoY growth rate of 34.6% with its internet user base increasing from 1.7mn in 2006 to 2.3mn in 2007. The next highest contributor was Saudi Arabia that reported a 31.9% YoY increase in the internet users’ base from 4.7mn in 2006 to 6.2mn in 2007. The high proportion of youth in the demographics, with 55% to 65% of the total population under the age of 30 years is driving the internet usage in the GCC region.
The higher rate of internet penetration and improved infrastructure services in terms of shift from Dial up to cable is helping increase the broadband subscriber base in the GCC region. The analysis of 5 year (2002-07) CAGR in broadband subscribers worldwide indicates that the GCC region is amongst the top three growth regions in the world. The worldwide broadband subscriber base increased at a 5 year (2002-07) CAGR of 38.9%.
Companies under coverage
As a part of the GCC Telecom coverage we are covering Qatar Telecom (Qtel), Mobile Telecommunications Company (Zain), National Mobile Telecommunications Company (Wataniya), Saudi Telecom (STC), Etihad Etisalat Company (Mobily), Emirates Telecommunications Corporation (Etisalat), Oman Telecommunications Company (OTEL) and Bahrain Telecommunications Company (Batelco) in this report.
Mobile Telecommunications Company (Zain) was established in 1983 in Kuwait as the region's first mobile operator. Since 2003, it has grown significantly becoming the 4th largest telecommunications company in the world in terms of geographic presence with a footprint in 22 countries spread across the Middle East and Africa providing mobile voice and data services to over 50.74mn active customers (as at 30 June 2008). In August 2008 the company is raising its equity capital through rights issue. The company’s paid up capital will be increased by 75% through rights. We have used Sum-Of-The-Parts (SOTP) valuation method for company’s operations in different countries. Based on consolidation of the individual country operations, our SOTP valuation estimates the fair value of Zain’s stock at KD1.77, which is 2.7% higher than the current market price of the stock of KD1.72 per share (as at Aug. 31, 2008). We, therefore, reiterate our “HOLD” recommendation on the stock.
National Mobile Telecommunications Company (Wataniya) has grown rapidly through acquisitions in the MENA region and Asia. Apart from Kuwait, the company has operations in Maldives (100% stake), Saudi Arabia (55.61% stake), Tunisia (50% stake), Algeria (71% stake) and in 2007 it got a license to launch second mobile services in Palestine (57% stake). In March 2007, Qatar Telecom (Qtel) acquired 51% of Wataniya Telecom shares from Kuwait Projects Company Holding KSC (KIPCO) group for a total cash consideration of US$3.8bn. We have used Sum-Of-The-Parts (SOTP) valuation method for company’s operations in different countries. Based on consolidation of the individual country operations, our SOTP valuation estimates the fair value of Wataniya’s stock at KD2.58, which is 38.6% higher than the current market price of KD1.86 (as at Aug. 31, 2008). We, therefore, revise our recommendation on the stock from HOLD to “BUY”.
Saudi Telecom (STC), was the sole provider of telecommunication services in Saudi Arabia until its monopoly in the mobile market ended when the second mobile license was granted in 2004 to Etihad Etisalat Company (Mobily). In March 2007, a consortium led by Zain of Kuwait won the third mobile, and launched its services in 2008. In April 2007, three fixed line licenses were granted in Saudi, ending STC's monopoly over fixed lines. As a result of increasing competition, the company started expanding outside its home market beginning with the Maxis deal which gave STC foothold in Malaysia, India, and Indonesia, Later, STC won the bid for a 26% stake in Kuwait's third mobile service operator. Finally, STC acquired a 35% stake in Oger Telecom, which gave STC presence in Turkey and South Africa. We expect STC's revenues to grow by a CAGR of 9.2% during our forecast period (2008-2011). Our DCF valuation estimates the fair value of STC's stock at SR78.75, which is 21.6% higher than the current market price of the stock. We therefore reiterate our "BUY" recommendation for STC.
Etihad Etisalat Company (Mobily), is Saudi's second mobile operator. Mobily launched its services in May 2005. Within three years of operations, the company managed to grab a market share of 41% by the end of 2007, with 11.1mn subscribers. Mobily has been targeting the data and internet segment aggressively. In 2007, the company acquired a 99.9% stake of the local data provider Bayanat Al-Oula, and set up Mobily InfoTech, a fully owned subsidiary in India, which will provide information technology and consulting services. In addition, Mobily got the approval to acquire 96% of Zagel International Communication Network Company which is specialized in providing internet services in Saudi Arabia. We believe that Mobily's latest acquisitions will strengthen its position in the wireless broadband internet segment. Our DCF valuation estimates the fair value of Mobily's stock at SR68.84, which is 49.6% higher than the current market price of the stock. We therefore reiterate our "BUY" recommendation for Mobily.
Emirates Telecommunications Corporation (Etisalat) was the sole provider of telecommunication in the UAE until its monopoly was broken when Emirates Integrated Telecommunications Company (EITC) know as "DU" won the second license for fixed line, mobile, and internet services in 2005. The group is present in 15 countries in Africa and Asia. We expect the share of international operations of the group's top line results to increase from 6% in 2007 to 11% in 2011. We have used Sum-Of-The Parts (SOTP) valuation method for the company's operations in different countries. Based on the consolidation of the individual company operations, our SOTP valuation estimates the fair value of Etisalat's stock at AED27, which is 50% higher than the current market price of the stock. We therefore initiate our coverage for Etisalat with a "BUY" recommendation.
Qatar Telecom (Qtel) provides domestic and international telecommunication services in Qatar and wireless telecommunication services in the Asia and MENA region through its subsidiaries. The year 2007 was a transformative one for Qtel – characterized by many partnerships and acquisitions in the MENA and Asia regions. These activities have broadened Qtel’s geographic presence to 16 countries (2006 – 2 countries) with the ability to reach over 560mn people. In 2007, the Qtel group’s subscriber base has grown from 1.72mn in 2006 to over 16mn – an increase of over 850%. In March 2007, Qatar Telecom (Qtel) acquired 51% of Wataniya Telecom shares from Kuwait Projects Company Holding KSC (KIPCO) group. In June 2008, Qtel acquired a 40.8% stake in PT Indosat Tbk, Indonesia's second-largest phone company, from its subsidiary Asia Mobile Holding Pte. Ltd. We have used Sum-Of-The-Parts (SOTP) valuation method for the company’s operations in different countries. Based on consolidation of the individual country operations, our SOTP valuation estimates the fair value of Qtel’s stock at QR282.4, which is 77.2% higher than the current market price of QR159.4 per share (as at Aug. 31, 2008). We, therefore, revise our recommendation on the stock from “HOLD” to “BUY”.
Bahrain Telecommunications Company (Batelco) is the incumbent telecom operator in Bahrain. The subsidiaries/associates of Batelco are Umniah (Jordan), Qualitynet (Kuwait), Sabafon (Yemen), Batelco Egypt and Atheeb (Saudi Arabia). Batelco posted a double digit YoY net income growth rate of 13.6% increasing from BD89.3mn in 2006 to BD101.5mn in 2007. Batelco has adopted the right strategy of exploring and investing in low penetrated markets both in cellular and broadband space. Its aim to grow geographically into the MENA region with a goal to generate 70.0% of its revenues from international operations by the end of 2010 seems to be achievable given the success they have achieved so far in their investments. The estimated fair value for Batelco works out to BD0.837 per share which offers and upside of 18.7% on the market price of BD0.705 per share (as at Aug. 31, 2008). Hence, we initiate on the stock with a “BUY” recommendation.
Oman Telecommunications Company (OTEL) is the incumbent telecom service provider in Oman. Nawras is a competitor of OTEL in the cellular segment. OTEL registered a topline YoY growth of 12.9% increasing from RO323.6mn in 2006 to RO365.3mn in 2007. The net profit increased from RO80.7mn in 2006 to RO112.0mn in 2007 registering a YoY growth rate of 38.8%. We believe that the Omani telecom sector is to see unprecedented competition in the coming years attracting cellular players now that TRA is considering a third cellular player. OTEL should continue to retain its market share in this competitive scenario by enhancing revenue growth in Fixed and Mobile segment, while retaining valued customers through loyalty programs. The estimated fair value for OTEL works out to RO2.339 per share which offers and upside of 18.0% on the market price of RO1.983 per share (as at Aug 31, 2008). Hence, we initiate on the stock with a “BUY” recommendation.
