Handset sales boost revenue and profits…
Earnings surprised positively at AED447mn, beating our forecast by 9%, largely as a result of better-than-expected mobile revenue (+6% vs. our estimate), which constituted 71% of total revenue for the quarter. Management explained that the acceleration in mobile revenue growth was driven largely by a surge in revenue from handset sales; excluding this, mobile revenue growth Y-o-Y would have been in the low single digit range rather than the actual 5%. Earnings recovered after two quarters of dismal performance, on the back of weak margins previously, which, in turn, were due to pressure on the company’s prepaid segment revenue and unfavourable shifts in revenue mix towards low-margin segments. Margins came in broadly in line with our estimates.
 
…but its sustainability is uncertain; remain Neutral
We had not expected the surprising strong growth in handset sales, but we do not believe this growth is necessarily sustainable, as this segment tends to be erratic, depending on new model/brand launches and seasonal retail shopping trends; hence, we see no reason to turn more positive on the overall market conditions, especially that competition appears to still be affecting du’s top-line growth. Management said that du continued to operate in a tough market, on the back of pricing pressure and challenging data monetisation. It is worth noting that du had stopped disclosing mobile data revenue contribution figures as of this quarter for competitive reasons; throughout the past quarters, mobile data revenue contribution have been largely stalling, indicating difficulty in monetising the data segment; hence, we reiterate our Neutral rating on the stock, as it looks fairly priced at current level.
 
No catalyst in sight, at least for now
The company announced a dividend of AED0.13/share for 1H17, in line with our estimate and in line with the 1H16 dividend (shareholders will vote on the proposed dividend in September 2017). We believe the dividend is largely priced in by the market, and we see no room for increasing DPS this year, given pressure on earnings; hence, the only possible catalyst we see is the opening of the stock to foreign ownership, but there is no visibility at all on when this could happen. Therefore, we see no room for rerating at the moment, given the absence of a clear catalyst. 

Omar Maher