• Results in line with our estimate; no sign of FOL changes Earnings totalled AED445mn, down 11% Y-o-Y in line with our expectation, mostly as a result of the increase in royalty rates from last year. Mobile revenues softened 2% Y-o-Y, despite a 5% Y-o-Y increase in mobile data revenues, which now account for 33.8% of total revenues (vs. 31.2% in 2Q15); this led to a flat total revenues. Operations appear to have been affected by strong competition from Etisalat, as well as slowing growth in the market. We reiterate our Neutral rating on du, as we believe trading multiples are rich at the current level, especially in light of the negative impact of royalty on earnings. With no sign of a potential opening of the stock to foreign ownership, we believe it is likely the stock will correct in the short to medium term.
• Strong competition affects mobile revenues, but margins are intact Mobile revenue in 2Q16 totalled AED2,184mn (-2% Y-o-Y, -2% Q-o-Q), missing our estimate by 6%. We believe this could be a sign of weaker market fundamentals and/or increased competition more than seasonality effects, to which the company’s management attributed the decline. This is particularly observed in Etisalat’s UAE revenue that was quite strong, meaning it could have captured du’s share of growth for this quarter; however, du managed to offset revenue pressure by optimising costs, leading to a healthy EBITDA margin of 44% vs. our estimate of 42.5%.
• Expect higher dividend distribution in 2H16 du proposed an interim dividend (1H16) of AED0.13/share, subject to shareholders’ approval, implying a pay-out ratio of 66.6%, which is less than its usual annual pay-out of 70-80% (barring any special dividends). This could mean that the company will have a more significant distribution in 2H16, in our view. Our FY16 estimate calls for a DPS of AED0.35, which translates into a pay-out of 89% and a yield of 5%; we do not see this yield as attractive enough to sustain the recent momentum in the share price.

Omar Maher
Karim Riad