Global Investment House – Kuwait -Oman Telecommunication Company (OTEL)’s net income has increased by 5.9% from RO112.6mn in 2007 to reach RO119.2mn in 2008. EPS increased from RO0.149 in 2007 to reach RO0.158 in 2008.
Total revenues grew by 12.6% from RO365.3mn in 2007 to reach RO411.5mn in 2008. The highest profit generator for OTEL was the mobile segment, which constituted 58.5% (RO240mn) of the total revenue. The second largest revenue source was the fixe-line which decreased by 9.6% because of the decline in ARPU. Internet segment witnessed 30% increase from RO25.6mn in 2007 to reach RO33.3mn in 2008.
Chart 01: Distribution of Revenues by Type
Source: Global Research & Company’s Reports
Profitability measures showed stability in the company for the last few years. 2008 performance was close to the three-year average with net profit margin recording 28.8%, ROA registering 20.2%, and ROE reaching 31.9%.
Assets grew significantly by 20.9% from RO488.6mn in 2007 to RO590.7mn in 2008. The increase in assets was led by the increase in investments in associates resulted from OTEL’s acquisition of 56.8% of Worldcall Telecom Limited, financed by a syndicated loan (US$205) provided by 15 regional and local banks. However, the company took heavy charges against its investment in the Pakistani Telecom company, Worldcall. OTEL recognized an impairment charge of RO18.9mn in 2008.
Competition will increase in the mobile and fixed-line because of the commencing of operations for two new players, Friendi and Renna, in the mobile segment, and awarding a second license in the fixed-line segment to Nawras. These events will adversely affect the growth in revenues for OTEL in these segments. In contrast, OTEL will continue enjoying lucrative double digits growth in the internet segment, given the low penetration rate in this sector and introduction of 3.5G technology into the market.
The award of the second fixed-line license to Narwas ended the monopoly that OTEL enjoyed for many years. The entrance of a second fixed-line operator will intensify competition, and prices will go down. Currently, the penetration rate for fixed-line is about 10%, and it is expected to increase marginally because of the price decrease that is anticipated from competition. The expected consequences on OTEL will be reflected in lower revenues from the fixed-line segment over the coming years. Besides, the fixed-line segment is on competition mobile segment which became a suitable substitute with low costs.
Based on the current market price of RO1.265 per share (as on June 11, 2009), OTEL is trading at a 2009E P/E and P/BV multiple of 8.5x and 2.4x respectively. Our estimated value for OTEL scrip is worked out to be RO1.755 per share. According to our fair value the company scrip offers an upside of 38.7% on the closing price of RO1.265 per share; we therefore reiterate our “BUY” recommendation on the scrip.
