UAE telecom sector to keep growing

The UAE's telecom service providers Emirates Telecommunications Corporation (etisalat) and Emirates Integrated Telecommunications Company (du) will face the impact of falling population rate in the UAE, thus shrinking mobile phone subscriber base in 2009.

The result of the global crisis could lead to a fall in population growth in the UAE, which has been one of the key drivers for increased subscriber numbers over the past few years.

Al Mal Capital's research on the telecom sector projects the UAE population to ease by 4.2 per cent in 2009 and by 1.2 per cent in 2010 before resuming growth by 3.0 per cent in 2011.

The global downturn in oil prices, tourism and a cooling in the housing market has had an impact on the UAE, making 2009 a challenging year for both du and etisalat, the report said.

However, despite the credit crisis, fall in population and weak emerging market currencies, the report projects etisalat to continue to grow revenues and Ebitda, driven by internet and data revenue growth in the UAE and an increasing contribution from overseas subsidiaries. Du should continue to capture net mobile and increase ARPU (average revenue per user) through increased usage driven by promotional offers. Offering its fixed line service outside the "New Dubai" area should provide an additional boost to revenues.

KEY THEMES

The result of the economic slowdown should lead to a reduction in population growth for the UAE, which has been one of the key drivers for increased subscriber numbers over the last few years. With population easing, subscriber growth should come from multiple Sims from mobile broadband and from business visitors and tourism.

Net immigration is expected to be positive in Q1 2009 and population easing to occur from Q2 2009 onwards, resulting in net additions to the existing subscriber base of 523,000 for FY 2009. While this should affect revenues in Q2 2009, Al Mal Capital does not expect to see it impacting subscriber numbers until Q3 2009 due to the TRA's 90 day active rule for mobile subscribers.

The TRA will be expected to ensure that an all out price war does not breakout through regulation of promotions. Given the relatively low subscriber penetration for the internet, population easing is not expected to impact the growth of internet subscribers, although growth will be at a lower rate than that witnessed in 2008.

The report projects internet subscribers to grow 22 per cent in 2009 to reach 1.47 million subscribers, giving an internet subscriber penetration of 27 per cent.

Fixed-line penetration is projected to grow marginally due to fixed mobile substitution and population easing (that is as population eases and fixed-lines decline at a lower rate, penetration increases) to reach 30 per cent by 2009. However, in subscriber terms we project a marginal decline of 1.7 per cent to 1.61 million lines.

"Overall, while we expect 2009 to be challenging year for the UAE telecoms sector, we project sector revenues to grow, albeit at a lower rate, with sector revenues increasing seven per cent to Dh29.62 billion for 2009," the report said.

POTENTIAL CATALYSTS

A reduction in royalty rates for both operators, and opening up Etisalat to institutional and foreign ownership would provide strong catalysts for a re-rating.

However, etisalat has indicated that a reduction in royalty rates is not expected to occur in the near term.

While there has been talk of infrastructure sharing no details have been provided.

Should infrastructure sharing be allowed, this could take one of two forms:

- Operators retain ownership of infrastructure and maintenance, while allowing access to other operators for a regulated fee. This option would benefit du as it would not have to build out additional infrastructure, thus reducing capex spend, depreciation expense and leverage.

Etisalat would however be saddled with maintaining and enhancing existing infrastructure.

- Ownership of infrastructure is transferred to a third party, who would earn an economic return by charging a usage fee for the infrastructure, effectively turning both du and etisalat into MVNO (mobile virtual network operator)

The report favours the second option as being more equitable for both operators. Both options would also open up the possibility of allowing a third operator to enter the market. Analysts, however, does not expect a third operator to be licenced until the current economic crisis has passed.

MOBILE PENETRATION

With a total mobile subscriber base of 10.57 million for the UAE in 2008, and earlier estimations of population at 5.02 million, headline mobile penetration appears to have exceeded 210 per cent, which appears to be too good to be true.

Headline numbers are for total subscribers and not for active subscribers, who are defined by the TRA 90 day active rule. Taking active mobile subscriber numbers into account reduces mobile penetration rates.

While du discloses active mobile subscribers on a quarterly basis, etisalat does not. Etisalat has, however, given guidance that 90 per cent of its mobile customers are active. Based on a headline figure of 7.3 million mobile customers for etisalat, we estimate active customers of 6.56 million. Du, meanwhile, reported 2.498 million active mobile subscribers for year end 2008.

The estimated population was revised in 2008 to 5.6 million, giving a penetration of 162 per cent based on active mobile subscribers.

This estimate brings us more into line with etisalat and du, who estimate the 2008 UAE population to be 5.5 million and 5.8m respectively. This level of penetration is still one of the highest in the world and is mainly because of business visitors and tourists using local SIMs, multiple SIMs used by local population, high local cross border traffic and growth in mobile broadband.

Etisalat riding the wave

Etisalat's operations have continued to perform well in 2008, and it has acquired an impressive set of overseas assets in 18 countries.

The company generates strong cash flow, has increased its dividends and has a strong balance sheet (it is net cash positive), illustrating its ability to continue to invest and grow its businesses.

Competition in its home market is relatively benign and the UAE should continue to be a cash cow for etisalat.

The footprint of etisalat's operations covers more than two billion people, with an estimated mobile phone penetration of 39 per cent for 2008, showing there is ample opportunity for topline growth, which should flow through to the bottom line.

The overseas operations should continue to be the growth engine for the company, as UAE subscriber growth eases in 2009.

CHALLENGES AND OPPORTUNITIES

Etisalat will face its fair share of challenges in 2009, brought about by the global financial crisis and its impact on both the UAE and international operations.

In terms of the UAE, the main challenge will be the impact of population easing and its impact on revenues generated by etisalat UAE's key segment of mobile phones. Revenues from overseas operation are expected to suffer from the effects of weak emerging currencies, while income from associates will be impacted by the start up costs of new operations, namely India and Iran.

Despite these challenges, Al Mal projects etisalat's total revenues to increase by 9.7 per cent to Dh28.64 billion. Net profits are projected at Dh8.53bn, a decline of 1.9 per cent year-on-year. However, 2008 results included a one-off capital gain from etisalat's stake sale in Mobily which generated a gain of Dh1.78bn.

Excluding this capital gain from 2008 results means net profits should increase by 24 per cent in 2009. Etisalat believes that 2009 will be a challenging year for it's UAE operations, however, it forecasts growth, driven mainly by data and internet revenues, despite the impact of the credit crunch. Etisalat estimated that there are two million smart phones in the UAE and it currently has 70,000 mobile broadband subscribers, indicating substantial growth prospects for mobile data.

The company has been pleasantly surprised by results for the first two months of 2009, with revenues up 14 per cent compared to the same period last year. Of UAE revenues, 36 per cent are from international outgoing calls and seven per cent are roaming revenues. It has noticed a drop in roaming revenues as people travel less due to the credit crisis.

Etisalat's UAE revenues are projected to grow by four per cent in 2009, driven by data and internet revenues. We project active mobile subscribers to grow by 280,000 versus an increase of 821,000 in 2008. Population easing, lower tourist and business visitors should result in ARPUs being driven down by 10 per cent, resulting in total UAE mobile revenues of Dh13.87bn for the year, a decline of three per cent compared to 2008.

Population easing and fixed mobile substitution are expected to result in a loss of 118,000 fixed lines and a decline in fixed line revenue by eight per cent to Dh2.81bn.

IPHONE

Etisalat launched the iPhone with special voice and data packages, for both prepaid and postpaid customers in February 2009 in UAE and Saudi Arabia.

It is expected that etisalat would cut rates on the iPhone packages during the course of the year. Etisalat should benefit from reduced churn, attract new high ARPU customers and increased data revenues, if the phone can only be sold through etisalat. The current batch of iPhones is not locked to etisalat's network.

Transformative year for Du

From a loss making start up to achieving net profits for the first time, 2008 has been a year of firsts – all in all a transformative year for du.

Quarterly results have consistently surprised on the upside.

More importantly this translated into strong growth in subscribers, revenue and capturing market share from the former incumbent, etisalat.

Du's 2008 revenues grew to Dh3.95 billion (157 per cent year-on-year), resulting in maiden net profits of Dh4.1million.

Increasing mobile phone and fixed-line subscribers resulted in revenue growth of 157 per cent compared to 2007, driven mainly by mobile phone revenue growth of 207 per cent.

During the year du increased its active mobile subscriber base by over 104 per cent to 2.498 million.

Fixed-line subscribers grew by 72 per cent in 2008 to 280,000 by the year end. du includes fixed telephony, broadband internet, TV and call select customer in its fixed-line subscriber numbers.

Investment in it network continued during the year with an investment of Dh 1.9 billion, (48 per cent of sales), with investment in new base stations to expand coverage and capacity resulting in du's 2.5G network covering 94 per cent of the UAE, while the 3G network covers close to 50 per cent of the population.

A CHALLENGING YEAR

Du's total revenues is projected to grow by 24.2 per cent in 2009 to Dh 4.91bn, driven by increased contributions from all business segments. Lack of geographic diversification will force du to concentrate on the UAE.

The report estimates that economic downturn resulting in a more modest increase of six per cent in active mobile subscriber to 2.7 million (versus 104 per cent in 2008). This should result in an active subscriber market share of 28 per cent, an increase of 156,850 subscribers for 2009. Business visitors and tourist subscriptions should contribute to this increase but its assumed that it will have lower usage and the numbers of visitors will be lower than in 2008, due to the credit crunch.

Overall for 2009 du is expected to capture 40 per cent of net adds, down from 66 per cent in 2008.

This lower growth rate for mobile subscribers should be offset by increasing ARPUs estimated at Dh103 resulting in mobile phone revenue growing year-on-year by 25 per cent to Dh3.29bn.

With a projected ARPU of Dh103, du mobile phone customers would still be spending less than those of etisalat, by virtue of it being a value player and etisalat having captured higher spending customers, when it was the former incumbent.

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