01-Jan-2017
Oman Telecom Company (Omantel) - Our worst-case scenario plays out; cut TP on royalty hike; maintain Neutral
Rating: Neutral
Target Price: OMR1.39
Closing Price: OMR1.51
Royalty rate hike warrants a cut to EPS and TP
We slash our TP by 17% to OMR1.394 (8% downside to current price) as the Council of Ministers has agreed to raise royalty rates to 12% of licenced revenue from 7%; we maintain our Neutral rating. Higher royalty has led to a 19-21% cut in our EPS estimates for 2017e-21e and a 20-22% cut in FCF for 2018e-21e. We have forewarned earlier of potential regulatory actions that could bring about an even more challenging operating environment, via either a royalty increase or the introduction of a third operator. However, we did not expect both to occur simultaneously. Seeing that our worst-case scenario has now materialised, with both actions having taken place, we adopt a more negative view on Oman’s telecom market.
Dividends: Key catalyst now significantly at risk
Prior to the royalty announcement, we were expecting a potential dividend increase starting 2018 to OMR0.120/share from OMR0.115/share currently. The royalty rate hike, coupled with a third operator, has compromised Omantel’s FCF generation and its ability to increase dividends going forward, in our view. Moreover, at the current DPS of OMR0.115, our new EPS estimates suggest Omantel’s payout ratio will jump to a range of 80-85% from 70% previously, which means the company may even opt to cut its current DPS, we believe. A third operator will also pressure FCF and dividends, as Oman’s mobile and fixed markets are largely saturated, and the introduction of a new player at such a mature stage will have a significant impact on the market as price-based competition intensifies. Moreover, Omantel is undertaking capex-intensive cable projects that will also pressure FCF and dividends.
Third player introduction in the horizon
The Telecommunications Regulatory Authority (TRA) has recently issued an information memorandum inviting bids for the third mobile network operator (MNO) licence. The pre-qualification criteria stipulate the bidder must: i) be an infrastructure owner and operator of mobile services in its home country for a minimum of 10 years; ii) be an infrastructure owner and operator of mobile services in another country other than its home country for a minimum of five years; iii) have a minimum annual turnover of USD250mn only from its mobile operation and a minimum net asset value of USD400mn; and iv) have experience in running and operating a similar network like the one proposed in the application.
Omar Maher
Karim Riad
Target Price: OMR1.39
Closing Price: OMR1.51
Royalty rate hike warrants a cut to EPS and TP
We slash our TP by 17% to OMR1.394 (8% downside to current price) as the Council of Ministers has agreed to raise royalty rates to 12% of licenced revenue from 7%; we maintain our Neutral rating. Higher royalty has led to a 19-21% cut in our EPS estimates for 2017e-21e and a 20-22% cut in FCF for 2018e-21e. We have forewarned earlier of potential regulatory actions that could bring about an even more challenging operating environment, via either a royalty increase or the introduction of a third operator. However, we did not expect both to occur simultaneously. Seeing that our worst-case scenario has now materialised, with both actions having taken place, we adopt a more negative view on Oman’s telecom market.
Dividends: Key catalyst now significantly at risk
Prior to the royalty announcement, we were expecting a potential dividend increase starting 2018 to OMR0.120/share from OMR0.115/share currently. The royalty rate hike, coupled with a third operator, has compromised Omantel’s FCF generation and its ability to increase dividends going forward, in our view. Moreover, at the current DPS of OMR0.115, our new EPS estimates suggest Omantel’s payout ratio will jump to a range of 80-85% from 70% previously, which means the company may even opt to cut its current DPS, we believe. A third operator will also pressure FCF and dividends, as Oman’s mobile and fixed markets are largely saturated, and the introduction of a new player at such a mature stage will have a significant impact on the market as price-based competition intensifies. Moreover, Omantel is undertaking capex-intensive cable projects that will also pressure FCF and dividends.
Third player introduction in the horizon
The Telecommunications Regulatory Authority (TRA) has recently issued an information memorandum inviting bids for the third mobile network operator (MNO) licence. The pre-qualification criteria stipulate the bidder must: i) be an infrastructure owner and operator of mobile services in its home country for a minimum of 10 years; ii) be an infrastructure owner and operator of mobile services in another country other than its home country for a minimum of five years; iii) have a minimum annual turnover of USD250mn only from its mobile operation and a minimum net asset value of USD400mn; and iv) have experience in running and operating a similar network like the one proposed in the application.
Omar Maher
Karim Riad