The Securities & Investment Company (SICO) has released an extensive report initiating coverage of Qatar Telecom (QTel), which is listed on the Doha Securities Market, Abu Dhabi Securities Market and Bahrain Stock Exchange, with a Buy rating.
The 31-page report aims to provide investors with a better understanding of the company and its future prospects against the backdrop of the region’s burgeoning telecommunications sector and impending market liberalization in Qatar. The report is part of SICO’s aims at providing investors with in-depth information and analysis of leading companies in the GCC to make better investment decisions.
The report, which has been distributed by SICO’s research department to its customers, includes highlights of the region’s telecommunications sector and QTel’s continued growth prospects.
SICO reaffirmed in the report that the telecommunication services sector in the GCC and wider MENA markets continues to witness unprecedented growth rates as a result of liberalization and increased competition. Furthermore, demand for services is also expected to continue unabated over the near - to longer term – benefiting QTel and other regional telecommunications providers.
Specific to QTel, the report underscored the company’s strong and highly profitable domestic operations, reinforced by its position as the monopoly operator in Qatar.
While QTel is set to lose its monopoly status, SICO forecasts strong growth prospects for the company, which it expects will post a healthy 23% compounded growth in earnings over 2005-08. In spite of anticipated domestic market competition, it is expected that QTel’s entrenched domestic franchise and progress of its regional subsidiary in Oman will continue to help drive growth.
Analysis of market liberalisation in Qatar and its impact on QTel as well as other key highlights of the report are as follows:
• It is expected that QTel will continue to enjoy its monopoly status in Qatar at least till the end of 2007. As the deregulation of the telecom sector is expected to happen in phases, the impact of competition will not be felt immediately, giving the incumbent time to defend its position. However SICO remain cautious about the longer term impact of liberalization on QTel.
• Royalty fees of 25% of profits were paid to the Qatar Government (GOQ) in 2005 significantly impacting QTel’s bottom line. With the onset of liberalization, SICO expect GOQ to revise downwards this royalty fee, thus improving margins and bottom line from 2008.
• QTel’s subsidiary in Oman, Nawras, has already gained a 25% market share by Jun’06 and broke even at EBITDA level in Q2-06. SICO expect the subsidiary to start contributing to the bottom line by 2007.
• QTel is currently trading at a P/E of 14.2 times its 2006E earnings, a premium of just 4% over its peers. The company’s strong cash flows, good growth opportunities in Oman and impressive margins warrant a higher premium to peers. In addition its P/E of 14.2x represents a 16% discount to Qatar’s forward market P/E of 16.9x. We believe QTel is a good proxy to capture the bullish structural and economic outlook of Qatar.
• SICO initiate coverage of QTel with a BUY recommendation and a fair value of QR 270.90 (an upside potential of 12%).
Securities & Investment Company is a securities house offering a selective range of investment banking services, including asset management, brokerage, market-making and corporate finance, on a regional basis and with a particular emphasis on Bahrain. SICO was incorporated in Bahrain in 1995 and holds an investment-banking license from the Central Bank of Bahrain.
SICO’s research and other information on its products and services is available at: www.sico-bahrain.com
