Fitch expects Mideast telecoms 2012 revenue from flat to negative

Fitch Ratings says maturing market penetration rates aligned with increased competition will offset strong economic fundamentals due to high oil prices, population growth and higher wages for state employees. Fitch therefore expects at best a stabilisation of overall revenues in Middle East telecoms.

However, Fitch still sees the possibility of some revenue contraction in 2012 as data revenue and the new driver of growth, mobile broadband fail to offset the fundamental decline in voice revenue. Pressure on average revenue per user (ARPU) levels due to a saturated voice market that still remains the major contributor to overall revenues could be highlighted as the main mid-term trend.

"Although the heightened level of competition is leading to lower operating margins for most Middle Eastern telecoms, Fitch believes that the credit outlook for the top-four telecoms is stable due to strong credit metrics and positive free cash flow (FCF) generation capability" said Bulent Akgul, Director in Fitch's EMEA Telecommunications, Media and Technology team.

"Regulatory risk still remains benign due to the state's involvement in major telecom operators and disruptive technologies are mostly being kept at bay at the moment," added Mr Akgul.

Mobile data traffic growth will continue to grow at double-digit rates in 2012 but this will only partially offset some of the competitive pressure on ARPU's and margins.. Furthermore, mobile data packages will have to become more affordable for the predominantly prepaid subscription base that has been under significant pricing competition. Some prominent mobile operators would also like to rely on the convergence of the telecom, media and financial services, but Fitch believes this is merely a long-term prospect.

The agency still expects high single digit growth in selected markets such as the politically unstable Iraq and Yemen as well as the mobile segment for the North African market due to its under-penetrated nature and under-investment in the fixed-line sector. However, new untapped subscriber growth is being gained at the expense of cheaper service offerings, as profit margins and ARPUs fall.

The main motivations for buyouts and expected consolidation are limited growth prospects in most of the bigger markets and falling EBITDA margins that will come under further pressure due to mostly increased competition. The leading players in the sector are also largely cash rich, and as the global economic environment shows signs of slower growth, Fitch believes that the pressure to use this cash for M&As may build again.

However, due to the region's sensitive internal balances, there are still political and regulatory hurdles to be cleared before the number of operators in the region is reduced to a handful in the next three years.

Certain markets such as Kuwait, Qatar, and Bahrain remain highly competitive while Saudi Arabia and the UAE may become even more competitive due to the maturity of these markets.

Although significant price competition is still not expected in the short-term due to strong economic fundamentals, the main risk may be mobile number portability, which is yet to be implemented in major markets other than Saudi Arabia and now Bahrain. Regulatory risk remains low in the short term due to the state ownership of major operators.

Incumbent sector leverage and liquidity profiles are expected to remain relatively low and healthy respectively versus west European peers. The leverage metrics for leading operators are expected to edge higher in 2012 due to new acquisitions and investments. However, Fitch does not expect any significant pressure on most operators' credit profile and cash-flow generation.

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