Those looking for convergence between du (Emirates Integrated Telecommunications Company), MENA’s top telecom YTD at +10.5% through end-May (20.1x 2011e P/E and 7.1x EV/Ebitdba) and Etisalat (-5.1%; 7.8x and 2.9x, respectively), which was recently ranked the GCC’s second most valuable portfolio brand (USD3.622bn) by Brand Finance, a consultancy, may have to hold on.  Analysts with Egypt’s CI Capital Research recently noted for instance that risk averse capital and bank deposit flow into the UAE from relatively unstable regional geopolitical backdrops “should in turn boost subscriber growth and limit average revenue per user (ARPU) erosion.”  To this end, it wrote, “driven by mobile services, du continued to deliver a positive performance in 1Q11, where earnings more than doubled [y/y].”  Moreover both players should benefit via the impending introduction later this year of long-term evolution (LTE, or “4G”) and voice over internet protocol (VoIP) services (i.e. the ability to make phone calls over the internet), as well as mobile number portability (MNP) which mark a paradigm shift within the sector towards liberalized, revenue diversification outside of the traditional fixed-line and mobile voice segments.  Etisalat’s agreement with France’s Alcatel-Lucent in mid-February to help develop its LTE network, for instance, which will enable high-speed access to multimedia content such as video conferencing, was predicated on said shift: “Over the last year we’ve witnessed a 200% growth in data roaming traffic.  There is an exploding demand for new technologies and large bandwidth to support and enable the surging data traffic,” commented Marwan Zawaydeh, Etisalat’s chief technology and information officer at the time.  Yet to date du has been more aggressive in its rollout: this spring it successfully conducted and completed its first LTE pilot, a move which followed the launch of the latest 42Mbps mobile broadband services, currently the fastest in the country, after having recently upgraded its network to next-generation DC-HSPA+ technology.

The strong push is somewhat characteristic, however, and EFG Hermes, an investment bank, wrote in April that unlike its rival, which maintains a presence in multiple frontier markets, du is a pure play on the various Emirates and moreover “has managed to cement its position in the [UAE] market over the past two years, strongly pressuring  Etisalat’s operational and financial performance to its own benefit.  Operationally [it has] reached a 36% share of the mobile market and a 31% fixed-line market share only four years after its launch.”  Plus, room for growth remains ample: UAE population and mobile penetration rates should rise from 4.9m and 245% in 2010, for instance, to 5.6m and 301% respectively in the next five years per analysts, and du’s higher-than-average expected growth (2010-2012 earnings before royalty growth 28.5% versus regional -1.1%) make it best in class, per a spring research note.  In fairness, some observers wonder to what extent du’s high multiple is merely a product of artificial subsidy: it paid a 15 percent royalty fee to the government in 2010, while its rival, Etisalat , paid 50 percent of its annual net profit as royalties.  Analysts with EFG admit that “there is little clarity on whether the Ministry of Finance will soon inform du of the royalty charge starting in 2011 or not,”  and its sensitivity model indicates a fairly dramatic (~25%) increased intrinsic value per share if the royalty is cut even by as little as 10% this year.  Etisalat’s shares would theoretically have even more to gain, however, given its hitherto under-performance as well as the thesis that the government is priming it for its own royalty cut in advance of allowing  non-local ownership of shares which in and of itself should be a huge liquidity boon for an already attractive country and sector.

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