• Investor inflows to keep valuation buoyant We raise our FV for Etisalat by 25% to AED18.6 to reflect the strong 2Q16 results and ongoing active and passive inflows from MSCI EM trackers (we assign a 25% liquidity premium due to this). While the stock may seem expensive, it trades at a 2016 EV/EBITDA of 8.3x, above its MENA peers’, and with a moderate dividend yield of 4%, we maintain our Neutral rating as the passive inflows and strong 2Q results are likely to continue to support the share price. Our top MENA telecom picks are GTH and Ooredoo Group.
• 2Q16 earnings surprise and beat our estimate by 16% 2Q earnings beat our estimate of AED2,315mn by 16% mostly due to a stronger-than-expected group EBITDA margin of 51.0% vs our estimate of 49.5%. This was driven by stronger-than-expected revenue and margins in the UAE. Operating results were generally good across most core operations.
• UAE, surprisingly, drives solid performance To our surprise, the UAE unit’s revenue came in 5% above our estimate and up a healthy 3% Y-o-Y and 6% Q-o-Q at AED7.7bn. Top-line growth was driven by a continued return to growth in the mobile subscriber base as well as a strong uptake of broadband services in all segments due to the launch of new bundles. UAE’s EBITDA margin stood at a solid 56% – despite the launch of new products – owing to cost optimisation efforts. The EBITDA margin in 1Q16 had slid to 53%, but the management said then that there was no reason to worry given that it was only a temporary effect.
• Tweak dividend estimate on solid earnings The company proposed an interim dividend for 1H16 of AED0.40/share, representing a pay-out ratio of 80.6% for 1H16, and in line with our 1H16 forecast. Given the positive earnings surprise in 2Q16 and solid growth outlook for Etisalat’s UAE operation, we raise our 2016 DPS estimate to AED0.80 and highlight the potential for a dividend surprise in 2H16.

Omar Maher
Karim Riad