EUR 158.85 For Business Accounts Only

Omani telecoms | Cheap valuations, limited downside; Favour ORDS

Undemanding valuations, despite challenges. Omani telecoms trade on a 2019e EV/(EBITDA-capex) of 8.5x. This compares to the regional peers’ average multiple of 11.5x and Saudi peers’ 18.0x. We initiate coverage on Omani telecoms with an Overweight call On Ooredoo Oman (ORDS), with 30% upside and a TP of OMR0.65/share, and a Neutral call on Omantel (OTEL), with 11% upside and a TP of OMR0.68/share. We do not see much of a downside from current levels, despite the: i) tough macroeconomic conditions in Oman (declining GDP per capita and telecom spending), ii) relatively high penetration levels (140% for mobile voice, 89% for mobile BB), and iii) potential entry of a third MNO in the Omani mobile market in 2H20.

Prefer Omani telecoms over Saudi. While we see the Saudi market growing at a higher CAGR of 2.7% over our forecast horizon vs. Oman’s 0.7%, we prefer Omani telecoms. This comes on: i) higher profitability, given the average EBITDA margin of 39% for Omani companies vs. 36% for Saudi, ii) Omani stocks’ cheapness relative to Saudi (adjusted for growth), and iii) the stronger balance sheet for ORDS and OTEL (excl. Zain)  vs. Saudi companies.

ORDS: Solid BS, high div. yield; OTEL: Zain a drag on cash flow. We favour ORDS, as it offers exposure to a: i) healthier balance sheet and cash flow generation, ii) high and stable dividend yield of 8-9% over 2019-21e (vs. 5% for OTEL and regional peers), and iii) higher 2018-20e EBITDA CAGR of 0.9% compared to a 2.6% drop for OTEL (excl. Zain), mainly following Friendi’s (one of the MVNOs in Oman) migration to roam on ORDS’ network from OTEL’s, starting May-19. For OTEL, we view the acquisition of Zain Group as a key overhang to the stock’s rerating, given the excessive pricing and high leverage attached to the deal (2017 EV/EBITDA of 9.3x, on our calculations), and slow progress of realising synergies from the transaction.

Potential third MNO to weigh down on the sector, priced in. The TRA intends to grant a third MNO licence. Our base case assumptions account for the third operator in 2H20. We expect the third MNO to potentially focus on mobile BB, reaching a revenue share of 11% by 2023, based on other third entrants in the region, adjusted for Oman’s current penetration. The competition on data would further lower the 2018-23e CAGR for data spending per addressable person to -2.0% vs. -1.1% (assuming the status quo). This should lower OTEL’S (excl. Zain) EBITDA margin to 37.2% by 2021e vs. 38.2% in 2018, while ORDS will maintain its EBITDA margin at 40.6%, due to new revenue from the MVNO. Scrapping the plan for the third licence is a key upside to our valuations (+23% on average).