July 20, 2016 UAE Telecom Sector

Sector Report Trading ahead of fundamentals

: reiterate ‘Sell’ rating, revised TP at AED 14.2 o Stock at 18.9x earnings, remains ahead of its fundamentals o Most international operations face pressure due to unfavourable currency movements, regulatory headwinds and increasing competitive intensity; UAE remains stable o Expect strong YoY 2Q performance on back of absence of loss from and lower royalty charge

 Du: dividend play, rating at ‘Sell’ with a TP of AED 5.40 o 2Q16 earnings to decline YoY due to higher royalty charge o Removing restrictions on foreign institutional investors to be a trigger for the stock o Progressive dividends, with a yield of c. 5.2% at current levels

UAE telcos trading ahead of fundamentals UAE telcos are trading at a P/E multiple of 18.6x for FY16, at a significant

premium to their GCC peer group (excl. UAE telcos) average of 13.8x, primarily due to moderate competition in the UAE market and non-fundamental factors. Etisalat’s stock price has increased 57% since September 2015, when

foreign investors were allowed to hold up to 20% stake in the company. Telecom In December 2015, Etisalat was included in the MSCI Emerging markets Index and FTSE Indices in March 2016, further fuelling demand for the company’s stock. Currently, only individual foreign nationals can invest in Du, but going forward, there is speculation that ownership restrictions on foreign institutions will also be lifted. Although we are not sure about the timeline, allowing foreign investors to buy shares in Du should lead to similar institutional flows as witnessed in case of Etisalat, during its MSCI and FTSE inclusion. Although we believe that both Etisalat and Du are well placed to benefit from strong UAE macros, current valuations are considerably ahead of the fundamentals, thereby driving our ‘Sell’ rating on both stocks.

Etisalat remains the market leader in UAE; market share stabilises Etisalat remains the market leader in the UAE, with a c.54% of the total mobile subscriber base and revenue market share of c.71% in 1Q16, led by its dominance in the high-value customer segment and also fixed services segment. According to the UAE TRA, the country’s post-paid subscriber numbers stood at 2.8mn at end-FY15, with Etisalat having a strong market

share of 63% and 1.77mn post-paid subscribers.

SICOResearch

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Attention is drawn to the disclaimer and other information in the end

SICO RESEARCH UAE Telecom

Exhibit 1: UAE mobile subscribers market share Exhibit 2: UAE telecom- revenue market share 100% 100%

30.3% 31.0% 31.5% 29.5% 80% 80% 32.5% 48.7% 47.4% 46.7% 45.2% 46.3%

60% 60%

40% 40% 67.5% 69.7% 69.0% 68.5% 70.5% 51.3% 52.6% 53.3% 54.8% 53.7% 20% 20%

0% 0% 2012 2013 2014 2015 1Q16 2012 2013 2014 2015 1Q16 Etisalat Du Etisalat Du Source: Du investor presentations, SICO Research Source: Du investor presentations, SICO Research

As a result of its leadership in the high-value segment, Etisalat reported c. 25% higher mobile ARPUs at AED 110, compared to Du’s mobile ARPUs of AED 88. Due to increasing competition in the UAE telecom market (penetration rate was as high as 217% by February 2016 end), both telcos reported a YoY decline in mobile ARPUs in 1Q16, a trend that has been following for some quarters now, as seen in the Exhibit below. Exhibit 3: Quarterly mobile ARPUs (AED) 130 119 116 117 120 115 115 115 114 110 110 110

100

97 98 90 96 95 96 92 93 93 88 80

70 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Etisalat Du

Source: Company Data, SICO Research

Bitstream access to intensify competition; advantage for Du The bitstream access was launched in July 2015 for double play (fixed and broadband) with inclusion of TV services and double play for business customers expected by end-FY16. However, current provision of TV services by Du is confined to newer areas of Dubai, while Etisalat has a monopoly in the rest of the UAE. We expect Du to benefit once infrastructure sharing for triple play services (including TV) is implemented, leading to increased competition. Du’s fixed line revenues grew 14% YoY in FY15. We believe that fixed line network sharing partially contributed, since it allowed the company to operate beyond its existing network. Going forward, the cost incurred to install new fixed telecom infrastructure would be shared between the two telcos, which should result in lower capital expenditure for both companies. GCC roaming rate cut impact to be limited In April 2016, the UAE TRA directed an average 42% cut in roaming rates for mobile users travelling within the GCC region, in line with the intra-GCC agreement to reduce roaming rates.

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SICO RESEARCH UAE Telecom

We believe that the impact on the telcos’ bottom line will not be material because of increased elasticity of roaming usage and lower interconnection charges. Our interaction with management of other GCC telecom operators validates this view. Competitive pricing; Du offers slightly better value and more flexibility Etisalat and Du have comparable pricing in major segments, but the latter is providing marginally extra talk time/data for same cost. The post-paid price comparison of both telcos suggests that in the low-value segment, Du offers better value in terms of higher talk time at 300 mins compared to Etisalat’s 200 min for AED 150/ month plan. In the medium- range plans, both telcos provide similar value at AED 300/month. In the premium segment, Etisalat’s plans are relatively data heavy with 100GB of data and 1000 mins of flexible talk time for AED 1,000/ month, which Du compensates with higher talk-time of 2,500 mins along with 50 GB of data at the same price. As per our analysis, Du offers better value for money to subscribers in the lower price range. Additionally, in terms of flexibility, we believe Du offers more flexible plans, with an option of contract-free plans in both low- and high-value segments, albeit with lesser benefits. However, Etisalat restricts the plans with 12- and 24- month contracts. Exhibit 4: Post-paid pricing comparison Plans (AED) Service Etisalat Du Talk time (mins) 200* 300* 150- Flexible mins Data (GB) 6 6 Talk time (mins) 1200 1200 Emirati- 300 mins Data (GB) 2 2 Talk time (mins) 1000* 2500* Premium- 1000 Data (GB) 100 50 *Note- Flexible minutes for local/ international calls or incoming roaming Data as of 15 July 2016 Source: Company Data, SICO Research Further increase in royalty rate for FY17 remains a risk to the sector Du’s royalty fee is set to increase and match Etisalat by FY16 with the latter’s royalty rate on profit declining in FY16. During this period, both operators need to pay 15% royalty on revenues and 30% on profits (after excluding revenue royalty). As a result, we expect Du’s royalty expense at AED 2.2bn, up 12% YoY compared to Etisalat’s decline of 9% YoY to AED 5.5bn. The royalty rates have not yet been disclosed for FY17 and beyond, but we have assumed royalty rates to be equal to FY16 rates. Exhibit 5: Royalty rates for UAE telcos Etisalat Du Royalty on Royalty on Royalty on Royalty on Years revenue profit revenue profit 2012 15.0% 35.0% 5.0% 17.5% 2013 15.0% 35.0% 7.5% 20.0% 2014 15.0% 35.0% 10.0% 25.0% 2015 15.0% 35.0% 12.5% 30.0% 2016 15.0% 30.0% 15.0% 30.0% Source: Company Data, SICO Research

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SICO RESEARCH UAE Telecom

Emirates Telecommunication Corporation Price Data (AED) Current Price 20.00 Continues to rally on institutional flows Target Price 14.20 52 wk High/Low 20.00/11.40 Reiterate ‘Sell’ recommendation, TP at AED 14.2/sh Ratings We reiterate our ‘Sell’ recommendation for Etisalat with a one-year blended Short-term Neutral target price of AED 14.2/sh, a downside of 29% from the current level. The Long-term Sell stock is currently trading at a P/E multiple of 18.9x on our FY16 EPS of AED

Risk Profile Normal 1.06, ahead of peer group average of 13.8x, which we believe is mainly due to

price increase after opening up for foreign investors and the stock’s inclusion Market Data in MSCI and FTSE Indices. Etisalat’s stock has rallied 57% since September 2015, Sector Telecom when it was opened up for foreign investors, compared to 0.1% decline in Abu

Telecom Market Cap USD 47.4bn Dhabi exchange index during the same period. We expect Etisalat to pay a

Primary Market Abu Dhabi dividend of 80 fils/sh in FY16, translating to pay-out ratio of 76% - in line with Other Exchg the past three years’ average - and a dividend yield of 4%. Reuters ETEL.AD Exhibit 6: Etisalat- Blended Valuation Bloomberg ETISALATUH (price in AED, per share) Target Price Weightage Free Float 40% DCF 13.3 50.0% Price/ Earnings 15.0 50.0%

Du – TP 14.2 Valuation Ratio Current Price 20.0 2016E 2017E % Up (Down) Side -29.2% P/E x 18.9 17.1 Source: Company Data, SICO Research P/BV x 3.8 3.6 Expect robust 2Q16 earnings at AED 1.9bn, led by Mobily’s turnaround and EV/EBIDTA 7.0 6.8 lower royalty Div Yld % 4.0 4.3 We expect Etisalat to report higher 2Q16 earnings at AED 1.9bn, up 25.3%

YoY from AED 1.5bn. The telco had a combined negative impact of AED Trading Data 422mn from a loss by Mobily (AED 215mn) and forex movement in 2Q15 (AED Daily Vol (6M Avg) 2.5 207mn). Since Mobily’s earnings are included with a one-quarter lag and it has Daily T/o (6M Avg USD) 12.4 already reported net profit of SAR 16.3mn in 1Q16, we have factored in a gain of AED 4.4mn in Etisalat’s 2Q16 estimates. In addition, we do not expect any Issued Shares 8,696.8 major forex loss in 2Q16 unlike 2Q15; in fact, Etisalat should benefit from 2.4% All in millions QoQ depreciation of the Euro versus the US dollar due to the telco’s Performance (%) 1m 3m 12m transactional gain on Euro-dominated debt. Our estimates suggest that the

Absolute 6.7 5.5 38.4 company’s royalty expense will decline 11% YoY to AED 1.7bn from AED GCC Equities GCC 1.9bn, led by lower royalty rate on profit. However, revenues are expected to Relative 5.4 6.0 43.1 decrease 2.5% YoY to AED 13bn from AED 13.3bn in 2Q15. Source: SICO Research, Bloomberg Exhibit 1: 2Q16 estimate (AED bn) 2Q16E 1Q16 2Q15 YoY QoQ Revenue 13.0 12.9 13.3 -2.5% 0.9%

EBITDA 6.3 6.3 6.8 -7.9% 0.5% EBITDA Margin 48.6% 48.8% 51.4%

Profit before Royalty 4.3 4.3 4.4 -0.7% 2.0%

PBT Margin 33.5% 33.1% 32.9% Net Profit 1.9 1.9 1.5 25.3% 3.8%

Net Margin 14.8% 14.4% 11.5% Source: SICO Research, Company Data

Etisalat sells Canar Telecom as part of its portfolio optimisation strategy

Etisalat sold its 92.7% holding in Sudan-based fixed line operator Canar Telecom to Sudan’s Bank of Khartoum for AED 349.6mn. The buyer bank had [email protected] a 3.7% stake in Canar and exercised its shareholding right to block Etisalat’s www.sicobahrain.com agreement with Zain Sudan for Canar’s buyout. In FY15, Etisalat sold its 85% stake in Tanzania-based subsidiary Zanzibar Telecom (Zantel) to Sweden- based Millicom for USD 1.

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SICO RESEARCH UAE Telecom

We believe Etisalat is aiming to improve its return on investment by disposing of its low -performing subsidiaries and optimising its investment portfolio. UAE still remains the largest operation for Etisalat Etisalat UAE remained the telco’s key operation, contributing 57% and 61% of the group’s consolidated revenues and EBITDA, respectively, in 1Q16. Additionally, Etisalat has strong international operations with 43% share in group revenues. Among its international operations, is a major operator, contributing 24% to the group’s total revenues and EBITDA. Exhibit 2: Etisalat- operation wise revenue contribution Exhibit 3: Etisalat - operation wise EBITDA contribution

Maroc Maroc Telecom, Telecom, 24% 24%

Egypt, 9% Egypt, 6% UAE, 61% UAE, 57% Pakistan, Pakistan, 8% 6%

Others, 3% Others, 2%

Source: Du investor presentations, SICO Research Source: Du investor presentations, SICO Research In 1Q16, UAE and Egypt remained the major contributors to YoY increase in Etisalat’s consolidated revenue. Morocco and Pakistan operations reported a decline in 1Q16 revenues, partially offsetting the growth. Exhibit 4: Etisalat revenue waterfall chart 13,000 95 33 12,853 12,726 97 31 67 12,600

12,200

11,800

11,400

11,000 1Q15 UAE Morocco Egypt Pakistan Others 1Q16

Source: Company Data, SICO Research UAE operations remained stable; offset the decline registered in international operations Etisalat’s UAE revenues remained stable in 1Q16, with a moderate growth of 1.1% YoY to AED 7.5bn. The telco’s total and mobile subscribers grew 6% and 7% YoY, respectively. However, due to increasing competition, mobile ARPUs declined 3.5% YoY, resulting in subdued top line growth. We expect Etisalat’s UAE revenues to increase moderately at a CAGR of c.2% during the FY15-18 period, with flattish FY16 revenues of AED 30.1bn.

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SICO RESEARCH UAE Telecom

Exhibit 5: UAE mobile revenue and EBITDA ( AED bn) 35 59.0% 58.1% 30 58.0% 25

20 57.0% 56.5% 56.2% 55.8% 31.3 15 28.8 30.1 30.7 56.0% 10 16.7 17.3 17.5 17.0 55.0% 5

0 54.0% FY15 FY16E FY17E FY18E Revenue EBITDA EBITDA Margin

Source: Company Data, SICO Research Maroc Telecom remains an important growth contributor Maroc Telecom is Etisalat’s largest international operation, contributing 24% to consolidated revenues and EBITDA. Maroc reported robust revenue growth of 7% YoY in 1Q16 at AED 3.1bn from AED 2.9bn YoY, led by full consolidation of Atlantique Telecom (compared to two months of Atlantique’s revenue included in 1Q15). Maroc’s subscriber base grew 3% YoY to 53.1mn by 1Q16 end, primarily driven by growth in Morocco, Ivory Coast, Burkina Faso, Benin, Niger and Togo. The company’s Morocco operation contributed 55% to total revenues in 1Q16, down from 61% YoY, reflecting improvement in Maroc’s other international operations Egypt’s robust top line growth partially subdued by devaluation of Egyptian Pound Etisalat Misr reported strong 1Q16 top line growth of 16% YoY in local currency. However, this was partially suppressed by unfavourable currency movements, and a 12% devaluation of the Egyptian Pound on 14 March 2016, which led to a revenue increase of 8.9% YoY at AED 1.2bn in 1Q16. The increase in top line was led by higher data usage and voice revenues, mainly in post-paid segment, and increased revenues from international incoming traffic. The telco’s EBITDA margin declined moderately to 35% in 1Q16 from 36% YoY due to a one-off expense related to a dispute in an interconnection agreement with another mobile operator. The company’s EBITDA grew 8% YoY to AED 0.4bn (14% YoY in local currency terms). We expect revenues from Egypt to decline 2% YoY in FY16 due to the weakness of the Egyptian Pound, despite an expected 13% YoY revenue increase in local currency. Based on media articles, Kuwait-based Zain group, STC and China telecom are among other telecom players who have applied for a 4G licence in Egypt, where the telecom regulator has already offered 4G licences to incumbent mobile operators , and Etisalat Egypt, for EGP 3.5bn, EGP 3.5bn and EGP 4.6bn, respectively, in June 2016. The fixed line operator would be the new entrant in the mobile segment with a 4G licence offered at EGP 7.08bn. The existing carriers have to submit their applications by the first week of August. If any of the existing operators do not opt for the 4G licence, the regulator would consider international operators as well.

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SICO RESEARCH UAE Telecom

Emirates Telecommunication Corporation Financials

Income Statement (Consolidated) Cash Flow Statement (Consolidated) Year ending 31 Dec (AED mn) 2015A 2016E 2017E Year ending 31 Dec (AED mn) 2015A 2016E 2017E Revenue 51,737 52,223 53,463 Operating profit after royalty 11,087 12,782 13,095

Cost of Goods Sold (11,113) (11,067) (11,276) Depreciation 5,838 5,717 5,837 Gross Profit 40,624 41,156 42,188 Other Adjustments (85) 0 0 Selling, General and Admin. Expenses 0 0 0 Working Capital Changes 0 0 0 EBITDA before royalty 26,526 26,486 26,932 Cashflow from Operations 20,425 20,628 17,927 Operating Profit 18,945 19,015 19,279 Capital Expenditure (8,779) (7,037) (6,229) Other Income (316) 61 162 Other Investing Activities (570) 916 782 Net Interest Income (296) (52) 298 Cashflow from Investing (12,807) (6,121) (5,447) Tax (7,333) (7,010) (7,168) Debt Raised/Repaid 1,508 (596) (5,247) Minority Interest 1,248 1,539 1,560 Dividend (8,164) (6,957) (6,957)

Net Profit 8,263 9,188 10,191 Other Financing Activities (209) 0 0 Cashflow from Financing (8,108) (8,604) (13,133)

Net Chg in Cash (490) 5,903 (653)

Note: The above statements may not match the published cash flow statements due to adjustments made by us.

Balance Sheet (Consolidated) Key Ratios (Consolidated) Year ending 31 Dec (AED mn) 2015A 2016E 2017E Year ending 31 Dec (AED mn) 2015A 2016E 2017E Cash & Short Term Deposits 21,422 27,326 26,672 EPS 0.95 1.06 1.17 Other Current Assets 20,258 17,436 19,928 EPS Growth (%) (3.9) 11.2 10.9

Investments 5,501 5,553 5,707 Gross Margin (%) 78.5 78.8 78.9 Net Fixed Assets 46,270 47,589 47,981 EBITDA Margin (%) 51.3 50.7 50.4 Net Intangible Assets 17,193 14,367 13,065 EBITDA Growth (%) 14.3 (0.2) 1.7

Other Non-Current Assets 16,699 18,310 18,348 Net Margin (%) 18.8 20.6 22.0 Total Assets 128,265 131,153 132,273 ROAE (%) 19.3 20.6 21.5 ROAA (%) 7.6 8.3 9.0 Current Liabilities 42,345 41,176 41,716 Total Debt 22,080 21,484 16,237 Debt/Equity (%) 37.2 34.0 23.9

Other Liabilities (17,881) (17,995) (13,600) Valuation Ratios PER (x) 21.1 18.9 17.1 Total Liabilities 68,598 67,717 64,044 PBV (x) 4.0 3.8 3.6 Minority Interest 15,886 17,425 18,985 Dividend Yield (%) 4.0 4.0 4.3 Share Capital 8,697 8,697 8,697 EV/EBITDA (x) 5.9 7.0 6.8 Reserves & Surplus 0 0 0 Source: Company, SICO Research, Bloomberg Shareholders Funds 43,489 45,720 48,953

Total Equity & Liabilities 128,265 131,153 132,273

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SICO RESEARCH UAE Telecom

Price Data (AED) Emirates Integrated Telecom Current Price 6.69 Target Price 5.40 Play on dividends but rich on valuations 52 wk High/Low 6.84/4.56 Reiterate ‘Sell’ recommendation, target price at AED 5.40/sh

We reiterate our ‘Sell’ rating on Du with a one-year blended target price of Ratings AED 5.40/sh, 19% lower than current levels. The stock is currently trading at Short-term Neutral P/E multiple of 16.8x on our FY16 EPS of 40 fils, a premium of 22% to the peer Long-term Sell group average of 13.8x. The company remains a better dividend play over Risk Profile Normal Etisalat with our estimated DPS at 35 fils/sh, implying a dividend yield of 5.2% at current levels. With a strong cash and bank balance of AED 1.3bn by 1Q16 Market Data end, we expect the telco to continue with its progressive dividend policy. In Sector Telecom addition, the possibility of opening up to foreign investors remains a key

Telecom Market Cap USD 8.3bn positive risk for the stock, although we believe the current valuations has Primary Market DFM already factored in the same. Other Exchg Exhibit 6: DU- Blended Valuation Reuters DU.DU (price in AED, per share) Target Price Weightage Bloomberg DUUH DCF 5.2 50.0% Free Float 41% Price/ Earnings 5.7 50.0% Du - TP 5.4 Valuation Ratio Current Price 6.7 2016E 2017E % Up (Down) Side -19.3% Source: Company Data, SICO Research P/E x 16.8 16.0 P/BV x 3.8 3.7 Stable dividend income with 5% yield in FY16 EV/EBIDTA 5.1 4.9 We expect Du to pay a dividend of 35 fils/sh in FY16, slightly ahead of recurring Div Yld % 5.2 5.5 dividend of 33 fils/sh in FY15, translating to a pay-out ratio of 88% with a

dividend yield of 5.2%. The company also paid a special dividend of 10 fils/sh Trading Data in 1H15, leading to total dividend of 43 fils/sh in FY15. We believe that Du can Daily Vol (6M Avg) 0.9 comfortably maintain its progressive dividend policy, with cash and short-term

investments of AED 7.2bn at end-1Q16. Daily T/o (6M Avg USD) 1.5 Exhibit 7: FCF vs DPS Issued Shares 4,571.4 60 All in millions 50 48 Performance (%) 1m 3m 12m 50 43 43

GCC Equities GCC Absolute 6.0 6.9 26.3 37 38 40 35 35 Relative -0.9 7.9 40.3 30 Source: SICO Research, Bloomberg

20

10

0 FY15 FY16E FY17E FY18E FCF per share Dividend per share

Source: Company Data, SICO Research

Opening up to foreign investors will be a trigger for the stock

Etisalat opened up to foreign investors in September 2015, and the stock has rallied 57% since 05 September 2015 compared to 0.1% decline in the benchmark Abu Dhabi Index during the same period. Allowing foreign institutional ownership should be a strong trigger for Du’s stock, along with [email protected] inclusion in MSCI Emerging Market Index and FTSE Emerging Market Index, as was the case with Etisalat. Fundamentally, however, it is difficult to justify such www.sicobahrain.com premium multiples (2016 Du PE 16.8x, Etisalat 18.9x, GCC peers 13.8x).

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SICO RESEARCH UAE Telecom

Our analysis of Index movements for both telcos reflects Etisalat’s Index divergence from Du’s Index in September 2015 led by foreign investments, until Du’s share price grew aggressively from 31 January 2016 increasing 16.5% in five days. We believe the strong increase in Du’s price could be attributed to media reports on 31 January 2016, hinting at the potential opening up to foreign ownership in the telco and possibility of inclusion in MSCI. Exhibit 8: Index movement Du vs Etisalat 150

140

130

120

110

100

90

80 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Du Index* Etisalat Index*

*Note: Share prices rebased to 100 on 1st August 2015 Source: Company Data, SICO Research Modest top line growth led by market saturation, improving margins Du reported flattish YoY top line growth in FY15 at AED 12.4bn, with a single- digit growth in each quarter of the year. The telco’s revenues also grew moderately at 1.8% YoY in 1Q16. Despite a strong increase of 8% YoY in mobile subscribers, the company’s mobile revenues fell by 1% YoY in 1Q16. The decline was attributed to 7.4% YoY lower mobile ARPUs led by price- based competition in the UAE telecom sector. We estimate Du’s FY16 revenues at AED 12.6bn, up 2.4% YoY, attributed to higher mobile subscribers on the back of a lower impact from subscriber cancellations due to “My Number, My Identity” campaign, which resulted in QoQ decline in subscriber numbers in 2Q15. The increased subscriber numbers should offset the lower mobile ARPUs. Exhibit 9: Revenue (AED bn) and EBITDA margin 14 50%

14 43.9% 44.2% 43.8% 43.8%

13 41.1%

13 40% 13.7 13.3 12 12.6 12.2 12.3 12

11 30% FY14 FY15 FY16E FY17E FY18E Revenue EBITDA margin

Source: Company Data, SICO Research

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SICO RESEARCH UAE Telecom

Expect YoY growth in top line in 2Q16, but lower earnings led by increased royalty charges We expect Du’s 2Q16 earnings to decline 3% YoY to AED 487.1mn from AED 502mn led by higher royalty charges. The telco’s 2Q16 revenues are expected at AED 3.2bn, up 2.8% YoY, primarily led by growth in the mobile and fixed line segments. Despite a 6.4% YoY increase in profit before tax to AED 1bn during 2Q16, net earnings will likely decline due to higher royalty charges, as mentioned previously. We estimate the royalty expense to increase to AED 554mn from AED 476mn in 2Q15. Exhibit 10: 2Q16 estimate (AED mn) 2Q16E 1Q16 2Q15 YoY QoQ Revenue 3,177 3,090 3,091 2.8% 2.8% EBITDA 1,399 1,389 1,339 4.5% 0.7% EBITDA Margin 44.0% 45.0% 43.3% Profit before Royalty 1,042 1,021 978 6.4% 2.0% PBT Margin 32.8% 33.1% 31.7% Net Profit 487 480 502 -3.0% 1.5% Net Margin 15.3% 15.5% 16.2%

Source: SICO Research, Company Data

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SICO RESEARCH UAE Telecom

Emirates Integrated Telecom Financials

Income Statement (Consolidated) Cash Flow Statement (Consolidated) Year ending 31 Dec (AED mn) 2015A 2016E 2017E Year ending 31 Dec (AED mn) 2015A 2016E 2017E Revenue 12,337 12,637 13,252 Net profit before minority 1,941 1,816 1,915 Cost of Goods Sold (3,683) (3,917) (4,134) Depreciation 1,307 1,406 1,418 Gross Profit 8,654 8,719 9,117 Other Adjustments 550 114 184 Selling, General and Admin. Expenses (3,238) (3,184) (3,313) Working Capital Changes 284 (50) 55 EBITDA before royalty 5,419 5,584 5,807 Cashflow from Operations 4,081 3,286 3,573 Operating Profit 3,862 3,952 4,157 Capital Expenditure (1,770) (1,684) (1,633) Other Income 3 49 3 Other Investing Activities (350) 6,327 120 Net Interest Income (116) (111) (100) Cashflow from Investing (2,120) 4,643 (1,514) Tax (1,921) (2,157) (2,266) Debt Raised/Repaid 100 (449) (404) Minority Interest 0 0 0 Dividend (1,966) (1,554) (1,646) Net Profit 1,941 1,816 1,915 Other Financing Activities (121) (111) (100) Cashflow from Financing (1,987) (2,114) (2,150)

Net Chg in Cash (26) 5,815 (91) Note: The above statements may not match the published cash flow statements due to adjustments made by us.

Balance Sheet (Consolidated) Key Ratios (Consolidated) Year ending 31 Dec (AED mn) 2015A 2016E 2017E Year ending 31 Dec (AED mn) 2015A 2016E 2017E Cash & Short Term Deposits 163 5,978 5,887 EPS-Fils 42.47 39.72 41.89 Other Current Assets 8,129 2,402 2,519 EPS Growth (%) (8.0) (6.5) 5.5

Investments 0 0 0 Gross Margin (%) 70.1 69.0 68.8 Net Fixed Assets 8,333 8,466 8,547 EBITDA Margin (%) 43.9 44.2 43.8 Net Intangible Assets 652 610 554 EBITDA Growth (%) 7.7 3.0 4.0 Other Non-Current Assets 663 663 663 Net Margin (%) 15.7 14.4 14.5 Total Assets 17,940 18,119 18,170 ROAE (%) 24.8 22.5 22.9 Current Liabilities 5,489 7,312 7,299 ROAA (%) 10.8 10.0 10.5 Total Debt 4,491 4,042 3,638 Debt/Equity (%) 57.4 50.0 43.6 Other Liabilities (4,358) (2,425) (2,183) Valuation Ratios Total Liabilities 10,122 10,039 9,821 PER (x) 15.8 16.8 16.0 Minority Interest 0 0 0 PBV (x) 3.0 3.8 3.7 Share Capital 4,571 4,571 4,571 Dividend Yield (%) 6.4 5.2 5.5 Reserves & Surplus 2,333 2,549 2,772 EV/EBITDA (x) 5.1 5.1 4.9 Shareholders Funds 7,819 8,080 8,349 Source: Company, SICO Research, Bloomberg Total Equity & Liabilities 17,940 18,119 18,170

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Price, Target Price and Rating Change History Chart of (ETISALAT UH) Closing Target Date RatingInitiation Price Price 22.5 7-Dec-11 8.7 10.2 A 20.5 S 1-Apr-12 8.1 9.5 A 18.5 28-May-12 8.0 9.5 A 24-Jul-12 8.3 9.6 A 16.5 S 12-Sep-12 8.7 9.6 A 14.5 A 24-Dec-12 8.2 10.4 B 12.5 24-Mar-13 9.4 10.4 A A N 10.5 A N 2-May-13 9.9 10.4 N A A A B N 26-Aug-13 10.7 11.4 N 8.5 21-May-15 11.8 13.2 A 6.5 3-Aug-15 14.2 13.3 N

21-Feb-16 16.3 13.4 S

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

Sep-12 Sep-13 Sep-14 Sep-15

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Mar-16 Mar-13 Mar-14 Mar-15 19-Jul-16 20.0 14.2 S Mar-12 Closing Price Target Price Rating B=Buy, A=Add, N=Neutral, R=Reduce, S=Sell, U/R = Under Review

Price, Target Price and Rating Change History Chart of (DU UH) Closing Target Date RatingInitiation Price Price 7.5 1-Apr-12 3.02 3.60 A S S 10-May-12 3.13 3.70 A 6.5 28-Aug-12 3.44 3.70 N S 5.5 N N 22-Oct-12 3.74 3.90 N 12-Dec-12 3.51 3.40 N 4.5 N 24-Feb-13 4.20 3.80 N A N 31-Jul-13 6.71 4.00 S 3.5 N N 21-May-15 5.08 5.10 N 2.5 11-Jan-16 5.10 5.10 N 21-Feb-16 5.77 4.90 S 1.5 19-Jul-16 6.69 5.40 S

Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

Jan-16 Jan-13 Jan-14 Jan-15

Oct-12 Oct-13 Oct-14 Oct-15

Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Closing Price Target Price Rating B=Buy, A=Add, N=Neutral, R=Reduce, S=Sell, U/R = Under Review

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SICO RESEARCH UAE Telecom

Securities & Investment Company BSC * Note:- Under old methodology, up until 20th Feb 2016, we had 5 categories of LT rating. Sell (<-25%), Reduce (-10 to -25%), Neutral (-10% to +10%), Add (+10% to +25%), Buy (>+25%). The LT rating was independent of Risk Profile. Analyst Stock Rating Definitions Time horizon

Short term SICO Research issues a Short term outlook if the analyst feels that there are factors which might affect the short-term performance of the stock during the immediate six months after issuing a rating. This might be due to both quantitative and qualitative factors which the analyst think can affect the stock price. Long term SICO Research’s Long-term rating is based on the Target Price calculated by the analyst. The Target Price is arrived at using both fundamental and/or comparative valuation methods based on the Financialdetailed models developed by analysts incorporating current expectations and analyst's assumptions. Target price for a stock is calculated one year forward from the valuation date Recommendation (Short term) Positive Analyst expect positive triggers in the short term which might affect current price positively (> 10%) Neutral Analyst does not expect any short term triggers/events (+/- 10%) Negative Analyst expect negative triggers in the short term which might affect current price adversely (< 10%) Recommendation (Long term)* Buy If Risk profile is “High” Target price estimate offers 20%+ return from the current share price. If Risk profile is “Normal” Target price estimate offers 15%+ return from the current share price. Neutral If Risk profile is “High” Target Price estimate offers 0% to 20% return from the current share price. If Risk profile is “Normal” Target Price estimate offers 5% to 15% return from the current share price Sell If Risk profile is “High” Target price estimate offers less than 0% return from the current share price. If Risk profile is “Normal” Target price estimate offers less than 5% return from the current share price. Risk

High Stock volatility (360 days standard deviation) exceeds 2x of S&P GCC market volatility Normal Stock volatility (360 days standard deviation) lower than 2x of S&P GCC market volatility

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SICO RESEARCH UAE Telecom

NOTES Contact Details

BMB Centre, 1st Floor P.O Box 1331, Diplomatic Area Manama Kingdom of Bahrain

Investment Research [email protected]

Head of Research Nishit Lakhotia, CFA, CAIA Tel: (Direct) +973 – 17515021

Brokerage Fadhel Makhlooq Tel: (Direct): +973 – 17515202

Visit us at www.sicobahrain.com

Disclaimer This report does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for any securities. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness and are subject to change without notice. Investors must make their own investment decisions. Past performance is not necessarily a guide to future performance. Nothing in this report should be construed as investment or financial advice or as an advice to buy or sell the securities of the company referred to in this report. SICO and/or its clients may have positions in or options on the securities mentioned in this report or any related investments, may affect transactions or may buy, sell or offer to buy or sell such securities or any related investments. The analyst(s) who is (are) responsible for producing the report certifies(y) that he (she) or any of their close relative have no beneficial ownership in the company’s stock at the time of publishing the report. Any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Additional information on the contents of this report is available on request. Among stocks under our coverage, Ahli United Bank and National Bank of Bahrain owns 11.9% and 12.5% respectively in SICO. SICO does market making in Aluminum Bahrain (ALBA) and Zain Bahrain’s shares.

Copyright Notice © Securities and Investment Company 2016. This report is being supplied to the recipient for information and not for circulation and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part. 14