• Trim FV to OMR1.677/share on higher capex We believe Omantel’s long-term capex intensity will be relatively higher than average due to ongoing investments in cable projects. While this reflects positively on our EBITDA forecasts on increased revenue, the valuation gain is offset by higher capex. We downgrade our rating to Neutral as we believe valuations are full with the stock trading at a 2016e P/E of 10x and a 2016e EV/EBITDA of 5x, a modest discount of 10% and 5% to the averages of our MENA telecoms coverage, respectively.
• Low visibility on key stock catalyst: dividend hike… In our previous update, we forecast a dividend hike in 2017, owing to healthy FCF generation and government’s (51% shareholder) need for more revenue to counter the budget deficit. However, we now see low visibility on a potential dividend raise; moreover, in the 1Q16 results conference call, management said dividend hikes would be driven by better profitability, which it said is unlikely for now. We now expect a hike in the longer term in 2018. We see two potential risks weighing on dividends: i) royalty rate hike to 12% from 7%; and ii) introduction of a third operator, which would lead to aggressive competition and lower profitability, in our view.
• …but dividend muscle remains strong Our analysis suggests that even under a scenario of higher capex and higher royalty (but excluding a third licence), Omantel is capable of raising dividends by about 5% to OMR0.121/share. We reiterate our view that a dividend hike is more beneficial for the government than a royalty hike or third licence; between the last two options, the latter is the least likely, in our view. In this note, we examine how a third operator in a comparable market, Kuwait, has led to aggressive competition, lower margins and a sharp decline in ARPUs.

Omar Maher
Karim Riad