• Cut FV by 7% mostly on tax hike; dividend paying ability unaffected We trim our FV to OMR1.73 from OMR1.87 mostly due to the recent corporate tax increase in Oman to 15% from 12%. We reiterate our Buy call on the stock as our FV implies 16% upside. We believe the stock will outperform in 2016 due to its defensive nature with a 2015e dividend yield of 8% and the potential for this to increase due to healthy FCF generation and low leverage. We do not expect this tax increase to curb its ability to pay dividends. Omantel remains one of our top MENA telecom picks as our thematic focus is on defensive, high-quality dividend plays.
• Market nervous about possible royalty hike, unlikely in our view The Shura Council (in November 2015) suggested a raise in royalty rates on telecoms to 12% from 7%. While the market is concerned about this, we believe it is unlikely given the recent tax hike. For the government, a royalty hike would make more sense than a dividend hike, but we see other considerations that would make a royalty hike less likely. Increasing royalties on a heavyweight like Omantel would: i) cause damage to the MSM; ii) hinder the company’s ability to maintain the current dividend; and iii) hurt the value for pension funds invested in the name as well as smaller minority investors. Moreover, should a royalty hike materialise, Omantel’s ability to invest in the network will likely be affected. Hence, we believe the government would be reluctant to impose such a decision.
• Bear case: royalty hike would affect dividends and capex We ran a scenario analysis to gauge the potential impact of a royalty hike and concluded that under such a scenario our current dividend estimates would be improbable. Our DPS estimates would be cut by 13-17% to OMR0.100, implying a yield of 6.6% and maintaining a pay-out close to the 70% mark. Moreover, a dividend cut would negatively affect our DDM value and, coupled with the royalty’s negative impact on FCF, our blended FV would be cut by 17% to OMR1.44 per share, in line with the current market price, meaning investors are factoring in a royalty hike.

Karim Riad
Omar Maher