Rating: Neutral

Target Price: AED6.10

Closing Price: AED6.00

TP largely unchanged; maintain Neutral on lack of catalysts

 
We tweak our TP by 1.4% to AED6.10, and maintain our Neutral rating as we see no catalysts in sight. The stock’s 22% rally in 2016 was due to speculation on allowing foreign ownership, which we see as unpredictable. Moreover, a dividend hike is most likely to be a product of an earnings surprise, which seems unlikely to us given the market saturation. Nevertheless, we keep an eye on: i) the cost optimisation programme that should lead to opex and capex savings of AED1bn in the next three years; ii) possible modest revenue boost from the Virgin Mobile agreement; iii) the activation of bit stream access for TV; and iv) a surprise opening of foreign ownership of the stock. We view the stock as fairly valued at this level, trading at a 2017e P/E of 15x and a 2017e EV/EBITDA of 4.6x. We have concerns that increasing price competition in the UAE could impact du more than Etisalat. du was unable to monetise the increase in data usage in 4Q16, a trend we are worried could spill over into 1H17.

4Q16 earnings impacted by higher-than-expected seasonal surge in operating expenses

 
Earnings missed our estimate by a large 20%, primarily on higher-than-expected SG&A and to a lesser extent higher-than-expected cost of sales. This is despite a better-than-expected top-line that was 8% above our estimate at AED3,434mn. The pressure on margins was a result of higher contribution from low-margin wholesale revenue and an increase in handset sales (also low-margin revenue). We attribute the strong revenue growth to aggressive offers and promotions by du, with the aim of boosting market and revenue shares, which came at the expense of profitability. du’s board proposed a DPS of AED0.21 for 2H16, bringing the total DPS for the year to AED0.34 vs. our estimate of AED0.35. Management guided that next year’s DPS should be the same as 2016.

Virgin Mobile branding agreement: a double-edged sword

 
The five-year Virgin Mobile branding agreement with Emirates Integrated Telecom. Co. (EITC) will help diversify the latter’s offerings, given Virgin Mobile’s strong brand perception, which may support du’s top-line. While the competitive environment in the UAE is somewhat benign, the introduction of Virgin Mobile may trigger aggressive competition as Etisalat will likely defendits market share. du’s management noted that there is a risk of cannibalisation of du-branded revenues by the Virgin brand.

Omar Maher

Karim Riad