november 2010 gcc telecom sector quarterly · 2012-11-27 · the telecom sector has witnessed an...

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Q2010

Sector November 2010

GCC Telecom Sector Quarterly BlackBerry here to stay in UAE

Etisalat sets eyes on Zain; Wataniya to increase its stake in “Tunisiana”

Telecom sector witnesses upsurge since our last valuation report on GCC Telecos

BlackBerry ban averted As we anticipated in our last telecom quarterly report, the UAE regulator and Research In Motion reached a deal on provision BlackBerry services. We believe, this was the likely and logical course of action by Research In motion (RIM) and the regulator since both parties had a lot at stake. The details of the agreement haven‟t been disclosed but it comes as good news for telecom operators and subscribers in UAE as Blackberry is the system of first choice for many corporates.

Qatari-Tunisian consortium to acquire 50% stake in Tunisian mobile operator for US$1.2bn Kuwait-based Wataniya Telecom, a subsidiary of Qatar Telecom, in a consortium led by Princesse Holding of Tunisia, has acquired 50% stake in „Tunisiana‟ from Orascom Telecom, subject to approval by the regulatory authorities. 75% of the 50% stake is expected to go to Wataniya and 25% to Princesse Holding. Wataniya, which already owns 50% stake in the Tunisian mobile operator, will be in a position to control the board and management of Tunisiana, thus allowing it to fully consolidate the results. The deal is expected to be finalized in January 2011, according to Qatar telecom. Currently Wataniya‟s Tunisian operation is one of its core growth drivers. The reported 9M-2010 revenues of “Tunisiana” reached US$276mn representing a growth of around 5% YoY. 9M-2010 EBITDA grew by 1% YoY to US$146mn translating into an EBITDA margin of 52.9%.

Etisalat and Kharafi group sign agreement for sale of 46.0% stake in Zain Etisalat and Kharafi group signed an agreement to start due diligence for sale of 46% stake in Zain Telecom at a price of KD1.7 (US$6.1) per share, in a deal that would be worth US$12bn.The deal is likely to see a bumpy ride as certain groups are objecting to the sale. According to Etisalat the proposal will terminate unless the parties enter into "definitive transaction documents” by 15 January 2011.

Regional Companies P/E & EV/EBITDA (2010E) Regional Companies Dividend Yield & ROAE (2010E)

Source: Company Reports & Global Research

Follow-up on our Recommendation The telecom sector has witnessed an upsurge since our last valuation report on GCC Telecos (July 2010). Zain witnessed an increase of 33.3% since recommendation followed by 12.7% for Mobily and 10.9% for Qtel. Wataniya, Saudi Telecom and Etisalat also witnessed an increase of 9.3%, 9.3% and 7.3% respectively, vindicating our overweight recommendations for all these stocks. Global Research Telecom Coverage

Source: Global Research & Zawya * Market Price as of 25th Nov. 2010 and for Saudi stocks market price is as of 27nd Nov. 2010

Qtel

Wataniya

Zain

Etisalat

Batelco

Saudi Telecom Mobily

Omantel

6.0

7.5

9.0

10.5

12.0

13.5

15.0

16.5

18.0

2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0

P/E

EV/EBITDA

Qtel

Wataniya

Zain

Omantel

EtisalatBatelco

Saudi Telecom

Mobily

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0% 15.0% 20.0% 25.0% 30.0%

Div

ide

nd

Yie

ld

ROAE

Ticker Country Mkt Cap Price* Div. Yield Target Reco. % chg.

(US$mn) (in LC) 1m 3m 12m 2010E 2011E 2010E 2011E Price in July '10 Since Rec.

Zain Kuwait 21,919 1.44 1.4% 18.3% 60.0% 5.2% 15.3 13.3 2.0 1.9 1.24 BUY 33.3%

Wataniya Telecom Kuwait 3,360 1.88 1.1% 5.6% 25.9% 3.2% 12.8 8.5 1.9 1.6 2.04 BUY 9.3%

Saudi Telecom KSA 21,333 40.00 1.1% 7.8% -7.9% 7.3% 9.5 10.1 1.8 1.7 44.80 BUY 9.3%

Mobily KSA 10,267 55.00 1.8% 4.2% 33.1% 3.2% 10.9 10.4 2.6 2.2 60.10 BUY 12.7%

Etisalat UAE 23,775 11.05 -3.5% 10.9% 14.5% 5.4% 12.0 11.3 2.2 2.0 13.50 BUY 7.3%

Qtel Qatar 7,373 183.00 3.7% 9.3% 30.1% 4.1% 9.6 9.4 1.7 1.5 187.70 BUY 10.9%

Omantel Oman 2,328 1.19 - 5.2% 0.5% 8.4% 8.8 8.1 2.0 1.9 1.38 BUY 2.9%

Batelco Bahrain 1,988 0.52 -1.0% -7.1% -4.7% 6.7% 7.5 7.0 1.4 1.2 0.618 HOLD -8.0%

Stock Performance P/E (x) P/BV (x)

Faisal Hasan, CFA

Head of Research

[email protected]

Phone: +965-2295 1270

Chandresh Bhatt

Assistant Vice President

[email protected]

Phone: +965-2295 1282

Umar Faruqui

Financial Analyst

[email protected]

Phone: +965-2295 1281

mailto:[email protected]

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Global – GCC Telecom Sector Quarterly

Road to Etisalat and Kharafi Group deal

As per recent media reports, Zain shareholder Kharafi Group and Etisalat signed an agreement on Wednesday to start the due diligence for a deal to sell 46% of Zain to the UAE telecoms operator. Kuwait's bourse had been informed that Al Khair National for Stocks and Real Estate Co., a portfolio client of National Investments Co. (NIC) have signed an agreement relating to Etisalat's planned 46% stake buy in Zain. NIC is a company owned by the Kharafi Group.

Due diligence will begin in accordance with the rules and regulations applicable by the company, and sale procedures will be executed in accordance with the rules and regulations of the Kuwait Stock Exchange,” according to the statement on bourse‟s website.

Etisalat said its proposal will terminate unless the parties have entered into "definitive transaction documents by 15 January 2011." Due diligence is expected to take a number of weeks, and if signed the transaction is unlikely to close before the end of the first quarter of 2011, Etisalat said. In September 2010, Etisalat submitted a preliminary conditional offer to buy 46% of Zain at a price of KD1.7 (US$6.1) per share, in a deal that would be worth US$12bn. The 46% is a controlling stake in Zain since 10% of its equity is in treasury shares which do not enjoy voting rights.

Deal Valuation:

- The deal values 46% stake in Zain at around US$12bn thus valuing the company at US$25.9bn as compared to its market cap. of US$21.9bn based on its closing price of KD1.44 per share(as of Nov. 25). The offer price of KD1.7 per share implies a 18% premium over Zain‟s market price of KD1.44 per share.

- The deal values Zain at 2010E and 2011E earnings multiple of 18.1x and 15.6x

respectively while on EV/EBITDA multiple basis the transaction is valued at 10.5x and 9.9x for 2010E and 2011E respectively.

- Zain‟s last closing price of KD1.44 per share is 16.1% higher than our

fair valuation of KD1.24 per share.

Zain Valuation Matrix

At current market price of KD1.44 per share At deal price of KD1.7 per share

EV/EBITDA P/E EV/EBITDA P/E

2010 2011 2010 2011 2010 2011 2010 2011

8.7 8.1 15.3 13.3 10.5 9.9 18.1 15.6

Source: Global Research

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Bahrain GSM Sector Indicators

Bahrain Cellular Subscriber base (in mn)

Source: Industry Sources & Global Research

Bahrain Quarterly Customer Additions


At the end of Sept. 2010, Bahrain’s total mobile subscriber base was at 1.61mn, registered a Y-o-Y increase of 9.6%. 3Q-2010 witnessed a Q-o-Q growth of 1% in subscriber base, added about 16k new subscribers during the quarter.

Operator-wise Subscriber Base (in ‘000)


Operator-wise Customer Additions (in ‘000)


In 3Q-2010, Batelco and Zain have witnessed Y-o-Y decline of 3.8% and 6.5%, respectively, in their subscriber base.

In 3Q-2010, Batelco and Zain witnessed Q-o-Q fall of around 33k and 39k, respectively, in subscriber base.

Quarterly Market Share based on Subscribers

Over the last few quarters, Batelco and Zain are gradually losing their subscriber market share. The entry of the third operator, STC (Viva) resulted in stiff competition in Bahrain and it gained around 13% market share at the end of Q3-2010.

1.47 1.48

1.53

1.60 1.61

2.8%

0.8%

3.4%

4.2%

1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1.40

1.45

1.50

1.55

1.60

1.65

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

Bahrain Cellular Subscriber base (in mn) - LHS Q-o-Q growth

40,000

12,000

50,014

63,986

16,000

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

-

200

400

600

800

1,000

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

779 822 838 869 836

693 662 646 604 565

50 125

213

Batelco Zain Viva

(60.0)

(40.0)

(20.0)

-

20.0

40.0

60.0

80.0

100.0

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

26.0

43.0

16.0

31.0

(33.0)

14.0

(31.0)

(16.0)

(42.0) (39.0)

50.0

75.0

88.0

Batelco Zain Viva

55.4%

44.6%

Q4-2009

Batelco Zain

54.6%

42.1%

3.3%

Q1-2010

Batelco Zain Viva

54.4%37.8%

7.8%

Q2-2010

Batelco Zain Viva

51.8%35.0%

13.2%

Q3-2010

Batelco Zain Viva

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Kuwait GSM Sector Indicators

Kuwait Cellular Subscriber base (in mn)


Kuwait Quarterly Customer Additions (in mn)


At the end of Sept. 2010, Kuwait’s total GSM subscriber base was at 4.32mn, registered a Y-o-Y increase of 17%. 3Q-2010 witnessed a Q-o-Q growth of 2.5% in subscriber base, added 105k new subscribers during the quarter.

Operator-wise Subscriber Base (in mn)




In 3Q-2010, Viva achieved a Q-o-Q subscribers growth of 11% and Wataniya reported a growth of 2.9% whereas Zain’s subscriber base declined by 0.8%.

Viva took the higher share of new subscriber additions in 3Q-2010, posing stiff competition to Zain and Wataniya.


Viva achieved significant mileage in terms of subscriber’s market share which increased from 4.2% at the end of 2008 (when it started its operation) to 16.9% in 3Q-2010. Zain witnessed a decline in its market share from 55.0% at the end of 2008 to 43.3% at the end of 3Q-2010. Since last few quarters Wataniya’s market share remained almost stable in the range of 39.5% to 39.8%.

3.69

3.86

4.094.21

4.32

3.6%

4.7%

5.9%

3.0%2.5%

1.5%

3.0%

4.5%

6.0%

7.5%

3.20

3.40

3.60

3.80

4.00

4.20

4.40

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

Kuwait Cellular Subscriber base (in mn) - LHS Q-o-Q growth

0.13

0.17

0.23

0.120.11

0.00

0.05

0.10

0.15

0.20

0.25

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

-

0.50

1.00

1.50

2.00

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

1.81 1.84 1.88 1.89 1.87

1.46 1.54 1.62 1.67 1.72

0.43 0.49 0.59 0.66 0.73

Zain Wataniya Viva

(20.0)

-

20.0

40.0

60.0

80.0

100.0

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

(8.0)

30.0

41.0

8.0

(16.0)

53.7

81.3 86.8

45.6 48.9

84.0

62.2

99.2

69.2 72.2

Zain Wataniya Viva

47.6%

39.8%

12.6%

Q4-2009

Zain Wataniya Viva

45.9%

39.7%

14.4%

Q1-2010

Zain Wataniya Viva

44.8%

39.6%

15.6%

Q2-2010

Zain Wataniya Viva

43.3%

39.8%

16.9%

Q3-2010

Zain Wataniya Viva

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Oman GSM Sector Indicators Oman Cellular Subscriber base (in mn)


Oman Quarterly Customer Additions (in mn)


At the end of Sept. 2010, Oman’s total mobile subscriber base was at 4.5mn, registered a Y-o-Y increase of 19%. Q3-2010 witnessed a Q-o-Q growth of 3% in subscriber base, added 130.4k new customers during the quarter.





In 3Q-2010, Nawras added 49.4k subscribers while Omantel added 81k subscribers achieving a Q-o-Q growth of 2.5% and 3.4% respectively.

Omantel took the higher share of new subscriber additions in 3Q-2010. It accounted for 62.1% of new subscriber additions in 3Q-2010 while Nawras accounted for the rest 37.9%.


Since last few quarters Omantel is witnessing gradual increase in its subscriber’s market share which increased from 52.8% in 3Q-2009 to 55.3% in 3Q-2010.

3.79 3.97

4.20 4.37 4.50

6.0%

4.9%

5.8%

4.1%

3.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

Oman Cellular Subscriber base (in mn) - LHS Q-o-Q growth

0.22

0.19

0.23

0.17

0.13

0.05

0.10

0.15

0.20

0.25

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

0.00

0.50

1.00

1.50

2.00

2.50

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

1.79 1.86 1.94 1.97 2.01 2.00 2.112.26

2.41 2.49

Nawras Omantel

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

110.9

73.4 76.8

27.4

49.4

105.0

112.0

153.0 145.0

81.0

Nawras Omantel

46.9%

53.1%

Q4-2009

Nawras Omantel

46.1%

53.9%

Q1-2010

Nawras Omantel

44.9%

55.1%

Q2-2010

Nawras Omantel

44.7%

55.3%

Q3-2010

Nawras Omantel

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Qatar GSM Sector Indicators

Qatar Cellular Subscriber base (in mn)


Qatar Quarterly Customer Additions (in mn)


At the end Q3-2010, Qatar’s total GSM subscriber base was at 2.73mn, registered a Y-o-Y increase of 19.6%. Q3-2010 witnessed a Q-o-Q growth of 1.7% in subscriber base, added 46.1k new customers during the quarter.





In 3Q-2010, Qtel’s mobile subscriber base declined marginally by 0.9% Q-o-Q while Vodafone’s subscriber base grew by 12.4%.

In 3Q-2010, Vodafone managed to add 66.4k new subscribers while Qtel’s subscriber base declined by 20.3k.


In Qatar’s mobile segment, Vodafone is gaining the subscribers market share which increased from 0.8% at the end of 2Q-2009 (when it started its operation) to 22% at the end of 3Q-2010.

2.29

2.47

2.612.69 2.73

18.1%

8.1%5.8%

2.8% 1.7%0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

21.0%

2.00

2.10

2.20

2.30

2.40

2.50

2.60

2.70

2.80

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

Qatar Cellular Subscriber base (in mn) - LHS Q-o-Q growth

0.35

0.19

0.14

0.070.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

0.00

0.50

1.00

1.50

2.00

2.50

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

2.14 2.12 2.15 2.15 2.13

0.15 0.35 0.46 0.53 0.60

Qtel Vodafone

(50.0)

-

50.0

100.0

150.0

200.0

250.0

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

214.4

(17.6)

31.2

4.5

(20.3)

135.8

202.8

111.4

69.5 66.4

Qtel Vodafone

85.7

%

14.3

%

Q4-2009

Qtel Vodafone

82.0%

18.0%

Q1-2010

Qtel Vodafone

80.1%

19.9%

Q2-2010

Qtel Vodafone

78.0%

22.0%

Q3-2010

Qtel Vodafone

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Saudi GSM Sector Indicators

Saudi Cellular Subscriber Base (in mn)


Saudi Quarterly Customer Additions (in mn)

Sources: Industry Sources & Global Research

Saudi cellular subscriber has increased by 9.1%YTD to 48.0mn subscribers at the end of 3Q-2010 compared to 44.0mn at the start of the year. Approximately 4.0mn cellular subscribers were added during 9M-2010. However, the quarterly subscriber growth has seen a declining trend since the start of the year with subscribers growing by 1.7mn, 1.6mn and 0.7mn in 1Q-2010, 2Q-2010 and 3Q-2010 respectively. With subscriber rate of over 175.0% the trend is likely to continue, barring the seasonal effect. We expect subscriber growth rate to pick up again in 4Q-2010 due to the Haj season as approximately 2-3mn people from all across the globe perform the annual pilgrimage.



Operator-wise Customer Additions (in mn)


Saudi Telecom Company subscriber base has increased to an estimated 22.3mn at the end of 9M-2010 compared t0 21.0mn subscribers at the start of the year while Mobily saw an increase in subscriber base to an estimated 18.15mn at the end of 9M-2010 compared to 17.61mn at the start of the year.

The growth in subscriber base was driven by Zain KSA and Saudi Telecom which added 2.07mn and 1.34mn subscribers in 9M-2010 on the back of aggressive call promotions and advertising campaigns.

Market Share based on Subscribers

The pace of decline in market share for the incumbent Saudi Telecom Company appears to have declined as it resorted to aggressive international call promotions in 1Q-2010. Saudi Telecom’s market share has come down to 46.5% in 3Q-2010 compared to 46.7% at the end of 2Q-2010. On the other hand, Zain KSA continues to march along with its market share increasing to 15.2% at the end of 3Q-2010 compared to 11.9% at the start of the year. Meanwhile, Mobily market share declined slightly to 37.8% from 40.0% at the start if the year.

42.00 44.03

45.74 47.31 48.00

5.5% 4.8%3.9% 3.4%

1.5%1.0%

2.5%

4.0%

5.5%

7.0%

8.5%

10.0%

11.5%

13.0%

14.5%

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010Saudi Cellular subscriber base Growth

2.22.0

1.71.6

0.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

-

5.0

10.0

15.0

20.0

25.0

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

0.19 0.19 0.20 0.20 0.20

16.75 17.61 18.10 18.13 18.16

20.67 21.00 21.80 22.07 22.34

4.40 5.23 5.64 6.91 7.31

Bravo Mobily STC Zain

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

0.01 0.00 0.01 0.00 0.00

1.23

0.86

0.49

0.03 0.03

0.33 0.33

0.80

0.27 0.27

0.62

0.83

0.40

1.27

0.40

Bravo Mobily STC Zain

0.4%

40.0%

47.7%

11.9%

Q4-2009

Bravo Mobily Saudi Telecom Zain

0.4%

39.6%

47.7%

12.3%

Q1-2010


0.4%

38.3%

46.7%

14.6%

Q2-2010


0.4%

37.8%

46.5%

15.2%

Q3-2010


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UAE GSM Sector Indicators

UAE Cellular Subscriber base (in mn)


UAE Quarterly Customer Additions (in mn)


At the end of Sept. 2010, UAE’s total GSM subscriber base was at 11.89mn, registered a Y-o-Y increase of 12.4%. 3Q-2010 witnessed a Q-o-Q growth of 1.4% in subscriber base, added 169.8k new customers during the quarter.





In 3Q-2010, Etisalat added 10k subscribers while DU added 159.8k subscribers achieving a Q-o-Q growth of 0.1% and 4.1%, respectively, in their subscriber base.

DU accounted for the major chunk of new subscriber additions in 3Q-2010. It accounted for 94.1% of new subscriber additions in 3Q-2010 while Etisalat accounted for the rest 5.9%.


DU achieved significant mileage in terms of subscriber’s market share which increased from 29.7% at the end of 3Q-2009 to 34.3% at the end of 3Q-2010.

10.58

11.22 11.45 11.72 11.89

4.1%

6.0%

2.1%

2.4%

1.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.00

8.50

9.00

9.50

10.00

10.50

11.00

11.50

12.00

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

UAE Cellular Subscriber base (in mn) - LHS Q-o-Q growth

0.41

0.64

0.230.27

0.17

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

0.50

1.50

2.50

3.50

4.50

5.50

6.50

7.50

8.50

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

7.44 7.74 7.71 7.80 7.81

3.14 3.48 3.74 3.92 4.08

Etisalat DU

(50.0)

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010

179.0

300.0

(30.0)

90.0

10.0

234.1

337.0

262.0

182.1 159.8

Etisalat DU

69.0%

31.0%

Q4-2009

Etisalat DU

67.3%

32.7%

Q1-2010

Etisalat DU

66.5%

33.5%

Q2-2010

Etisalat DU

65.7%

34.3%

Q3-2010

Etisalat DU

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Sector Universe Outlook & Recommendations

Global Research Telecom Universe 3Q-2010 Performance Key Long-Term Factors

Wataniya Telecom’s revenue increased by 13.9% Y-o-Y from KD400.7mn in 9M-2010 to KD351.7mn in 9M-2010. The company's consolidated EBITDA grew by 11.2% Y-o-Y in 9M-2010 to KD155.7mn, resulting in EBITDA margin of 38.9% which declined from 39.8% in 9M-2009. It reported a net profit of KD53.7mn in 9M-2010 compared to a profit of KD97.3mn reported in 9M-2009. The fall in profit needs to be viewed with reference to 2009 net profit included reversal of provisions of KD45.2mn, resulted from winning of a case against the Ministry of Communications, Kuwait, regarding network license fees. On Q-o-Q basis, the group achieved a growth of 4% in total revenue, EBITDA increased by 2% while net profit declined by 5.4% in 3Q-2010. EBITDA margin declined from 40% in 2Q-2010 to 39.3% in 3Q-2010. On Y-o-Y basis, the group’s revenue and EBITDA grew by 17.9% and 12.9% respectively while net profit declined by 6% in 2Q-2010.

In Kuwait, ARPU continued its declining trajectory which declined from US$39.4 at the end of 3Q-2009 to US$35.5 at the end of 3Q-2010. On Q-o-Q basis, ARPU declined marginally by 1.9% in Q3-2010. On Y-o-Y, EBITDA margin in Kuwait remained stable at 45% in 3Q-2010.

The company’s operation in Tunisia continuous to remain strong with EBITDA margin of 53% for 3Q-2010, however, subscriber growth would be the key growth driver as ARPU is under pressure. On the back of 20.6% Y-o-Y growth in subscriber base while top-line declined by 2.5% Y-o-Y to KD27.7mn in 3Q-2010.

In Algeria also growth in subscriber base would be the key growth driver. In 3Q-2010, subscriber base grew by 36% Y-o-

Y while revenue grew by 28.3% to KD45.8mn Y-o-Y,

EBITDA margin remained stable at 37% in 3Q-2010. At the net level, Algerian operation reported profit of KD1.5mn, after 3 quarters of reporting net losses.

Zain’s group’s consolidated revenue grew by 8.3% Y-o-Y to KD1,009.8mn in 9M-2010 and consolidated EBITDA declined by 2% to KD447.6mn. The company’s these results reflect its Middle East operations. In 9M-2010, net profit was at KD975.6mn. This includes the capital gain of KD770.3mn from the sale of Zain Africa assets. With the conclusion of the sale of Zain Africa on June 8, 2010, the company received cash proceeds of US$7.8bn. Therefore, profit for 9M-2010 includes capital gain of KD770.3mn from the sale of Africa operations. The company also announced that results for 9M-2009 had several reversals of provisions including a favorable ruling resulting in an extraordinary net income gain of KD63mn and EBITDA gain of KD44.8mn. Therefore on 9M-2009 adjusted numbers, EBITDA and net profit growth in 9M-2010 would have been at 9% and 61% respectively.

On June 8th 2010, the Zain group disposed its entire shareholding in Zain Africa BV, Netherlands, (Africa Operations) to India’s Bharti Airtel International for an enterprise value of US$10.7bn.

Now Zain group is left with its Middle Eastern portfolio with

operations in Kuwait, Bahrain, Saudi Arabia, Iraq, Jordan, Lebanon and Sudan.

Out of total seven countries operations, Kuwait, Iraq, Sudan and Jordan are the key markets as these operations jointly account for about 92% of the group revenue for 9M-2010.

Going forward, in Kuwait, we expect that margins are likely to remain under pressure due to increasing competitive pressure.

With regard to Iraq operation, it has high growth potential and its margins are also strong. In Saudi, the market still has room for further growth, however, Zain will have to compete hard with the two existing players, STC and Mobily. In 2Q-2010, Zain Saudi turned EBITDA positive after 22 months of operations.

Qatar Telecom (Qtel)’s group revenue grew by 14.4% from QR17.5bn in 9M-2009 to QR20bn in 9M-2010. The company's consolidated EBITDA registered a Y-o-Y growth of 15.1% in 9M-2010 to QR9.5bn, resulting in EBITDA margin of 47.7% which increased from 47.4% achieved in 9M-2009. It reported a net profit of QR2.4bn in 9M-2010, an increase of 3.7% over 9M-2009. Net profit for 9M-2010 needs to be viewed with reference to one-off gain from reduced royalty payment to the government

of Qatar The backdated reduction of the royalty fee had been resulted in an

increase in Qtel's profit of about QR554mn in 9M-2010. The profit for 9M-2009 was also higher due to one-off adjustment of QR344mn for a reversal of provision resulting from a favorable court ruling on a license fee decision related to its Kuwait business. On Q-o-Q basis, the group’s revenue and EBITDA grew by 2.7% and 0.9% respectively while net profit grew by 14.1% in 3Q-2010. On Y-o-Y basis, the group’s revenue and EBITDA grew by 16% and 16.2% respectively while net profit declined by 8.3% in

3Q 2010.

In 9M-2010, Qatar operation witnessed a Y-o-Y decline of 6.3% in revenue to QR4bn. EBITDA margin in Qatar declined from 60.6% in 9M-2009 to 54.5% in 9M-2010. On the back of declining margin, EBITDA declined by 15.8% from QR2.6bn in 9M-2009 to QR2.2bn in 9M-2010.

Indosat witnessed a Y-o-Y growth of 40.8% in subscriber base in 3Q-2010. Revenue and EBITDA grew by 27.8% and 33.8% Y-o-Y in 9M-2010.

Going forward we are positive on Iraq and Oman as both these operations are performing well with growing revenue and strong margins. In Oman and Iraq, Y-o-Y subscriber growth was 12.7% and 6.7% respectively in 3Q. In Oman, Y-o-Y growth in revenue and EBITDA was 14.4% and 39%, respectively, in 9M-2010. EBITDA margin improved to 55.3% in 9M-2010 from 45.5% in 9M-2009. In Iraq, Y-o-Y revenue and EBITDA growth was 28.9% and 32.7%, respectively in 9M-2010.

Revenue from Wataniya Telecom’s group operations grew from QR4.4bn in 9M-2009 to QR5.1bn in 9M-2010. EBITDA for the period increased by 8.7% to QR2bn in 9M-2010.

Saudi Telecom Company announced its 3Q-2010 results. Net profits witnessed a strong growth of 38.0%YoY in 3Q-2010 to SR3,317mn. The net profit was propped up by recognition of SR728mn profit on sale of fixed assets by the group. If the non-recurring income is adjusted, the net profit comes to SR2,589mn, a growth of 7.7%YoY. The rise in operating profits by 4.6%YoY was attributed to a rise in revenues from broadband, data and content services as many services were launched including digital television service, “Invasion” and e-learning “Vitamin” Sequel. As anticipated, the company posted a strong growth of 25.6% QoQ in net profits after adjusting for the sale of fixed assets, due to the Ramadan season falling in 3Q-2010. The month of Ramadan accompanies a rise in religious tourists who subscribe to local telecommunication services for their communication needs. The 4Q-2010 is likely to witness the same trend with the Haj season falling in it.

Refinement and consolidation of overseas portfolio.

Effective market, promotional and operational strategies to retain and attract new customers in the face of growing competition in the domestic market.

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.

Streamlining of the organization in view of the new competitive environment.

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3Q-2010 Performance Key Long-Term Factors

Etihad Etisalat Company, also known as Mobily, continued to post strong results. Net profits witnessed an increase of 41.0%YoY and 26.3%QoQ in 3Q-2010 to SR1,138mn while sales increased by 13.6%YoY and 0.4%QoQ to SR3,989mn. The company cited growing contribution from higher margin broadband revenues, lower international inter-connection costs and lower direct costs associated with other services as the reasons behind the increase in profitability. Mobily has managed to carve out an effective marketing and promotional strategy to lure high-value post paid and broadband customers. The impact of high value customers is reflected in the increase in EBITDA margins to 41.3% in 3Q-2010 from 34.9% in 2Q-2010 and 36.4% in 3Q-2009. On a cumulative basis, sales have increased by 21.2%YoY to SR11,542mn while net profits have increased by 40.3%YoY to SR2,753mn in 9M-2010.

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

Targeting of high ARPU post-paid customers.

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

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

Increasing the portfolio of government and private sector contracts

Etisalat’s revenue declined by 2% Y-o-Y in 9M-2010 to AED23.3bn while net profit declined from AED6.8bn in 9M-2009 to AED5.6bn in 9M-2010. In 9M-2010, its operating expenses grew by 29% Y-o-Y to AED9bn. Operating expenses as a percentage of total revenue grew to 56.2% in 9M-2010 from 44.9% in 9M-2009. Its finance income grew from AED392.5mn in 9M-2009 to AED715.9mn in 9M-2010. On Y-o-Y basis, the group’s total revenue declined by 8.5% in 3Q-2010 to AED7.3bn while net profit declined by a whopping 22.8% in 3Q-2010 to AED1.7bn. In 9M-2010, the company’s revenue and profit from UAE witnessed a Y-o-Y decline of 10.8% and 32.2% to AED18.1bn and AED4.7bn respectively. At the end of 3Q-2010, the company’s mobile subscribers in the UAE increased marginally to 7.81mn which was at 7.80mn at the end of 2Q. Fixed line subscribers declined to 1.25mn from 1.28mn in 2Q while Internet subscriber base also declined to 1.35mn from 1.39mn at the end of 2Q.

During the quarter, Etisalat group has submitted a preliminary conditional offer to buy a 46% stake in Kuwait’s Zain for US$11.7bn (at a price of KD1.7 per share).

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. But in 9M-2010 we have seen that both revenue and profitability from UAE are under pressure, mainly due to competitive pressure.

Amongst international operations, we are optimistic about Etisalat’s operations in Egypt and Saudi Arabia. These markets are the key value drivers in the short to medium term.

Etisalat is a net cash positive company, which enables it to continue pursuing its expansion strategy and eye strategic acquisitions. We believe that going forward overseas expansion would be the key for further growth.

Oman Telecommunication Co. (Omantel)’s revenue grew by 3.9% from RO303.9mn in 9M-2009 to RO315.8mn in 9M-2010. It reported a Y-o-Y decline of 20.6% in its net profit which declined from RO105.8mn in 9M-2009 to RO84mn in 9M-2010. In 9M-2010, its operating expenses grew by 17.7% Y-o-Y to RO224mn. The major reason for increase in operating expenses is on account of expenses incurred for developing and enhancing the 3.5G network services and also due to increase in depreciation resulting from the implementation of the latest technology. Results for 9M-2010 also includes full 9 month’s operations of Worldcall whereas 9M-2009 includes only its 3 month’s results. While reviewing results for 9M-2010 one needs to consider that profits for 9M-2009 includes an amount of RO3.64mn towards the settlement of insurance claim and a reversal of bad debts amounting to RO2.8mn. In 3Q-2010, the company’s revenue declined by 7.6% Y-o-Y while net profit declined by 29.9%.

The company has completed the installation of 763 sites that provides an extensive coverage of 3.5G services in the Sultanate.

The company expects to incur capex of RO30mn in Q4. For full year 2010 target capex is RO70mn – capex is targeted to fund 3.5G, NGN operations.

The opening up of fixed line business segment and international gateway services has its impact on the overall revenue growth of Omantel.

Impact of Nawras using its own international gateway and therefore revenue loss to Omantel, is likely to nullify from next year onwards.

Mobile ARPU is likely to come under pressure due to competitive pressure.

Bahrain Telecommunications Co. (Batelco) announced its 3Q-2010 results. Net profits witnessed a decline of 22.3%YoY to BD20.4mn. The net profit was dented due to BD4.8mn share of loss from associates. As we anticipated, the company’s Indian operations through a 42.7% stake in Stel, has become a drag on profitability since it will take an estimated three-four years for the operation to show positive results. The net profit also suffered because of a loss of BD0.35mn on sale of property and equipment. Meanwhile, the revenues remained flat at BD85.3mn in 3Q-2010 compared to 85.6mn in 3Q-2009. According to the company, the mobile subscriber base has reached 7.5mn as of 31 September 2010 while the broadband subscriber base has reached 233,000. Decline in the domestic mobile market by 4.0% to 86,000 is being offset by strong performance of Jordan operations where the mobile subscriber base has reached 1.8mn.

The company’s Jordan operations will be the mainstay for the company in the medium-term with the decline in market share in the domestic market and required time for Indian and Saudi operations to turn around.

In Bahrain TRA introduces a new competition-based framework for the regulation of retail tariff which paves the way for the de-regulation of Batelco's mobile tariffs and calls to certain international destinations. Under the new regime Batelco will no longer require our approval to launch new mobile tariffs. With this Batelco will have adequate flexibility to compete on a level playing field with its competitors.

Management of operations in India will be a key growth driver for the company in the long term. S Tel has mobile licenses to operate in 6 states of India which includes Himachal Pradesh, Orissa, Bihar, Jharkhand, Jammu and Kashmir and Assam circles.

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APPENDIX

GCC Countries Telecom Profiles

Source: ITU, Industry sources, Respective Regulatory Authorities and Global Research

000s 2005 2006 2007 2008 2009

Cellular Subscribers (000) 767 907 1,116 1,441 1,480

Cellular Penetration 86.0% 94.0% 107.0% 130.0% 120.0%

Pre paid subscribers % 82.8% 83.3% 82.8% 84.0% 84.5%

Post paid subscribers % 17.2% 16.7% 17.2% 16.0% 15.5%

Blended ARPU (US$) N/A N/A 28.1 31.0 29.7

Fixed Line Subscribers (000) 194 194 204 220 238

Fixed Line Penetration % 26.6% 26.1% 26.8% 28.4% 30.1%

Internet Users (000) 155 210 250 403 649

User Penetration % 21.3% 28.2% 32.9% 52.0% 82.0%

000s 2005 2006 2007 2008 2009

Cellular Subscribers (000) 2,277 2,530 2,774 3,216 3,864




Blended ARPU (US$) 58.0 58.2 61.8 59.0 44.9



Internet Users (000) 700 800 900 1,000 1,100


000s 2005 2006 2007 2008 2009

Cellular Subscribers (000) 1,333 1,818 2,500 3,219 3,965




Blended ARPU (US$) 33.0 32.7 30.4 27.4 25.0



Internet Users (000) 175 222 455 557 1,237


000s 2005 2006 2007 2008 2009

Cellular Subscribers (000) 717 920 1,264 1,683 2,472




Blended ARPU (US$) 58.6 63.8 56.7 53.4 43.3



Internet Users (000) 219 290 261 327 399


000s 2005 2006 2007 2008 2009

Cellular Subscribers (mn) 14.2 19.7 28.4 36.0 44.8




Blended ARPU (US$) 43.3 34.3 27.8 25.3 22.2

Fixed Line Subscribers (mn) 3.8 4.0 4.0 4.1 4.2


Internet Users (mn) 3.0 4.7 7.5 9.0 9.8


000s 2005 2006 2007 2008 2009

Cellular Subscribers (mn) 4.5 5.5 7.7 9.4 11.2




Blended ARPU (US$) N/A N/A 46.3 46.8 40.6

Fixed Line Subscribers (000) 1,237 1,320 1,324 1,455 1,561


Internet Users (000) 1,321 1,708 2,260 3229.2 3777.9


UAE

Saudi Arabia

Bahrain

Qatar

Oman

Kuwait

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november 2010 gcc telecom sector quarterly · 2012-11-27 · the telecom sector has witnessed an...

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