GCC Telecoms Q113 Results Underscore BMI Views
The biggest telecoms service providers in the GCC announced mixed financial results for the first quarter of 2013. While external factors materially affected the performance of some operators, the results largely support our view of new revenue growth and efficiency improvement strategies amid increasing market saturation in the region.
We consider the performances of the seven biggest GCC-based telecoms service providers. These are Batelco (Bahrain), Zain (Kuwait), Omantel (Oman), Ooredoo (Qatar), STC (KSA), du (UAE) and Etisalat (UAE). Five of the operators reported posit ive revenue growth in Q113 , with only Zain and Batelco reporting revenue declines in that quarter compared to the same period in 2012 . However, our analysis also focus es on the operators' bottom - line figures, almost a reverse of the top - line figure with only three of the operators reporting a year-on-year (y-o-y) increase in net profit in Q113.
|Du Leads, STC Lags|
|Q113 Revenue And Profit Growth (%)|
Du was the best performer in Q113, with a 10.7% y-o-y increase in revenue and 40.5% y-o-y increase in net profit. The company's continued outperformance is based on two key factors: the strength of the UAE economy and its aggressive service diversification as well as efficiency improvement strategy. Du announced a new strategy in January 2013, which, among other aims, intends to streamline its operations ( see our online service, January 23 2013, 'Du Goes Lean To Boost Earnings' ). BMI believes d u's new strategy puts in a strong position to perform well in the future. However, we caution that the company's footprint , which only extends to its domestic market , makes it susceptible to the economic fortunes of th e coun try , especially as the business sector, which usually suffers most during an economic downturn, now accounts for an increasing proportion of its consolidated revenues.
Ooredoo and Etisalat were the other two strong performers, with y-o-y net profit increases of 13.6% and 2% respectively. Ooredoo's net profit was boosted by a 5% y-o-y increase in revenues, driven by usage growth in its domestic market and subscriptions growth in key international markets, including Algeria, Indonesia and Iraq. For its part, Etisalat's net profit was less reflective of its impressi ve revenue growth of 17% y-o-y, although the company will be encouraged by a positive growth in net profit after reporting declining profits for eight of the previous 12 quarters. Etisalat's bottom line is greatly influenced by weak margins in some of its international operations , plagued by slow revenue growth and high operating expenses.
The remaining four operators reported declining profits in Q113 relative to their Q112 result. STC reported the sharpest decline at 38.5% y-o-y, despite a respectable revenue increase of 3.6% y-o-y for the same period. Although STC attributes its weak bottom line to an impairment of SAR500mn (US$133mn) related to its India operations, we believe the results also demonstrate the company's huge cost outlay , which it needs to trim to guarantee future growth.
Zain and Batelco also reported declining profits in double digits in Q113, at 27% y-o-y and 17% y-o-y respectively. Zain's performance in recent quarters has been affected by currency fluctuations and a harsh fiscal and operating environment in Sudan, an example of the influence of macro factors on t he telecoms sector. In addition to weak results from Sudan, Zain's bottom line was also affected by the consolidation of the results from its loss-making Saudi unit following its increase stake in Zain KSA from 25% to 37%. For its part, Batelco attributed the decline in its net profit to increased competitive pressure in its domestic market, a situation driving its international expansion strategy.
Omantel reported a mixed result in Q113, with revenue rising by 3.1% y-o-y but net profit falling by 2.5% during the same period. Omantel's bottom line w as affected by an increase in maintenance and depreciation expenses following the expansion of its 3.5G and 4G LTE networks. A large proportion of Omantel's revenue is generated from its domestic market, a situation we expect to constrain growth amid market saturation and growing competition from new entrants.
Although the companies' Q113 results could be an indicator for their overall performance in FY13 , BMI notes that some developments in the latter part of the year could change the outlook for some operators . One confirmed development is Batelco's consolidation of the 10 telecoms operations it acquired from Cable & Wireless Communications (CWC) in early 2013. We expect this to boost Batelco's revenue figures in the future. For the full year ended March 2012, CWC's Monaco & Islands division, now acquired by Batelco, generated consolidated revenue of UA$586mn.
Oored o o and Etisalat are bidding for Vivendi 's 53% stake in Moroccan incumbent Maroc Telecom ( see 'Etisalat And O oredoo Vie For Stake In Maroc Telecom', April 25 ). The winner is expected to emerge before the end of the year and could see a major boost to its financial indicators from the consolidation of Maroc Telecoms assets, despite increasing downward pressure on the operator's revenue due to weak consumer spending in Morocco. Maroc Telecom reported consolidated revenue of US$3.6bn in FY12, down 3.2% y-o-y as growth in its international operations failed to offset a 7.4% y-o-y decline in domestic sales.
The other operators have announced aggressive revenue growth strategies for the remainder of 2013 and beyond. Most of these will focus on deploying higher value data-centric services, leveraging off their investments in next generation fixed and mobile networks. However, we caution that a combination of slow subscriptions growth due to market saturation, intense competition in some markets and rising input costs will continue to put pressure on their bottom line figures. This scenario strengthens our view that continuous innovation by the operators and their technical partners will improve operational efficiencies , as well as the prospect for further consolidation in the G CC telecoms market .