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Research Department Telecoms - Qatar

Qatar Telecom (Qtel) Initiation of Coverage Report 14 October 2009

Qatar Telecom (Qtel) 1

Smart Growth Buy

� Qtel has underperformed other Middle Eastern telecom stocks, which suggests a potential rally after investor concerns regarding its debt profile were appeased and

recent acquisitions started to pay off significantly.

� An improving debt profile coupled with strong cash flow generation (backed by organic growth) translates into attractive FCF CAGR and yields.

� We initiate coverage on Qtel with a “Buy” recommendation and a target price of QAR207/share.

We are positive on Qtel due to: 1) its attractive growth profile - organically, 2)

operations in attractive and diversified markets, 3) good cash flow generation

translating into an FCF CAGR of 93.3% from 2010f-2012f and dividend and FCF yields of 7.5% and 14.6% for 2010f, 4) improving credit profile and ability to

refinance and restructure debt in such a turbulent financial environment. This has been a concern for investors and we believe that the debt restructuring is not fully

discounted in the share price, and 5) inexpensiveness on multiples relative to its growth as Qtel trades at a 36.9% and 2.7% discount to peers on 2010f PER and

EV/EBITDA, respectively. We believe that the limited discount in EV/EBITDA is justified by the stock’s attractive growth profile and attribute the deeper discount on

PER to the fact that Qtel will be deleveraging its balance sheet and discontinue paying royalty fees in Qatar, while growing its operations impressively. We are

initiating coverage on Qtel with a “Buy” recommendation based on a SOTP valuation with a DCF approach that yielded a target price of QAR207/share, offering a 40.0%

upside.

We prefer Qtel over Wataniya as it offers higher organic growth and exposure to Indonesia and Iraq, two of the fastest growing and least penetrated markets. It

Qtel trades at a deeper discount to peers and, unlike Wataniya, its operational growth filters through to the bottom line. We believe that Qtel might use Wataniya

as an acquisition vehicle, given its low leverage, which could be positive for Wataniya depending on the acquisition.

Qtel's exposure is well diversified as its operations are divided into i) cash

generating mature markets like Qatar, Kuwait and Oman and ii) growing markets like Indonesia, Iraq, Algeria, and Tunisia. We identify Indonesia, Iraq and Algeria as

Qtel’s fastest growing and least penetrated operations (average mobile penetration rate of 65%). The consolidation of Indonesia has significantly contributed to Qtel,

accounting for 56.4% of total subscribers, 26.4% of revenue, and 25.2% of EBITDA in 2Q09. Although FX devaluation in key markets, mainly Indonesia, Tunisia, Algeria

and Kuwait has hurt Qtel’s revenue and margins in 1Q09, this started to change in 2Q09 with currencies rebounding. We estimate Qtel’s revenue, EBITDA and net

income to grow at attractive CAGR of 10.8%, 8.9% and 18.0% respectively from

2010f-2012f and estimate FCF to grow at an attractive CAGR of 93.3% over the same period.

Key Performance Indicators

08a 09e 09c 10f 10c Revenue (QAR Million) 20,319 24,401 24,272 26,897 26,971 EBITDA (QAR Million) 9,825 11,657 11,402 12,617 12,209 EBITDA margin (%) 48.4% 47.8% 47.0% 46.9% 45.3% Net Income (QAR Million)* 2,277 2,880 2,693 3,239 3,493 EPS (QAR) 17.46 19.51 18.36 22.08 23.82 EPS Growth 36.0% 26.5% 22.4% 12.5% 8.5% Net debt/EBITDA 2.09x 2.04x 1.92x 1.69x 1.56x PER 8.47x 7.53x 7.75x 6.69x 7.27x EV/EBITDA** 7.68x 6.77x 5.20x 6.06x 4.89x Dividend Yield 6.8% 7.6% 6.9% 7.5% 7.2% Free cash flow yield -7.9% 4.1% N/A 14.6% N/A

Target Price QAR207

Market Price QAR148*

Upside 40.0%

Listed on DSM, ADSM and

LSE

Bloomberg Code Qtel QD

Reuters Code Qtel.qa

Ent. Val. (QAR) 78.3 bn

Net Debt (QAR) 24.4 bn

Minorities (QAR) 32.1 bn

Mark. Cap (QAR) 21.7 bn

Market Cap (USD) 6.0 bn

Num. of Shares 147 Mill

Daily Turn. (QAR) 5.3 Mill

Daily Turn. (USD) 1.5 Mill

Shareholders Structure

Free Float 21.0%

State of Qatar 55.0 %

Sovereign stakes 13.0%

ADIA 10.0%

ETC 1.0%

Price Performance Chart

* Price as of October 8, 2009

NematAllah Choucri

� +2023332-8610

� [email protected]

May Khamis

� +2023332-8610

� [email protected]

* Disclaimer See Page 24

* e= estimate, c=consensus and f=forecast ** Our calculated EV/EBITDA multiples is adjusted to minorities.

80

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M A M J J A

Qtel

DSM

Telecoms - Qatar


Financial Statements All figures in QAR Million 2008a 2009e 2010f 2011f 2012f 2013f Income Statement Qatar 5,447 5,783 6,496 6,940 7,164 7,248 Indonesia 4,164 6,674 7,169 8,467 9,667 10,200 Oman 1,318 1,601 1,761 2,045 2,318 2,600 Iraq 2,847 3,859 4,454 4,959 5,515 6,053 Kuwait 3,070 2,653 2,773 2,939 3,174 3,409 Tunisia 1,344 1,303 1,339 1,357 1,383 1,404 Algeria 1,768 1,876 2,153 2,372 2,541 2,660 Maldives 76 91 102 112 122 132 KSA 269 261 297 374 442 500 Palestine - - 49 238 560 878 Total Group Revenue 20,319 24,401 26,897 30,125 33,225 35,443 Growth in Revenue (%) 92.7% 20.1% 10.2% 12.0% 10.3% 6.7% Calculated EBITDA 9,634 11,382 12,305 13,545 14,688 15,439 Calc. EBITDA Margin 47.4% 46.6% 45.7% 45.0% 44.2% 43.6% Reported EBITDA 9,825 11,657 12,617 13,895 15,073 15,850 Rep. EBITDA Margin 48.4% 47.8% 46.9% 46.1% 45.4% 44.7% Depreciation & Amortization (4,022) (5,449) (5,852) (6,245) (6,478) (6,670) Operating Profit 5,612 5,932 6,453 7,301 8,210 8,769 Operating Margin 27.6% 24.3% 24.0% 24.2% 24.7% 24.7% Other non-oper. income (41) 845 0 0 0 0 Net Interest Expense (1,596) (1,915) (1,596) (1,727) (1,323) (667) PBT 3,925 4,865 4,866 5,584 6,897 8,111 Taxes (256) (401) (291) (334) (413) (486) Royalties (826) (598) (526) (557) (571) (575) Minorities (565) (986) (810) (938) (1,183) (1,410) Net Profit 2,277 2,880 3,239 3,753 4,730 5,640 Net Margin (%) 11.2% 11.8% 12.0% 12.5% 14.2% 15.9% Earnings Per Share (EPS) 17.46 19.64 22.08 25.59 32.25 38.46 Growth in EPS (%) 36.0% 26.5% 12.5% 15.9% 26.0% 19.2% Dividends Per Share 10.00 11.19 11.04 12.80 16.13 19.23 Dividends Pay-Out (%) 57.3% 57.0% 50.0% 50.0% 50.0% 50.0% Balance Sheet Intangible Assets 33,819 32,782 30,966 29,150 27,334 25,518 Tangible Assets 23,480 27,645 30,333 31,929 33,248 34,065 Investments & Other Assets 5,019 4,993 4,603 4,213 3,823 3,433 Total Fixed Assets 62,318 65,420 65,902 65,293 64,405 63,016 Total Current Assets 11,980 8,344 13,518 11,656 6,915 15,398 Total Current Liabilities 20,765 26,253 26,428 26,923 27,631 28,252 Total LT Liabilities 24,571 18,917 21,969 16,187 6,304 8,546 Minority Interest 15,678 13,604 14,414 15,352 16,535 17,945 Shareholder’s Equity 13,284 14,990 16,610 18,486 20,852 23,672 Cash flow Statement C/f from ops 7,229 13,593 12,302 13,471 14,695 15,653 Dividends received 325 397 400 400 400 400 Interest + minrty divs (1,395) (2,289) (1,596) (1,727) (1,323) (667) Taxes (256) (423) (291) (334) (413) (486) Capex + investment (7,281) (7,554) (6,724) (6,025) (5,980) (5,671) Acqns + disposals (2,247) (3,031) 0 0 0 0 Dividends paid (200) (1,466) (1,642) (1,619) (1,877) (2,365) Net c/f pre financing (3,568) (772) 2,448 4,165 5,502 6,864 Liquid resources 2,843 (2,063) 0 0 0 0 Financing 5,646 (1,388) 2,177 (6,737) (10,925) 1,131 Change in cash 4,879 (4,223) 4,625 (2,572) (5,423) 7,995 Key Ratios Net Debt/EBITDA 2.09x 2.04x 1.69x 1.23x 0.76x 0.28x RoAE 22.6% 20.4% 20.5% 21.4% 24.0% 25.3% CAPEX to Sales 36.9% 30.0% 25.0% 20.0% 18.0% 16.0%

Telecoms - Qatar


We initiate coverage on Qtel with a “Buy”, a 40% upside potential � We are initiating coverage on Qtel with a target price of QAR207/share which implies a “Buy” recommendation.

� Highest contribution to Qtel valuation is from Qatar, followed by Indonesia, Kuwait and Iraq.

� Qtel trades at a 36.9% discount to its peers on 2010f PER and 2.7% discount on 2010f EV/EBITDA, while offering attractive EPS and EBITDA growth from 2010f-2012f.

We are initiating coverage on Qtel with a “Buy” recommendation based on a SOTP valuation with a DCF approach that yielded a target price of QAR207/share, offering a 40.0% upside to the current market price. We have used a five year model in our DCF

valuations except for Wataniya Palestine where we discounted the FCFs over 7 years, as we estimate that the company will break even in terms of EBITDA and net income by 2013f, and will be heavily spending on CAPEX until 2013f. The WACCs used in our

SOTP valuation range from 9.7%-15.1% and we have assumed an average equity weight of 70% for the subsidiaries that are not listed and do not have publicly released financial statements.

Table 1: Qtel SOTP valuation

(QAR billion) Qtel Indosat Nawras Asia Cell

Kuwait Tunisia Algeria Bravo Maldives Pales. Inv. Debt Cash Other Total

Enterprise Val. 29.7 16.9 5.4 15.4 8.7 8.4 3.5 0.3 0.01 0.9 2.0 (36.8) 12.4 (4.3) 62.5

EV (USD billion) 8.1 4.7 1.5 4.2 2.4 2.3 1.0 0.1 0.0 0.2 0.5 (10.1) 3.4 (1.2) 17.2

Qtel Stake 100% 65% 56% 30% 53% 26% 46% 29% 53% 30% 100% 100% 100% 100%

Value to Qtel 29.7 11.0 3.0 4.6 4.6 2.2 1.6 0.1 0.0 0.3 2.0 (36.8) 12.4 (4.3) 30.3

Per Share (QAR)

202 75 20 31 31 15 11 1 0 2 13 (251)

84 (29) 207

Impl. EV/EBITDA 10f

7.6x 4.8x 6.1x 6.8x 7.1x 6.1x 5.9x NM NM NM - - - - -

Source: HC Brokerage

Chart 1: Contribution to Qtel Group Total Enterprise Value

Source HC Brokerage

Table 2: WACCs used range from 9.7% to 15.1%

Qatar Indonesia Oman Iraq Kuwait Tunisia Algeria Maldives KSA Palestine

Cost of Eq. 15.7% 16.6% 15.6% 17.5% 16.7% 12.9% 13.5% 13.8% 12.6% 17.0%

Cost of debt 9.1% 7.2% 6.3% 13.9% 4.3% 5.9% 4.1% 11.0% 3.5% 7.0%

WACC 11.9% 12.7% 12.9% 15.1% 14.6% 10.8% 9.7% 12.9% 9.9% 14.0%

G 2.5% 3.0% 2.0% 2.0% 2.5% 2.0% 3.0% 2.5% 2.5% 2.5%


Qatar 50%

Indonesia 19%

Iraq 8%

Kuwait 8%

Oman5%

Tunisia 4%

Invest. 3%

Algeria 3%

Palestine 1%

KSA 0%

Telecoms - Qatar


Sensitivity analysis suggests deviations of (6.9%) to 6.7% from our fair value per share

We have tested the upside/downside effects of currency depreciation/appreciation on Qtel, which yielded deviations ranging from (6.9%) to 6.7% from our value/share. It is important to note that of Qtel’s countries of operation Qatar, KSA and Oman have

currencies which are pegged to the USD.

Table 3: Sensitivity of FX fluctuation on value/share

Value per share Deviation from base case value per share (%)

5% currency depreciation QAR193 (6.9%)

Base case QAR207 0.0%

5% currency appreciation QAR221 6.7%


Qtel stock price catalysts and downside risks to valuation

We believe that Qtel making an acquisition would be the strongest catalyst to its share price, depending on the acquisition and its

valuation. We believe Qtel might be using Wataniya as an acquisition vehicle given its low leverage. Another catalyst would be an increase in the stock’s liquidity.

The downside risks to our valuation for Qtel are stronger than expected competition, mainly from new entrants in its markets of

operation including Vodafone in Qatar, Viva in Kuwait and Orange-Divona in Tunisia. Another downside risk is higher than expected depreciation in currencies in Qtel’s markets of operation; however, we have seen a rebound in currencies starting 2Q09.

Despite its attractive growth profile, Qtel trading at a discount to its peers

Qtel trades at a 2010f PER of 6.69x and EV/EBITDA multiple of 6.06x, which represents a discount of 36.9% and 2.7% to peers,

respectively, while Wataniya trades at a 2010f PER of 8.52x and EV/EBITDA multiple of 5.91x, representing a discount of 13.7% and a premium of 2.2% to peers, respectively, and offers lower growth rates than Qtel. We believe that Qtel’s limited discount on

EV/EBITDA is justified by its attractive growth profile and we attribute the deeper discount on PER to the fact that Qtel will deleverage its balance sheet and discontinue paying royalty fees in Qatar, while growing its operations in an impressive way. The

EV/EBITDA multiples have been adjusted for minority interest.

Chart 2: Qtel relative to peers

Qtel on 2010f PER vs. EPS CAGR (2010f-2012f) Qtel on 2010f EV/EBITDA vs. EBITDA CAGR (2010f-2012f)

Source: Qtel, Wataniya, Bloomberg, Reuters Knowledge and HC Brokerage

TE

BTBelgacom

Deutsche Tel.

Wataniya

Telenor OTH

TA

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

-10.0% 0.0% 10.0% 20.0%

P/E (2010f)

EPS CAGR (%) (2010f-2012f)

Zain

STC

EtisalatVodafone

Qtel

FT TE

FTTelekom Austria

Maroc Tel.

OTH

Telefonica

Vodafone

STC

BelgacomTelenor

Qtel

2.0

3.0

4.0

5.0

6.0

7.0

8.0

-5.0% 0.0% 5.0% 10.0%

EV/EBITDA

(2010f)

EBITDA CAGR (%) (2010f-2012f)

Zain

WataniyaZain

WataniyaZain

WataniyaZain

Wataniya

Omantel

Telecoms - Qatar


Chart 3: Qtel offering attractive FCF yield for 2010f

2009e and 2010f Div. Yield (%) 2009e and 2010f FCF Yield (%)

Source HC Brokerage, Bloomberg, Reuters

Qtel outperformed MSCI EMEA Telecom Index but underperformed other players, suggesting a potential rally

Given the defensiveness of the telecom sector and the attractiveness of Middle Eastern markets' growth relative to other regions of the world, telecom companies performed relatively better starting 4Q08. Qtel has mostly outperformed MSCI EMEA Telecom index

since the start of 2008, but has generally underperformed Arabian telecom operators, which suggests a potential rally for the stock after: i) investors concerns regarding the company’s debt profile were appeased with latest developments (i.e. restructuring of debt

through the successful FSF and GMTN issues and the improved net/EBITDA), and ii) the company’s recent acquisitions started to payoff.

Chart 4: Qtel relative to MSCI EMEA Telecom Index and other Arabian Telecom Stocks

Source HC Brokerage, Bloomberg, Reuters

0.0%

5.0%

10.0%

Div. Yield 09 Div. Yield 10

0.00%

5.00%

10.00%

15.00%

20.00%FCF Yield 09 FCF Yield 10

-100

0

100

200

300

400

500 MSCI Telecom EMEA Qtel NMTC ZAIN ORTE OTEL EMOB ETEL

Telecoms - Qatar


Qtel’s main markets are still going strong

We believe that Qtel’s portfolio of operations is attractive as the company has exposure to hydrocarbon rich economies like Qatar, Kuwait and Oman, and populous fast growing economies like Indonesia, Algeria and Tunisia. At a time when the world’s economy

is expected to decrease by 1.7% in 2009e (according to Economic Intelligence Unit estimates), Qtel’s main markets, including Qatar, Indonesia and Iraq, seem to be less affected by the global slowdown as they are estimated to grow at a range of 3.6-8.9%.

In addition, some of these countries enjoy high GDP per Capita (PPP); Qatar has the highest GDP per Capita (PPP) in the world. To top it all, these markets offer attractive demographics with over 50% of the population between the ages of 15-64, steady

population growth and inflow of expatriates, especially in Qatar.

Table 4: Qtel operates in diversified attractive markets

Demographics Economic Data Market Data

Country 2009e

Population (‘000s)

2009e Pop.

Growth

(%)

Pop.

Above the age of 15

Literacy Rate ***

(%)

2009e Real GDP

Growth

(%)

2009e

Inflation (%)

2009e GDP per

capita

(PPP/USD)

Number

of Players

Mobile Penetration

as of June

09

Qatar 1,756 5.3% 79.0% 89.8% 8.9% -1.4% 92,121 2 112.9%

Indonesia 240,271 1.1% 65.9% 91.0% 3.6% 4.6% 38,717 6 65.0%

Iraq 30,051 2.5% 58.2% 74.0% 6.1% 13.8% 3,655 3 60.0%

Oman 2,986 3.1% 54.5% 83.7% 2.6% 6.0% 24,874 2** 118.3%

Kuwait 3,587 4.0% 70.7% 93.3% -0.7% 6.0% 38,718 3 106.7%

Tunisia 10,478 1.1% 70.1% 76.9% 2.8% 3.2% 8,220 2* 87.0%

Algeria 35,218 1.2% 69.5% 74.6% 2.5% 4.6% 6,801 3 69.4%

Maldives 387 4.5% 73.8% 97.0% 5.7% 12.8% 5,000 2 119.8%

KSA 25,519 2.5% 59.5% 84.3% -1.0% 4.6% 23,255 - -

Palestine 4,000 3.0% 55.5% 92.4% -3.1% 4.1% 1,156 2 42.7% * 3rd player is to enter the market in early 2010f ** The government has issued 5 MVNO license and there are already operational

*** Latest available statistics (2006)

Source: EIU, IMF, BMI, Palestinian Central Bureau of Statistics, UNDP and HC Brokerage

Qtel’s mobile and broadband markets promise further upside…

We believe that there is still an upside in Qtel’s markets of operation in the mobile and broadband segments. We believe that Indonesia, Algeria and Iraq will offer the highest growth among these, on the back of growing penetration rates and increasing

competition. Meanwhile, cash generating markets with already high penetration rates like Qatar, Kuwait and Oman are expected to grow on the back of the provision of Value Added Services (VAS) and multi sim usage.

Chart 5: Comparison between countries’ mobile and broadband penetration rates

Mobile Penetration Broadband Penetration

Source ITU, IMF and HC Brokerage

Algeria

China Egypt

IranIraq

Jordan

Lebanon

MalaysiaMaldives

MoroccoPakistan

Syria

Tunisia

YemenPalestine

Oman

Kuwait

QatarBahrain

France

Germany

UK

UAE

Switzerland

USA

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

Mobile Penetration (%) (2008)

GDP per Capita (PPP) (USD/2008)

Jordan

Lebanon

MalaysiaMaldives

MoroccoPakistanSyriaTunisiaPalestine

Oman Kuwait

QatarBahrain

France

Germany

UK

UAE

Switzerland

USA

Norway

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0 20,000 40,000 60,000 80,000

Broadband Penetration (%)

(2008)


Telecoms - Qatar


…however, the fixed line market offers less attractive growth

Given the international fixed to mobile substitution trend, we view that the potential in the fixed line market is less attractive than in the mobile and broadband markets. However, we believe that there is still room for growth as the provision of fixed line services

paves the way for other telecommunications services such as broadband services.

Chart 6: Qtel Markets’ Fixed Line Penetration vs. other countries

Source: ITU, IMF and HC Brokerage

Qtel positions itself as a value player

In line with Qtel’s strategy of focusing on market share of revenue more than market share of subscribers, it has a higher average tariff than its competitors in some markets, as illustrated by the graph below.

Chart 7: Comparison between Qtel’s average tariff rates and its competitors (USD)

Source: Qtel and telecom operators’ websites, Bloomberg and HC Brokerage

Jordan

Iran

Malaysia

Maldives

Morocco

Pakistan

Syria

Tunisia

EgyptPalestineChina KuwaitLebanon

BahrainMaldives Germany

UKQatar

Algeria

France

Norway

UK

UAE

Switzerland

USA

Norway

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

-10,000 10,000 30,000 50,000 70,000 90,000

Fixed Line Penetration (%)

(2008)


Ir

Ye

0.00

0.05

0.10

0.15

0.20Average Tariff per minute Local SMS

Telecoms - Qatar


Set for solid growth

� We believe that Qtel offers attractive organic growth relative to its peers and identify Indonesia, Iraq and Algeria

as its least penetrated and fastest growing markets.

� We estimate revenue, EBITDA and net income to grow at CAGR of 10.8%, 8.9% and 18.0% respectively from 2010f-2012f. Bottom line growth is expected to be fuelled by growth in operations and deleveraging.

� Qtel’s strong cash flow generation is expected to translate into an attractive FCF CAGR of 93.3% from 2010f-

2012f and a FCF yield of 14.6% for 2010f.

Qtel is expected to offer solid growth due to attractive markets of operation

After making attractive acquisitions over 2007 and 2008, the most important among which was Indosat, we believe that Qtel is set to offer higher growth than its peers in 2009e and 2010f. 2009e growth reflects the increase of Qtel’s stake in Indosat from 40.8%

to 65.0% that took place in 1Q09; however, 2010f growth is purely organic, excluding any acquisitions. We believe that the fastest growing markets among Qtel’s portfolio of operations will be Indonesia, Iraq and Algeria.

Chart 8: Qtel offers attractive growth relative to peers

Revenue Growth EBITDA Growth

Source Qtel, Wataniya, Bloomberg, Reuters Knowledge and HC Brokerage

Chart 9: Net Income Growth

* Wataniya 2009 and 2010 NI growth has been normalized by excluding unusual items related to a reversal of provisions.

Source Qtel, Wataniya, Bloomberg, Reuters Knowledge and HC Brokerage

-10%

10%

Rev. Growth 09 Rev. Growth 10f

-5%

0%

5%

10%

15%

20%

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EBITDA growth 09e EBITDA Growth 10f

-5%

0%

5%

10%

15%

20%

25%

30% NI Growth 09e NI Growth 10f

Telecoms - Qatar


Indonesia and Qatar to contribute 52% of revenue and 57% of EBITDA, expected double digit growth rate in sales until 2012f

Qtel’s top line has been growing exponentially as a result of organic growth and acquisitions. In 2007 top line grew by 138.5% YoY mainly as a result of the Wataniya acquisition, and in 2008 the Indosat acquisition caused top line to grow by 92.7% YoY. We

estimate 2009e top line growth at 20.1% to QAR24.4 billion, reflecting the increase of Qtel’s stake in Indosat to 65% (1H09 revenues were QAR11.5 billion, up 42% YoY) and in line with the company’s guidance of revenue growth ranging between 20-22%

for 2009e. For 2010f, we estimate top line to grow by 10.2% YoY and expect Wataniya Palestine to start contributing to consolidated revenue during this year, though not significantly. We believe that top line growth would be fuelled by subscriber

increases as we estimate Qtel’s total subscriber base of 52.2 million as of 2Q09 to grow at a CAGR of 14.9% from 2010f to 2012f, and revenue to grow at a lower 10.8% over the same period as a result of ARPU dilution. Indonesia is expected to capture the

highest share of net adds, followed by Iraq in 2009e. We expect top line to grow at a decelerating rate, reflecting increasing penetration rates in markets of operation. We estimate the strongest contribution to revenue in 2009e to be from Indonesia (at

28%) followed by Qatar (at 24%). In terms of EBITDA, we estimate contributions to be from Qatar (at 30%) followed by Indonesia (at 27%) due to the higher ARPU and hence EBITDA margin in Qatar, despite the fact that Qatar is expected to contribute by only

3.9% to Qtel’s total 2009e subscribers.

We expect EBITDA to grow at a lower CAGR of 8.9% from 2010f to 2012f, due to increasing competition in Qtel’s markets of

operations and new entrants in Qatar, Kuwait and Tunisia, resulting in a downward trend in EBITDA margin. We have estimated EBITDA margin to range from 46.6% to 42.8% over our forecast horizon and expect Qtel to report a calculated EBITDA margin of

46.6% in 2009e. This compares to a calculated 1H09 EBITDA margin of 46.6% vs. 48.3% in 1H08.

The current financial crisis has affected Qtel in the form of FX devaluation in key markets of operations, mainly Indonesia, Tunisia, Algeria and Kuwait. However, we believe that the worst is over and expect the effect of currency devaluation on revenue and

EBITDA to subside.

Chart 10: Operations Evolution (2008a-2013f)

Total subscriber base evolution, CAGR of 14.9% (2010f-2012f) 2010f estimated ARPU by operation (USD)

Revenue Evolution, CAGR of 10.8% (2010f-2012f) EBITDA Evolution, CAGR of 8.9% (2010f-2012f)

Source: Qtel, HC Brokerage

58 59

69

79

8992

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2008 2009 2010 2011 2012 2013

Total subscribers

4139

29

19 1816

12 128 7

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USD

20.3

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30.133.2

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35

40

2008 2009 2010 2011 2012 2013

QAR Billion

Revenue Revenue Growth

9.6

11.4 12.3

13.5 14.7

15.4

41.0%

42.0%

43.0%

44.0%

45.0%

46.0%

47.0%

48.0%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2008 2009 2010 2011 2012 2013

EBITDA EBITDA Margin

Telecoms - Qatar


Chart 11: Contribution by operation to revenue and EBITDA in 2009e

2009e Revenue Contribution By Operation 2009e EBITDA Contribution by operation


Improving debt profile, an estimated net debt/EBITDA of 1.7x by 2010

We believe that Qtel's debt profile is improving and estimate the company’s net debt/EBITDA to drop to 2.0x by the end of 2009e and 1.7x by the end of 2010, as a result of de-leveraging and growing operations. We are not alarmed by Qtel's debt profile, given

that the company managed to refinance and restructure its debt in such a turbulent financial environment, is significantly growing with operations in attractive markets, and has 70.6% of its debt as long-term and 54% of its debt maturing beyond 2011. In the

case of acquisitions, management is able to increase its net debt/EBITDA (without breaching covenants) in the short term up to around 3.5x, provided that there is a clear plan in place to de-leverage.

Despite a 70.3% increase in total debt from 2007 level of QAR21.6 billion to QAR36.8 billion in 2Q09, the company’s net debt/EBITDA dropped to 2.3x from 3.7x in 2007. Qtel secured in February 2009 a 2-year Forward Start Facility (FSF) with a value

of around USD2 billion, in addition to launching in May 2009 a USD5 billion Global Medium Term Note Programme (GMTN), of which the company issued USD1.5 billion in dual tranche bonds. The inaugural issue of the bond attracted substantial interest, with

global orders in excess of USD13 billion, demonstrating investor confidence in Qtel’s financial performance and its good ratings from S&P and Fitch Ratings. It is important to note that Qtel has an investment grade. Of its total debt figure, 28% will mature in

2009e and 18% by 2011, while the bulk of the total debt figure will mature beyond 2011, suggesting limited default risk for Qtel. The FSF will be drawn in November 2009 to repay a USD2 billion revolving credit facility that is due that same month, while the

funds generated from the bond issue would be used for general corporate purposes, including refinancing existing indebtedness. Qtel’s GMTN has received an “A-“rating by Standard & Poor’s Rating Services and an “A+” rating by Fitch Ratings. Of Qtel’s total

debt, 71% is from Qatar, 22% from Indonesia and 7% from other countries of operation.

Chart 12: Qtel's Debt Profile is improving

Forecast net debt/EBITDA (2008a-2013f) Qtel Debt and FCFs (2009e-2014f)

Source Qtel, HC Brokerage

Qatar 24%

Indonesia 28%

Oman 7%

Iraq 16%

Kuwait, 11%

Tunisia 5%

Algeria 8%

KSA 1%

Maldives 0%

Qatar 30%

Indonesia 27%

Oman 6%

Iraq 16%

Kuwait 10%

Tunisia 6%

Algeria 5% KSA 0% Maldives 0%

0.28

0.76

1.23

1.69

2.04

2.09

2013

2012

2011

2010

2009

2008

0.00 1.00 2.00 3.00

Net debt/EBITDA (x)

10.6

0

6.7

10.9

0

3.3

0.9

3.2

4.9

6.4

89.19.2

2.2

0 01.1

0

0

2

4

6

8

10

12

14

QAR Billion

Debt Repayment FCF New debt

Telecoms - Qatar


We estimate net income to grow at a CAGR of 18.0% from 2010f-2012f

We estimate 2009e net income to grow by 26.5% YoY to QAR2.9 billion on the back of the increase of Qtel’s stake in Indosat to 65%, reversal of provisions related to Wataniya and organic growth. 1H09 net income came in at QAR1.6 billion, up 39.9% YoY.

Another factor that is expected to fuel net income growth in 2009e and going forward is that Qtel stopped paying royalty fees of 25% of the profits attributable to the shareholders of the parent, and will only by paying industry and license fees on its Qatari

operation. We estimate net income to grow by 12.5% in 2010f, 15.9% by 2011f and 26.0% by 2012f as we expect positive impact on Qtel’s bottom line as the company deleverages its balance sheet and grows organically. We estimate Qtel’s consolidated net

income to grow at a CAGR of 18.0% from 2010f-2012f, higher than revenue and EBITDA growth over the same period. We positively view that Qtel’s operation growth filters through to bottom line, one of the reasons we are preferring Qtel over Wataniya

for. We have assumed a dividend payout ratio of 57% for 2009e and 50% thereafter.

Chart 13: Bottom line growth a function of organic growth and deleveraging

Net Income Evolution, CAGR of 18.0% (2010f-2012f)


Capex/sales to drop to an estimated 18.0% by 2012f, significant remaining capex only in Iraq and Palestine

2008 and 2009 both saw with heavy capex bills due to acquisitions and investments on networks. We believe that going forward capex/sales will decrease gradually as Qtel will have more mature assets and will only need to make investments in Iraq and

Palestine. In light of the global financial crisis, we believe that Qtel’s management is flexible in shifting capex to better performing

operations.

It is important to note that in 1H09, Qtel was making significant investments in its Indonesian operation, mainly on network

improvement, and since the CAPEX is in USD, this has affected the contribution of Indosat to consolidated CAPEX due to the

Indonesian Rupiah’s devaluation against the USD, bringing it to an estimated 62%. In order to minimize its FX exposure in Indonesia, management has a conservative program in place, with 50% currently hedged.

Chart 14: Qtel’s capex 2008a-2013f and capex breakdown

Capex/Sales to decrease gradually going forward 1H09 Capex Breakdown by operation


2.3

2.9

3.2

3.8

4.7

5.6

2008

2009

2010

2011

2012

2013

0 2 4 6

QAR Billio

n

7.5 7.3

6.7

6.0 5.9

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2008 2009 2010 2011 2012

CAPEX CAPEX/Sales

Indonesia

62%

Qatar

7%

Iraq

7%

Oman

3%

Kuwait

6%

Algeria

8%

Tunisia

1%Palestine

4%

Boradband

1%

Maldives

1%

KSA

0%

Telecoms - Qatar


FCF expected to grow at a CAGR of 93.3% from 2010f-2012f

We estimate FCF to grow at a CAGR of 93.3% from 2010f-2012f as a result of growing operations, deleveraging and lower capex

bill going forward.

Chart 15: FCF and FCF Yield (2008a-2013f)

-7.9% 4.1%

14.6%

22.6%

29.5%

37.1%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

(4.0)

(2.0)

-

2.0

4.0

6.0

8.0

10.0

1 2 3 4 5 6

QAR Billio

n

FCF FCF Yield

Source: Qtel and HC Brokerage

Telecoms - Qatar


Forecasts by operation

1) Qatar: Home market and largest contributor to EBITDA (25% of revenue, 30% of EBITDA)

Favorable Market Dynamics Qatar has a population of less than 2 million, but its hydrocarbon economy with one of the highest GDP growth rate and GDP per capita in the world make it one of Qtel’s most lucrative markets. Favorable economic conditions coupled with the fact that Qtel enjoyed a monopoly of the fixed line and mobile markets until 2Q09 translated into high ARPU figures and a high EBITDA margin of 63.4% in 2Q09, the highest among Qtel’s markets of operation. Furthermore, 13.3% of Qtel’s subscribers are postpaid. We believe that there is still room for growth in the Qatari mobile market. For instance in the UAE, which has an economy to Qatar's, mobile penetration rate exceeds 200%. We have estimated that Qtel’s current penetration rate of 112.9% can increase to 203% by 2015 on the heels of the strong economy, competition and multi sim usage. Qtel well equipped to face competition from Vodafone Qatar Qtel’s monopoly ended when Vodafone Qatar started operation in 3Q09. We believe that Qtel is in good shape to face this competition given its superior network, good experience in the Qatari market and focus on new product and service offerings that will positively impact margins and partly offset competition's effect on EBITDA margin. We estimate a mobile market share for the new entrant of 10% by the end of 2010, 20% by 2011 and 44% by 2015, in line with the company’s plan of targeting a 40-60% market share over the next 10 years. So far, Vodafone Qatar has 100K subscribers, around 50% of which are prepaid customers, implying a market share of around 5%, in line with our estimates. Qtel has signed two strategic agreements with Vodafone Qatar; the first is an outdoor site sharing agreement allowing both companies to use each others’ mobile towers, while maintaining separate active mobile networks. The second is an interconnection wholesale agreement which allows customers of Qtel and Vodafone Qatar to communicate with each other. Vodafone Qatar’s shares were listed on the DSM on July 22. The Vodafone and Qatar Foundation Consortium was announced as the winning applicant of the Second Public Fixed Networks and Services Licence by the Supreme Council of Information and Communication Technology (“ictQATAR”) in September 2008. Vodafone Qatar has not yet been awarded a second fixed license by ictQATAR. As such, the company will not be able to commit to launch dates for fixed services. We have assumed a fixed line market share for Vodafone Qatar of 5% in 2009e. The company will offer fixed line services to two real estate development projects and recently announced that it is talking to Qatari Diar and United Development Company about becoming an exclusive fixed line service provider. Royalty payment discontinued and replaced by industry and license fees Qtel was paying royalties to the Government of Qatar for the exclusive right to provide telecommunication services in the country. The royalty was calculated based on 25% of the profits attributable to the shareholders of the parent. According to the law, the payment of royalty should be discontinued from the date another operator gets a second license. Therefore, Qtel has discontinued payment of royalties since Vodafone Qatar launched its network on March 1, 2009. Qtel has communicated this change to the Qatari government and is awaiting final confirmation of acceptance from the authorities. Industry and license fees have replaced the royalties, where the group will be paying an industry fee of 12.5% on profit generated from the Group’s operations in Qatar and a license fee of 1% of net revenue generated from the provision of telecommunication services in Qatar. We estimate Qtel’s revenue to grow at a CAGR of 7.4% from 2010f-2012f and estimate EBITDA margin to be in the range of 62%-54% over our forecast horizon.

Telecoms - Qatar


Table 5: Qatari Market and Qtel KPIs (2008a-2013f)

2008a 1H09a 2009e 2010f 2011f 2012f 2013f

Fixed line Market

Subscribers (‘000s) 263 277 286 312 328 361 380

Net Adds (‘000s) 26 25 23 26 17 33 19

Penetration Rate (%) 16.0% 16.3% 16.3% 16.3% 16.3% 16.3% 16.3%

Market share:

Qtel 100% 100% 95% 93% 90% 87% 85%

Vodafone Qatar 0% 0% 5% 7% 10% 13% 15%

Mobile Market

Total Subscribers (‘000s) 1,683 1,922 2,096 2,572 3,011 3,622 4,141

Growth YoY (%) - 32.3% 24.6% 22.7% 17.1% 20.3% 14.3% Net Adds (‘000s) 469 413 476 439 611 519


Market Share: Qtel 100% 100% 95% 90% 80% 70% 60%

Vodafone Qatar 0% 0% 5% 10% 20% 30% 40%

Operator’s KPIs

Qtel Subscribers (‘000s) 1,683 1,922 1,992 2,315 2,409 2,536 2,485

Blended Monthly Mobile ARPU (QAR) 195.3

156.6 153.8 149.2 144.7 140.4 136.2

YoY (%) - (19.8%) (20.8%) (3.0%) (3.0%) (3.0%) (3.0%) Revenues (QAR Million) 5,447 2,902 5,783 6,496 6,940 7,164 7,248

YoY (%) 22.5% 11.2% 6.2% 12.3% 6.8% 3.2% 1.2% EBITDA (QAR Million) 3,399 1,814 3,586 3,898 4,095 4,155 4,132

EBITDA Margin (%) 62.4% 62.5% 62.0% 60.0% 59.0% 58.0% 57.0%


2) Indonesia: High population, low penetration make it one of Qtel’s fastest growing markets (26% of revenue, 25% of EBITDA)

Attractive market despite low ARPU and low postpaid base Despite having the lowest monthly ARPU of USD3.7 among Qtel’s markets of operation and a low postpaid percentage of 3.5%, the Indonesian market suggests significant upside for Qtel given Indonesia’s population of around 240 million and the mobile

penetration rate of 65%. As a result, we are classifying Indonesia as one of the fastest growing markets among Qtel’s markets of

operation. Indosat is an integrated player that ranks number two in a six player market. Indosat captures an estimated market share of 3% of Indonesia’s fixed line market and 19.0% of the mobile market. In June 2008, Qtel acquired 40.8% of Indosat and

in March 2009, Qtel increased its stake in Indosat by 24.2%, bringing its total stake in the company to 65.0%. The acquisition of Indosat has significantly contributed to Qtel’s operations, capturing 56.4% of total subscribers, 26.4% of revenue, and 25.2% of

EBITDA in 2Q09. We estimate the mobile penetration rate in Indonesia to reach 100% by 2011f.

Indosat management responding well to market variables In an attempt by Indosat’s management to address calling card type behavior, management has limited promotional on-net offers

and implemented price increases in order to clean its subscriber base. This had led to a decrease in the number of subscribers in 2Q09 to 28.9 million subscriber from 33.3 million subscribers in 1Q09, but is expected to have a positive impact on ARPU after the

elimination of zero value customers, which is in line with Qtel’s strategy of value driven growth. Qtel has also implemented key management changes in Indosat that are expected to positively impact the company’s operations and growth. The company is

implementing a network improvement program, another reason to improve operations, and it has the rationale of investing in the business ahead of economic improvement. Indosat was negatively affected by currency devaluation in 1Q09; however, its effect of

on revenue and EBITDA has started to subside in 2Q09. Also, the company has hedged 50% of its capex needs as they are USD denomindated.

We estimate Indosat’s revenue to grow at a CAGR of 13.1% from 2010f-2012f. For conservative reasons, we have maintained an

EBITDA margin of 49% over our forecast horizon despite management's belief that margins will increase going forward.

Telecoms - Qatar


Table 6: Indonesian Market and Indosat KPIs (2008a-2013f)

2008a 1H09a 2009e 2010f 2011f 2012f 2013f

Fixed line Market

Subscribers (‘000s) 22,000 22,220 22,345 22,599 22,856 23,115 23,378

Net Adds (‘000s) - 345 254 257 260 263


Market share:

Indosat 3.5% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Other Players 96.5% 97.0% 97.0% 97.0% 97.0% 97.0% 97.0%

Mobile Market


Growth YoY (%) 39.5% 21.0% 20.9% 17.7% 16.4% 2.9% 2.9% Net Adds (‘000s) 40,240 - 35,972 36,767 40,061 8,261 8,411


Market share: Indosat 29.0% 18.6% 19.5% 19.5% 19.5% 19.5% 19.5%

Other players 71.0% 81.4% 80.5% 80.5% 80.5% 80.5% 80.5%

Operator’s KPIs

Indosat Subscribers (‘000s) 36,258 28,857 33,500 40,514 47,684 55,496 57,106


12.9 11.9 12.5 12.9 12.9 12.5

YoY (%) - - 34.1% 5.0% 3.0% 0.0% -3.0% Revenues (QAR Million) 4,164 2,977 6,674 7,169 8,467 9,667 10,200

YoY (%) - - 60.3% 7.4% 18.1% 14.2% 5.5% EBITDA (QAR Million) 2,080 1,457 3,268 3,513 4,149 4,737 4,998

EBITDA Margin (%) 49.9% 48.9% 49.0% 49.0% 49.0% 49.0% 49.0%

Source: Qtel , Indosat and HC Brokerage

3) Oman: another cash generating market (7% of revenue, 6% of EBITDA)

Oman is another cash generating market for Qtel. Nawars, Qtel’s subsidiary, is the second player in the Omani market, along with

government owned integrated player Omantel. MVNOs focus is on niche segments with minimal impact to date. Nawras was awarded a new fixed line license along with an international gateway in Oman in June 2009. The company is now entitled to

provide fixed, data and international telecommunication services and can use its network infrastructure to offer a range of cutting-edge technologies. The license provides for the installation and operation of fixed telecommunications services for a period of 25

years with frequency spectrum rights granted for 15 years. Nawras' margins are expected to improve with the rollout of the new

network as the company will no longer have to pay interconnect cost and can compete with Omantel with equal footing. As a result of this, we have assumed an improvement in Nawras’ margins in 2009 and 2010; we have assumed that the effect of competition

will result in a drop in margins beyond 2010, however not dramatically. Nawras posted an EBITDA margin of 49.5% in 2Q09, positively impacted by increased on-net traffic and postpaid revenues, driven by positive market for Nawras’ new value added

services. Nawras’ postpaid subscribers are 7.6% of its total subscriber base.

We have assumed that Oman's current penetration rate of 118.3% can increase to 155% by 2015 due to the fact that Oman is a hydrocarbon economy with favorable GDP per capita; this is lower than our estimate for the addressable market for Qatar. We

estimate Nawras’ revenue and EBITDA to grow at a CAGR of 13.1% from 2010f-2012f.

Telecoms - Qatar


Table 7: Omani Market and Nawras KPIs (2008a-2013f)

2008a 1H09a 2009e 2010f 2011f 2012f 2013f

Fixed line Market

Subscribers (‘000s) 274 276 278 280 286 295 304

Net Adds (‘000s) 6 5 4 3 6 9 9


Market share:

Nawras 0% 0% 3% 10% 14% 20% 22%

Omantel 100% 100% 97% 90% 86% 80% 78%

Mobile Market


Growth YoY (%) 28.8% 20.3% 15.3% 11.4% 8.5% 6.8% 5.3% Net Adds (‘000s) 719 468 0.493 0.424 0.352 0.305 0.252


Market share: Nawras 46.9% 48.3% 48.9% 49.9% 50.4% 50.7% 50.7%

Omantel 53.1% 51.7% 51.1% 50.1% 49.6% 49.3% 49.3%

Operator’s KPIs

Nawras Subscribers (‘000s) 1,511 1,676 1,814 2,063 2,261 2,429 2,557


73.8 73.9 66.5 66.5 67.2 69.2

YoY (%) - (11.1%) (11.2%) (10.0%) 0.0% 1.0% 3.0% Revenues (QAR Million) 1,318 752 1,601 1,761 2,045 2,318 2,600

YoY (%) 47.5% 23.4% 21.5% 10.0% 16.1% 13.4% 12.2% EBITDA (QAR Million) 508 340 769 880 1,002 1,113 1,222

EBITDA Margin (%) 38.6% 45.2% 48.0% 50.0% 49.0% 48.0% 47.0%

Source: Qtel , Oman TRA, Omantel and HC Brokerage

4) Iraq: one of Qtel’s growth engines (16% of revenue, 17% of EBITDA)

Market Conditions promise positive future performance Iraq is one of Qtel’s fastest growing markets with sustained revenue growth and profitability. Iraq is a populous nation of around 30 million and the mobile penetration rate is around 60%, implying ample room for growth. Qtel's subsidiary, Asia Cell, is one of

three players in Iraq, the other two players are Zain Iraq and Korek, which is believed to have a small subscriber base compared to Asia Cell and Zain Iraq. A fourth license might be issued in Iraq that will most probably belong to the government. The Iraqi

market is almost a 100% prepaid market. Asia Cell is the first and only mobile telecommunications company to provide coverage

for all of Iraq and is expected to grow operationally as a result of network expansion plans to accommodate for continued subscriber growth. We estimate mobile penetration rate to reach 80% by 2011f and 95% by 2015f.

Government’s mobile phone registration program has a temporary effect on subscriber base The Iraqi government has enacted a mobile phone registration program starting 1H09. As a result of this, Asia Cell announced that it began disconnecting 500,000 unregistered mobile lines on the 15th of June 2009. This step aims to encourage Iraqi citizens to

register their mobile phone lines in accordance with the law and to support the government’s objectives of preventing mobile phones from being used for purposes of terrorism. Positive results began to manifest right after this step was taken, as 400,000

Iraqi citizens came forth to legally register their lines, which Asia Cell promptly reactivated for them using an advanced technological mechanism. A new campaign to disconnect an additional 500,000 unregistered mobile phone lines began on the 1st

of July 2009, to which we expect the same reaction from subscribers. As a result, we did not assume any drops in Asia Cell's subscriber base in 2009e.

We estimate Asia Cell’s revenue to grow at a CAGR of 12.6% from 2010f-2012f and expect EBITDA margin stability at the 51%

level over our forecast horizon. Market dynamics might change if Korek gets acquired by a large telecom operator.

Telecoms - Qatar


Table 8: Iraqi Market and Asia Cell KPIs (2008a-2013f)

2008a 1H09a 2009e 2010f 2011f 2012f 2013f

Mobile Market

Total Subscribers* (‘000s) 15,787 18,430 19,533 22,487 25,261 27,836 29,861

Growth YoY (%) 36.5% 44.6% 23.7% 15.1% 12.3% 10.2% 7.3% Net Adds (‘000s) 4,218 5,687 3,745 2,954 2,774 2,575 2,025


Market share: Asia Cell 38.7% 38.0% 38.6% 38.6% 38.6% 38.6% 38.6%

Zain Iraq 61.3% 62.0% 61.4% 61.4% 61.4% 61.4% 61.4%

Operator’s KPIs

Asia Cell Subscribers (‘000s) 6,106 7,003 7,540 8,680 9,751 10,745 11,527


46.0 45.5 44.1 43.2 43.2 43.7

YoY (%) (7.2%) (5.7%) (3.0%) (2.0%) 0.0% 1.0% Revenues (QAR Million) 2,847 1,829 3,859 4,454 4,959 5,515 6,053

YoY (%) 288.9% 48.5% 35.5% 15.4% 11.4% 11.2% 9.8% EBITDA (QAR Million) 1,427 941 1,977 2,271 2,529 2,813 3,087

EBITDA Margin (%) 50.1% 51.5% 51.2% 51.0% 51.0% 51.0% 51.0% * Excluding Korek subscribers due to unavailability of exact data in addition to the fact that it doesn’t provide coverage for all areas of Iraq. Korek subscribers are

believed to be in the range of 1-2 million subscribers.

Source: Qtel , HC Brokerage

5) Kuwait: a cash cow with one of the highest ARPU among Qtel’s markets of operation (11% of revenue, 11% of EBITDA)

An almost saturated market, shifting the focus to value added services The Kuwaiti market offers favorable dynamics given the high GDP per capita, high ARPU and large postpaid base. Despite having a

mobile penetration rate of 107% as of 2Q09, the market still offers room for growth as the mobile penetration rate remains lower

than other GCC countries like the UAE (over 200)%, Oman (118.3%) and Qatar (112.9%). A third aggressive player, STC’ Viva, entered the market in late 2008 and there was a spur in market growth rates; however, the market is starting to stabilize and

destructive pricing behaviors are coming to an end. We expect the mobile market to grow at a CAGR of 13.0% over 2010f-2012f. Wataniya Kuwait offers a high ARPU of QAR151 for 2009e among Qtel’s markets of operations, and has a large postpaid base of

13.2% of its total subscribers. On the back of higher market growth rates, we forecast Wataniya’s subscribers to grow at a CAGR of 9.2% over 2010f-2012f. We believe that Kuwait’s high standard of living suggests strong uptake of Value Added Services (VAS).

Wataniya has already introduced mobile broadband, known as Wnet, and although the contribution of this line of business may currently be small, we expect it to grow in the future.

Competition heating up in 2009e We believe that Wataniya will lose less market share to Viva compared to Zain Kuwait in 2009e. We estimate the highest market share drop in 2009 of 433bps in 2009e, bringing Wataniya Kuwait’s market share to 36.6% compared to Zain’s market share loss

of 987bps in 2009e to reach 45.2%. Due to strong competition, ARPU is expected to come under pressure in 2009e and decline by 12.7% YoY. Post 2009e, ARPU dilution is expected to soften as competition eases and the contribution of VAS increases. We

estimate revenue to decline by 13.6% YoY in 2009e; one of the factors affecting revenue growth is the removal of incoming call charges, which continues to impact call volumes and associated revenues. Due to the increasing marketing costs incurred to

defend its market share, we expect Wataniya’s EBITDA to decline to 47.7% in 2009e, from a high 53.2% in 2008a. Market is expected to mature beyond 2009e Post 2009e, we forecast revenue to grow at a CAGR of 6.2% over 2010f-2012f, compared to a CAGR of 16.0% over 2006-2008a.

On the back of revenue growth slowdown, we forecast EBITDA to grow at a low CAGR of 1.7% over 2010f-2012f.

Telecoms - Qatar


Table 9: Kuwaiti Mobile Market and Wataniya Kuwait KPIs (2008a-2013f)

2008a 1H09 2009e 2010f 2011f 2012f 2013f

Market:


Growth YoY (%) 15.8% 27.7% 27.0% 15.9% 12.2% 10.8% 9.7% Net Adds (‘000s) 438 814 866 648 577 575 571


Market Share: Wataniya Kuwait 40.9% 37.4% 36.6% 34.6% 33.6% 33.1% 32.1%

Zain 55.1% 48.4% 45.2% 42.4% 41.4% 40.9% 41.4%

Viva 4.0% 14.2% 18.2% 23.0% 25.0% 26.0% 26.5%

Key Performance Indicators:

Wataniya Subs. (‘000s) 1,314 1,403 1,492 1,635 1,781 1,945 2,069

Blended Monthly Mobile ARPU (QAR)

173.0 147.7 151.0 140.4 136.2 134.9 134.5

YoY (%) -2.6% -19.0% -12.7% -7.0% -3.0% -1.0% -0.3% Revenues 3,070 1,299 2,653 2,773 2,939 3,174 3,409

YoY (%) 38.2% -8.7% -13.6% 4.5% 6.0% 8.0% 7.4% EBITDA 1,631 617 1,265 1,231 1,245 1,329 1,428

EBITDA Margin (%) 53.1% 47.5% 47.7% 44.4% 42.4% 41.9% 41.9%

Source: Wataniya, Zain and HC Brokerage

6) Tunisia: Three’s a crowd (5% of revenue, 6% of EBITDA)

Tunisiana is considered one of Qtel’s growth markets and the only net income positive operation for Wataniya besides Kuwait. We

do not expect the entry of a third player (Orange-Divona) in 2010f to significantly increase mobile penetration given the current penetration rate of 87.0% and we estimate Tunisia’s penetration rate to reach 112.5% by 2015f. On the operational front, we

believe that 2009e will witness decent subscriber growth rates as mobile players will seek to increase their market shares prior to the entry of Orange-Divona in early 2010f. Therefore we estimate the market and Tunisiana’s subscribers to grow by an annual

9.4% and 11.5% in 2009e, respectively. 2009e has not be the strongest year for Tunisia given the slowdown in tourism inflows (according to World Travel and Tourism Council, tourism contributed by around 16.7% to Tunisia’s GDP in 2008) and local currency

devaluation. As a result, we expect revenue to grow at a lower rate of 3.9% in 2009e compared to 23.1% in 2008a.

Post 2009e, we believe that the Tunisian mobile market will grow at a CAGR of 7.5% over 2010f-2012f. We expect Tunisiana to maintain its market leadership with a market share of around 45%, and forecast its subscribers to grow at a CAGR of 4.3% over

2010f-2012f. Competitive pressures are expected to result in a 2.0% revenue CAGR over 2010f-2012f, lower than 31.4% from 2006-2008a and a decline in EBITDA margin to 47.0% by 2013f from 52.3% in 2008a.

Table 10: Tunisian Market and Tunisiana KPIs (2008a-2013f)

2008a 1H09 2009e 2010f 2011f 2012f 2013f

Market:


Growth YoY (%) 11.3% 14.2% 9.4% 9.1% 7.5% 6.1% 3.5% Net Adds (‘000s) 864 1,127 803 848 759 667 406


Market Share: Tunisiana 51.1% 52.4% 50.9% 48.9% 47.4% 46.4% 45.4%

Tunisie Telecom 48.9% 47.6% 49.1% 46.1% 42.6% 38.6% 36.6%

Orange- Divona - - - 5.0% 10.0% 15.0% 18.0%

KPIs:

Tunisiana Subs.(‘000s) 4,256 4,399 4,745 4,973 5,181 5,381 5,449

Blended Monthly Mobile ARPU (QAR) 50.3 46.0 45.9 43.6 42.3 41.5 41.1

YoY (%) 4.6% -5.6% -8.7% -5.0% -3.0% -2.0% -1.0% Proportionate Revenues 1,344 602 1,303 1,339 1,357 1,383 1,404

YoY (%) 23.1% -1.1% 3.9% 2.6% 1.3% 1.9% 1.5% Proportionate EBITDA 703 326 710 689 671 664 660

EBITDA Margin (%) 52.3% 54.3% 54.5% 51.5% 49.5% 48.0% 47.0%

Source: Wataniya, OTH, Tunisie Telecom and HC Brokerage

Telecoms - Qatar


7) Algeria: cherry on top (8% of revenue, 5% of EBITDA)

An attractive three player market Algeria is one of Qtel’s growth markets and Wataniya’s current fastest growing market. The market offers favorable demographics

with a population of around 35 million and a mobile penetration rate of 69%. There are three players in the market, Djezzy, OTH’s subsidiary with the biggest market share of 63%, followed Nedjma, Wataniya’s subsidiary with a 23% market share and Mobilis

with an 11% market share. After the slowdown in 2008 subscribers’ growth of 1.7% YoY due to the government increasing requirements on subscriber registration, we believe that 2009e will note an increase of 15.8% in market subscribers on the back of

competition and penetration of lower income segments especially in Southern Algeria. Nedjma’s efforts to ease the churn are paying off as subscribers increased by 15.9% YoY in 1H09. Nedjma has demonstrated consistent growth over the past period and

promises more going forward. We estimate Nedejma’s subscribers to grow at a CAGR of 9.9% over 2010f-2012f and maintain its position as the second player in a three player market and we estimate its market share to reach 26.3% by 2013f.

The new 5% tax on prepaid recharge cards revenue to affect EBITDA margin by an estimated 400bps Our estimates factor in a recently announced government decision of charging a 5% tax on prepaid recharge cards revenue. It is important to note that prepaid subscribers contribute 93.1% of Nedjma’s total subscriber base. This tax will not be passed onto

consumers and negotiations are still underway between mobile players and the government on ways to mitigate its effect. We estimate that such a decision would lower EBITDA margin by around 400bps. Driven by strong subscribers’ growth, we estimate

Nedjma’s revenue to increase by 6.1% YoY in 2009e. Post 2009e, we forecast revenue to grow at a decent CAGR of 10.6% over 2010f-2012f. We estimate EBITDA (in KWD) to increase by an impressive 21.7% YoY in 2009e thanks to strong revenue growth

offsetting the increasing marketing and football sponsorship expenses. Post 2009e, management’s effective cost controls is expected to lead EBITDA to increase at a CAGR of 9.2% over 2010f-2012f and EBITDA margin to range from 30.8%-33.3% over

our forecast horizon.

Table 11: Algerian Market and Nedjma KPIs (2008a-2013f)

2008a 1H09 2009e 2010f 2011f 2012f 2013f

Market:


Growth YoY (%) 1.7% 8.2% 15.8% 11.1% 7.6% 4.8% 3.5% Net Adds (‘000s) 361 1,836 3,449 2,797 2,139 1,456 1,117


Market Share:

Djezzy 64.7% 63.7% 64.1% 63.4% 63.1% 63.3% 63.5%

Nedejma 23.5% 23.8% 24.8% 25.8% 26.3% 26.3% 26.3%

Mobilis 11.8% 11.3% 11.1% 10.8% 10.6% 10.4% 10.2%

Key Performance Indicators: Nedejma Subscribers (‘000s) 5,114 5,784 6,264 7,238 7,941 8,324 8,618

Blended Mobile ARPU (QAR) 27.7 26.4 26.7 25.8 25.3 25.3 25.4

YoY (%) -2.1% -7.0% -3.5% -3.5% -2.0% 0.0% 0.5% Revenues 1,768 876 1,876 2,153 2,372 2,541 2,660

YoY (%) 28.2% 13.5% 6.1% 14.8% 10.2% 7.2% 4.7% EBITDA 575 279 579 600 688 754 778

EBITDA Margin (%) 32.5% 31.8% 30.9% 32.3% 33.3% 33.8% 33.3% Adjusted Margin (%) 28.8% 31.7% 30.8% 27.9% 29.0% 29.7% 29.2%

Source: Wataniya, OTH and HC Brokerage

8) Wataniya Palestine: A mixed bag

In September 2006, Wataniya International won the bid to build and operate a second mobile network in Palestine and in

December 2006, Wataniya International signed a partnership agreement with the Palestine Investment Fund (PIF) to form Wataniya Telecom in Palestine. The license won by the consortium covers the West Bank and Gaza areas only. The operations

were originally scheduled to be launched in 2007, but after several delays, due to the Israeli government’s reluctance to release related frequencies to the operator, the company has not yet commercially launched. Negotiations are underway and operations

may be launched by the end of 2009e; however, we believe that this may not be possible and the earliest launch in our view is in 2010f. Palestine promises to be a lucrative market given its penetration rate of only 34% as of the end of 2008 and the fact that it

has one player, Paltel. Palestine has favorable demographics with a large youth segment which is currently underserved. Wataniya Palestine is expected to launch new and innovative voice and data services. We estimate market subscribers to grow at a CAGR of

19.9% over 2010f-2012f.

Telecoms - Qatar


We estimate that following the entry of Wataniya Palestine in 2010f, mobile penetration rate is expected increase to 59.7% as subscribers are expected to increase by an impressive 24.9% YoY, with Wataniya Palestine capturing 5% of the market. We

estimate it to reach 32% by 2013f. Wataniya Palestine’s subscribers are set to grow at a CAGR of 114.9% over 2011f-2013f. Since Wataniya Palestine is a start up operation, we expect revenue to grow at a high CAGR of 161.3% over 2011f-2013f. We estimate

Wataniya Palestine to turn EBITDA positive after three years of operations, by 2013f, and report an EBITDA margin of 4.0%.

Table 12: Palestinian market and Wataniya Palestine KPIs (2008a-2013f)

2008a 2009e 2010f 2011f 2012f 2013f

Market:

Total Subscribers (‘000s) 1,314 1,907 2,382 2,864 3,289 3,693

Growth YoY (%) 28.7% 45.1% 24.9% 20.3% 14.8% 12.3% Net Adds (‘000s) 293 592 475 483 425 404

Penetration Rate (%) 34.2% 47.7% 59.7% 69.7% 77.7% 84.7%

Market Share:

Paltel 100.0% 100.0% 95.0% 85.0% 75.0% 68.0%

Wataniya Palestine 0.0% 0.0% 5.0% 15.0% 25.0% 32.0%

Key Performance Indicators: 2010f 2011f 2012f 2013f 2014f 2015f

Wat. Palestine Subs. (‘000s) 119 430 822 1,182 1,548 1,904

Blended Monthly Mobile ARPU (QAR) 68.9 72.3 74.5 73.0 73.0 73.0

YoY (%) NM 5.0% 3.0% -2.0% 0.0% 0.0% Revenues 49 238 560 878 1,196 1,512

YoY (%) NM 383.8% 135.0% 56.9% 36.2% 26.4% EBITDA (5) (12) (6) 35 108 212

Margin (%) -10.0% -5.0% -1.0% 4.0% 9.0% 14.0%

Source: Wataniya and HC Brokerage

9) KSA: volatile business with limited contribution (1% of revenue, -0.3% of EBITDA)

Given the terms of agreement with STC and the nature of the Push to Talk Services (PTT) serving a niche market, revenue from

this line of business has been volatile. We estimate subscribers to this service to increase at a CAGR of 18.2% over 2010f-2012f, driving revenues to grow by a CAGR of 20.2% over the same period. We forecast the operation to turn EBITDA positive by 2011f.

Table 13: Bravo KPIs (2008a-2013f)

QAR 2008a 1H09a 2009e 2010f 2011f 2012f 2013f

Bravo Subs. (‘000s) 149 177 204 254 305 336 370

Blended Monthly ARPU (QAR)

95.3 113.6 99.9 103.9 107.0 110.3 113.6

YoY (%) 1.5% 1.4% 4.9% 4.0% 3.0% 3.0% 3.0% Revenues 269 120 261 297 374 442 500

YoY (%) -2.7% 55.4% -2.9% 13.8% 25.9% 18.0% 13.3% EBITDA (84) (22) (35) (12) 15 40 60

Margin (%) -31.3% -17.9% -13.4% -3.9% 4.1% 9.1% 12.1%


10) Maldives: A saturated market heavily dependent on tourism (0.4% of revenue, 0.0% of EBITDA)

Maldives is a country with a small population of less than half a million and an economy that is heavily dependent on tourism,

leading to earnings seasonality for telecom players. The Maldivian telecom market is a relatively small two player mature market with a penetration rate of around 120%. We estimate market subscribers to grow at a CAGR of 6.4% over 2010f-2012f and

Wataniya Maldives to have the higher share of the market growth as its subscribers are set to increase at an estimated CAGR of 7.2% over the same period. Driven by subscribers’ growth and steady ARPU, we estimate revenue to increase at a decent CAGR of

10.1% over 2010f-2012f. We forecast EBTIDA to range between 2.4% and 22.4% over our forecast horizon. Wataniya Maldives is another low contribution operation to Qtel with a revenue contribution of 0.4% and EBITDA contribution of 0.01% as of 2Q09.

Telecoms - Qatar


Table 14: Maldivian market and Wataniya Maldives KPIs

2008a 1H09a 2009e 2010f 2011f 2012f 2013f

Market:

Total Subscribers (‘000s) 443 465 477 515 546 575 601

Growth YoY (%) 41.5% 36.8% 7.5% 7.9% 6.1% 5.3% 4.5% Net Adds (‘000s) 130 125 33 38 32 29 26


Market Share:

Dhivehi Raajjeyge Gulhun Pvt 77.0% 77.0% 77.0% 76.5% 76.5% 76.5% 76.5%

Wataniya Maldives 23.0% 23.0% 23.0% 23.5% 23.5% 23.5% 23.5%

KPIs: Wt. Maldives Subs. (‘000s) 102 107 110 121 128 135 141


59.8 58.1 59.2 61.0 62.8 64.7

YoY (%) -1.7% 10.1% 2.0% 2.0% 3.0% 3.0% 3.0% Revenues 76 48 91 102 112 122 132

YoY (%) 21.7% 58.1% 20.9% 11.3% 10.3% 8.9% 8.0% EBITDA (1) 1 2 9 15 21 26

EBITDA Margin (%) -1.2% 2.9% 2.4% 8.4% 13.4% 17.4% 19.4%


Telecoms - Qatar


Qtel Overview

Qatar Telecom (Qtel) is a Qatar-based regional integrated telecom player with operations in 17 countries in the MENA region, the

subcontinent and South East Asia. Qtel’s countries of operation are divided into i)cash generating mature markets like Qatar, Kuwait and Oman, and ii) growing markets like Indonesia, Iraq, Algeria, and Tunisia, thus diversifying the company’s exposure and

allowing it to leverage synergies across the group. Of Qtel’s total revenue, 86% is contributed by mobile services and 14% by fixed line services. Qtel is 55% owned by the state of Qatar, 13% by other sovereign entities, 10% by Abu Dhabi Investment Authority

(ADIA) and a free float of around 21.0%. Qtel offers landline, mobile, cable television and Internet services to personal users and businesses. Its consumer broadband offerings are being developed in Jordan, Pakistan and Philippines. Qtel has a strategic vision

to become one of the world’s top 20 telecommunications companies by 2020 and its announced strategy is to focus on attracting higher value customers and market share of revenue, more than subscriber additions. In 2007, Qtel acquired 51% of National

Mobile Telecommunications Co KSC (Wataniya), giving the company exposure to Kuwait, Tunisia, Algeria, KSA, Maldives and Palestine. Wataniya is planning to launch its services in Palestine by 4Q09. In June 2008, Qtel acquired 40.8% of Indosat and in

March 2009, it increased its stake in Indosat by 24.2%, bringing its total stake in the company to 65.0%. Qtel has a paid-in capital of 1.47 billion, divided over 147 million shares with a par value of QAR10/share. The company’s total number of subscribers as of

2Q09 reached 52.1 million, and proportionate subscribers reached 29.0 million subscribers. Qtel has strategic alliances with leading international telecommunication companies like Tata Communications. Qtel’s management has a good track record and its

corporate governance meets international standards.

Chart 16: Qtel’s simplified organizational structure

1) Qtel owns 37% of Nedjma through Wataniya NMTC and a 9% stake via Qtel

2) Qtel owns 61% of Raywood which owns 49% of Asia Cell making Qtel’s effective stake in Asia Cell 30%

Source: Qtel

Qtel

Wataniya

Asia Mobile

Wi-tribe

Qtel

Indosat

Nawras

Asia Cell²

Wataniya Kuwait

100%

Tunisiana

50%

Nedjma1

71%

Bravo

56%

Wataniya Maldives

100%

Wataniya Palestine

57%

Qtel International

Liberty

Telecom

52.5%

100%

65%

55%

30%

25%

78%

100%

40%

Navlink 38%

9%

Telecoms - Qatar


Exponential growth in operations Qtel has managed to grow its business exponentially. Subscribers grew at a CAGR of 478.3% from 2006 to 2008 reaching 57.5 million by the end of 2008. Revenue, EBITDA and net income grew at CAGR of 114.4%, 91.8% and 16.0% respectively over the

same period fuelled by organic growth and acquisitions. As of 2Q09, the bulk of Qtel’s subscribers are from Indonesia (56%), followed by Iraq (13%), and Algeria (11%). Howeverw in terms of contribution to revenue Indonesia contributed only by 26%,

followed by Qatar (25%) and Iraq (16%). On the other hand, Qatar offers the highest contribution to EBITDA at 30%, followed by Indonesia (25%) and Iraq (17%). We attribute Indonesia’s lower contribution to revenue and EBITDA, despite having the highest

share of subscribers, to lower ARPU and margins compared to Qatar, reflecting the difference in GDP per capita and currency

strength between the two countries. To illustrate, the Qatari Riyal is pegged to the USD, which strengthened over the past period, unlike the Indonesian Rupiah which devaluated significantly against the USD.

Chart 17: Operations’ contribution as of 2Q09

Total subscriber contribution Revenue contribution

EBITDA contribution EBITDA and NPM

*The NPM of Qatar and Kuwait was exceptionally high in 2Q09 due to a reversal of provision related to Wataniya.

ARPU Comparison Revenue and Net Income Evolution (2006-1H09)


Qtel

4%

Indosat

57%

Nawras

3%

Asia Cell

14%

Wataniya

Kuwait Telecom

3%

Tunisiana

8%

Nedjma

11%

Bravo

0%

Qatar

25%

Indonesia

27%Oman

7%

Iraq

16%

Kuwait

11%

Tunisia

5%

Algeria

8%

KSA

1%

Qatar

30%

Indonesia

25%Oman

6%

Iraq

17%

Kuwait

11%

Tunisia

6%

Algeria

5%

KSA

0%

-50.00%

-30.00%

-10.00%

10.00%

30.00%

50.00%

70.00%

90.00%EBITDA Margin

NPM

43.0

40.6

29.6

20.2

15.3

12.5

12.5

7.2

3.7

Qtel

Wataniya …

Bravo

Nawras

Wataniya …

Tunisiana

Asia Cell

Nedjma

Indosat

0 20 40

USD

4,420

10,543

20,319

11,534

1,692 1,674 2,277 1,649

0

5,000

10,000

15,000

20,000

2006 2007 2008 1H09

QAR Million

Revenues

Net Income

Telecoms - Qatar


Rating Scale

Recommendation Upside

Buy Greater than 25%

Hold 0-25%

Sell Less than 0%

Disclaimer

This memorandum is based on information available to the public. This memorandum is not an offer to buy or sell, or a solicitation of an offer to buy or sell the securities mentioned. The information and opinions in this memorandum were prepared by HC Brokerage from sources it believes to be reliable and from

information available to the public. HC Brokerage makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned in this memorandum, and accepts no responsibility or liability for losses or damages incurred as a result of opinions formed and decisions made based on information

presented in this memorandum. HC Brokerage does not undertake to advise you of changes in its opinion or information. HC Brokerage and its affiliates and/or its directors and employees may own or have positions in, and effect transactions of companies mentioned in this memorandum. HC Brokerage and its affiliates may also seek to perform or have performed investment-banking services for companies mentioned in this memorandum.

Telecoms - Qatar


HC Research [email protected]

Karim Khadr Regional Head of Research [email protected] +971 4 2935381

Tudor Allin-Khan, CFA

Chief Economist/Strategist [email protected] +971 4 2935386

NematAllah Choucri Telecoms [email protected] +202 3332 8610

Germaine Benyamin Banks & Financials [email protected] +971 4 2935382 Janany Vamadeva Banks & Financials [email protected] +971 4 2935384 Engy El Dishish Banks & Financials [email protected] +202 3332 8636 Roaa Alian Construction & Build. Materials [email protected] +202 3332 8612 Mennatallah El Hefnawy Construction & Build. Materials [email protected] +202 3332 8632 Hatem Alaa Industrials & Consumer Goods [email protected] +202 3332 8614 Mai Nehad Industrials & Consumer Goods [email protected] +202 3332 8626 Majed Azzam Real Estate [email protected] +971 4 2935385 Ankur Khetawat Real Estate [email protected] +971 4 2935387 Nermeen Abdel Gawad Real Estate [email protected] +202 3332 8628 Yasmin El-Rifae Editor [email protected] +202 3332 8634 Mohamed El Saiid, MFTA Head of TA Desk [email protected] +202 37496008 (Ext. 175) Wael Atta, CFTe Senior Technical Analyst [email protected] +971 4 2935388 Sameh Khalil, CFTe Technical Analyst [email protected] +202 37496008 (Ext. 361)

HC Brokerage – Cairo, Egypt [email protected]

Shawkat El-Maraghy Managing Director [email protected] Ext. 200

Mostafa Saad Local & Gulf Sales [email protected] Ext. 213 Yasser Mansour Local & Gulf Sales [email protected] Ext. 217 Hossam Wahid Local & Gulf Sales [email protected] Ext. 206 Hassan Kenawi Local & Gulf Sales [email protected] Ext. 300 Abou Bakr Shaaban Local & Gulf Sales [email protected] Ext. 238 Nihal Hany Local & Gulf Sales [email protected] Ext. 219 Mohamed Helmy Foreign Sales [email protected] Ext. 207 Ahmed Nabil Fixed Income Trader [email protected] Ext. 218

HC Brokerage – Dubai, UAE

Hassan Aly Choucri General Manager [email protected] +971 4 293 5305

Mohamed Hegazy Head of Sales [email protected] +971 4 293 5365 Mohamed Galal Head of Sales Trading [email protected] +971 4 293 5309 Hesham Bakry Institutional Sales Manager [email protected] +971 4 293 5353 Anne Marie Browne Foreign Institutional Sales [email protected] +971 4 293 5301 Richard Frost Foreign Institutional Sales [email protected] +971 4 293 5302

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