Revenue – OMR470mn, +257% Y-o-Y, +37% Q-o-Q, +0% vs. EFGe
EBITDA margin – 32.4%, -9.6pp Y-o-Y, +6.4pp Q-o-Q, -10.4pp vs. EFGe 
Net income – OMR16.0mn, -33% Y-o-Y, +9% Q-o-Q, -31% vs. EFGe
 
Omantel published its 1Q18 results, which came in rather disappointing except at the top line. Revenue stood at OMR470mn, exactly in line with our estimate, up a considerable 37% Q-o-Q as 4Q17 did not account for a full quarter of consolidation of Zain Group’s results, given that consolidation began on 15 November 2017. Revenues from Oman and Zain Group operations were all broadly in line with our estimates. However, EBITDA missed our estimate by 24%, coming in at OMR152.4mn, and implying a rather weak EBITDA margin of 32.4% vs. our estimate of 42.8%. Omantel’s segmental breakdowns in the financial statements did not provide breakdowns at the EBITDA level, and the company did not clarify what led to this margin weakness; however, we suspect it could have been due to the impact of implementation of IFRS 15 on both Omantel’s Omani operation and Zain Group. The latter’s EBITDA margin this quarter stood at 32.4% vs. its usual margin of early-40s, primarily due to the impact of IFRS 15, but this had not affected the bottom-line. Moreover, our consolidated EBITDA estimate for Omantel does not account for royalty paid in Oman (it is captured after earnings before taxes), while it appears Omantel now accounts for it within operating costs; adjusting for that, EBITDA still would have been 18% below our estimate due to the impact of IFRS 15.
 
Consolidated net income came in at OMR16mn, missing our estimate by 31%, and expanding only 9% Q-o-Q despite a 37% Q-o-Q growth in revenue; the miss also comes despite our higher-than-expected interest expense, taxes, and depreciation and amortisation. Seeing as Zain Group’s 1Q18 earnings were in line with our estimate (please see results comment attached), we suspect the weakness in Omantel’s consolidated earnings this quarter came from the Omani operation as well as holding-company costs relating to the acquisition of the Zain Group stake, namely interest expenses paid on the bridge loan used to finance the acquisition. For now, we do not have sufficient visibility on these items and will seek more details from management in the results conference call. The stock’s recent sell-off is somewhat justified by concerns about the rather punchy price Omantel paid for Zain Group’s stake acquisition, and while Omantel’s stock is starting to look cheaper, we believe it lacks a clear catalyst. 

Omar Maher
 
Omantel: OMR0.80 as of 15 May. 2018, Rating: Neutral, TP: OMR1.39/share, MCap: USD1,571mn, OTEL OM/OTEL.OM