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MENA telecoms | Favour TE as our top pick; Initiate on VIVA with Overweight and Zain Group with Underweight

Focus to shift to 5G and digital transformation in the GCC; Room for growth in Egypt, Iraq, and Sudan. With mobile penetration stabilising in our GCC coverage and Jordan at 135%, we see limited growth potential. Consequently, more focus is diverted towards enterprise, digital transformation, IoT, and 5G services (6.0% of revenue, on average, by 2024e, with a 2019-24e revenue CAGR of 167%). Operators in these markets are considering other options of monetising idle assets and selling their tower portfolios, as with Zain in Kuwait and Saudi. In Egypt, Iraq, and Sudan, there is room for growth in mobile broadband (2019-24e revenue CAGR of 8.9%), but political and currency instability raises concerns in the latter two markets.

TE our top pick. TE is our preferred stock within our MENA telecoms coverage, on: i) offering the highest upside of 47%, ii) low valuation, trading on a 2020e EV/EBITDA of 1.9x, excluding VFE, at a 65% discount to peers’ average, iii) solid and visible growth, with an adjusted 2019-21e EBITDA CAGR of 15%, on fixed BB growth, iv) c45% exposure to VFE, with a 2019-24e mobile market CAGR of 6.4%), and v) upside risk, as we value VFE, 73% of valuation, at a discount to peers. TE’s main watch factor, in our view, is the higher cash flow needs in 2020e, due to the expected high capex to revenue of 30% and settlement of a USD200mn facility starting 2H20, potentially growing the company’s debt.

Initiate on VIVA with Overweight. We value VIVA Kuwait on an adjusted 2020e EV/EBITDA of 4.8x, 12% lower than the peer average, to account for the stock’s illiquidity. Our valuation is based on a 2019-21e EBITDA CAGR of 3.2%, despite the introduction of new MVNOs, on the recent Qualitynet acquisition, due to offering new services and cost savings arising from synergies. We hold our views on the Omani telecom stocks, valuing both at an average discount to peers of 24%, due to the lack of catalysts and illiquidity.

Initiate on Zain Group with Underweight, same as Saudi stocks. Zain Group trades at a premium of 29% to peers, on an adjusted 2020e EV/EBITDA of 7.1x. This is unwarranted, in our view, even with the MSCI inclusion increasing inflows (8.9% of index), given: i) political and security concerns in Iraq and Sudan (28% of valuation), ii) the addition of new MVNOs in Kuwait, iii) renewing the licence in Iraq for USD220mn, and v) the capital restructure of Zain KSA. We downgrade STC to Underweight, which trades on an adjusted 2020e EV/EBITDA of 8.3x vs. peers’ average of 5.5x. This is unjustified, in our view, given the company’s below average 2019-21e EBITDA CAGR of 3.0%.