MEA telecoms offer select opportunities, GCC to fare better: Arqaam Capital

Tuesday, April 4, 2017

Growth opportunities in the telecom sector are now scarce and much more difficult to assess because of the entanglement of the voice and data cycles, where growth of the latter typically cannibalizes on the existing revenue stream from the first. Additionally, macro challenges and political risk across the Middle East and Africa footprint has weighed on the limited opportunities in the sector, according to a recent research report released by Arqaam Capital, the specialist emerging markets investment bank.

Arqaam’s comprehensive benchmarking analysis utilizing its unique in-house developed Market Opportunity Index (MOI) and Operator Positioning Index (OPI) shows, however, that GCC players will ride the data cycle easier than other operators in Africa and South Asia mainly due to the higher disposable income of these countries. Moreover, macro pressure has also helped in rationalizing competition in the GCC and pushed operators to introduce cost efficiency programs and manage CAPEX spending. Equally important, GCC governments have mostly already decided on taxation changes, with Kuwait as the only country that can still surprise.

“A deteriorating macro environment usually affects telcos in two negative ways. Firstly, telcos are generally seen as easy targets to extract taxation revenue, whether through royalties, corporate tax or telecom specific tax such as usage or SIM tax. Secondly, telecom revenue is sensitive to disposable income changes. In this sense, we believe that for the GCC the worst is behind us, with consumer spending already squeezed in 2016 and taxation changes addressed in most markets under coverage. Macro pressures have also led to cost efficiency initiatives, such as operators reducing their headcount or looking for ways to reduce CAPEX.” said Sarah Shabayek, Head of TMT Research at Arqaam Capital
“Findings of our thematic score aggregating MOI and OPI indicate that single-country GCC players fare better, including Ooredoo Oman, STC, Omantel and Vodafone Qatar.  GCC operators with multi-country exposure are weighed on by their subsidiaries in riskier markets. In Africa, Safaricom makes the top 10 rank in both MOI and OPI due to its market leadership position and growth prospects in Kenya.  Losers of the thematic score include operators with challenges in market positioning such as TE, Mobily, GTH and Zain KSA.” She added

Arqaam’s top pick in the sector is Ooredoo Group, which offers a balanced mixture of exposure to the stable less competitive Qatari market ranked number one on MOI as well as growth from other frontier and emerging markets. The company is a lagging on valuation compared to other blue chip telco names in the sector and its Free Cash Flow yield of 15-17% during 2017-2019 is expected to lead to further deleveraging as well as a hike in dividends.

The report expects SIM penetration to grow across the board driven by multi-SIMs with Africa and South Asia to boast above average subscriber growth. Mobile data growth will be dependent on Smartphone penetration in low income countries, but on successful pricing strategies in the GCC. Operators are likely to diversify away from the core telecom business, which takes the form of ICT investments in the GCC and mobile financial services in Africa and South Asia.

“We see Smartphone penetration as a key catalyst for higher levels of mobile data growth. As such, countries exhibiting lower Smartphone penetration are also those with lower income levels, as well as mobile broadband penetration rates. There is growth potential across Africa and MENA, excluding GCC, for higher mobile data penetration supported by improving Smartphone penetration. That said, in the GCC growth is more dependent on monetization efforts, where other supply-side factors including the availability of content and data pricing are more crucial to the potential of data growth.” She said

“We expect GCC operators to diversify away from the core business to boost growth as a result of lower growth than historical levels with the UAE, Qatar and Saudi Arabia as countries most poised to leverage the digital economy.   We believe there is potential from such diversification, yet return on investment is a key concern, especially as telecom operators would be competing with larger IT corporations in this venture, and margins would be almost half that of their core business.” Sarah Shabayek concluded.