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Du shares slip over raised royalty fee

Tuesday, Feb 07, 2012

Gulf News

Dubai Shares in du slumped the most in seven weeks yesterday after the company announced it was to pay an increased royalty fee to the UAE Government.

Du will pay 15 per cent of its full-year 2011 net profit as royalty along with a further 5 per cent of revenue, the company said in a statement to the Dubai Financial Market.

Etisalat is expected to pay a 50 per cent royalty fee in line with previous years.

“This news might be a step from the government to bridge the gap between royalty fees for the two operators,” said Hasan Sandila, a telecommunications analyst at IDC Middle East, Turkey and Africa.

Negative impact

Sandila says the Telecommunications Regulatory Authority last year contemplated cutting royalty charges for etisalat, which has paid significantly more than du in previous years. etisalat paid 50 per cent of its net profit as royalty charges in 2010 whereas du paid 15 per cent.

“Du’s royalty payments are expected to significantly increase to more than double and this will impact the bottom line results for 2011,” Sandila said.

“The increase in royalties will have a negative impact on du’s net income. However, there will be no significant impact on the balance sheet; it will only impact the income statement and statement of retained earnings,” he added.

Following du’s announcement, shares in the company fell 2.28 per cent to Dh3.

The company had a 2010 profit of Dh1.31 billion ($357 million) compared with Dh264 million a year earlier after royalty reductions.

Othman Sultan, du’s CEO, told reporters at an event in Abu Dhabi yesterday the company had always provisioned 50 per cent of its annual profit for royalty fees. However, he did not comment on the change in the royalty fee structure that effectively sees du being taxed on its revenues.

“The reason for the increase in royalty is to reflect the fact that du is growing and maturing into a financially successful company,” said Matthew Reed, a senior analyst at Informa Telecoms and Media.

“I am not quite sure why the UAE government has introduced this alternative form of royalty payment instead of increasing the amount of net profit paid by du,” he added.

Lobbying

Green says etisalat is still paying royalty at a rate of 50 per cent but has been negotiating and lobbying behind the scenes about a potential rate reduction. “Du is maturing and last year paid royalty at a much lower rate than etisalat, which is also likely to pay more in royalty this year even taking into account the added revenue component facing du,” he said.

“Etisalat found it quite difficult last year in the UAE; revenues were flat and profits were under pressure. It will be interesting to see whether etisalat has managed to recover growth and profitability in the local market,” he added.

By Kevin Scott?Staff Reporter

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