• Global values OTEL stock at RO2.339 and recommends ‘BUY’ on the stock
Global Investment House -Kuwait - Oman Telecommunications Company (OTEL)) registered a YoY net profit growth of 38.8% increasing from RO80.7mn in 2006 to RO112.0mn in 2007. The majority of this growth has come from the cellular segment. The opening up of the cellular services market in Oman has worked well to improve the cellular penetration that has increased considerably from 51.9% in 2005 to 96.2% in 2007. OTEL currently has 1.4mn cellular subscribers. Cellular subscribers in Oman have increased at a 5-year (2002-07) CAGR of 40.1% from 0.5mn subscribers in 2002 to 2.5mn in 2007.
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. Also, a prospective second fixed line player is expected to spice up the competition in this segment. Broadband is huge opportunity yet untapped to its full potential as reflected in the penetration rate. Future growth is expected to come from broadband and other international expansion. The sale of government shareholding to strategic telecom partners is expected to improve internal efficiencies and also the competitiveness of the company.
We believe that the stock is oversold on the news of a possible third player as the TRA is inviting bids on Aug 25, 2008. Also, after factoring in the potential loss of market share and decline in future ARPUs we believe that the stock has an upside potential at current valuation level. At the current market price of RO1.983 per share (as at Aug 31, 2008), the stock trades at 10.4x and 8.9x of its earnings and 3.8x and 3.1x of its book value for FY2008E and FY2009E respectively. 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.
Financial Overview
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%. The EPS also increased at the same rate from RO0.108 in 2006 to RO0.149 in 2007. The increase in revenues was due to increase in cellular revenues. Analysis of revenue composition in 2005 and 2007 indicates that cellular revenues have increased from 68.6% of annual revenues in 2005 to 77.6% in 2007.
Gross profit margin improved from 70.3% in 2006 to 72.3% in 2007 on the back of slight increase in the blended ARPU (including interconnect revenues). EBITDA margin also improved from 49.8% in 2006 to 52.9% in 2007 on the back of a lower SG&A expense ratio of 19.4% in 2007 as compared to 20.5% in 2006.
The ARPUs in the fixed line segment decreased by 9.3% whereas; those in cellular segment registered only a minor YoY growth of 0.7% leading to a slower YoY growth in the revenues of 12.9% in 2007. OTEL had registered a higher YoY growth rate of 19.6% in 2006. The positively growing EBITDA profile has also translated into better ROE for the company. The ROE has increased from 26.8% in 2005 to 32.9% in 2007.
OTEL’s ROA also has improved from 15.0% in 2005 to 22.9% in 2007 on the back of superior EBITDA growth profile. OTEL’s total assets increased by 7.7%; from RO457.3mn in 2006 to RO492.4mn in 2007. The capital expenditure was lower in 2007 at RO29.9mn compared to RO57.5mn in 2006.
We expect that the company should post a net profit of RO142.7mn in 2008 (EPS of RO0.190) and RO167.4mn in 2009 (EPS of RO0.223).
Financial Performance –1Q08
In 1Q08, OTEL achieved a net profit of RO38.4mn compared to RO24.0mn in 1Q07 registering a YoY growth of 60.0% on the back of double digit revenue growth with lower spending in operating expenses compared to the previous year. The revenues for the quarter ended Mar'08 rose by 14.6% to RO98.2mn compared to RO85.7mn in 1Q07.
The operating expenses declined by 2.7% to RO56.9mn compared to RO58.5mn for the same period of last year. The major reason for decline in operating expenditure came from royalty charges, provision of impairment of receivables and depreciation.
The EPS for 1Q08 was RO0.051, which is 59.8% higher than the corresponding period of the previous year. Total subscriber base (including cellular, fixed line and broadband) increased to 1.97mn as of Mar'08 compared to 1.67mn as of Mar’07, a YoY growth of 17.8%.
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. Also, the focus should be directed on enhancing internal efficiency to control operating costs, while cautious infrastructure investment to abreast new technologies that enhance the customer experience. The investment in 3G is a best bet to increase the subscriber base in the cellular space.
The international expansion strategies of OTEL are yet to show results as those investments are in a nascent stage and are gaining market share in the respective geographies gradually. With focus on profitable growth and steps to handle the competition we have a positive outlook on OTEL in the medium term.
