|27 August, 2019

Dialing the future: Road ahead for telecom firms in UAE and Saudi Arabia

The sector is the second largest in terms of market capitalisation on the Dubai and Abu Dhabi stock markets and is the third largest on the Saudi market

Image used for illustrative purposes. The telecom sector is the second largest in terms of market capitalisation on the Dubai and Abu Dhabi stock markets and is the third largest on the Saudi market.

Image used for illustrative purposes. The telecom sector is the second largest in terms of market capitalisation on the Dubai and Abu Dhabi stock markets and is the third largest on the Saudi market.

Getty Images/ Jasmin Merdan

A mature telecom sector in the UAE and Saudi Arabia faces different challenges and growth opportunities in both countries.

A slowdown in the UAE markets has weighed on telecoms, but analysts told Zawya that they are optimistic about the second half of 2019, as the government increases spending ahead of Expo 2020.

In the Kingdom, market saturation could dent growth, but government initiatives and a decline in the number of expats leaving the country are positives for the sector.

The sector is the second largest in terms of market capitalisation on the Dubai and Abu Dhabi stock markets and is the third largest on the Saudi market.

Earlier in August, the UAE has been ranked first in the Arab region in Government Electronic and Mobile Services (GEMS) Maturity Index, according to a report issued by the United Nations Economic and Social Commission for Western Asia (ESCWA). (Read more here).

Here we take a look at how the leading telecoms in the UAE and Saudi Arabia performed in the last two quarters and the pointers that could prompt growth for the rest of the year.

UAE

Du and Etisalat are the two listed telecom companies in the UAE. A slowdown in the economy has affected the performance of both the companies.

“The local market has been very challenging due to a slowdown in the economy and a telecom sector that is already matured, seeing population growth and high demand drivers in the last couple of years,” Omar Maher, vice president of equity research at EFG Hermes told Zawya during a phone interview.

“However, in the past 6 months demand has been slowing,” he added.

Dubai’s Du posted a 5.4 percent drop in net profit after Royalty payments for the first half (H1) of 2019. The company’s revenue fell 5.3 percent during the period.

Abu Dhabi-based Etisalat, the UAE’s biggest telecom operator, posted a 3.1 percent increase in consolidated net profit for H1 2019 and a 1.27 percent drop in revenue.

“Du has been more affected than Etisalat. Etisalat managed to protect its subscriber base better and has been more proactive on the commercial side in the last couple of years,” Maher said.

Etisalat Group’s subscriber base reached 143 million at the end of June 2019, a year-on-year (y-o-y) increase of 2 percent compared to H1 2018.

Du’s mobile subscriber base dropped 8.9 percent to 7.22 million at the end of June 2019, compared to 7.92 million at the end of H1 2018. The company’s fixed line subscribers reached 773 thousands at the end of H1 2019, a 2.38 percent increase from H1 2018’s subscribers number.

“Etisalat has core operations in the UAE, Morocco, Egypt, Pakistan and KSA. Performance in Egypt has been better and Maroc Telecom (owned by Etisalat) as a group has done much better in the past six months. Also Saudi Mobily (owned by Etisalat) is doing much better due to a recovery in demand in Saudi Arabia as well as support from the regulator and the government,” Maher noted.

“We might see an uptick for both UAE telecom players in the second half of 2019 because of the additional spending by the government ahead of the expo 2020,” he ended.

Saudi Arabia

Saudi Telecom Company (STC), Etihad Etisalat Company (Mobily), Mobile Telecommunications Company Saudi Arabia (Zain) and Etihad Atheeb Telecom constitute the telecom sector on Tadawul, with a total market capitalisation of 12.34 percent in the index.

Al Rajhi Capital that tracks telecoms in the kingdom said market saturation and pricing regulations could dent growth going forward.

“Sector growth may be unlikely to revise upwards because of already high penetration and firm regulatory control over prices,” Pritish Devassy, head of equity research at Al Rajhi Capital told Zawya in an email statement

“Impact of reversal of royalty fee, IFRS 16 impact and high top-line y-o-y growth were the key notables in H1 2019 results,” he added.

At the end of 2018, Zain, STC and Mobily reached an agreement with the Kingdom’s ministries of finance, communications and communication and information technology to reduce the annual royalty fee that each company pays to 10 percent, from 15 percent, retrospectively from January 2018.

The trio also reached a deal with the government to settle all old disputes in connection to royalties up to the end of 2017.

“All the companies reported healthy top-line growth rates coming from a low base with STC up 8.4 percent y-o-y as compared to Mobily’s 13.0 percent and Zain’s 24.2 percent,” Devassy said.

“While the new calculation for royalty fees was expected to deliver a negative set of results for Mobily and a positive set for Zain, it was the other way round with better than expected results for Mobily and a lower gross margin for Zain KSA,” he added.

Zain reported a net profit after zakat and tax of 260 million Saudi Riyals for H1 2019, while Mobily recorded a net profit of 105.02 million riyals for the period and STC saw a net profit of 5,598 million riyals for H1 2019.

According to Al Rajhi’s Devassy, the key drivers for the sector continue to be data pricing and promotional offers.

“Pricing is tightly controlled by the regulator and hence a material increase is not easy in our view,” he said.

“On the positive side of things, rate of decline in expats could decline as already a large chunk of expats have left. Lifting of ban on Voice over Internet Protocol (VoIP), being in existence for more than one and half year could also lower the cannibalization on an annual basis especially now as data contributes to a large part of earnings for companies,” Devassy added.

(Writing by Gerard Aoun, editing by Seban Scaria)

(Gerard.aoun@refinitiv.com)

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© ZAWYA 2019

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