• Global values Batelco stock at BD0.837 and recommends ‘BUY’ on the stock
Global Investment House – Kuwait - Bahrain Telecommunications Company (Batelco) posted a double digit YoY net income growth rate of 13.6% increasing from BD89.3mn in 2006 to BD101.5mn in 2007. The company posted an EPS of BD0.085 in 2007 compared to BD0.074 in 2006. Batelco’s net profit declined by 2.8% at BD50.8mn in 1H08 compared to BD52.2mn in 1H07. The 1H08 results were impacted by a number of one-off adjustments which had a net negative impact of BD1.2mn. During 1H07, one-off adjustments had a net positive impact of BD4.7mn. The revenues were up by 17.7% from BD136.4mn in 1H07 to BD160.5mn in 1H08.
Batelco has adopted the right strategy of exploring and investing in low penetrated markets both in cellular and broadband space. Its aim to grow geographically into the MENA region with a goal to generate 70.0% of its revenues from international operations by the end of 2010 seems to be achievable given the success they have achieved so far in their investments.
At the current market price of BD0.705 per share (as at Aug 31, 2008), the stock trades at 9.8x and 9.2x of its earnings and 2.0x and 1.8x of its book value for FY2008E and FY2009E respectively. The estimated fair value for Batelco works out to BD0.837 per share which offers an upside of 18.7% on the market price of BD0.705 per share (as at Aug 31, 2008). Hence, we initiate on the stock with a “BUY” recommendation.
Financial Overview
Batelco’s revenues were up by 25.0% from BD234.4mn in 2006 to BD293.1mn in 2007. Net income posted a double digit YoY growth rate of 13.6% increasing from BD89.3mn in 2006 to BD101.5mn in 2007. The company posted an EPS of BD0.070 in 2007 compared to BD0.062 in 2006, up by 13.6%. Gross margin declined from 74.0% in 2006 to 70.7% in 2007. This was due to only a marginal growth in ARPUs in the Bahrain cellular services segment and loss of market share to the competitor MTC (Zain).
Batelco’s market share in the Bahrain cellular services market declined from 67.2% in 2006 to 59.9% in 2007. EBITDA margin also declined from 48.8% in 2006 to 45.0% in 2007 on the back of a higher SG&A expense ratio of 25.7% in 2007 as compared to 25.2% in 2006. Analysis of revenue composition in 2005 and 2007 indicates that geographic expansion plans of Batelco is yielding result as revenue from other regions has increased from 14.1% of total revenues in 2005 to 35.0% of revenues in 2007. We believe that Jordan cellular segment contributed to the majority of growth in the international segment.
We expect that the company should post a net profit of BD103.2mn in 2008 (EPS of BD0.072) and BD109.8mn in 2009 (EPS of BD0.076).
Financial Performance – 1H08
Batelco’s net profit declined by 2.8% at BD50.8mn in 1H08 compared to BD52.2mn in 1H07. The 1H08 results were impacted by a number of one-off adjustments which had a net negative impact of BD1.2mn. During 1H07, one-off adjustments had a net positive impact of BD4.7mn. The revenues were up by 17.7% from BD136.4mn in 1H07 to BD160.5mn in 1H08.
Growth was driven mainly by overseas operations which now represent 33.0% of Batelco’s revenues. The Group’s 96.0% owned subsidiary in Jordan, Umniah, has delivered significant YoY revenue growth of 59.0% buoyed by a 61.0% increase in the number of mobile subscribers, with a customer base now standing at 1.3mn. Sabafon, in which the Group holds a 26.9% equity investment, has delivered a 30.0% YoY growth in revenue with the mobile subscribers base increasing by 16.0%, for a total customer base of 1.9mn.
Strong revenue performance has also impacted Batelco’s cost base, particularly in network operating expenses. Payments to other telecom operators increased as a result of significant growth in international traffic minutes, particularly wholesale resulting in a drop in gross margin that declined from 72.9% in 1H07 to 68.3% in 1H08. Net margin declined from 38.3% in 1H07 compared to 31 of one-offs.
Jordan is a positively influencing investment with increasing revenue and profit contribution to the group revenues and margins. The group’s investment in SabaFon Yemen and Atheeb consortium is also expected to yield robust results in the high growth.7% in 1H08 as a result of negative impact cellular and broadband markets respectively in the long term.
In the home market in view of high level of cellular penetration and increased competition, we expect the revenue and profit contributions to diminish in long term. However, we expect that the company should do well on the back of its expansion plans.
