16-May-2017
Oman Telecom Company (Omantel) - 1Q17: No surprises at the operating level; maintain Neutral as third player is a key risk
Rating: Neutral
Target Price: OMR1.39
Closing Price: OMR1.29
One-off tax credit drives 1Q17 earnings beat
Omantel’s full financial statements showed 1Q17 earnings of OMR23.9mn, c30% above our estimate and despite revenue and EBITDA both coming in broadly in line with our estimates. The beat was driven by a one-off tax credit benefit that is not expected to recur, management clarified. Starting 2Q17, Omantel will witness the full impact of the hike in corporate income tax rate to 15% from 12%. Revenue in 1Q17 totalled OMR133mn, up 7% Q-o-Q; strong quarterly growth in top-line was driven partially by indefeasible right of use (IRU) sales, following two consecutive quarters of nil revenue. Omantel is expecting the same level of quarterly IRU sales throughout the year as it capitalises on its investments in submarine cable systems. The FY17 IRU revenue is expected to surpass that of FY16, as the company is finalising the launch of a new submarine cable in June 2017.
Maintain Neutral rating on third player risk and lack of catalysts
We are of the view that the Omani telecom market is currently at risk of losing its competitive rationality with the introduction of the third mobile player on the horizon. Saudi Telecom Company (STC), Etisalat Group and Zain Group have all expressed interest in the said licence, having submitted technical and financial bids to the Telecommunication Regulatory Authority (TRA) earlier this month. The winner of the licence will be announced in September 2017. The market has already priced in the entrance of a third player, in our view; Omantel is down 15% YTD, while Ooredoo Oman is down 24% YTD. We have a Neutral rating on Omantel, as we believe the stock is fairly valued at current price – bearing in mind the third player risk – as well as due to a lack of catalysts.
Third player profitability questionable due to licence terms and operating environment
While the pricing is not announced yet, we believe the current dynamics of the Omani mobile market renders a third licence unattractive due to: i) a high mobile penetration rate of c170%, which makes it an increasingly challenging operating environment; ii) recent hikes in royalty to 12% from 7% and in corporate income tax to 15% from 12%; and iii) the hefty investment that would be incurred by the third entrant in a short period of time, as the licence requires a geographic coverage of not less than 90% in five to seven years. Therefore, we believe that discounted service prices, coupled with significant network investments, would make it difficult for the third entrant to be profitable.
Omar Maher
Karim Riad
Target Price: OMR1.39
Closing Price: OMR1.29
One-off tax credit drives 1Q17 earnings beat
Omantel’s full financial statements showed 1Q17 earnings of OMR23.9mn, c30% above our estimate and despite revenue and EBITDA both coming in broadly in line with our estimates. The beat was driven by a one-off tax credit benefit that is not expected to recur, management clarified. Starting 2Q17, Omantel will witness the full impact of the hike in corporate income tax rate to 15% from 12%. Revenue in 1Q17 totalled OMR133mn, up 7% Q-o-Q; strong quarterly growth in top-line was driven partially by indefeasible right of use (IRU) sales, following two consecutive quarters of nil revenue. Omantel is expecting the same level of quarterly IRU sales throughout the year as it capitalises on its investments in submarine cable systems. The FY17 IRU revenue is expected to surpass that of FY16, as the company is finalising the launch of a new submarine cable in June 2017.
Maintain Neutral rating on third player risk and lack of catalysts
We are of the view that the Omani telecom market is currently at risk of losing its competitive rationality with the introduction of the third mobile player on the horizon. Saudi Telecom Company (STC), Etisalat Group and Zain Group have all expressed interest in the said licence, having submitted technical and financial bids to the Telecommunication Regulatory Authority (TRA) earlier this month. The winner of the licence will be announced in September 2017. The market has already priced in the entrance of a third player, in our view; Omantel is down 15% YTD, while Ooredoo Oman is down 24% YTD. We have a Neutral rating on Omantel, as we believe the stock is fairly valued at current price – bearing in mind the third player risk – as well as due to a lack of catalysts.
Third player profitability questionable due to licence terms and operating environment
While the pricing is not announced yet, we believe the current dynamics of the Omani mobile market renders a third licence unattractive due to: i) a high mobile penetration rate of c170%, which makes it an increasingly challenging operating environment; ii) recent hikes in royalty to 12% from 7% and in corporate income tax to 15% from 12%; and iii) the hefty investment that would be incurred by the third entrant in a short period of time, as the licence requires a geographic coverage of not less than 90% in five to seven years. Therefore, we believe that discounted service prices, coupled with significant network investments, would make it difficult for the third entrant to be profitable.
Omar Maher
Karim Riad