Emirates Integrated Telecommunications Company (du)
Initiating Coverage
HOLD June 7th, 2007
Current Price (AED) 5.20 Target Price (AED) 5.31 Investment Highlights 1-year Total Return 2% • We initiate coverage on Emirates Integrated Telecommunications Company (du) Company Data with a target price of AED 5.31 and a Hold recommendation. While we are opti-
Country UAE mistic that du will emerge to secure a formidable portion of the country’s mobile Sector Telecom and fixed line telecommunications market, we believe the market is correctly Exchange DFM Shares Outstanding (mn) 4,000 valuing the strong growth prospects of the UAE’s second telecom carrier. Market Cap (mn) AED 20,800 • Due to their startup nature, du is expected to continue to show negative EBITDA Net Debt (mn) AED (1,099) Enterprise Value (mn) AED 19,700 and Net Income in the short term. We expect EBITDA and Net Income to be posi- tive by 2009. Margins are expected to approach regional peer averages and we Stock Data estimate these figures at 42.6% and 18.6% respectively, by the end of our projec-
52 Week High AED 7.25 tion period. 52 Week Low AED 4.83 • Our projections make two broad assumptions regarding policies of the Telecom- Div Yield 0% Beta vs. DFMGI 0.86 munications Regulatory Authority (TRA): 1) That the TRA implements the Local Bloomberg DU DB Loop Unbundling agreement which will have a material impact on the company’s
triple-play strategy and fixed line delivery; and 2) That Mobile Number Portabil- ity (MNP) is introduced which will ‘grease the wheels’ of defection for du. While we anticipate these policies to be implemented, delays in such implementation could have a material effect on our financial projections. Performance—Past Twelve Months • The key risk in our price forecast is related to the number of assumptions we have
7.5 100 made based on limited historic data. It is important to note that du is a new oper- 7 90 ating entity and while we believe our assumptions are reasonable and have been 6.5 80 70 6 made on sound grounds, significant variance from our assumptions is possible and 60 5.5 likely. The principal assumptions investors should be aware of include but are not 50
Price 5 40
Volume (mn) Volume limited to: mobile penetration, market share, revenue growth, cost structure, mar- 4.5 30 4 20 gins, and capital spending. 3.5 10 3 0 Jun-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Financial Highlights Year-End as of December 31st AED (Mn) 2007E 2008E 2009E 2010E 2011E Revenue 998 2,567 4,414 5,944 7,254 Omar Rana, MA, MSc Revenue Growth - 157.2% 71.9% 34.7% 22.0% Managing Director [email protected] EBITDA (736) (11) 1,040 2,070 3,088 EBITDA Margin -73.7% -0.4% 23.6% 34.8% 42.6% Darren K Smith, CFA EBITDA Growth - - - 99.2% 49.1% Vice President [email protected] Net Income (1,044) (701) 109 764 1,346 Net Income Margin -104.6% -27.3% 2.5% 12.8% 18.6% Justin Tantalo Net Income Growth - - - 602.9% 76.3% Business Analyst [email protected] EPS (0.26) (0.18) 0.03 0.19 0.34 EPS Growth - - - 602.9% 76.3% Munira Mukadam Dividend Per Share - - - - - Business Analyst [email protected] Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0%
Contact Us Valuation EV/Revenue 42.3x 10.8x 6.1x 4.6x 3.7x Gulf Capital Group Dubai International Financial Centre EV/EBITDA - - 19.0x 9.5x 6.4x Dubai, United Arab Emirates P/E - - 191.4x 27.2x 15.5x Tel: +971 4 363 5730 P/B 8.8x 12.6x 11.8x 8.2x 5.4x Fax: +971 4 363 5739 www.gulfcapitalgroup.com Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% ROE -44.4% -42.5% 6.2% 30.3% 34.8%
Gulf Capital Group does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decisions.
TABLE OF CONTENTS
FINANCIAL FORECASTS AND OVERVIEW...... 1 Revenue...... 1 EBITDA ...... 4 Net Income ...... 5 Capital Expenditures ...... 6 VALUATION ...... 7 Free Cash Flow ...... 7 Weighted Average Cost of Capital ...... 8 Discounted Cash Flow Analysis ...... 8 DCF – Sensitivity Analysis ...... 9 Relative Value – Market Share v. Market Cap ...... 10 FINANCIALS ...... 13 APPENDIX A: COMPANY BACKGROUND...... 14 Ownership ...... 15 Corporate Structure and Operations ...... 15 du’s Triple-Play – Fixed Line and More ...... 19 APPENDIX B: MENA MOBILE TELECOMMUNICATIONS OVERVIEW...... 23 Liberalization in the MENA region ...... 23 MENA Mobile Operators ...... 24 A Changing Landscape ...... 25 MENA Mobile Penetration ...... 26 Subscriber Growth Remains Strong ...... 26 Price Decline With Increased Competition ...... 28 June 7th, 2007
FINANCIAL FORECASTS AND OVERVIEW
Emirates Integrated Telecommunications Company (du) was established in 2005 effectively ending the 30 year monopoly of the incumbent provider Emirates Telecommunications Company (Etisalat). The competitive dynamic has begun to settle in as the AED 16.3 billion market saw competition for the first time in February 2007.
As would be expected by a new capital intensive telecom carrier, the first few years of operations will lead to losses for du. While the early years of battling Etisalat’s monopolistic legacy will be challenging, the UAE’s high GDP per capita and expanding population base will provide a favorable environment for du to become a profitable operating entity in a relatively short time. The company’s EBITDA and Net Income margins are anticipated to approach regional averages by the end of our projection period. We expect the company to be profitable by 2009, after two full years of operations
Select financial highlights are displayed in Exhibit 1.0
Exhibit 1.0: du Financial Highlights 2007 – 2011
Year End - As of December 31st Net Income is AED (mn) 2007E 2008E 2009E 2010E 2011E Revenue 998 2,567 4,414 5,944 7,254 expected to be EBITDA (736) (11) 1,040 2,070 3,088 positive by 2009 EBITDA Margin -73.7% -0.4% 23.6% 34.8% 42.6% Net Income (1,044) (701) 109 764 1,346 Net Income Margin -104.6% -27.3% 2.5% 12.8% 18.6%
Source: Company Reports, GCG Analysis
Revenue
Fixed Line
Although the company’s nascent mobile operations are currently it’s most visible and advertised service, they do not yet dominate du’s top line. A majority of the company’s revenue is currently generated from its fixed line triple-play services in the free-zones of Dubai. These services were operational even before du’s incorporation and were subsequently acquired with du’s purchase of Tecom’s telecommunications assets.
While the company has more than 25,000 fixed line customers, we expect fixed line growth to be slow until either: 1) A Local Loop Unbundling (LLU) agreement is implemented by the country’s Telecommunications Regulatory Authority (TRA) – expected in 2009, or 2) du has a significant portion of its own Next Generation Network built out. Under either scenario, it will be at least two years before fixed line services are fully operational to a majority of the UAE population. The company has not made a final decision on their strategy for tackling the fixed line market. It is very possible, and likely, that their strategy will utilize the LLU agreement in conjunction with their own Next Generation Network.
Emirates Integrated Telecommunications Co. 1 June 7th, 2007
Mobile
As of the end of May 2007, the company had amassed 400,000 mobile subscribers – which represents approximately 6% of the mobile market. These operations are expected to eventually dominate du’s top line as the company defers its triple-play product in the established areas of the country.
Exhibit 1.1 depicts expected revenue throughout our projection period.
Exhibit 1.1: du’s Revenue 2007 – 2011 (Mn) du’s revenue is 7,254 expected to grow at an annual rate of 5,944 68% over the next four years 4,414
2,567
987
2007E 2008E 2009E 2010E 2011E
Source: Company Reports, GCG Analysis
Three months of operations is a prohibitively short time period to draw any concrete conclusions, however, du has not been subject to the initial success experienced by comparable regional entrants like Mobily – Saudi Arabia’s second GSM carrier. There are three main reasons why we think this has been the case:
1. Mobile Number Portability (MNP) – MNP allows a subscriber to take their mobile phone number with them when they switch carriers. Clearly, this type of policy lubricates the wheels of defection (as it has done in Saudi Arabia). Conversely, the absence of it imposes prohibitively high non- monetary switching costs . Again, we feel that the inconvenience of having to switch telephone numbers (or as little as the prefix) has discouraged a substantial amount of ‘would-be’ subscribers. Had MNP been in place during du’s launch, subscriber numbers would be materially higher than they are today. du expects that MNP will be in place by the end of 2007.
2. Mobile Network Coverage – Poor network coverage has been a significant complaint from du subscribers. du’s network coverage, even in densely populated regions of the country, remains well behind that of Etisalat. The lack of early interconnection with Etisalat’s network is partially to blame for the service hiccups. While early growing pains were anticipated by technical experts, and well communicated by management to the prospective clients, du has received an abundance of negative press coverage regarding early network problems. With Etisalat’s mobile network being of world-class quality, customers have been hesitant to switch carriers given these network concerns.
Emirates Integrated Telecommunications Co. 2 June 7th, 2007
3. Tariff rates – du did not directly undercut Etisalat’s headline rates, rather, they decided to offer ‘per second’ billing to differentiate themselves from the incumbent. They suggest this billing method to be effectively 8-10% cheaper than that of Etisalat. Turn out for du’s services may have been more robust had they been able to undercut the headline rate of their competitor in addition to per second billing. Exhibit 1.3 compares the tariff rates of Etisalat and du.
Exhibit 1.3:– Etisalat and du Mobile Charges
Amounts in AED du’s main Charges Eitsalat Du advantage over Prepaid Etisalat is its ‘per - SIM Card 165 155 - Annual Fee 100 100 second billing’ Postpaid - SIM Card 185 125 - Monthly Fee 20 30 Call Charges - Per Second - 0.005 - First Minute 0.30 - - Per Incremental 0.15 (peak) 30 seconds 0.12 (off peak) - SMS Charges - Local 0.18 0.18 - International 0.60 0.60
Source: Company Websites, GCG Analysis
Average Revenue Per User
The UAE currently has one of the highest blended ARPUs in the region at AED 145 per month. However, as mobile penetration growth begins to slow, we anticipate that overall ARPU in the country will decline. We make this case for both Etisalat and du over the long term.
Entering as the second operator in the UAE has put du at a disadvantage in extracting high revenue per user. This is primarily a result of the fact that the country’s high value customers, those who spend upwards of AED 300+ per month, are generally not price sensitive. As such, per second billing offers little incentive to switch – especially if it involves the inconvenience of switching mobile numbers/prefix. Because of this dynamic, Etisalat will enjoy higher average revenue per mobile user than du in the medium term. du’s ARPU is expected to rise over the next eighteen months as more and more subscribers use du as their primary mobile carrier – as opposed to secondary lines which we hypothesize applies to a significant number of du’s current subscribers. Although 3G services such as mobile TV and video calling will buoy average revenue per user, we expect it to steadily decrease over time after its peak in 2008 – averaging AED 128 per month by the end of our projection period. Exhibit 1.4 depicts du’s ARPU through to 2011.
Emirates Integrated Telecommunications Co. 3 June 7th, 2007
Exhibit 1.4: du’s Average Revenue Per User 2007 – 2011 (AED) Mobile ARPU is 148 currently low as 141 134 many subscribers 128 are using their du line as a secondary connection 85
2007E 2008E 2009E 2010E 2011E
Source: GCG Analysis
EBITDA
We believe du will find the UAE a profitable environment to operate in. The company’s EBITDA is expected to grow substantially in the first few years – once the carrier covers initial costs associated with startup and operating leverage is in place. EBITDA is projected to be positive by 2009, and reach over AED 3 billion by 2011.
The company’s projected EBITDA and EBITDA margin are displayed in Exhibit 1.5.
Exhibit 1.5: du’s EBITDA 2007 – 2011 (Mn)
EBITDA is expected 3,750 60% to be positive by 3,000 2009 30% 2,250
1,500 0%
750 -30% 0 -60% -750
-1,500 -90% 2007E 2008E 2009E 2010E 2011E EBITDA EBITDA Margin Source: GCG Analysis
EBITDA margins for regional telecommunications companies have historically been quite high. This was primarily due to the lack of competition and the ensuing pricing power the carriers were able to exploit. However, the region has recently embraced competition (See GCG MENA Mobile Telecom: Moving Beyond Boundaries, January 2007 ) which has eroded the profitability margins of the carriers. A simple
Emirates Integrated Telecommunications Co. 4 June 7th, 2007 regional comparison indicates that the highest EBITDA margins are achieved by companies who currently, or recently, had no competitive threats. Exhibit 1.6 depicts the EBITDA margin of our regional universe of telecom carriers.
While Etisalat has the highest EBITDA margin in the region, we anticipate this to fall as du captures market share and forces Etisalat into a more competitive stance. We expect that margins in the region will deteriorate over our forecast period as more competition is introduced to the region, mobile penetration becomes saturated, and ARPU’s decline.
Exhibit 1.6: LTM EBITDA Margin – MENA Carriers
Etisalat 77.8% High EBITDA margins are STC 60.7% dominated by Qtel 58.5% current or recent monopolies Batelco 48.0% MTC 45.4%
Orascom 44.5% Mobily 37.1% Wataniya 28.6%
Source: GCG Analysis
We expect du to settle near the middle of the list of carriers, together with other ‘second comers’ of the regional telecoms; we forecast an EBITDA margin of 43% by 2011.
Net Income
Significant start up costs are expected to result in annual loses for the first two years of operations for du. We project du to break even in 2009 as net income gradually increases from early loses. Furthermore, we expect the bottom line to reach nearly AED 1.35 billion by the end of our projection period; assuming the telecom royalty rate reduction (from 50% to 40%) has been implemented by the time du’s operations are in the black. We have assumed a 40% royalty fee on du’s business throughout our forecast period.
Exhibit 1.7 depicts the company’s net income and net income margin throughout our projection period.
Emirates Integrated Telecommunications Co. 5 June 7th, 2007
Exhibit 1.7: du’s Net Income 2007 – 2011 (Mn) .
Net Income is 1,500 30% expected to be 1,000 positive by 2009 0% 500 -30% 0 -60% -500
-1,000 -90%
-1,500 -120% 2007E 2008E 2009E 2010E 2011E
Net Income Net Income Margin Source: GCG Analysis
Capital Expenditures
du has been faced with significant capital expenditure for its network infrastructure. They have both a wireless and high-speed wire-line network that must be installed. This has inflated the company’s capital expenditure requirements for the early years. As of Q1 2007 du’s mobile network covered 80% of the populated area of the country. Company officials suggest that the remaining area will continue to be served through the interconnection agreement with Etisalat. Capex will transition toward the fixed line network over the next eighteen months as the company lays the foundation for expanding their operations along with spending on indoor building solutions to improve mobile coverage.
Maintenance of newly constructed infrastructure is estimated to cost du 10% of annual revenue in the post build-out era. This figure is similar to the charge on other regional carriers. Exhibit 1.8 depict du’s expected capital expenditure plans throughout our projection period.
Capex is currently Exhibit 1.8: du’s Capital Expenditure 2007 – 2011 (Mn) targeted to mobile 1,560 infrastructure – 1,463 soon to be transitioned toward du’s NGN 725 640 594
2007E 2008E 2009E 2010E 2011E
Source: GCG Analysis
To fund the company’s planned capex program, we have assumed a AED 2.5 billion debt facility raised in the fourth quarter of 2007.
Emirates Integrated Telecommunications Co. 6 June 7th, 2007
VALUATION
We initiate coverage on Emirates Integrated Telecommunications Co. with a one year target price of AED 5.31 and a Hold recommendation. Our target price represents a 2% premium over the current market price of AED 5.20 and is derived from our Discounted Cash Flow (DCF) analysis.
All things considered, we are very optimistic about the business prospects of the company. The UAE is in a period of fantastic economic growth, ARPU is high, GDP per capita is high, and the competitive environment is favorable. We believe that the market has accurately priced in these prospects.
The Achilles’ heel in our DCF analysis (as is the case with most DCFs) is the impact that our terminal value has on the end result. Because du is a new entity, it will generate limited cash flow in its first years of operations. Thus, our five year DCF, places an overwhelming emphasis on our terminal value assumptions. Some may argue that we should use a longer period for our DCF, however, this presents a new set of problems as we will then be forecasting growth and margin assumptions well beyond a reasonable time frame for a new operating entity.
We have applied an EV/EBITDA multiple of 11x’s to our 2011 forecast. 11x’s is the average trailing 12 month multiple of a comparable sample of carriers in our MENA telecom universe. These carriers, which are characterized by high growth rates, include: MTC, Qtel, Orascom, Wataniya, and Etisalat; we believe this multiple will fit du’s profile in five years time.
Free Cash Flow
As a startup in a capital intensive industry du will find itself generating negative free cash flow for the first few years of operation. The build-out of their network infrastructure, IT, and strategic consultancy are amongst the preliminary extra costs the company faces. Through our projection period these non-recurring costs phase out, and we expect the company to start generating positive free cash flow by 2010.
The expected free cash flow for the company is displayed in Exhibit 2.0.
Exhibit 2.0: du’s Free Cash Flow to Firm 2007 – 2011 Year End - As of December 31st Free Cash Flow is AED (Mn) 2007E 2008E 2009E 2010E 2011E expected to be EBITDA (732) (11) 1,040 2,070 3,088 Royalties 0 0 (145) (562) (1,025) positive by 2010 Changes in Working Capital 21 (56) (257) (159) (227) Capex (1,463) (1,560) (640) (594) (725) Free Cash-Flow (2,174) (1,626) (3) 755 1,111
Source: Company Reports, GCG Analysis Note: Royalties have been adjusted to reflect royalty savings from interest expense
Emirates Integrated Telecommunications Co. 7 June 7th, 2007
Weighted Average Cost of Capital
We have discounted the company’s free cash flow to the firm, on a quarterly basis, using its weighted average cost of capital (WACC). The company’s estimated target capital structure of 33% debt and 67% equity was used. While company has no debt on its balance sheet to date, we assume an AED 2.5 billion facility is raised in Q4 2007. As such, du’s WACC is a function of the required rate of return on equity and the expected interest on long term debt. We have estimated a discount rate of 9.15%. Our assumptions are detailed in Exhibit 2.1.
Exhibit 2.1: du’s Weighted Average Cost of Capital
Du’s WACC was Weighted Avg. Cost of Capital based on the Debt 6.00% company’s target Risk Free (10y US) 4.85% capital structure Equity Market Premium 7% Beta (v. DFMGI) 0.86 WACC 9.15%
Source: Bloomberg, GCG Analysis
We acknowledge that the WACC we have estimated for du appears low. This is primarily a function of the possible misspecification of the company’s beta. du’s beta (0.86 v. DFMGI) as a proxy for systematic risk implies that the company is less risky than the market as a whole – as a startup we are skeptical of this result. The primary reason for the debatable estimate is that the stock has only been listed on the Dubai Financial Market for one year. Also, this period has been characterized by severe market turmoil in which the index is down over 10%.
We have used a before-tax cost of debt in the calculation of the weighted average cost of capital. This was done because of the uncertainty surrounding the royalty rate when du becomes profitable. Our analysis may have been skewed if we employed an erroneous estimated rate. Given the low WACC to begin with, we decided to exclude any estimate and use the pre tax-adjusted cost of 6%. However, we have included the tax adjustment case in our sensitivity analysis for reference.
Discounted Cash Flow Analysis
For our discounted cash flow analysis we have employed a terminal multiple approach to estimate the value of the company at the end of our projection period. In doing so we have considered the average trading multiple for a sample of comparable carriers in the region (boxed carriers in Exhibit 2.2). These companies were deemed to be relevant comparables primarily because of their recent high growth in EBITDA and net income – a profile which we expect du to fit in 2011.
Exhibit 2.2 depicts the EV/EBITDA multiple of select carriers in the MENA region.
Emirates Integrated Telecommunications Co. 8 June 7th, 2007
Exhibit 2.2: EV/EBITDA Multiple – ME NA Carriers (2006)
High growth 16.5x regional carriers 14.9x have been priced 13.6x with the highest EV/EBITDA 9.6x 9.2x 8.6x multiples 7.0x 6.7x
Mobily Qtel MTC Batelco Wataniya Orascom Etisalat STC
Source: Company Reports, GCG Analysis
Using an EV/EBITDA terminal multiple of 11x’s and a WACC of 9.15% we arrive at a fair value of equity of AED 5.31 per share. The details of the discounted cash flow analysis are presented in Exhibit 2.3.
Exhibit 2.3: Discounted Cash Flow Analysis 2007 -2011
Year End - As of December 31st AED (Mn) 2007E 2008E 2009E 2010E 2011E Our DCF indicates 2011 EBITDA 3,088 a fair value of EV/EBITDA Multiple 11.0 equity at AED 5.31 2011 Terminal Value 33,966 Total Cash Flows (2,174) (1,626) (3) 755 35,077 Discounted Cash Flow (2,106) (1,455) (13) 557 23,158 Sum of Discounted CF 20,141 Less Net Debt (1,100) Equity Value 21,241 Outsanding Shares 4,000 Equity Per Share (AED) 5.31
Source: Company Reports, GCG Analysis
DCF – Sensitivity Analysis
As is generally the case with a discounted cash flow analysis using an exit multiple, the outcome is significantly dependant on the choice of the terminal parameter. We chose to employ an average of high growth regional carriers’ EV/EBITDA multiple of 11x’s in our valuation. This, combined with our estimated WACC gives du a fair value of AED 5.31 – shaded in dark grey in Exhibit 2.4. Shaded in light grey is the estimate of fair value if we had included the tax adjustment in our calculation of the company’s WACC. Under this course of action the company’s fair value of equity would be AED 5.53.
Emirates Integrated Telecommunications Co. 9 June 7th, 2007
Exhibit 2.4: DCF Sensitivity Analysis
2011 EV/EBITDA Multiple WACC 10.0 10.5 11.0 11.5 12.0 12.5 10.2% 4.58 4.82 5.07 5.31 5.56 5.80 9.7% 4.69 4.94 5.19 5.44 5.69 5.94 9.2% 4.80 5.06 5.31 5.57 5.82 6.08 8.3% 5.00 5.26 5.53 5.79 6.06 6.32 7.8% 5.12 5.39 5.66 5.93 6.20 6.47
Source: GCG Analysis
Our range of results suggest that under the worst case scenario, with a low terminal value multiple and high weighted average cost of capital, the fair value of du’s shares is estimated to be AED 4.58. Under the best case scenario with a high terminal value and a low weighted average cost of capital, the fair value of du’s shares is estimated to be AED 6.47. Cross combinations of various terminal multiples and WACC rates are displayed in Exhibit 2.4
Relative Value – Market Share v. Market Cap
As a supplementary analysis, we have conducted a comparison of du’s relative value versus Etisalat – based on market capitalization and telecom market share (as defined by telecom revenues).
In theory, if two companies share the same fundamentals (margins, growth, capital structure, operating leverage, etc) the two should have the same ratio of market cap to market share of revenues. While we recognize that there will be material differences between du’s business and Etisalat’s business, we think a rudimentary analysis is worth considering.
As seen in Exhibit 2.4, we plotted the percentage share of the UAE telecom market capitalization for each of the carriers on the Y-axis and the respective shares of telecom revenues on the X-axis. Currently, Etisalat has 76% of the total telecom market capitalization (adjusted to exclude international operations/subsidiaries) while having 95% of the total telecom revenue expected to be generated in 2007 (as per GCG estimates). Correspondingly, du’s share of market cap and telecom revenue stands at 24% and 5% respectively. The four points of data are represented by the first red marker in Exhibit 2.5. Again, assuming the fundamentals for the businesses are the same , this would imply that Etisalat is undervalued (the company should have a larger percentage of the market capitalization based on revenue distribution between the two carriers).
Emirates Integrated Telecommunications Co. 10 June 7th, 2007
Exhibit 2.5: Relative Value – Market Share Versus Market Cap
Share of Telecom Revenue 100% 25% 5% Du’s relative
overvaluation
amortizes as the 76% 2 1 24%
MarketCapitalization companies growth
ShareofTelecom profiles converge
Etisalat overvalued
Telecom of Share du overvalued Capitalization Market
75% 95% 100% Share of Telecom Revenue
1 Market Share based on 2007E Total UAE Revenues
2 Market Share based on 2011E Total UAE Revenues
Efficient Frontier Source: GCG Analysis Note: Etisalat’s data points are referenced to the bottom left origin, du’s data is referenced to ‘their origin’, in the top right corner. Etisalat’s market cap has been adjusted to the proportion attributable to UAE operations (77%) – based on our sum of parts valuation. See our Initiating Coverage report on Etisalat published in March 2007.
du is the growth story
While a duopoly with two identical entities should theoretically be priced along the diagonal efficient frontier, the fact is that du and Etisalat are quite different businesses. Consider their growth profiles: du is the growth story with Etisalat’s UAE operations being a more mature business. The red markers indicate market share (by revenue) for our 2007 and 2011 forecasts for both du and Etisalat. These markers suggest a significant premium is currently being paid for du based on its 2007 revenue profile, but the premium disappears over the medium term as the growth profiles of the two companies converge. Based on our 2011 forecasts, du represents fair value relative to Etisalat.
Emirates Integrated Telecommunications Co. 11 June 7th, 2007
Exhibit Exhibit ari eeo o BTLO 16050%51995 4.6 9.59 8 5,159 1,957 5.00% 2.05% 1,0 600 9,267 1.57% 1 11 41 27,000 4 45 erageAv 45 (Mobily) Etisalat Etihad Corporation (Etisalat) Telecommunications Emirates (Wataniya) Co. Telecommunication Mobile National Holding (Mobinil) Telecom Orascom Co.(BATELCO) Telecom Bahrain (QTEL) Telecom Qatar (STC) Co. Saudi Telecom Co. (MTC) Telecommunications Mobile Company 27,8 14.67 4.24 KWD (MTC) Co. Telecommunications Mobile Company National Mobile Telecommunication Co. (Wataniya) KWD 3 KWD Co.(Wataniya) Telecommunication Mobile National rso eeo odn Mbnl G 33 28 14,14 12.86 73.30 EGP Holding (Mobinil) Telecom Orascom ari eeo o BTLO H .625 ,1,1 (38, 3,113,514 2.59 BHD 0.96 (BATELCO) Co. Bahrain Telecom (QTEL)Telecom Qatar Co.(STC) Saudi Telecom mrtsTlcmuiain oprto Eiaa)AED 19 Corporation (Etisalat) Telecommunications Emirates Average (Mobily)Etisalat Etihad figures. ARPU for MTC and Orascom are for Kuwait and Kuwait for are Orascom and MTC for ARPU figures. The 2006. end year of is as Subscribers/ARPU Note: AnalysisGCG Source:
2 . 6
: Regional Comparables Regional
A 5.06.7687334,327,605 6,887,363 68.87 250.70 QAR twelv trailing are data/metrics financial remaining A 20 65 30667(3,116,113) 33,066,667 16.53 SAR 62.00 E 00 33 ,6,6 4,644,060 6,666,667 13.33 AED 50.00 oa US$ Local RUSubscribers ARPU U 000's $US Egypt operations respectively operations Egypt Market Price 03 .4 ,5 07 .41.73%10 30% 1.06 39% 16.97 5.34 10.76 3,552 3.74% 40.38 3606na1871.961 73 / / 19% n/a n/a 25% 27.37 36% 6.12 0.33 -1.15 42% -9% 14.17 16.49 10.25 8.74 4.04 1,877 14.94 6.66 n/a 5,944 2,721 6,026 3.99% 7.17% 33 1,989 13,300 64 39 1 07 ,1,7 308,920 4,915,077 10.73 .10 3 .62,4,6 (932,057) 26,248,263 5.26 .30
,3 .6 ,7 .854 51 9 .930% 0.39 39% 15.15 5.46 6.78 4,679 2.86% 5,535 5
0935%49292 .11.717 .137% 0.11 127% 13.37 3.71 9.20 4,982 3.55% ,069
Market Cap
YieldDiv $USD(000) 1701,747,405 11,700 ,1 3,823,790 5,614
.
,5 13 ,6 45 43 4 .%16.0% 3.7% 743 44.3% 34.5% 2,063 31.3% 4,656 7 76 2 47 80 5 .%37.2% 5.6% 250 48.0% 14.7% 323 17.6% 673 ,5 98 9 73 85 8 24 36.0% 42.4% 486 58.5% 47.3% 791 49.8% 1,352 89814 ,3 1.%6.%328-.%36.0% -8.9% 24.2% 62.3% 3,228 1,160 60.7% 45.2% -13.7% 90.6% 5,433 1.4% 2,164 95.2% 8,958 4,788 1442.%594.%4.%38170 25.6% 127.0% 368 40.4% 42.0% 579 22.3% 1,434 ,4 89 ,4 50 05 ,3 91 36.5% 39.1% 1,733 80.5% 35.0% 4,745 28.9% 4,745 ,4 / 8 / 71 4 / 13.2% n/a 244 37.1% n/a 686 n/a 1,849 NetDebt EV/Sub. ($US) EV/Sub.
873)
month e ueVal ,5 5 ,9 6 2 ,2 9 28% 39% 1,026 52% 36% 2,098 35% 3,557 eeu EBITDA Revenue 51.661 39 2 .826% 0.38 62% 23.97 6.17 13.66 95 EV / EBITDA EV /
Growth
7 .91.34 .338% 5.13 4% 19.03 3.89 .78 a ueVal
Valuation EV / Revenue/ EV
Growth $USD(Mn) (Mn) 24 %22 26% 2.23 6% 12.44 0
Marg in
P/E
Growth* ueVal
Net Income
Growth PEG
Marg in ROE
Emirates Integrated Telecommunications Co. 12 June 7th, 2007
FINANCIALS
Year End - As of December 31st AED (mn) 2007E 2008E 2009E 2010E 2011E Revenue 998 2,567 4,414 5,944 7,254 Cost of Revenue 445 1,160 1,833 2,228 2,432 SG&A 1,289 1,418 1,542 1,646 1,734 EBITDA (736) (11) 1,040 2,070 3,088 EBITDA Margin -73.7% -0.4% 23.6% 34.8% 42.6% Depreciation/Amortization 346 600 684 665 662 Operating Profit (EBIT) (1,082) (611) 356 1,406 2,426 Interest Expense (Income) (38) 90 147 133 92 Earnings Before Taxes (1,044) (701) 209 1,273 2,334 Royalties 0 0 100 509 934 Zakat 0 0 0 0 54 Net Income (1,044) (701) 109 764 1,346
EPS (0.26) (0.18) 0.03 0.19 0.34
Year End - As of December 31st AED (mn) 2007E 2008E 2009E 2010E 2011E Assets Cash and Cash Equivalents 1,800 84 0 655 1,711 Deferred Fees 92 92 92 92 92 Inventories 109 283 400 467 479 Accounts Recievables 189 494 772 992 1,146 Other Recievables 142 370 579 744 859 Due From A Related Party 88 88 88 88 88 Total Current Assets 2,421 1,411 1,931 3,039 4,375
Property, Plant, and Equipt. 2,435 3,409 3,380 3,325 3,403 Telecommunication License Fee 113 107 100 94 88 Indefeasible Right of Use 117 109 100 92 83 Goodwill 549 549 549 549 549 Total Non-Current Assets 3,214 4,174 4,130 4,060 4,123 Total Assets 5,635 5,585 6,061 7,099 8,498
Liabilities Operating Line of Credit 0 0 21 0 0 Accounts Payable & Accruals 763 1,414 1,761 2,055 2,109 Total Current Liabilities 763 1,414 1,781 2,055 2,109
Fees Payable 14 14 14 14 14 End of service benefits 7 7 7 7 7 Long-Term Debt 2,500 2,500 2,500 2,500 2,500 Total Non-Current Liabilities 2,522 2,522 2,522 2,522 2,522 Total Liabilities 3,285 3,936 4,303 4,577 4,630
Shareholder Equity Issued and Fully Paid 4,000 4,000 4,000 4,000 4,000 Statutory Reserve 0 0 15 91 226 Retained Earnings (1,649) (2,351) (2,257) (1,570) (358) Total Shareholder Equity 2,351 1,649 1,758 2,522 3,868 Shareholder Equity & Liabilities 5,635 5,585 6,061 7,099 8,498
Emirates Integrated Telecommunications Co. 13 June 7th, 2007
APPENDIX A: COMPANY BACKGROUND
Emirates Integrated Telecommunications Company (du) was granted a 20-year telecommunications license in February 2006 for an upfront fee of AED 124.5 million. This effectively ended the 30 year monopoly reign by the incumbent provider Emirates Telecommunications Company (Etisalat). Since the license issuance, the company has been diligently implementing its plan to become the nation’s premier integrated telecommunications carrier, attracting 400,000 clients to- date. The business model centers on providing the full spectrum of telecommunications services, namely: mobile telephony, fixed-line telephone, internet, and television services.
Exhibit 3.0 depicts a timeline of the company’s notable events to-date.
Exhibit 3.0: du’s Timeline of Events
Emirates Integrated Emirates Integrated du is awarded the du officially Telecommunication country’s second launches its mobile Telecommunications s Company (du) is telecom license for network for public Company was incorporated AED 124.5 million usage
incorporated on
December 28, 2005
Feb. 11, 2007 Dec. 28, 2005 Feb. 12, 2006 Dec. 31, 2005 Mar. 5, 2006 Feb. 25, 2007
du acquires: Sama du opens all mobile Communications Applications for the 20% IPO channels, enabling DIC Telecom begin, eventually 167x’s the entire network for Emirates oversubscribed the first time Communications & Tech. LLC
Source: Company Reports, GCG Analysis
du’s board of directors is comprised of nine members. These members and select executive officers are listed in Exhibit 3.1.
Exhibit 3.1: du’s Board Members / Senior Officers (2007)
Position Name Chairman Ahmad Bin Byat Vice Chairman Khaled Al Bustani Ahmad Bin Byat, Director Director Soud Baalawy General of the Dubai Director Abdullah Hamad Al Shamsi Technology and Media Director Ziad Abdullah Galadari Free Zone Authority Member Saeed Al Yateem chairs du’s board of Member Walid Al Mokarrab Al Muhairi directors Member Jassim Al Zaabi Member Saad Abdulrazak CEO Osman Sultan CFO Mark Shuttleworth
Source: Zawya, GCG Analysis
Emirates Integrated Telecommunications Co. 14 June 7th, 2007
Ownership
In 2006 du underwent an initial public offering equivalent to 20% of the company’s equity. The offering took place during the GCC IPO frenzy and was oversubscribed by an astounding 167x’s. While much of this demand for the allocation was the result of the inefficient IPO pricing process (see GCG’s GCC Corporate Governance: A Work In Progress, January 2007 ), the public was very eager to be involved in the UAE’s newest telecom carrier. The remaining 80% of the company is owned by Governmental agencies: 40% directly, and 40% indirectly through various governmentally controlled investment vehicles.
The ownership structure of du is displayed in Exhibit 3.2.
Exhibit 3.2: du’s Ownership (2007)
Public Governmental 20% entities own 80% of du, the public own UAE Government the remaining 20% 40%
Mubadala Development Co. 20%
TECOM Investments 20% Source: Company Websites, GCG Analysis
One factor which encouraged the UAE and many other GCC countries to embrace liberalization initiatives in their telecommunications market was compliance with WTO’s competition doctrine. However, with the UAE government remaining as the majority owner of both carriers in the market (Etisalat 60%, du 80%) one could argue this has stunted the benefits of competition. This issue has been widely debated by the public and many wonder if it is only an “illusion” of competition.
Corporate Structure and Operations du’s operations thus far have centered around mobile telephone services. Their strategy has been to establish a footing in the mobile market, and subsequently roll out fixed line services leveraging their newly established brand value.
du – A Fully Integrated Company
From the beginning du has positioned itself as the region’s first fully integrated telecommunications company, meshing fixed line and mobile services in a framework of convergence. Laying the technological foundation with an
Emirates Integrated Telecommunications Co. 15 June 7th, 2007
integrated/convergence theme in place will give du an advantage over the incumbent Etisalat, who must adopt new strategies in a retro-fit manner.
du’s corporate strategy targets three main classes of users – consumers, enterprises, and carriers. The services are based on a common technological foundation with synergies in an array of support services. The strategy is depicted in Exhibit 3.3, which was communicated through senior management.
Exhibit 3.3: du’s Integrated Corporate Strategy
du has taken the integrated approach Consumer Enterprise right from the get- go TV Carrier Fixed Line
Internet / Data
Mobile
Technology
Support Services
Source: du Senior Management
Mobile Operations
In March 2006 Nokia was awarded an AED 700 million contract by du to design, build, operate, and transfer (DBOT) GSM and 3G network. The turnkey solution was won on the company’s ability to provide long term technological requirements for du, whose strategy is to provide access using state of the art equipment.
The mobile market in the UAE is one of the regions’ most developed. Penetration reached 109% at year-end 2006, technically more than one mobile telephone per person. This saturation is largely due to multiple mobile phone usage by some customers (i.e. customers using one mobile phone specifically for business purposes and one for personal use).
Exhibit 3.4 depicts the growth in subscribers and penetration rate in the UAE over the past nine years.
Emirates Integrated Telecommunications Co. 16 June 7th, 2007
Exhibit 3.4: UAE Mobile Subscribers / Penetration Rate 1998 – 2006 Unfortunately for du, The UAE is a 6,000,000 120% highly penetrated 5,000,000 100% country – forcing them to rely on 4,000,000 80% Etisalat churn in the short term 3,000,000 60%
2,000,000 40%
1,000,000 20%
0 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Subscribers Penetration Rate
Source: Company Websites, GCG Analysis
Mobile telephone usage in the UAE has exploded onto the scene in the last decade. The country’s demographics and economic environment contributed significantly to the growth in usage. The countries population is expanding rapidly, growing at a compounded annual growth rate (CAGR) of 7.5%. Furthermore, the population is overwhelmingly comprised of expatriates, who generally prefer to have mobile connectivity. For many people in the UAE, mobile connectivity has replaced fixed line telephone altogether.
Economic growth experienced over the past few years has also contributed to the fantastic growth in mobile telephone usage. The economic expansion in the UAE, spurred on by record oil prices, has resulted in an increase in disposable income. In fact, as Exhibit 3.5 depicts, GDP per capita has increased substantially over the past five years, a CAGR of approximately 11%. This growth has had a direct effect on the popularity and affordability of mobile telephones in the country.
Ex hibit 3.5: UAE Economic Indicators 1998 – 2007 High world oil $40,000 14% prices and real estate development $35,000 12% have fueled $30,000 10% fantastic growth in $25,000 The UAE 8% $20,000 6% $15,000 4% $10,000 $5,000 2% $0 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E
GDP Per Capita GDP Growth Rate
Source: Company Websites, GCG Analysis
Emirates Integrated Telecommunications Co. 17 June 7th, 2007
According to company estimates, du had attracted more than 400,000 subscribers as of June 1st, 2007. In comparison, Etisalat reported an estimated subscriber base of approximately 5.78 million. The current market share is depicted in Exhibit 3.6, highlighting the 6% market share du currently serves in the mobile market.
Exhibit 3.6: UAE Mobile Market Share (June 2007)
du currently serves 6% of the country’s mobile subscribers, du 6% just over 400,000
Etisalat 94%
Source: Company Websites, GCG Analysis
3G Mobile Network
Technology advancements have allowed mobile carriers to go above and beyond the traditional realm of talk time and text messages to generate revenue. du’s third generation network uses state of the art mobile technology which allows for extended value added services to be offered. Subscribers to du, using a 3G compatible handset are able to use services such as:
1. High-Speed Internet: The 3G network allows users to connect to the internet using a high-speed connection. Data transfer rates are up to seven times faster than traditional dial-up internet access using a computer and telephone modem. du charges on a per kilobyte basis.
2. Video Calls/Mail: Users of the 3G network can engage in video calls with another 3G subscriber. Also, du offers a feature that allows video mail messages to be recorded in the event that a person is unable to receive the video call.
3. Mobile-TV: du’s mobile television services allow subscribers to watch streaming broadcast television on their mobile handset. Subscribers can choose from a handful of themed packages which include 5 – 7 channels. The service is available for a flat monthly fee.
Welcome To The UAE…
An element of du’s strategy involves leveraging the UAE’s transient environment. Each year millions of people travel to the country for both business and pleasure; in fact, the UAE is positioning itself as one of the global leaders in tourism with an expectation of 15 million tourists per year (by 2015). Given the exorbitant roaming/international tariffs charged by Etisalat, du has identified a market with a potential to be very lucrative.
Emirates Integrated Telecommunications Co. 18 June 7th, 2007
The company has made available an account that can be used whenever a visitor is in the UAE. The account is especially tailored to suit short term stays, allowing customers to stay connected while in the country – at rates substantially lower than traditional roaming.
Because of the nature of the target market, this strategy has the potential to inflate du’s reported number of subscribers and dilute the average revenues per user. The service was formally launched at the end of April.
du’s Triple-Play – Fixed Line and More du’s position entering the market is centered around the convergence model. The company strategy is to consolidate consumers’ telecommunications services and provide the entire package. From this notion came the Triple Play ; the combination of fixed line telephone, internet, and television programming – all delivered through the same wire.
Delivery of Triple Play services is highly dependent on du’s network strategy. The company is in the process of determining how, when, and where to build out their own network, and how dependent they would like to be on the expected Local Loop Unbundling agreement (LLU) to be announced by the TRA. The LLU is mandated by the regulating authority and allows du to lease the use of Etisalat’s installed wire- line infrastructure in the developed parts of the country. Very little has been disclosed about the LLU agreement in the UAE but we have assumed that the LLU agreement will be approved and that du will use Etisalat’s network. As it stands, du does not intend to build a redundant fixed line network tracing that of Etisalat, rather, they will install the ‘last mile’ of the network and use Etisalat’s infrastructure to bridge the gap. A final decision on LLU by the TRA is expected by 2009 which leaves a significant time gap for the company to fill with their own fixed line services. du’s network’s connectivity to the rest of the world will be through the FALCON system – a submarine backbone cable that links Suez to Mumbai and branches out along the way. The FALCON system is the regional portion of the FLAG project (Fiber Link Around the Globe), which aims to install a super high capacity (80 Gigabytes/s west of Mumbai) world-wide fiber optic network.
The appeal of the triple play angle is it offers convenience to consumers as it consolidates three bills into one. Furthermore, the range of products available through a mix and match of television/internet/telephone products could allow consumers to minimize unwanted services.
Customer retention and increased ARPU are the most important potential benefits of the triple play strategy from du’s point of view. However, the extent that the company wins over clients with this strategy greatly depends on Etisalat, and whether they go to market with a similar package. The value of offering this service would diminish if consumers could bundle their telecommunications bills without switching carriers.
Emirates Integrated Telecommunications Co. 19 June 7th, 2007
Fixed Line Services
Consumers in the UAE have continued the global trend of opting for mobile telephones rather than a traditional fixed line; and with reasonable mobile tariffs (amongst the region’s lowest), who could blame them?
At present Etisalat serves nearly the entire fixed line market – with the exception being an estimated 25,000 customers in the free-zones (Dubai Internet City, Dubai Media City, Dubai Knowledge Village, Dubai Marina, Dubai International Financial Centre, and Emirates Hills, etc) being served by du. There are currently 1.3 million fixed line subscribers in the country, resulting in an estimated 25.6% penetration rate. Exhibit 3.7 displays the number of fixed line subscribers and the corresponding penetration rate in the last six years.
Exhibit 3.7: UAE Fixed Line Subscribers / Penetration Rate Fixed line penetration has 1,400,000 35% been decreasing as 1,200,000 30%
more people choose 1,000,000 25% mobile over land line service 800,000 20% 600,000 15%
Subscribers (000s) 400,000 10%
200,000 5%
0 0% 2000 2001 2002 2003 2004 2005 2006 Number of Fixed Lines Penetration
Source: IMF, Company Reports, GCG Analysis
Fixed line subscriptions have steadily increased in the last six years. From just over 1 million subscribers in 2000, Etisalat serves approximately 1.3 million customers. While subscribers have increased steadily, penetration has steadily decreased. This implies that the rate of net migration has been higher than the rate of fixed line subscriber growth.
The formidable economic growth that the UAE is currently experiencing is expected to increase the market for fixed line services via new homes and new business lines. du currently has a limited involvement in the fixed line market which centers around the newly developed free zone areas. However, these are the areas which du will most likely find easiest to penetrate; namely, because the new developments have not been penetrated by Etisalat.
Fixed line telephone services are expected to include the following features: call divert, call waiting, follow-me, ring back, three-way party conference, incoming and outgoing call barring.
Internet Services
Complementing du’s fixed line services will be their entrance into the ISP marketplace. Our estimations of internet market share acquired by du are highly
Emirates Integrated Telecommunications Co. 20 June 7th, 2007 correlated with our assumptions on their fixed line success. Both du and Etisalat are keen to enter triple play service packaging, and as such we expect those who choose du fixed line services to also use du’s internet service.
Exhibit 3.8 depicts the number of internet subscribers in the UAE over the past few years.
Exhibit 3.8: UAE Internet Penetration 2001 – 2006 (000’s) Internet penetration 800 16% has experienced 700 14% high growth over 600 12% the past few years 500 10% 400 8% 300 6% 200 4% 100 2% 0 0% 2001 2002 2003 2004 2005 2006 Subscribers Penetration Rate
Source: IMF, Company Reports, GCG Analysis
Similar to fixed line services, the rate of population and economic growth will dictate the growth in demand for internet services in the UAE. As is depicted in Exhibit 3.8, internet services have just begun to grow at an accelerated pace. As recent as 2001 the country had under 300,000 internet subscribers. This highlights the notion that significant internet penetration was late to arrive in the UAE – and the MENA region in general.
Internet penetration in the UAE has picked up in recent years and is comparable to the OECD countries displayed in Exhibit 3.9. The continuation of robust economic activity and expected population growth should drive internet subscribership and penetration.
Exhibit 3.9 depicts the internet penetration of the UAE and select OECD countries.
Emirates Integrated Telecommunications Co. 21 June 7th, 2007
Exhibit 3.9: Internet Penetration Rates – Select Countries 2006
The internet Denmark 29.3%
penetration rate in Slovak Republic 27.3% The UAE is higher than some G-8 Poland 26.2% countries Ireland 24.6%
Italy 19.3%
France 17.7%
Luxembourg 17.7%
UAE 14.3%
USA 13.6%
United Kingdom 12.9%
Canada 11.7%
Norway 9.2%
Iceland 2.9%
Greece 2.7%
Source: IMF, Company Reports, GCG Analysis
Television
An integral component of du’s Triple-Play package is their IP-based digital television services. Given the multicultural diversity in The UAE, the company has decided to offer services catering to different cultures and nationalities. In doing so, they have committed to offer channels in Arabic, English, French, German, Hindi, Italian, Korean, Russian, Spanish, Urdu.
The service will provide access to basic free-to-air television as well as popular television packages such as Showtime, Orbit, and ADD. The basic monthly packages will start from AED 69.
Emirates Integrated Telecommunications Co. 22 June 7th, 2007
APPENDIX B: MENA MOBILE TELECOMMUNICATIONS OVERVIEW
The ability to be continuously connected has appealed to many segments of the MENA region: business community, students, and blue collar workers have embraced mobile telecommunications and all the benefits derived from its use. As a result of this broad acceptance, the MENA mobile market can be characterized by one word: growth . Subscribers, revenues, capital spending and earnings have increased significantly over the past three years. Exhibit 4.0 highlights the compound annual growth rate of earnings for the major publicly traded carriers in the region. Most have shown double digit growth in profit over the past three years.
Exhibit 4.0: Net Income – Three Year CAGR (2005) STC and Orascom lead the pack with 52.0% strong growth in net income 43.8% 39.0% 33.0%
20.1% 15.3%
4.6%
STC Orascom MTC Wataniya Etisalat Batelco Qtel
Source: Company Reports, GCG Analysis
While the MENA mobile market can be characterized by the word growth , the Gulf Cooperation Council (GCC) countries, and its carriers, are distinctly different than the rest of the MENA region. The GCC is characterized by high ARPUs and penetration rates that, in many instances, exceed 100%. While the remainder of the MENA region is generally characterized by low ARPUs and low penetration.
The material difference between these two geographic segments has resulted in a number of the GCC carriers aggressively pursuing opportunities beyond their domestic markets. Etisalat, along with other regional giants such as MTC, Batelco, QTel, and Wataniya, have all undergone cross border expansion.
Liberalization in the MENA region
A catalyst towards cross border expansion has been the liberalization of the telecommunications industry. Due to the relatively low capital expenditure required to build a mobile network (compared to fixed line), the mobile marketplace is well suited to foster competition and the MENA region has welcomed liberalization. This cost differential has provided the support for a continued monopoly in fixed line market and competition in the mobile market.
Exhibit 4.1 depicts the consequences of the network cost differential; while fixed line competition in the region has begun, the majority of countries in the region have one fixed line provider and more than one wireless provider.
Emirates Integrated Telecommunications Co. 23 June 7th, 2007
Exhibit 4.1: MENA Telecommunications Providers (2007)
Fixed Mobile All the action is in the Operators Operators mobile Algeria 2 3 telecommunication Bahrain 1 2 sector Egypt 1 2 Iraq 1 3 Jordan 1 4 Kuwait 1 2 Saudi Arabia 1 2 While liberalization has Lebanon 1 2 been the catalyst for Libya 1 2 increased mobile Morocco 1 2 competition, fixed line Oman 1 2 competition is minimal Palestine 1 1 Qatar 1 1 Syria 1 2 Tunisia 1 2 UAE 1 2 Yemen 1 3
Source: GCG Analysis
The MENA telecommunications industry has been embracing market liberalization over the past decade. Since 2000, the number of mobile carriers has doubled to 38, ending many of the long standing monopolies in the region. The region is beginning to experience the benefits that competition has on service and pricing.
Competition has lowered prices and greatly increased mobile penetration across the region. New mobile licenses being offered by governments have generated exceptional interest by entities looking to continue their historic growth via mobile operations.
MENA Mobile Operators
In the last decade the mobile telecom industry in the MENA region has experienced significant changes; the industry is no longer monopolized by fixed line carriers.
There are currently 38 operators providing mobile services in the region’s 17 countries. Exhibit 4.2 is a comprehensive list detailing who is providing mobile services in each MENA country as of early 2007.
Emirates Integrated Telecommunications Co. 24 June 7th, 2007
Exhibit 4.2: MENA Mobile Carriers (2007)
Jordan There are currently 38 Jordan MTS ‘95 Syria Tunisia Mobilecom ‘99 mobile providers in Lebanon SyriaTel ‘00 Morocco SNT ‘96 Xpress ‘04 SpaceTel ‘00 Iraq the region Orascom ‘02 Fel Dete ‘04 AsiaCell ‘99 Maroc Telecom ‘84 Umniah ‘03 MTC ‘04 Medi Telecom ‘99 MTC ‘03 Orascom ‘03 Kuwait Palestine MTC ‘83 Paltel ‘99 Wataniya ‘97
Bahrain Algeria Batelco ‘81 Orascom ‘01 Libya MTC Vodafone ‘03 Mobilis ‘03 Al Madar ‘97 Qatar Wataniya ‘03 Egypt Libyana ‘03 Qtel ‘87 Mobinil ‘98
Vodafone ‘98 Saudi Arabia UAE Saudi Telecom ‘98 Etisalat ‘76 Mobily ‘04 Du ‘07
Oman OmanTel ‘04 Nawras ‘04 Yemen SpaceTel ‘00 Source: Zawya, GCG Analysis Yemen Co. FMT ‘01 Yemen Mobile ‘04
A Changing Landscape
The list of service providers has changed significantly over the past few years. Many of the regulatory regimes have opened up; in some cases, pushed to do so by their bid to gain entry to the WTO. As a result, we have seen an abundance of new service providers enter the market.
Exhibit 4.3 tracks the number of mobile telecom providers operating in the region in the recent past.
Exhibit 4.3 : Number of MENA Mobile Carriers – 2000 to 2006 From 2002 to 2006 37 38 the number of mobile 36 carriers in the region increased by over 60% 29
21 22 19
2000 2001 2002 2003 2004 2005 2006
Source: Zawya, GCG Analysis
The most significant of the changes in the landscape took place during 2003 and 2004; in that period alone the number of carriers in the region rose by nearly 35%. At
Emirates Integrated Telecommunications Co. 25 June 7th, 2007
the end of 2006, the mobile telecom sector in the MENA region was supplied by a total of 38 providers.
MENA Mobile Penetration
Mobile penetration in the MENA region varies substantially. In few other regions of the world would you find such distinct variation. The lowest of the range is in Yemen, where around 10% of the population has a mobile phone. In the other extreme there is Bahrain, where estimates of mobile penetration have topped 120% - technically more than one mobile phone per person. In fact, the variations in penetration rates mirror the high variations in GDP per capita in the region – brought about by, amongst others, different natural resource endowments.
Exhibit 4.4: GDP Per Capita vs. Penetration Rate - 2006
Unsurprisingly, the $60,000 wealthier countries Qatar have higher mobile $50,000 penetration rates $40,000 UAE Kuwait sample best fit line $30,000 Bahrain $20,000 Saudi Arabia Oman Libya Lebanon $10,000 Algeria Egypt Morocco Tunisia Jordan Yemen $0
0% 20% 40% 60% 80% 100% 120% 140%
Source: IMF, Company Reports, GCG Analysis Note: The GDP value on the dotted line when penetration rate equals 100 is roughly $25,000
Exhibit 4.4 shows the richer countries in the region have higher penetration rates. Countries with a GDP per capita of over $10,000 tend to have significant mobile penetration rates – 75% plus. Furthermore we notice that the richest countries have penetration rates exceeding 100%. Roughly, holding all other characteristics constant, a country in the MENA region will reach 100% penetration when their GDP per capita has reached $25,000.
Subscriber Growth Remains Strong
Since 1998 the region has experienced a compound annual growth rate in mobile subscribers of just under 60%. Exhibit 4.5 displays the subscriber figures in the region as of 2006, excluding Iraq.
Emirates Integrated Telecommunications Co. 26 June 7th, 2007
Exhibit 4.5 : MENA Mobile Sub scribers, ex Iraq – 1998 to 2006 (Mn) Growth in subscribers has been exponential in 104.6 the last few years
78.9
49.5
34.2 24.7 16.5 9.1 2.6 4.2
1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: ITU, MENA Carriers, GCG Analysis Note: Iraq was excluded due to problematic data
Growth has accelerated in the past few years in conjunction with robust economic activity in the region. In eight years the region has gone from a little more than 2.5 million subscribers to just under 105 million. It is evident that consumers in the region are adopting mobile telephones as an increasingly important medium of voice telecommunication.
The top 10 mobile providers in the region provide services for more than 65% of mobile subscribers. Unsurprisingly, the carriers with the largest amount of subscribers generally come from the most populous countries in the region such as Egypt, Algeria, and Morocco.
Exhibit 4.6 displays the carriers with the largest subscriber base.
Exhibit 4.6: Largest Subscriber Base (2006, Mn) North African carriers 13.3 dominate when categorized by number of subscribers 10.0 9.0 8.1 7.1 7.1
5.3 4.8 4.1
STC Orascom Maroc Orascom Vodafone Mobilis Etisalat Mobily Medi Algeria Telecom Egypt Egypt Telecom
Source: Carrier’s Reports, GCG Analysis
Saudi Telecom Company is the largest provider by subscriber base at 13.3 million. Two of the Orascom operations in North Africa (Egypt and Algeria) are amongst the
Emirates Integrated Telecommunications Co. 27 June 7th, 2007
largest subscriber bases in the region. In fact, North Africa has six of the top nine service providers by subscribers.
The growth in subscribers has resulted from a few major developments. Popularity and convenience of mobile telecommunication, combined with its recent affordability has made mobile the telecommunication medium of choice.
Price Decline With Increased Competition
The affordability of mobile connectivity as a source for subscriber growth should not be underestimated. It has been increasingly an influential factor for two reasons:
1. Lowering the price has made mobile telephony a viable option for a larger portion of the population.
2. Lowering the price has enticed substitution from fixed line telecommunication. For some, mobile connectivity is their sole form of communication.
Exhibit 4.7 displays the average price for a 3 minute call from a mobile phone.
Exhibit 4.7: Price of 3 Min. Local Mobile Phone Call –MENA Average ($US)
Despite a blip along the $0.60 way, regional tariffs Price increases have been declining $0.50 in Morocco and Lebanon since 1999 $0.40
$0.30
$0.20
$0.10
$- 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: ITU, GCG Analysis
From 1998 to 2006 the average price in the region has decreased by just under 40%. This resulted largely from increased competition and an attempt to increase penetration by capturing customers who may not value the service as highly, and thus are not willing to pay high prices.
Exhibit 4.8 shows the relatively quick liberalization progress that has occurred in the MENA region.
Emirates Integrated Telecommunications Co. 28 June 7th, 2007
Exhibit 4.8: Evolution of the Competitive Environment – 1998 to 2006 In 1998 over 80% of
the countries were 100% served by monopolies 90% 80% 70% Four Carriers 60% Three Carriers 50% Duopoly 40% Monopoly 30% 20% 10% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Zawya, GCG Analysis
As recent as 1998 almost 85% of the countries in the region were served by monopolistic providers; in 2006 it was less than 15%. Additionally, since 2003 some countries have opened up their mobile telecom sector to three or more providers. Currently Jordan is the only country in the region with four providers.
Emirates Integrated Telecommunications Co. 29 Analyst Certification The GCG Analyst names on the report hereby certifies that the recommendations and/or opinions expressed herein accurately reflect such research analyst’s personal views about the company and securities that are the subject of the report; or any other companies mentioned in the report that are also covered by the named analyst. In addition, no part of the research analyst’s compensation is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. The head of GCG’s research department and all individuals involved in the preparation of this report are familiar with and have complied with the CFA Institute Code of Ethics and Standards of Professional Conduct.
Rating System Equity Ratings Definitions Recommendation Description Strong Buy Anticipated total returns in excess of 30% Buy Anticapated total return between 15% and 30% Hold Anticapated total return between 0% and 15% Sell Anticapted total return to be negative Note: Total return includes capital appreciation and dividends over next 12 months
Ratings Distribution Distribution of Ratings - TOTAL Number of companies with All Research Recommendations recommendation % of Total Strong Buy 1 33% Buy 1 33% Hold 0 0% Sell 1 33% 3 100%
Distribution of Ratings - BY SECTOR Research Recommendations in the Number of companies with Telecommunications sector recommendation % of Total Strong Buy 1 33% Buy 1 33% Hold 0 0% Sell 1 33% 3 100%
Valuation Techniques
A combination of valuation methods are used by GCG’s analysts to determine the 12-month target price for issuers including but not limited to discounted cash flow techniques, historical trading multiples and capitalization rates, and peer average trading multiples and capitalization rates.
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This research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such.
This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Gulf Capital Group recommends that investors independently evaluate particular investments and strategies and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on investors’ individual circumstances and objectives.
This report is not an offer to buy or sell any security or to participate in any trading strategy. Investors should seek financial advice regarding the appropriateness of investing in any securities of investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Past performance is not necessarily a guide to future performance, future returns are not guaranteed and a loss of original capital may occur.
Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or opinion or futures contracts.
It is confirmed that GCG or any of its associates: do not hold shareholding of 1% or more of the total issued share capital in any of the companies covered in the report; do not act as corporate broker for any of the companies covered in the report; have not undertaken any corporate finance business over the past 12 months with or for the companies covered in the report ; are not Market Makers on any of the securities covered in the report. Further confirmed that, none of the companies covered in the report hold any material shareholding in GCG.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities across different exchanges, whose values are influenced by the currency of the underlying security, effectively assume currency risk.
This report or any portion hereof may not be reprinted, sold or redistributed without the prior written consent of Gulf Capital Group.
Gulf Capital Group Limited
Dubai International Financial Center Registered Office – Offices 5 & 6, Level 4, Precinct Building 3, P O Box – 214851, Dubai, UAE Tel: +971 4 363 5730 Telefax: +971 4 363 5739 www.gulfcapitalgroup.com
GCG is regulated by the Dubai Financial Services Authority
Omar Rana, MA, MSc Managing Director [email protected]
Darren K Smith, CFA Vice President [email protected]
Justin Tantalo Business Analyst [email protected]
Munira Mukadam Business Analyst [email protected]