Sector. Global Research GCC. GCC Telecom Sector. Ringing all the way...

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1 Global Research Sector GCC GCC Telecom Sector Ringing all the way... August 2008

2 KSCC Sharq, Global Tower P.O. Box Safat Kuwait Tel: (965) Fax: (965) stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB Omar M. El-Quqa, CFA Executive Vice President Phone No:(965) Faisal Hasan, CFA Head of Research Phone No:(965) Chandresh Bhatt Assistant Vice President Phone No:(965) Abeer Gouda Senior Financial Analyst Phone No:(965) Vinod Shenoy Financial Analyst Phone No:(965)

3 Table of Contents Investment Summary World Telecom Sector Overview GCC Telecom Sector Overview Fixed Line Services Cellular Services Broadband Services Country-wise Telecom Profile in GCC Kuwait Qatar Saudi Arabia UAE Oman Bahrain Player Profiles Mobile Telecommunications Company (Zain) National Mobile Telecommunications Company (Wataniya) Saudi Telecom (STC) Etihad Etisalat Company (Mobily) Emirates Telecommunications Corporation (Etisalat) Qatar Telecom (Qtel) Bahrain Telecommunications Company (Batelco) Oman Telecommunications Company (OTEL)

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5 Investment Summary In the recent years the GCC telecom players are on an expansion spree following measures from Saudi Arabia, Bahrain, Oman, and UAE to allow additional service providers in the respective countries. This should result in inducing higher competition and further drop in ARPUs in the region and resultant contracting profitability of the players. The service providers should aim to increase their market shares by providing differentiated value added services and providing content based services (like mobile video streaming) to enhance the ARPUs. The GCC region registered a decline of 6.9% in fixed line subscribers from 5.8mn subscribers in 2006 to 5.4mn subscribers in 2007 on account of increasing shift of customer base to the more convenient mobile voice services. Increasing disposable income and convenience of use is encouraging the cellular penetration in the region. Other important contributing factor to the increased cellular penetration is the relaxation in telecom regulations allowing second or third player in each country apart from the incumbent local carriers (usually the first state run telco service provider in each country). The GCC region registered a 5 year ( ) growth in cellular subscribers at a CAGR of 37.6 %. The MENA region has seen the highest worldwide 5 year ( ) growth in cellular subscribers at a CAGR of 52.9% against the worldwide increase of 23.3%. With the country wise cellular markets reaching or crossing the 100% penetration levels within the GCC region, all the six member countries registered double digits CAGR during the 5 year ( ) period. In 2007, Asia and MENA region were the major growth contributors with YoY growth rates of 36.8% and 33.9% respectively. UAE topped the list of high growth contribution with a YoY growth rate of 34.6% with its internet user base increasing from 1.7mn in 2006 to 2.3mn in The next highest contributor was Saudi Arabia that reported a 31.9% YoY increase in the internet users base from 4.7mn in 2006 to 6.2mn in The high proportion of youth in the demographics, with 55% to 65% of the total population under the age of 30 years is driving the internet usage in the GCC region. The higher rate of internet penetration and improved infrastructure services in terms of shift from Dial up to cable is helping increase the broadband subscriber base in the GCC region. The analysis of 5 year ( ) CAGR in broadband subscribers worldwide indicates that the GCC region is amongst the top three growth regions in the world. The worldwide broadband subscriber base increased at a 5 year ( ) CAGR of 38.9%. Companies under coverage As a part of the GCC Telecom coverage we are covering Qatar Telecom (Qtel), Mobile Telecommunications Company (Zain), National Mobile Telecommunications Company (Wataniya), Saudi Telecom (STC), Etihad Etisalat Company (Mobily), Emirates Telecommunications Corporation (Etisalat), Oman Telecommunications Company (OTEL) and Bahrain Telecommunications Company (Batelco) in this report. August 2008 GCC Telecom Sector 1

6 Mobile Telecommunications Company (Zain) was established in 1983 in Kuwait as the region s first mobile operator. Since 2003, it has grown significantly becoming the 4th largest telecommunications company in the world in terms of geographic presence with a footprint in 22 countries spread across the Middle East and Africa providing mobile voice and data services to over 50.74mn active customers (as at 30 June 2008). In August 2008 the company is raising its equity capital through rights issue. The company s paid up capital will be increased by 75% through rights. We have used Sum-Of-The-Parts (SOTP) valuation method for company s operations in different countries. Based on consolidation of the individual country operations, our SOTP valuation estimates the fair value of Zain s stock at KD1.77, which is 2.7% higher than the current market price of the stock of KD1.72 per share (as at Aug. 31, 2008). We, therefore, reiterate our HOLD recommendation on the stock. National Mobile Telecommunications Company (Wataniya) has grown rapidly through acquisitions in the MENA region and Asia. Apart from Kuwait, the company has operations in Maldives (100% stake), Saudi Arabia (55.61% stake), Tunisia (50% stake), Algeria (71% stake) and in 2007 it got a license to launch second mobile services in Palestine (57% stake). In March 2007, Qatar Telecom (Qtel) acquired 51% of Wataniya Telecom shares from Kuwait Projects Company Holding KSC (KIPCO) group for a total cash consideration of US$3.8bn. We have used Sum-Of-The-Parts (SOTP) valuation method for company s operations in different countries. Based on consolidation of the individual country operations, our SOTP valuation estimates the fair value of Wataniya s stock at KD2.58, which is 38.6% higher than the current market price of KD1.86 (as at Aug. 31, 2008). We, therefore, revise our recommendation on the stock from HOLD to BUY. Saudi Telecom (STC), was the sole provider of telecommunication services in Saudi Arabia until its monopoly in the mobile market ended when the second mobile license was granted in 2004 to Etihad Etisalat Company (Mobily). In March 2007, a consortium led by Zain of Kuwait won the third mobile, and launched its services in In April 2007, three fixed line licenses were granted in Saudi, ending STC s monopoly over fixed lines. As a result of increasing competition, the company started expanding outside its home market beginning with the Maxis deal which gave STC foothold in Malaysia, India, and Indonesia, Later, STC won the bid for a 26% stake in Kuwait s third mobile service operator. Finally, STC acquired a 35% stake in Oger Telecom, which gave STC presence in Turkey and South Africa. We expect STC s revenues to grow by a CAGR of 9.2% during our forecast period ( ). Our DCF valuation estimates the fair value of STC s stock at SR78.75, which is 21.6% higher than the current market price of the stock. We therefore reiterate our BUY recommendation for STC. Etihad Etisalat Company (Mobily), is Saudi s second mobile operator. Mobily launched its services in May Within three years of operations, the company managed to grab a market share of 41% by the end of 2007, with 11.1mn subscribers. Mobily has been targeting the data and internet segment aggressively. In 2007, the company acquired a 99.9% stake of the local data provider Bayanat Al-Oula, and set up Mobily InfoTech, a fully owned subsidiary in India, which will provide information technology and consulting services. In addition, Mobily got the approval to acquire 96% of Zagel International Communication Network Company which is specialized in providing internet services in Saudi Arabia. We believe that Mobily s latest acquisitions will strengthen its position 2 GCC Telecom Sector August 2008

7 in the wireless broadband internet segment. Our DCF valuation estimates the fair value of Mobily s stock at SR68.84, which is 49.6% higher than the current market price of the stock. We therefore reiterate our BUY recommendation for Mobily. Emirates Telecommunications Corporation (Etisalat) was the sole provider of telecommunication in the UAE until its monopoly was broken when Emirates Integrated Telecommunications Company (EITC) know as DU won the second license for fixed line, mobile, and internet services in The group is present in 15 countries in Africa and Asia. We expect the share of international operations of the group s top line results to increase from 6% in 2007 to 11% in We have used Sum-Of-The Parts (SOTP) valuation method for the company s operations in different countries. Based on the consolidation of the individual company operations, our SOTP valuation estimates the fair value of Etisalat s stock at AED27, which is 50% higher than the current market price of the stock. We therefore initiate our coverage for Etisalat with a BUY recommendation. Qatar Telecom (Qtel) provides domestic and international telecommunication services in Qatar and wireless telecommunication services in the Asia and MENA region through its subsidiaries. The year 2007 was a transformative one for Qtel characterized by many partnerships and acquisitions in the MENA and Asia regions. These activities have broadened Qtel s geographic presence to 16 countries ( countries) with the ability to reach over 560mn people. In 2007, the Qtel group s subscriber base has grown from 1.72mn in 2006 to over 16mn an increase of over 850%. In March 2007, Qatar Telecom (Qtel) acquired 51% of Wataniya Telecom shares from Kuwait Projects Company Holding KSC (KIPCO) group. In June 2008, Qtel acquired a 40.8% stake in PT Indosat Tbk, Indonesia s second-largest phone company, from its subsidiary Asia Mobile Holding Pte. Ltd. We have used Sum-Of-The-Parts (SOTP) valuation method for the company s operations in different countries. Based on consolidation of the individual country operations, our SOTP valuation estimates the fair value of Qtel s stock at QR282.4, which is 77.2% higher than the current market price of QR159.4er share (as at Aug. 31, 2008). We, therefore, revise our recommendation on the stock from HOLD to BUY. Bahrain Telecommunications Company (Batelco) is the incumbent telecom operator in Bahrain. The subsidiaries/associates of Batelco are Umniah (Jordan), Qualitynet (Kuwait), Sabafon (Yemen), Batelco Egypt and Atheeb (Saudi Arabia). Batelco posted a double digit YoY net income growth rate of 13.6% increasing from BD89.3mn in 2006 to BD101.5mn in Batelco has adopted the right strategy of exploring and investing in low penetrated markets both in cellular and broadband space. Its aim to grow geographically into the MENA region with a goal to generate 70.0% of its revenues from international operations by the end of 2010 seems to be achievable given the success they have achieved so far in their investments. The estimated fair value for Batelco works out to BD0.837 per share which offers and upside of 18.7% on the market price of BD0.705 per share (as at Aug. 31, 2008). Hence, we initiate on the stock with a BUY recommendation. Oman Telecommunications Company (OTEL) is the incumbent telecom service provider in Oman. Nawras is a competitor of OTEL in the cellular segment. OTEL August 2008 GCC Telecom Sector 3

8 registered a topline YoY growth of 12.9% increasing from RO323.6mn in 2006 to RO365.3mn in The net profit increased from RO80.7mn in 2006 to RO112.0mn in 2007 registering a YoY growth rate of 38.8%. We believe that the Omani telecom sector is to see unprecedented competition in the coming years attracting cellular players now that TRA is considering a third cellular player. OTEL should continue to retain its market share in this competitive scenario by enhancing revenue growth in Fixed and Mobile segment, while retaining valued customers through loyalty programs. The estimated fair value for OTEL works out to RO2.339 per share which offers and upside of 18.0% on the market price of RO1.983 per share (as at Aug 31, 2008). Hence, we initiate on the stock with a BUY recommendation. Table 1 : Global Valuation Matrix Company Local Currency Price* Target Reco. Upside / Market (Downside) Cap. (US$ bn) BV** EPS** P/BV (x) P/E (x) EV/EBITDA M Cap./Sales (x) (x) 2008F 2009F 2008F 2009F 2008F 2009F 2008F 2009F 2008F 2009F 2008 F 2009 F Zain KD HOLD 2.7% Wataniya KD BUY 38.6% STC SR BUY 21.6% Mobily SR BUY 49.6% Etisalat AED BUY 50.1% Qtel QR BUY 77.2% Batelco BD BUY 18.7% Omantel RO BUY 18.0% * Market Price as of August 31, 2008 ** In Respective Local Currencies Source: Global Research 4 GCC Telecom Sector August 2008

9 World Telecom Sector Overview The worldwide communications (Telecoms, Television and Radio) market and the Telecom market in specific are evolving at a very brisk pace. In view of increasing disposable income in the developed and the emerging economies the Telecom sector is now moving from the erstwhile infrastructure driven to more demand driven. Also, the aspect of convergence of voice, data and entertainment are becoming the new trend when the consumption patterns are changing with increasing demand for bundled services. Telecom sector evolving on the back of quad play (including a combination of television, internet, fixed voice and mobile) According to Ofcom UK, Telecoms service revenues increased by 5 year ( ) CAGR of 10.0% from US$420.5bn in 2001 to US$676.2bn in 2006 across 12 major developed and developing countries (USA, UK, France, Germany, Italy, Canada, Japan, Sweden, Ireland, Spain, Poland and Netherlands). Mobile is driving most of the growth and accounts for over 50% of total telecoms revenues in all countries except Sweden and Canada. However, with increasing maturity in mobile markets, growth rates have slowed in Europe and Japan. Mobile networks capable of delivering high-speed data services are beginning to take off. The number of 3G connections has increased by 200% in most of 12 major developed and developing countries between 2005 and Broadband accounting for 9% of total telecoms revenue across 12 comparator countries in 2006 (up from less than 2% in 2001) is the fastest growing sector amongst voice. Other than the US (which is characterised by regional operators), in terms of market share of the leading operators the UK has the most diversified mobile and broadband markets of the countries analysed. It also has the second most diversified fixed-line market (after Germany) as measured by the market share of the incumbent. The decline of fixed-line voice is a characteristic of all the countries. However, there is large variation in measures of fixed to mobile substitution. Approximately 38% of Italian households are mobile only, compared to just 10% in Germany. In terms of call volumes, 49% are made over mobile networks in Spain compared to fewer than 20% in Germany. Total broadband connections across the 12 comparator countries increased by 600% between 2001 and This growth has been driven primarily by DSL broadband which increased its share of connections in every country and is now the largest broadband platform in all countries analysed except the US. Likely uneven distribution of high-speed fibre networks is leading to a lower proportion of Japanese consumers (39%) to be satisfied with the speed of their broadband connection than in any other country surveyed. The highest levels of satisfaction with broadband speed were in the US (85%), despite the high proportion of low-speed lines. Levels of next-generation access deployments vary significantly according to different market conditions. Japan is the clear leader among the countries analysed with around 30% of broadband connections being delivered via fibre-to-the-home. August 2008 GCC Telecom Sector 5

10 The convergence has impacted the world wide communications market as follows Multi-service communications offerings, which include a combination of television, internet, fixed voice and mobile, are now available in many countries. Quad-play bundles, involving all four services, are generally offered by the incumbent telco, but also in some cases by the cable operators. The US leads the world in the sale of audio-visual content, which is reflected in the revenues generated by its online TV and video industry. These were 250% higher than the next biggest market, the UK. The internet is taking an increasing share of advertising spend across the key comparator countries. The online share is largest in the UK, at 14.4%. User-generated content is proliferating, although professional producers appear to provide the most popular content on websites hosting User-generated content. As of the beginning of Nov 07 the three most viewed channels ever on YouTube.com were all contributed by professional American TV and music producers. France is the clear market leader in IPTV with 1.5mn subscribers at the end of IPTV has been a key driver of triple-play offers in France, which have also promoted VoIP take-up to the highest levels in Europe. Device convergence in the mobile handset is becoming widespread. For example, between 37% and 82% of internet users across the key comparator countries surveyed by Ofcom use their mobile phone to take photos. Over 75% of mobile phone users in the UK, France, Germany and Italy send SMS text messages. This compares with only 17% of mobile users in Japan, who prefer to send from their mobile phone instead. The internet user base in more mature markets tends to include a greater share of younger and older users. The US is the key example of this, where 9% of internet users are over 65 and 20% are 17 or under. The US is the only market among comparator countries where more women than men use the internet. A greater proportion of UK internet users (39%) visit social networking sites than in any other key European country surveyed. They also visit these sites more frequently and spend more time on them. Search and navigation, and portals, comprise the most-visited types of website in most countries. Google s lead is greater in Europe than in the US and Japan, where other search engines provide more competition. 6 GCC Telecom Sector August 2008

11 GCC Telecom Sector Overview The trends in US, UK and other major telecom markets are percolating into the GCC region as well, however with some time lag. The increasingly popular mobile services are leading to a decline in fixed line voice subscribers. Though, convergence in this region is far behind its developed international peers with few countries in the region implementing enhanced 3.5G and related data services, the region is pretty much reaching saturation in terms of cellular voice penetration. Value added services and innovation should lead to sustainability of growth in the future. In the recent years the GCC telecom players are on an expansion spree following measures from Saudi Arabia, Bahrain, Oman, and UAE to allow additional service providers in the respective countries. This should result in inducing higher competition and further drop in ARPUs in the region and resultant contracting profitability of the players. The service providers should aim to increase their market shares by providing differentiated value added services and providing content based services (like mobile video streaming) to enhance the ARPUs. Though geographic expansion provides an opportunity to grow the customer base, the latest technological developments in the region including Mobile Number Portability (MNP) allows easy churn in customer base and loss of customer to a better service provider. Hence, to maintain profitability the service providers must also aim at optimizing the customer acquisition costs. Fixed Line Services Fixed line services are suffering on account of increasing shift of customer base to the more convenient mobile voice services. In 2007, the worldwide fixed line subscribers declined by 0.9% to reach 1,271.2mn from 1,282.5mn in Table 1: GCC vs. Worldwide Fixed Line Subscribers mn World 1, , , , , ,271.2 Asia Americas Europe Oceania Rest of Africa MENA GCC Source: ITU and Global Research This declining trend was also seen in Asia, Americas and Europe where the mobile penetration is on the rise. The Asian market is growing on account of rising volumes backed by increasing disposable income major contributors being India and China who have underwent high economic growth rates of 8 to 11% in the recent years. Also, availability of very cheap handsets in the range of US$20 is encouraging mass consumption of cellular services. August 2008 GCC Telecom Sector 7

12 MENA sector is the only exception that has shown a 6.1% YoY increase in the fixed line subscribers in However, the growth in fixed line subscribers is declining as the YoY growth rate decelerated in 2007 at 6.1% compared to 6.7% in The GCC region however registered a decline of 6.9% from 5.8mn subscribers in 2006 to 5.4mn subscribers in However, during the period , the worldwide fixed lines have increased at a 5 year ( ) CAGR of 3.3% representing a minor growth rate vis-à-vis a whopping double digit 23.3% growth in cellular subscribers. Chart 1: Comparative YoY change in Fixed Line vs. Cellular Subscribers 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 47.7% 40.1% 33.0% 25.6% 19.6% 14.7% 9.9% 7.7% 6.1% World Asia Americas Europe Oceania Rest of Africa MENA GCC -0.9% -1.1% -0.7% -1.0% -2.5% -1.9% -6.9% Source: ITU and Global Research Fixed line Cellular The Growth in MENA during the same period was 7.2% on the back of high growth rates in highly populous Morocco and Egypt that registered a 5 year ( ) CAGR of 16.3% and 7.7% respectively. Chart 2: GCC vs. Worldwide - 5 year ( ) CAGR of Fixed Line Subscribers 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 7.6% 7.2% 3.3% 3.1% 3.6% 0.4% World Asia Americas Europe Oceania Rest of Africa MENA GCC -0.9% -1.2% Source: ITU and Global Research The other growth contributors in these regions were Yemen (12.3%), Syria (10.5%) and Algeria (9.5%). The GCC region however displayed only a modest 5 year ( ) CAGR of 3.6% due to an increase in fixed line subscribers in Qatar (6.1%). Cellular Services Increasing disposable income and convenience of use is encouraging the cellular penetration in the region. 8 GCC Telecom Sector August 2008

13 Other important contributing factor to the increased cellular penetration is the relaxation in telecom regulations allowing second or third player in each country apart from the incumbent local carriers (usually the first state run telco service provider in each country). Chart 3: GCC Cellular Services - ARPUs & Penetration Rates % 166.4% 148.8% 116.0% 96.2% 81.6% Kuwait Qatar Saudi Arabia UAE Oman Bahrain 200.0% 150.0% 100.0% 50.0% 0.0% ARPUs (US$) Penetration rates Source: ITU and Global Research Increasing crude oil prices over the last 5 year and the resultant oil surpluses are contributing to the increase in disposable income and the aggregate percentage of household expenditure on communications and entertainment are rising in the MENA and the GCC regions. Chart 4: Cellular Blended ARPU (US$) Trends in the GCC Region Kuwait Qatar Saudi Arabia UAE Oman Bahrain Source: ITU and Global Research As a result the GCC region registered a 5 year ( ) growth in cellular subscribers at a CAGR of 37.6 %. The MENA region has seen the highest worldwide 5 year ( ) growth in cellular subscribers at a CAGR of 52.9% against the worldwide increase of 23.3%. Rest of Africa Region followed with a CAGR of 45.5%, followed by Asia (26.1%) and Americas (20.7%). August 2008 GCC Telecom Sector 9

14 Table 2: GCC vs. Worldwide Cellular Subscribers mn World 1, , , , , ,297.1 Asia , ,384.5 Americas Europe Oceania Rest of Africa MENA GCC Source: ITU and Global Research The YoY growth rates in cellular subscribers corroborate our observation on cellular becoming a favorite over fixed lines in the GCC region. Chart 5: GCC vs. Worldwide - 5 year ( ) CAGR of Cellular Subscribers 60.0% 50.0% 45.5% 52.9% 40.0% 37.6% 30.0% 20.0% 10.0% 23.3% 26.1% 20.7% 17.0% 11.3% 0.0% World Asia Americas Europe Oceania Rest of Africa MENA GCC Source: ITU and Global Research The GCC region was the leader with the highest growth rate of 47.7% against the 19.6% increase registered worldwide in terms of YoY growth in Rest of Africa Region stood second with a growth rate of 33.0%, followed by Asia (25.6%) and Americas (14.7%). With the country wise cellular markets reaching or crossing the 100% penetration levels within the GCC region, all the six member countries registered double digits CAGR during the 5 year ( ) period. Saudi Arabia leads the pack with a 5 year ( ) CAGR of 41.5% with cellular subscribers increasing from 5.0mn in 2002 to 28.4mn in Oman followed with a 5 year ( ) CAGR of 40.1% with cellular subscribers increasing from 0.5mn in 2002 to 2.5mn in Qatar also contributed with a resilient growth registering a 5 year ( ) CAGR of 36.5% with subscribers increasing from 0.3mn in 2002 to 1.3mn in GCC Telecom Sector August 2008

15 Chart 6: GCC vs. Worldwide - YoY growth in Cellular Subscribers in % 50.0% 40.0% 30.0% 20.0% 10.0% 19.6% 25.6% 14.7% 9.9% 7.7% 33.0% 40.1% 47.7% 0.0% World Asia Americas Europe Oceania Rest of Africa MENA GCC Source: ITU and Global Research Broadband Services The high proportion of youth in the demographics, with 55% to 65% of the total population under the age of 30 years is driving the internet usage in the GCC region. Table 3: GCC vs. Worldwide Internet Users mn World , , ,470.1 Asia Americas Europe Oceania Rest of Africa MENA GCC Source: ITU and Global Research The worldwide internet users increased from 615.7mn in 2002 to 1,470.1mn in 2007 registering a 5 year ( ) CAGR of 19.0%. During the same period the MENA region registered the highest growth rate in internet users with a CAGR of 40.6%. GCC region internet subscribers had increased at a CAGR of 33.6%. The second highest growth was clocked by Rest of Africa region with a 35.0% CAGR followed by Asia that registered a CAGR of 26.7%. It is notable that the GCC region is growing rapidly as higher numbers of young users are accumulating to the user base and a higher general level of awareness of internet usage amongst the GCC nationals over the last 5 years. In 2007, Asia and MENA region were the major growth contributors with YoY growth rates of 36.8% and 33.9% respectively. UAE topped the list of high growth contribution with a YoY growth rate of 34.6% with its internet user base increasing from 1.7mn in 2006 to 2.3mn in The next highest contributor was Saudi Arabia that reported a 31.9% YoY increase in the internet users base from 4.7mn in 2006 to 6.2mn in August 2008 GCC Telecom Sector 11

16 Chart 7: GCC vs. Worldwide - 5 year ( ) CAGR in Internet Users 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 40.6% 35.0% 33.6% 26.7% 19.0% 15.1% 11.5% 6.1% World Asia Americas Europe Oceania Rest of Africa MENA GCC Source: ITU and Global Research Qatar also registered an impressive double digit YoY growth rate of 21.1% increasing its internet users base from 0.3mn in 2006 to 0.4mn in Chart 8: GCC vs. Worldwide - YoY growth in Internet Users in % 35.0% 30.0% 36.8% 33.9% 28.8% 25.0% 20.0% 15.0% 10.0% 5.0% 21.1% 10.3% 7.9% 5.5% 16.3% 0.0% World Asia Americas Europe Oceania Rest of Africa MENA GCC Source: ITU and Global Research The higher rate of internet penetration and improved infrastructure services in terms of shift from Dial up to cable is helping increase the broadband subscriber base in the GCC region. Table 4: GCC vs. Worldwide Broadband Subscribers mn World Asia Americas Europe Oceania Rest of Africa MENA GCC Source: ITU and Global Research The analysis of 5 year ( ) CAGR in broadband subscribers worldwide indicates that the GCC region is amongst the top three growth regions in the world. The worldwide broadband subscriber base increased at a 5 year ( ) CAGR of 38.9%. 12 GCC Telecom Sector August 2008

17 Chart 9: GCC vs. Worldwide - 5 year ( ) CAGR in Broadband Subscribers 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 38.9% 36.4% 30.3% 52.3% 78.8% 132.8% 89.8% World Asia Americas Europe Oceania Rest of Africa MENA GCC Source: ITU and Global Research 71.6% The rest of Africa region was the top growth region with a CAGR of 132.8% during the same period whereas Oceania and the GCC region registered a CAGR of 78.8% and 71.6% respectively. Chart 10: GCC vs. Worldwide - YoY growth in Broadband Subscribers in % 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 68.9% 57.7% 20.2% 21.8% 23.2% 23.0% 13.8% 5.2% World Asia Americas Europe Oceania Rest of Africa MENA GCC Source: ITU and Global Research In 2007, the GCC region registered the highest growth rate at a YoY rate of 68.9% compared to the worldwide YoY growth rate of 20.2%. The member countries that contributed to this increase were Saudi Arabia and Qatar. The subscriber base in Saudi Arabia displayed an astronomical YoY growth of 175.0% increasing from 0.2mn subscribers in 2006 to 0.6mn in 2007 on the back of increased spending on IT infrastructure. Qatar followed, growing from 0.05mn subscribers in 2006 to 0.07mn in 2007 registering a YoY growth of 50.2%. We expect the broadband penetration to increase further as a result of the young demographics and increased focus on developing the IT infrastructure in the region. August 2008 GCC Telecom Sector 13

18 GCC Country-wise Telecom Profile Kuwait The Kuwait telecom market is the first to open itself to competition in 1999 in the GCC region for cellular services, though the fixed line market is yet under monopoly government control. Table 5: Country Telecom Profile Kuwait 000s Cellular Subscribers 1, , , , , ,773.7 Cellular Penetration 57.9% 69.2% 76.6% 76.1% 79.5% 81.6% Pre paid subscribers % 69.0% 76.2% 80.1% 79.5% 79.6% 78.3% Post paid subscribers % 31.0% 23.8% 19.9% 20.5% 20.4% 21.7% Blended ARPU (US$) Fixed Line Subscribers Fixed Line Penetration % 20.4% 19.6% 19.5% 18.8% 18.7% 18.1% Broadband Subscribers Broadband Penetration % 0.4% 0.5% 0.8% 0.9% 0.9% 0.9% Source: ITU and Global Research Regulatory Environment Ministry of Communications (MOC) plays the role of the regulator in Kuwait in the absence of an independent Telecom Regulatory Authority (TRA). The fixed line services in Kuwait are completely controlled and operated by the MOC. However, following the trends in the international market and the regional changes with requirement of higher data transfers should lead to a relaxation in this segment and should lead to a higher penetration. The fixed line penetration declined from 20.4% in 2002 to 18.1% in 2007 on account of loss of subscribers to the cellular segment. Cellular Penetration and ARPUs Mobile Telecommunications Company and National Mobile Telecommunications Company are the two listed cellular service providers in Kuwait. The MOC opened up the cellular services to competition in 1999, the first country to do that in the GCC region then. This has helped increase the penetration in the region from 57.9% in 2002 to 81.6%. Though the proportion of prepaid subscribers has increased from 69.0% in 2002 to 78.3% in 2007, the ARPUs have increased at a 5 year ( ) CAGR of 8.4% from US$40.3 in 2002 to US$60.4 in We observe that this has occurred due to lower competition on account of only two cellular operators in the country and increasing subscription to high priced value added services. 14 GCC Telecom Sector August 2008

19 Qatar The Telecom market in Qatar is highly monopolized until 2007 and is expected to see growing competition in 2008 or early 2009 onwards with liberalization setting in. Table 6: Country Telecom Profile Qatar 000s Cellular Subscribers ,264.4 Cellular Penetration 43.2% 52.5% 64.9% 90.0% 109.7% 143.4% Pre paid subscribers % 51.4% 63.5% 72.2% 78.1% 79.9% 83.4% Post paid subscribers % 48.6% 36.5% 27.8% 21.9% 20.1% 16.6% Blended ARPU (US$) Fixed Line Subscribers Fixed Line Penetration % 26.3% 26.0% 25.8% 26.3% 27.2% 28.3% Broadband Subscribers Broadband Penetration % 0.0% 0.4% 1.4% 3.2% 5.6% 8.4% Source: ITU and Global Research Regulatory Environment Supreme Council of Information and Communication Technology (ictqatar) was set up in 2004 as the regulator of telecommunication sector in Qatar. The regulatory environment was highly monopolistic with Qatar Telecom providing both fixed line and cellular services until the decree law No. 34 of 2006 was promulgated to liberalize and open the telecom sector in Qatar. Cellular Penetration and ARPUs In continuation to the liberalization decree in 2006 and commercial bidding, Qatar s second mobile license has been granted to Vodafone in Jun 08. In early 2009, consumers should be able to choose the company that best serves them. Following the years depicting lower cellular penetration since 2002, the penetration level has increased on account of proposed liberalization. The cellular penetration has increased from 43.2% in 2002 to 143.4% in 2007, the third highest in the region after UAE (166.4%) and Bahrain (148.8%). August 2008 GCC Telecom Sector 15

20 Saudi Arabia The largest market by size in the GCC region, Saudi Arabian telecom market is growing resiliently in the recent years breaching the 100% penetration mark in the cellular services. However, the level of penetration is low in the fixed line services. The kingdom is characterized by one fixed line and two cellular service providers. A third cellular services provider and a second fixed line services provider are expected to start operations in Table 7: Country Telecom Profile Saudi Arabia 000s Cellular Subscribers 5, , , , , ,381.0 Cellular Penetration 23.3% 32.9% 40.5% 61.3% 83.0% 116.0% Pre paid subscribers % 42.0% 52.8% 53.3% 67.4% 76.6% 83.1% Post paid subscribers % 58.0% 47.2% 46.7% 32.6% 23.4% 16.9% Blended ARPU (US$) Fixed Line Subscribers 3, , , , , ,996.0 Fixed Line Penetration % 15.1% 15.0% 15.4% 15.6% 15.7% 16.2% Broadband Subscribers Broadband Penetration % 0.2% 0.2% 0.3% 0.3% 0.9% 2.4% Source: ITU and Global Research Regulatory Environment The Independent telecom regulatory authority of Saudi Arabia, the Communications & Information Technology Commission (CITC) was established in The incumbent fixed line and cellular player Saudi Telecom (STC) established in 1998 is the largest provider followed by Emirates Telecommunications Corporation (ETISALAT) who won the second cellular provider license in Mobile Telecommunications Company, Kuwait (ZAIN) is expected to commence operations as the third cellular service provider by 2H08 and Bahrain Telecommunications Company (BATELCO) through Atheeb is expected to launch the country s second fixed line services in 3Q08. Cellular Penetration and ARPUs Increasing number of players in the telecom market is driving the penetration and the country s cellular penetration has breached the 100% levels in 2007 when it clocked an all time high cellular penetration rate of 101.4%. Increasing competition and slashing prices is driving down the ARPUs year after year. The cellular ARPUs have declined from US$57.0 in 2002 to US$35.2 in 2007 thereby declining at a 5 year ( ) CAGR of 9.2%. Apart from competition the increasing composition of prepaid subscribers that increased from 50.0% in 2002 to 60.0% in 2007 is also contributing to decline in ARPUs. Broadband Penetration The increasing component of youth in the population is driving the internet users in the country and also the broadband subscribers. The broadband penetration has increased from a negligible 0.2% in 2002 to 2.4% in 2007, with subscribers registering a 5 year ( ) CAGR of 76.7%. 16 GCC Telecom Sector August 2008

21 UAE The country is characterized with the highest cellular penetration in the GCC region following intense competition. Table 8: Country Telecom Profile UAE 000s Cellular Subscribers 2, , , , , ,594.5 Cellular Penetration 69.4% 80.6% 94.7% 110.5% 127.6% 166.4% Pre paid subscribers % 100.0% 100.0% 100.0% 88.4% 89.9% 91.4% Post paid subscribers % 0.0% 0.0% 0.0% 11.6% 10.1% 8.6% Blended ARPU (US$) Fixed Line Subscribers 1, , , , , ,385.5 Fixed Line Penetration % 29.2% 28.1% 27.8% 27.5% 28.1% 31.6% Broadband Subscribers Broadband Penetration % 0.4% 0.8% 1.3% 2.9% 5.2% 5.5% Source: ITU and Global Research Regulatory Environment The Telecommunications Regulatory Authority (TRA) of the United Arab Emirates (UAE) has been established according to the UAE Federal Law by Decree No. 3 of The incumbent telecom player Emirates Telecommunication Corporation (ETISALAT) remained the only player since 1976 to provide fixed line and cellular services in the UAE. However, with establishment of TRA the sector was opened up for more competition seeing a second cellular service provider Emirates Integrated Telecommunications Company (DU) winning the license in 2005 entering the market in Cellular Penetration and ARPUs Increasing penetration in the telecom market was responsible for driving down the ARPUs from US$50.0 in 2002 to US$37.5 in The composition of prepaid subscribers in the UAE has historically remained in the % region causing drop in the ARPUs despite a healthy growth in the number of subscribers. Fixed Line Penetration Fixed line penetration has increased from 29.2% in 2002 to 31.6% in This represented a 5 year ( ) CAGR of 4.8% against the CAGR of 25.6% in cellular subscribers during the same period. Broadband Penetration Owing to increasing spend on IT infrastructure as UAE is turning into a business & financial hub of the GCC region over recent years, the broadband subscribers have displayed 71.5% CAGR during the 5 year ( ) period. In terms of penetration, the same increased from a meager 0.4% in 2002 to 5.5% in August 2008 GCC Telecom Sector 17

22 Oman Owing to liberalization the Oman market has displayed tremendous improvement in the penetration levels. Table 9: Country Telecom Profile Oman 000s Cellular Subscribers , , ,500.0 Cellular Penetration 18.6% 23.7% 31.9% 51.9% 69.7% 96.2% Pre paid subscribers % 40.0% 53.0% 60.0% 63.0% 65.0% 72.0% Post paid subscribers % 60.0% 47.0% 40.0% 37.0% 35.0% 28.0% Blended ARPU (US$) Fixed Line Subscribers Fixed Line Penetration % 9.1% 9.4% 9.6% 10.1% 10.3% 10.3% Broadband Subscribers Broadband Penetration % 0.0% 0.0% 0.0% 0.3% 0.7% 0.7% Source: ITU and Global Research Regulatory Environment Oman Telecommunications Company (OTEL) is the incumbent telecom player in Oman since 1980 until The Telecommunications Regulatory Authority (TRA) of Oman was established in OTEL provides fixed line and cellular services in Oman. In furtherance of liberalization the sector was opened up for more competition and a second cellular service provider license was granted to Qatar Telecom (QTEL) promoted entity Nawras in Oman is the first country to introduce mobile number portability (MNP) in Cellular Penetration and ARPUs The cellular subscriber base has increased in Oman at an unprecedented level and it registered a 5 year ( ) CAGR of 40.1%. Increasing number of prepaid cellular subscribers that increased from 40% of the total in 2002 to 72% in 2007 has caused the ARPUs to slide in the recent years. The ARPUs have declined from US$52.5 in 2002 to US$34.0 in Fixed Line Penetration Fixed line penetration has increased slightly from 9.1% in 2002 to 10.3% in This represented a 5 year ( ) CAGR of 3.3% against the CAGR of 40.1% in cellular subscribers during the same period. Broadband Penetration The growth in the Broadband subscribers was also encouraging as the penetration increased from 0.01% in 2002 to 0.7% in 2007 with the subscriber base growing at 5 year ( ) CAGR of 185.3%. 18 GCC Telecom Sector August 2008

23 Bahrain Liberalization has also affected the Bahrain telecom market in a positive manner with higher penetration rates. It has the second highest cellular penetration in the GCC region. Table 10: Country Telecom Profile Bahrain 000s Cellular Subscribers ,116.0 Cellular Penetration 55.6% 62.4% 90.3% 102.6% 122.6% 148.8% Pre paid subscribers % 76.0% 75.0% 75.0% 75.0% 75.0% 75.0% Post paid subscribers % 24.0% 25.0% 25.0% 25.0% 25.0% 25.0% Blended ARPU (US$) Fixed Line Subscribers Fixed Line Penetration % 25.1% 26.2% 26.6% 26.5% 26.2% 25.9% Broadband Subscribers Broadband Penetration % 0.7% 1.4% 2.1% 2.9% 5.2% 5.1% Source: ITU and Global Research Regulatory Environment The Telecommunications Regulatory Authority (TRA) of Bahrain was established by Legislative Decree No. 48 of 2002 promulgating the Telecommunications Law. Bahrain Telecommunications Company (BATELCO) was established in 1981 as the incumbent telecom player. Following liberalization, Mobile Telecommunications Company (ZAIN) was awarded the second cellular service provider license in The competition also intensified in the fixed line segment with the licenses for second and third fixed line operators being granted to Lightspeed Communications and Kalaam Telecom respectively. Cellular Penetration and ARPUs The cellular penetration has increased from 55.6% in 2002 to a whopping 148.8% in The entry of new player in the arena gave ample choice to the customers and thus the customer base increased at a 5 year ( ) CAGR of 23.5% from 0.4mn in 2002 to 1.1mn in ARPUs have fluctuated over the 5 year period but remained in the range of US$46.0 to US$50.4 as a result of stable 75% prepaid concentration in the total cellular subscriber base. Fixed Line Penetration The competition in the fixed line segment is intensifying with three operators in play; however the penetration is relatively flat at 25.9% in 2007 as compared to 25.1% in 2002 and has not declined as the consumers interest was maintained due to provision of internet related facilities through fixed line connections. This was quite different from the declining fixed line penetration trend seen in other countries in the GCC region. August 2008 GCC Telecom Sector 19

24 PLAYER PROFILES

25 Mobile Telecommunications Company (Zain) Tickers ZAIN.KW (Reuters) TELE KK (Bloomberg) Recommendation Hold Listing: Kuwait Stock Exchange Current Price: KD1.72 (August 31, 2008) Key Data EPS* (fils) 79.5 Avg. daily vol. ( 000) 4,796.7 BVPS* (fils) week High / Low / P/E (x) 21.6 Market Cap (KD mn) 7,362 P/BV (x) 2.4 Target Price (KD) Source: Global Research * Projected (2008) Background Mobile Telecommunications Company (Zain) was established in 1983 in Kuwait as the region s first mobile operator. Since 2003, it has grown significantly becoming the 4th largest telecommunications company in the world in terms of geographic presence with a footprint in 22 countries spread across the Middle East and Africa providing mobile voice and data services to over 50.74mn active customers (as at 30 June 2008). In the Middle East the company operates under the Zain brand name in Bahrain, Iraq, Jordan, Kuwait and Sudan. In Lebanon the company operates as mtc-touch. Zain plans to commence operations in the Kingdom of Saudi Arabia during the current year. In Africa, Zain operates under the Celtel brand in 14 sub-saharan African countries namely: Burkina Faso, Chad, Democratic Republic of the Congo, Republic of the Congo, Gabon, Kenya, Malawi, Madagascar, Niger, Nigeria, Sierra Leone, Tanzania, Uganda and Zambia. Recent Developments Launch of Commercial Services in the Kingdom of Saudi Arabia On August 26, 2008, Zain announced the launch of commercial services in the Kingdom of Saudi Arabia. With the launch, the Kingdom joins and connects to One Network, the Group s renowned, and the world s first, borderless mobile service offering over 45mn customers in 16 countries favorable rates, free of high roaming charges for cross-border communications. Zain will initially cover 53% of the population in 36 major cities and 14 highways spanning over 4,000 kms. The remaining coverage area will be attained initially through a complimentary countrywide roaming service. Zain will introduce high-speed 3.5G broadband technology to approximately half of the Saudi population offering the latest August 2008 GCC Telecom Sector 21

26 3.5G services that include television, video-calling, rich multimedia content and even faster internet access. Zain s network will be further expanded in stages to eventually cover the entire Kingdom. Zain Saudi Arabia is a publicly listed company on the Saudi Stock Exchange Tadawul. Expansion of One Network In April 2008, Zain launched borderless One Network mobile service to Bahrain, Iraq, Jordan and Sudan. This service will allow Zain s 15mn customers to communicate in between and to be treated as local customers in terms of pricing while using their home network service. In November 2007, Zain s subsidiary Celtel International expanded its One Network, the world s first borderless mobile network in Africa. This One Network in Africa covers 12 countries. Celtel Re-branded to Zain In August 2008, Zain announced that it has re-branded its entire African operations from Celtel to Zain. Fourteen country operations across Africa will immediately rebrand to Zain, namely Burkina Faso, Chad, the Republic of Congo, the Democratic Republic of Congo, Gabon, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda and Zambia. Zain also announced the creation of the world s first cross-continental borderless network, extending and linking its One Network service between Africa and the Middle East. The service will be available to 500 million people stretching from the west coast of Africa to the Middle East. Zain to Increase Equity Capital In August 2008 the company is raising its equity capital through rights issue. The company s paid up capital will be increased by 75% through rights which is priced at 850 fils per share (premium of 750 fils). The company s equity capital will increase to KD428.03mn from the current KD189.4mn. The capital increase will allow Zain to finance its future expansion plans as well as meet its financial commitments. Analysis of Country Operations Group level Performance In FY2007, total active customers of Zain increased to 42.50mn versus 27.04mn in FY2006, an increase of 57.2%. As of year end 2007, Zain s African operations through its subsidiary Celtel International represented 64% of the company s customer base while the operations in Middle East countries of Iraq, Sudan, Jordan, Kuwait, Lebanon and Bahrain represented the remaining customers. Zain s African operations registered a 59% increase in customers in 2007, while the Middle Eastern operations registered a 53% increase over the same period. The company s customer increase was driven primarily by its high growth African operations including Nigeria, Uganda and Tanzania. In the Middle East, the operations in Iraq, Bahrain and Sudan showed solid growth. At the end of July 2008, Zain s group customer base increased to 50.74mn from 42.50mn at the end of 2007, registering a YTD growth of 19.4% and a YoY growth of 57.8%. 22 GCC Telecom Sector August 2008

27 Chart 01: Country-wise Customer Segmentation - June 2008 Chart 02: Customer segmentation of African countries June 2008 Bahrain1.1% Lebanon 1.4% Kuwait 3.3% Jordan 3.9% Iraq 15.6% Sudan 9.1% Zambia 6.9% Uganda 5.4% Tanzania 8.5% Sierra Leone 1.3% Burkina Faso 3.5% Chad 2.3% Congo Brazzaville 3.5% DRC 8.1% Gabon 2.2% Kenya 5.7% Madagascar 2.7% Africa 65.6% Malawi 2.9% Niger 2.6% Nigeria 44.5% Source: Company Reports and Global Research Middle East Operations Kuwait In 2007 Kuwait witnessed a growth of 9.6% in total subscriber base for GSM to reach 2.77mn customers, which indicates penetration rate of 82% on total population and 106% on addressable population. Zain leads the GSM segment in Kuwait with a market share of 57% whereas NMTC accounts for the rest of the market share i.e. 43% as there are only two GSM operators in the country. In GSM segment, the total customer addition in 2007 was 244,009. In 2007, NMTC gained a larger slice of total market additions with a customer addition of 129,009 which helped it to increase its market share from 42% in 2006 to 43% in Zain increased its customer strength by 115,000 customers. In Kuwait, out of the total subscriber base of 2.77mn as of Dec. 2007, 2.17mn customers (78.3%) were prepaid customers while 602,506 (21.7%) customers were postpaid. Zain accounted for 72.5% of the total postpaid customers and 52.5% of total prepaid subscribers while NMTC accounted for 27.5% of total postpaid customers and 47.5% of total prepaid customers. Saudi Telecom Company (STC), the third operator is likely to start its operation in In 2007, the government of Kuwait issued a third mobile license to STC for US$907.6mn. MTC s Kuwait operation had a total of 1.58mn customers by year end 2007, representing an increase of 7.9% over Out of the total subscriber base, 72.3% were prepaid customers while 27.7% were postpaid customers. For FY2007, Kuwait operations reported revenues of KD359.4mn, contributed 21.4% to total revenues of MTC for the year. EBITDA was at KD194.1mn representing an EBITDA margin of 54%. Net profit from Kuwait operations August 2008 GCC Telecom Sector 23

28 increased by 53.1% to reach KD216.1mn. In 2007, its Kuwait operations had a high ARPU of US$70, which declined marginally to US$69 at the end of 1H During 1H-2008, MTC increased its customer base to 1.66mn, a y-t-d increase of 84,000 customers. Jordan Zain s Jordan operation had a total of 1.858mn customers at the end of 2007, representing a 5.2% decline in total customers compared to In 2007, ARPU for Jordan operations increased to US$19 from US$17 in Revenues for FY2007 were KD135.3mn, a decline of 4%, compared to KD141mn reported for FY2006. EBITDA was at KD62.5mn representing an EBITDA margin of 46.2%. It reported a decline of 14% in its net profit to reach at KD32.6mn for FY2007. Bahrain Bahrain has the highest mobile penetration rate in the region and is leading the way in offering new innovative services such as triple play and Wi-Max. In 2007, Zain s Bahrain operations increased its total customer base by 92% to 448,000 customers. Its revenues in FY2007 reached to KD42.9mn, registered a growth of 32.4% over FY2006. In 2007, ARPU for Bahrain operations increased to US$42 from US$31 in Its EBITDA increased by 34% to reach at KD13.5mn. In FY2007, it reported significant growth of 39.2% in net profit to reach at KD4.7mn as compared to KD3.4mn reported in FY2006. Iraq In Iraq, at the end of 2007 Zain had total customer base of 7.287mn, representing a 128% increase over Zain s leading position in the Iraqi market has been further strengthened by the acquisition of Iraqna, one of Iraq s three mobile operators. Iraq is predominantly a prepaid customer market for the Zain Group as there are only 55,000 postpaid customers and the rest all are prepaid customers. For FY2007, Zain Iraq reported revenues of KD159.1mn representing a growth of 60% for the year. In 2007, ARPU for its Iraq operations declined to US$13 from US$14 in EBITDA increased by 70.7% to reach KD50.4mn. In FY2007, Iraq operations reported a significant growth of 149% in its bottom-line to reach KD13.2mn from KD5.3mn in FY2006. Lebanon Zain has a 4-year management contract to operate one of Lebanon s two GSM operations. In June 2004, MTC won a 4-year management contract to operate one of Lebanon s two GSM operations. This year, Lebanon is in the midst of privatizing the two state-owned cellular networks, which are currently managed by the Kuwait s Mobile Telecommunications Company Lebanon (MTC Touch) and the German-Saudi consortium Alfa. MTC has developed the Lebanese operation to full potential in hope that it will be added to the Group s portfolio as soon as the government undertakes the process of privatization. At the end of 2007, Zain s Lebanon operation had a total customer base of 630,000 customers which grew by 12.5% over MTC Touch s revenues reached KD17.2mn in FY2007, registering an increase of 2% over FY2006. The disclosed revenues are from the management contract and not the total revenues of the operation which are collected by the Government of Lebanon. Its EBITDA and net profit increased by 7.9% and 6.4% to reach at KD3.03mn and KD2.7mn respectively. 24 GCC Telecom Sector August 2008

29 Sudan In February 2006, Zain acquired 100% of Mobitel in a deal valued at US$1.33bn. Mobitel, Sudan s first mobile operator was successfully re-branded to Zain in September Zain s Sudan operation had a total of 3.883mn customers at the end of 2007, increasing from 2.754mn in Its revenues increased by 16% to KD224.8mn in FY2007. EBITDA was KD92.2mn which declined by 21.7% and its net profit declined by 22.1% to reach KD74.7mn in FY2007. In 2007, ARPU for Sudan operations declined to US$20 from US$25 in Sub-Saharan Africa (Celtel) As of December 31, 2007, Zain s African operations, through its subsidiary Celtel International represented 64% of the company s customer base and registered a 59% increase in total customers. The company s customer increase was driven primarily by its high growth African operations including Nigeria, Uganda and Tanzania. Nigeria As the competition became intense during the first quarter of 2008, Zain Nigeria (formerly Celtel Nigeria) focused on its key strategic initiatives, controlled 31% market share and was able to sustain its no. 2 position in the mobile telecom market. In addition, Zain Nigeria launched its Blackberry offering into the mass market and was the first operator to offer the Blackberry Red Phone. Adopting the One Network with the neighboring countries has led to increased subscriber acquisition. At the end of 2007, Zain Nigeria had a total customer base of mn, representing an increase of 73.5%. Zain Nigeria s operation was accounting for 26% of Zain total customer base in Its revenues increased by 20.5% to KD332.4mn, EBITDA increased by 5.4% KD111.6mn and its net profit declined by 36.7% to KD23.6mn. Tanzania Zain s Tanzania operation had over 2.5mn active customers by year end 2007, representing a 65% increase compared to Its market share was 39% at the end of the year. The operation s customers accounted for 6% of Zain total customer base. Its revenues increased by 56% to KD75.2mn, EBITDA increased by 55% KD27.6mn and its net profit grew significantly by 96% to KD14.7mn. Gabon In Zain s African operations Gabon is a high APRU market which increased to US$33 in 2007 from US$31 for Zain Gabon had a total of 666,000 active customers by year end 2007, representing a 30% increase compared to Its revenues increased by 42% to KD66.1mn, EBITDA increased by 26% KD31.7mn and its net profit grew by 11% to KD14.9mn. Kenya Zain s Kenya operation had over 2mn active customers by year end 2007, representing an 8% increase over The operation s customers accounted for 5% of Zain s total customer base. In 2007, Zain Kenya s total revenues grew by 11% to KD55.1mn whereas its EBITDA declined by 38% to KD9mn. It registered an increased net loss of KD6.1mn from KD3.2mn reported for August 2008 GCC Telecom Sector 25

30 Other African Operations In case of Zain s Uganda operation the year 2007 was the year of significant achievement as it increased its customer base from 470,000 to over 1.4mn, a growth of 205%. Among Zain s other major operations in Africa are Democratic republic of Congo which accounted for 5% of the total group revenue. The other major revenue contributors to Zain were Zambia 4.3%, Gabon 3.9%, Tanzania 4.5%, Burkina Faso 1.7%, Niger, Chad and Uganda each contributed 1.6%. Many of these African countries have low penetration rate and offer high growth potential. Financial Performance In FY2007, Zain reported total revenues of KD1.68bn, EBITDA of KD725.3mn and net profit of KD320.4mn as compared to our projected total revenues of KD1.66bn, EBITDA of KD716.8mn and net profit of KD335.3mn. Zain s actual performance as compared to our projections for FY2007 showed variations (actual v/s projection) of 1.3% in total revenues, 1.2% in EBITDA, -4.4% in net profit and -4.5% in total assets. Revenues for the 12-months of FY2007 grew to KD1.68bn, an increase of 29.3% compared to revenues of KD1.3bn reported for FY2006. EBITDA grew to KD725.3mn, an increase of 22.2%, resulting into an EBITDA margin of 43.2%. Its EBITDA margin declined from 45.8% in FY2006 to 43.2% in FY2007. Its finance cost and depreciation & amortization grew by 40.3% and 45.7% to KD123.6mn and KD236.1mn, respectively. Net profit attributable to shareholders of the parent company for FY2007 increased by 8.6% to KD320.4mn as compared to KD295mn reported for FY2006. In FY2007, the size of consolidated balance sheet of Zain grew by 25.1% to KD4.4bn. Its gross fixed assets increased by 33.3% to reach KD2.3bn. The company s net intangible assets, represented by goodwill and license fees, increased to KD1.6bn in FY2007 from KD1.5bn for FY2006. The increase in intangibles was mainly due to acquisitions and increase in stake in subsidiaries. In FY2007, the company s borrowings from banks increased to KD2bn from KD1.4bn in FY2006 which was for its African Celtel operations. In 1H-2008, Zain Group s consolidated revenues increased by 17% on y-o-y basis to reach KD936mn. Its EBITDA grew by 10.8% to KD350mn representing an EBITDA margin of 37.4%. Net profit declined from KD149mn reported in 1H-2007 to KD148mn in 1H-2008, witnessing a fall of 0.7%. Future Trend in Consolidated Revenues & Profitability Going forward we forecast a 4 year ( ) CAGR of 11.7% in consolidated revenues, 13.7% in EBIDTA and 19.7% in net profit. The contribution of Kuwait operation to the group revenue was 21.4% in 2007, which we expect to decline to 19.7% in 2008, 17.7% in 2009, 16% in 2010 and 14.2% in 2011, due to increasing revenue contribution from other operations. 26 GCC Telecom Sector August 2008

31 Chart 3: Trend in Consolidated Revenues, EBITDA and Net Profit 3,000 2,500 (in KD Mn) 2,000 1,500 1, (F) 2009 (F) 2010 (F) 2011 (F) Source: Global Research Outlook and Valuation Zain s Kuwait operation will continue to witness strong growth in 2008 and However, it is likely to face more competitive pressure especially when the third operator, Saudi Telecom, will start its operations in Kuwait in Therefore, we expect that ARPU and margins are likely to come under pressure with the beginning of operations of third operator. Among the other Middle Eastern markets, in Jordan the company is losing its market share as well as customers and therefore revenues and margins are under pressure resulting in decline in profitability. With regard to Iraq operation, it has high growth potential and its margins are also improving. With the acquisition of Iraqna it has a substantial chunk of the market in Iraq and it will continue to drive the growth further. In Saudi though the penetration level has already crossed 100%, the market has still room for further growth, however, it will have to compete hard with the two existing players, STC and Mobily. In Sudan, the company is the number 1 operator but despite of growing subscriber base as well as topline, the bottomline shrank as margins are under pressure. In Africa the company has many high growth under penetrated markets. Nigeria is an important market in the company s Africa portfolio. The company has achieved significant growth in customer base in Nigeria. Its market share and revenues are also going up but net profit is on decline. Apart from these, in Africa the company operates in many high growth potential markets such as Congo Brazzaville, Zambia, Tanzania, Niger, Burkina Faso, Malawi, Chad, etc., however, many of these are low-income markets. At the current market price of KD1.72 (Aug. 31, 2008), Zain trades at 21.6x and 16.6x of its earnings and 2.4x and 2.3x of its book value for FY2008E and FY2009E respectively. We have used Sum-Of-The-Parts (SOTP) valuation method for company s operations in different countries. Based on consolidation of the individual country operations, our SOTP valuation estimates the fair value of Zain s stock at KD1.766, which is 2.7% higher than the current market price of the stock. We, therefore, reiterate our HOLD recommendation on the stock. August 2008 GCC Telecom Sector 27

32 Table 1: SOTP Valuation Summary Country Operations Equity Value (in KD mn) Jordan Kuwait 1,798.8 Iraq Nigeria 1,071.8 Other African Countries 1,485.4 Sudan 1,164.1 Others Cash & Bank Balances Total Equity Value 7,561.1 Number of shares outstanding (in mn) 4,280.3 Per share value (KD) Source: Global Research 28 GCC Telecom Sector August 2008

33 BALANCE SHEET Mobile Telecommunications Company KSC Amount in Kuwaiti Dinar 2005 (A) 2006 (A) 2007 (A) 2008 (F) 2009 (F) 2010 (F) 2011 (F) Assets: Bank & cash equivalents 91,788, ,731, ,226, ,938, ,948, ,783, ,496,637 Short-term Deposits 201,091, ,591, ,037, ,560,160 99,308, ,790, ,969,869 Investments 14,566,000 18,455,000 23,002,000 33,587,852 25,190,889 30,229,067 36,274,880 Trade & billing receivable 63,921, ,096, ,718, ,555, ,498, ,520, ,856,876 Income receivable 3,892,000 4,760,000 11,664,000 14,656,746 17,000,886 18,613,129 20,423,639 Other receivables 49,718,000 81,667, ,764, ,255, ,341, ,313, ,236,390 Inventories 7,025,000 14,791,000 22,047,000 30,444,778 39,593,150 49,655,612 60,815,094 Provision for doubtful debt (37,510,000) (39,038,000) (42,870,000) (48,163,198) (48,125,092) (53,208,050) (65,029,005) Total Current Assets 394,491, ,053, ,588, ,836, ,756, ,698, ,044,379 Investment Securities 147,111, ,842, ,468, ,412, ,765, ,118, ,742,392 Investments in Associates-Gross 236,383, ,640, ,532, ,915, ,393,750 Investments in Associates 236,383,000 8,026, ,640, ,532, ,915, ,393, ,242,188 Loan to an associate 170,875, ,876, ,876, ,876, ,876,000 Fixed assets 499,853,000 1,131,189,000 1,495,602,000 1,943,020,112 2,252,496,417 2,416,667,978 2,542,395,323 Intangible Assets 756,838,000 1,477,557,000 1,637,255,000 1,675,034,667 1,626,029,905 1,577,237,244 1,534,350,713 Deferred tax assets 6,723,000 40,618,000 64,724,000 87,377, ,590, ,949, ,444,650 Other financial assets 14,908,000 6,648,000 6,850,000 7,535,000 8,288,500 9,117,350 10,029,085 Total Assets 2,056,307,000 3,490,933,000 4,367,002,000 5,450,623,627 5,725,718,460 5,987,059,176 6,409,124,730 Liabilities: Trade payables 58,877, ,310, ,587, ,759, ,491, ,660, ,504,756 Due to suppliers and other accruals 150,676, ,994, ,690, ,626, ,885, ,990, ,527,526 Other Payables 31,362,000 48,092,000 74,477,000 87,455, ,575, ,757, ,625,478 Due to Banks 248,417, ,721, ,747, ,399, ,941, ,847, ,137,989 Due to minority interest holders 131,154, ,262,000 18,509,000 18,509,000 18,509,000 18,509,000 18,509,000 Total Current Liabilities 620,486,000 1,043,379,000 1,027,010,000 1,085,748,968 1,153,403,743 1,241,764,179 1,381,304,748 Other non-current liabilities 21,016,000 16,023,000 28,411,000 48,080,990 50,485,039 53,009,291 55,659,756 Deferred tax liabilities 5,879,000 9,980,000 31,763,000 36,527,450 42,006,568 48,307,553 55,553,686 Long term Debt 190,342, ,117,000 1,531,512,000 1,057,129,355 1,039,039, ,677, ,087,554 Due to minority interest holders Total non-current liabilities 217,237, ,120,000 1,591,686,000 1,141,737,794 1,131,531,431 1,012,994, ,300,995 Minorities Interest 32,844, ,002, ,379, ,209, ,900, ,857, ,857,855 Owner s Equity: paid-up equity capital 109,723, ,182, ,398, ,030, ,030, ,030, ,030,673 treasury shares (15,576,000) (15,576,000) (15,576,000) (15,576,000) (15,576,000) (15,576,000) (15,576,000) share premium 624,465, ,465, ,465,000 1,690,771,403 1,690,771,403 1,690,771,403 1,690,771,403 legal reserve 54,862,000 63,091,000 94,699, ,015, ,015, ,015, ,015,336 voluntary reserve 54,862,000 63,091,000 63,091,000 63,091,000 63,091,000 63,091,000 63,091,000 foreign currency translation reserve 2,352,000 (24,390,000) (26,014,000) (26,014,000) (26,014,000) (26,014,000) (26,014,000) Fair Value Reserve 55,540,000 41,778,000 67,704, ,648, ,001, ,354, ,978,392 Retained earnings 299,512, ,055, ,938, ,738, ,340, ,547,603 1,110,142,327 Share based compensation reserve - 5,736,000 12,222,000 12,222,000 12,222,000 12,222,000 12,222,000 Total Shareholder s Equity 1,185,740,000 1,354,432,000 1,581,927,000 3,030,927,273 3,215,882,337 3,470,442,675 3,806,661,131 Total Liabilities 2,056,307,000 3,490,933,000 4,367,002,000 5,450,623,627 5,725,718,460 5,987,059,176 6,409,124,730 Source: Company Reports and Global Research August 2008 GCC Telecom Sector 29

34 OPERATING STATEMENT Mobile Telecommunications Company KSC Amount in Kuwaiti Dinar 2005 (A) 2006 (A) 2007 (A) 2008 (F) 2009 (F) 2010 (F) 2011 (F) Sales Revenue 579,496,000 1,297,415,000 1,677,270,000 1,954,232,786 2,266,784,846 2,481,750,502 2,723,151,862 Cost of Sales (90,741,000) (274,729,000) (361,751,000) (416,454,671) (474,302,057) (519,028,826) (555,418,259) Gross Profit 488,755,000 1,022,686,000 1,315,519,000 1,537,778,115 1,792,482,789 1,962,721,676 2,167,733,602 Distribution, Marketing & Operating Expenses (158,396,000) (336,708,000) (470,446,000) (566,727,508) (669,834,922) (733,357,273) (799,245,071) General & Administrative Expenses (56,079,000) (115,829,000) (153,537,000) (183,697,882) (222,144,915) (253,138,551) (294,100,401) Provision for doubtful debt (7,075,000) (2,921,000) (3,832,000) (5,293,198) 38,106 (5,082,958) (11,820,955) Share of (loss) / profit of associates 25,300,000 5,825,000 (3,135,000) (37,218,296) (16,034,212) 15,201,051 28,287,216 Other Income 4,213,000 9,505,000 6,092,000 7,919,600 9,503,520 11,404,224 13,685,069 Foreign currency revaluation gains 5,191,000 3,396,000 13,144,000 14,458,400 15,904,240 17,494,664 19,244,130 Investments Income 20,930,000 7,810,000 21,537,000 30,690,032 33,195,644 39,834,773 47,801,727 EBITDA 322,839, ,764, ,342, ,909, ,110,250 1,055,077,605 1,171,585,317 Financial Charges (50,224,000) (88,084,000) (123,586,000) (126,623,364) (104,166,265) (100,885,128) (98,808,173) Interest Income 4,613,000 18,254,000 26,289,000 33,436,041 23,833,849 24,101,980 25,201,321 Depreciation and Amortization (66,326,000) (162,057,000) (236,062,000) (285,386,961) (316,642,888) (347,371,829) (378,701,043) Goodwill written off on disposal of shares in subsidiaries (1,663,000) (5,785,000) Profit for the year from discontinued operations 10,995, Director s Fees (28,000) (28,000) (28,000) (28,000) (28,000) (28,000) (28,000) Profit Before Taxes 220,206, ,064, ,955, ,306, ,106, ,894, ,249,422 Income Tax (28,912,000) (34,972,000) (40,874,000) (44,255,752) (51,607,473) (59,864,907) (70,461,078) KFAS (1,811,000) (2,940,000) (2,973,000) (2,557,349) (4,944,995) (5,710,297) (6,487,883) NLST (2,877,000) (4,323,000) (5,447,000) (6,328,739) (12,238,162) (14,132,286) (16,056,812) Net Profit for the year 186,606, ,829, ,661, ,165, ,316, ,187, ,243,649 Minority Interest (4,694,000) (18,848,000) (22,206,000) (25,830,592) (32,691,357) (36,956,907) (42,625,920) Net Profit to Parent company shareholders 181,912, ,981, ,455, ,334, ,624, ,230, ,617,729 P&L Appropriation Account: Op Balance of Retained Earnings 218,157, ,512, ,055, ,938, ,738, ,340, ,547,603 Net Profit for the year 181,912, ,981, ,455, ,334, ,624, ,230, ,617,729 Transfer to reserves (15,661,000) (16,458,000) (31,608,000) Cash Dividend (81,198,000) (91,526,000) (123,831,000) (167,435,000) (321,023,005) (321,023,005) (321,023,005) Exercise of employee share options - - (42,000) Bonus Shares (3,626,000) (16,459,000) (63,091,000) (94,782,791) Trfr to Statutory Reserve (119,316,336) Realized gains on available-for-sale investments (72,000) Forex changes - 5, Cl Balance of Retained Earnings 299,512, ,055, ,938, ,738, ,340, ,547,603 1,110,142,327 Source: Company Reports and Global Research 30 GCC Telecom Sector August 2008

35 CASH FLOW STATEMENT Mobile Telecommunications Company KSC Amount in Kuwaiti Dinar 2005 (A) 2006 (A) 2007 (A) 2008 (F) 2009 (F) 2010 (F) 2011 (F) Operating Operating Activities 262,118, ,236, ,518, ,299, ,429, ,382,235 1,059,541,197 Net Profit before tax 219,794, ,801, ,535, ,334, ,624, ,230, ,617,729 Depreciation & Amortisation 63,673, ,842, ,062, ,386, ,642, ,371, ,701,043 Interest income (4,613,000) (18,254,000) (26,289,000) Property and equipment disposed (4,000) 1,062, , Profit on sale of subsidiary (10,995,000) (268,000) Provision for receivables - 5,293,198 (38,106) 5,082,958 11,820,955 Provision for contingencies (4,541,000) Deferred Costs - (23,338,400) (26,966,720) (12,187,912) (13,406,703) Financing Expenses 50,224,000 88,084, ,586, ,623, ,166, ,885,128 98,808,173 Income from investments (20,930,000) (7,810,000) (21,537,000) Share of profit of an associate (25,300,000) (5,825,000) 3,135, Gain/loss from currency revaluation (5,190,000) (3,396,000) (13,144,000) Working Capital 21,363, ,602,000 (13,236,000) (140,218,534) 159,987,754 37,747,257 52,975,404 ( Increase)/ Decrease in investments held for trading (10,585,852) 8,396,963 (5,038,178) (6,045,813) Dec/(inc.) in trade and other receivables 10,613, ,466,000 (67,024,000) (100,321,627) (35,373,021) (46,606,949) (100,069,308) Dec / (inc) in Inventories (197,000) (5,145,000) (7,835,000) (8,397,778) (9,148,372) (10,062,462) (11,159,482) Inc/(dec) in trade & other payables 25,563,000 85,896,000 90,547,000 (20,913,277) 196,112,184 99,454, ,250,007 Inc/(dec) in other non-current liabilities (113,000) 2,287,000 12,319, Income Tax paid (10,833,000) (31,146,000) (36,895,000) BoD remuneration paid (28,000) (28,000) (28,000) KFAS paid (1,239,000) (1,851,000) NLST paid (2,403,000) (2,877,000) (4,320,000) Proceeds from UNCC Total Operating 283,481, ,838, ,282, ,081, ,417, ,129,491 1,112,516,601 Investing Capex (130,186,000) (441,764,000) (586,700,000) (732,805,073) (626,119,193) (511,543,390) (504,428,388) Increase in intangible assets (13,616,000) (37,292,000) (166,645,000) (37,779,667) 49,004,763 48,792,661 42,886,531 Interest received 4,062,000 15,879,000 26,269, Acq. of Investment securities (20,138,000) (7,686,000) (4,677,000) Proceeds from sale of subsidiaries 15,813, , Profit on sale of investments available for sale 60,875,000 4,144,000 1,275, Proceeds from disposal of property and equipment Investment in associate - (450,000) (269,306,000) (77,892,000) (84,383,000) (105,478,750) (131,848,438) Acquisition of subsidiaries (839,972,000) (529,441,000) (60,920,000) Dividend received 4,644,000 5,033,000 Total Investing (923,162,000) (991,698,000) (1,055,671,000) (848,476,740) (661,497,431) (568,229,479) (593,390,294) Financing Increase/(decrease) in shareholders capital ,849, Share Premium - - 1,066,306,403 Increase/(decrease) in long term debt (474,382,646) (18,089,531) (127,362,201) (63,590,069) Loan to an associate - (170,875,000) (72,001,000) Proceeds from sale of share capital 667,218,000 83, Minority shares in Bahraini sub 3,095,000-1,527, Due to minority interest holders Financing expenses (37,552,000) (92,136,000) (123,436,000) (126,623,364) (104,166,265) (100,885,128) (98,808,173) Increase in dues to banks 228,602, ,451, ,421,000 79,652,245 (128,457,409) (11,094,409) (30,709,438) Increase in other non-current liabilities ,434,440 7,883,167 8,825,237 9,896,598 Payment of dividend (83,447,000) (90,383,000) (123,588,000) (167,435,000) (321,023,005) (321,023,005) (321,023,005) Dividends paid to minority shareholders - (2,938,000) (2,875,000) Minority Interest ,830,592 32,691,357 36,956,907 - Total Financing 777,916, ,994, ,257, ,631,552 (531,161,686) (514,582,598) (504,234,087) Effect of Foreign Currency translation (375,000) 11,309,000 (13,927,000) Net Change in Cash 137,860, ,134,000 (213,059,000) 245,235,949 (194,242,076) (89,682,586) 14,892,219 Net Cash at beginning 151,472, ,879, ,322, ,263, ,498, ,256, ,574,287 Net Cash at end 292,879, ,322, ,263, ,498, ,256, ,574, ,466,506 Source: Company Reports and Global Research August 2008 GCC Telecom Sector 31

36 FACT SHEET Mobile Telecommunications Company K.S.C (A) 2006 (A) 2007 (A) 2008 (F) 2009 (F) 2010 (F) 2011 (F) LIQUIDITY RATIOs - Current Ratio Quick Ratio Cash Flow from Operations ratio PROFITABILITY ANALYSIS - Gross Profit Margin 84.3% 78.8% 78.4% 78.7% 79.1% 79.1% 79.6% - EBITDA to Revenues 55.7% 45.8% 43.2% 40.8% 41.6% 42.5% 43.0% - Net Profit Margin 31.4% 22.7% 19.1% 17.4% 19.6% 20.7% 21.4% - Return on assets 13.4% 10.6% 8.2% 6.9% 8.0% 8.8% 9.4% - Return on Equity 23.1% 23.2% 21.8% 14.8% 14.2% 15.4% 16.0% ACTIVITY RATIOs - Inventory Turnover Ratio Debtor turnover Ratio Creditors Turnover Ratio LEVERAGE RATIOs - Interest Coverage (times) Debt to equity ratio GROWTH RATES - Revenue growth rate 79.8% 123.9% 29.3% 16.5% 16.0% 9.5% 9.7% - Net income growth rate 51.3% 62.2% 8.6% 6.2% 30.6% 15.7% 13.5% - Equity growth rate 204.5% 14.2% 16.8% 91.6% 6.1% 7.9% 9.7% - Total assets growth rate 216.5% 69.8% 25.1% 24.8% 5.1% 4.6% 7.1% RATIOS USED FOR VALUATION - EPS (fils) Book Value Per Share (fils) Market Price in fils 1,001 1,086 1,875 1,720 1,720 1,720 1,720 - Market Capitalisation (KD mn) 4,285 4,648 8,026 7,362 7,362 7,362 7,362 - Enterprise Value (EV QR 000) 4,431 5,556 9,750 8,446 8,494 8,445 8,336 - EV/EBITDA (x) P/E P/BV Source: Company Reports and Global Research * Market price for 2008 and subsequent years are as per closing prices on Kuwait Stock Exchange on Aug. 31, GCC Telecom Sector August 2008

37 National Mobile Telecommunications Co. (Wataniya Telecom) Tickers NMTC.KW (Reuters) NMTC KK (Bloomberg) Recommendation BUY Listing: Kuwait Stock Exchange Current Price: KD1.86 (August 31, 2008) Key Data EPS* (fils) Avg. daily vol. ( 000) BVPS* (fils) week High / Low (KD) 2.782/1.86 P/E (x) 9.6 Market Cap (KD mn) P/BV (x) 2.8 Target Price (KD) Source: Global Research * Projected (2008) Background National Mobile Telecommunications Company (Wataniya) is a Kuwaiti Shareholding Company incorporated in October Wataniya Telecom was commercially launched in 1999 as the first privately owned operator in Kuwait. Wataniya Telecom has grown rapidly through acquisitions in the MENA region and Asia. Apart from Kuwait, the company has operations in Maldives (100% stake), Saudi Arabia (55.61% stake), Tunisia (50% stake), Algeria (71% stake) and in 2007 it got a license to launch second mobile services in Palestine (57% stake). In March 2007, Qatar Telecom (Qtel) acquired 51% of Wataniya Telecom shares from Kuwait Projects Company Holding KSC (KIPCO) group for a total cash consideration of US$3.8bn. Analysis of Country Operations Kuwait In 2007, Kuwait witnessed a y-o-y growth of 9.6% in total GSM subscriber base to reach 2.77mn customers, which indicates penetration rate of 82% on total population and 106% on addressable population. Zain leads the GSM segment in Kuwait with a market share of 57% whereas Wataniya accounts for the rest of the market share i.e. 43% as there are only two GSM operators in the country. In GSM segment, the total customer addition in 2007 was 244,009. In 2007, Wataniya gained a larger slice of total market additions with a customer addition of 129,009 which helped it August 2008 GCC Telecom Sector 33

38 to increase its market share from 42% in 2006 to 43% in Zain increased its customer strength by 115,000 customers in In Kuwait, out of the total subscriber base of 2.77mn as of Dec. 2007, 2.17mn customers (78.3%) were prepaid customers while 602,506 (21.7%) customers were postpaid. Zain accounted for 72.5% of the total postpaid customers and 52.5% of total prepaid subscribers while Wataniya accounted for 27.5% of total postpaid customers and 47.5% of total prepaid customers. Chart 1: Market Segmentation 80% 73% 60% 40% 20% 52% 27% 48% 0% MTC Post-paid Pre-paid NMTC Source: Company Reports and Global Research Saudi Telecom Company (STC), the third operator is likely to start its operation in In 2007, the government of Kuwait issued a third mobile license to STC for US$907.6mn. In 2007, Wataniya s total customer base for its Kuwait operations increased by 12.1% to 1.2mn. Out of the total subscriber base, 13.8% were postpaid customers while 86.2% were prepaid customers. For FY2007, Kuwait operations reported revenues of KD212.2mn, contributing 18.9% to total revenues of Wataniya for the year. EBITDA was at KD107.9mn representing an EBITDA margin of 50.8%. Its net profit from Kuwait operations increased by 35.5% to reach KD87.7mn. In 2007, Average ARPU improved by 4.2% to US$14.8. During 1H-2008, Wataniya increased its customer base to 1.28mn, a y-t-d increase of 79,263 customers. It reported revenues of KD112.2mn and EBITDA of KD58.9mn, representing an EBITDA margin of 52.5% for Kuwait operations. Net profit from Kuwait operations declined by 17% to KD40.9mn from KD49.3mn reported in 1H Iraq After December , the regulatory authorities did not renew Asia-Cell s GSM license. As a result the majority shareholders of Asia-Cell (a company incorporated in Cayman Islands) has filed for voluntary liquidation of Asia-Cell in the Grand Court of the Cayman Islands. Further to the appointment of liquidator and submission of arguments of the case, it was agreed to enter into an Asset Sale Agreement to dispose the net assets of Asia-Cell to Asia Cell LLC, a newly formed company. The sale has been completed and the liquidator has offered Wataniya US$107mn for its share of the total assets of Asia Cell amounting to US$225mn. The board of directors of Wataniya have decided to accept the offered price of US$107mn consisting of US$90mn, that will be distributed as dividend to Wataniya and the remaining US$17mn represents the settlement of a debt due to Wataniya by Asia-Cell. 34 GCC Telecom Sector August 2008

39 Algeria Wataniya s Algeria operations under Nedjma brand name increased its total customer base by 51.7% to 4.54mn in 2007 as compared to 2.99mn at the end of Out of the total subscriber base, 2.7% were postpaid customers while 97.3% were prepaid customers. Revenues for FY2007 were KD101.7mn, registered a growth of 37.7%, compared to KD73.9mn reported for FY2006. EBITDA was at KD23.2mn representing an EBITDA margin of 22.8%. It reported a net loss of KD13.6mn for FY2007 which reduced from KD16.8mn reported in FY2006. Out of the total loss of KD16.8mn, the net attributable loss to Wataniya Telecom for FY2007 was KD9.6mn, representing its 71% ownership in Nedjma. In 2007, Average ARPU declined by 10.7% to KD2.5. In 1H-2008, Nedjma s customer base increased to 5.0mn subscribers, a y-t-d increase of 10%. Nedjma reported revenues of KD61.2mn and a net attributable loss of KD0.1mn for 1H-2008, which declined from KD4.7mn reported in 1H Tunisia Wataniya operates under the brand name Tunisiana in Tunisia. It closed the year with 3.652mn customers, registered a growth of 19%. Out of the total subscriber base, 1.4% were postpaid customers while 98.6% were prepaid customers. For FY2007, Tunisiana reported revenues of KD80.6mn, contributing 19.8% to total revenues of Wataniya for the year. EBITDA was at KD40.2mn representing an EBITDA margin of 49.8%. In FY2007, Tunisiana witnessed a growth of 20.2% in revenues and 21.1% in EBITDA. Its net profit from Tunisia operations increased by 47.1% to KD12.9mn. Wataniya accounts for Tunisiana on the basis of 50% proportionate consolidation method. In 2007, Average ARPU declined by 4.4% to KD3.8. In 1H-2008, Tunisiana s customer base increased to 3.9mn subscribers, a y-t-d increase of 6.6%. Tunisiana reported revenues of KD48mn and EBITDA of KD25.4mn, representing an EBITDA margin of 52.9%. The net profit attributable loss to Wataniya was KD9.6mn, which increased from KD5.7mn reported in 1H Saudi Arabia Wataniya operates iden network under the brand name Bravo in Saudi Arabia. In 2007, Bravo subscribers grew 34.7% over 2006 to reach 91,841. It reported a net loss of KD6.3mn on total revenue of KD8.5mn for FY2007. In 2007, Wataniya increased its stake in Bravo from 47% to 55.6%. In 2007 Average ARPU declined by 22.6% to KD8. At the end of 1H-2008, Bravo has achieved an active customer base of 129,924 subscribers. Revenues were KD6.1mn and the net attributable loss to Wataniya was KD3.8mn, which increased by 35% on y-o-y basis. Maldives Wataniya Telecom Maldives (100% owned by Wataniya) ended the year 2007 with a customer base of 64,730, adding 9,368 customers in a year. Out of the total subscriber base, 3.8% were postpaid customers while 96.2% were prepaid customers. For FY2007, Maldives operations reported revenues of KD4.6mn which increased from KD4.1mn in FY2006. Its EBITDA remained negative, however, it declined to KD0.2mn in FY2007 from KD0.5mn in FY2006. It reported a higher net loss of KD4.1mn in FY2007 from KD3.5mn in FY2006. A the end of 1H-2008, total customers increased to 81,946. For 1H-2008 it reported revenues of KD2.3mn and net loss of KD1.9mn which declined by 12.4% on y-o-y basis. August 2008 GCC Telecom Sector 35

40 Palestine Wataniya Palestine Mobile Telecommunications Company (WPT), the company formed by Wataniya International and the Palestine Investment Fund (PIF), will launch Palestine s second mobile services. It has already signed a license agreement with the Ministry of Telecommunications and Information Technology in Palestine (MTIT). Wataniya group offered JD251mn (KD101mn) for the license to build and operate mobile telecommunication services in Palestine. Under the license conditions imposed by the Palestinian Ministry of Telecommunications and Information Technology, Wataniya Telecom International (WTI a holding company for WPT and 100% owned by Wataniya Telecom) is required to keep at all times 40% of the shareholding in WPT, 30% shall be held by the Palestinian Investment Fund (PIF) and 30% shall be held by the Public. During 2007, the Parent Company increased its shareholding in WPT from 40% to 57% by subscribing to additional capital for KD0.8mn. Since the public offering did not take place yet, which is envisaged to take place within six months from the allocation of frequency, WTI will in the meantime own 57% of the shares and the PIF shall own 43%. Once the public offering take place the percentage of WTI s ownership shall be diluted to 40%. On July , the Palestinian ministry of telecommunications and information technology announced that an agreement had been reached with Israel to allocate radio frequency spectrums to the Palestinian National Authority. Therefore, Wataniya Palestine is expected to be given its operating band within the next few months, ending a long delay after having been granted a license in late For Palestine operation, Wataniya group has accounted a loss of KD1.2mn for 1H-2008 which was at KD0.6mn during corresponding period of the previous year. Financial Performance In FY2007, Wataniya group reported total revenues of KD407.6mn, EBITDA of KD161.2mn and net profit of KD71.6mn (from continuing operations) as compared to our projected total revenues of KD388.2mn, EBITDA of KD164.8mn and net profit of KD69.9mn. Wataniya s actual performance as compared to our projections for FY2007 showed variations (actual v/s projection) of 4.9% in total revenues, -2.2% in EBITDA, -2.3% in net profit (from continuing operations) and -0.9% in total assets. Group level Performance In FY2007, total active customers of Wataniya group increased to 9.54mn versus 7.25mn during FY2006, an increase of 31.6%. Algeria, Tunisia, Kuwait, Saudi Arabia and Maldives operations constituted 47.5%, 38.3%, 12.6%, 0.9% and 0.7% respectively of the total customer base at the end of Revenues for the 12-months grew to KD407.6mn, an increase of 26% compared to revenues of KD323.5mn reported for FY2006. EBITDA grew to KD161.2mn, an increase of 25.2%, resulting in an EBITDA margin of 39.5%. Net profit attributable to shareholders of the parent company for FY2007 increased by 51.5% to KD80.7mn as compared to KD53.3mn reported for FY2006. In FY2007, the company s net profit margin increased to 19.8% from 16.5% in FY GCC Telecom Sector August 2008

41 Chart 2: Country-wise Customer Segmentation 2006 Chart 3: Country-wise Customer Segmentation 2007 Saudi Arabia 0.9% Maldives 0.8% Kuwait 14.7% Saudi Arabia 0.9% Maldives 0.7% Kuwait 12.6% Algeria 41.2% Algeria 47.5% Tunisia 42.3% Tunisia 38.3% Source: Company Reports In FY2007, the size of consolidated balance sheet of Wataniya grew by 5.4% to KD754.8mn. Its gross fixed assets increased by 4% to KD499.5mn. The non-current portion of long term debt at group level declined to KD158.5mn from KD184.7mn which was attributable to its operations in Algeria, Tunisia and Maldives. At the end of June 2008, Wataniya s group customer base increased to 10.37mn, registering a YoY growth of 39.3%. During 1H-2008, Wataniya s group revenue increased by 19.7% on y-o-y basis to reach KD230mn. Its EBITDA margin increased to 42.2% from 40.3% in 1H On the back of increase in margins, its EBITDA grew by 25.5% to KD97mn. The company reported a decline of 2.7% in consolidated net profit of KD42.6mn for the first half of 2008 compared to KD43.8mn reported for corresponding period of the previous year. Future Trend in Consolidated Revenues & Profitability Going forward we forecast a 4 year ( ) CAGR of 8.4% in consolidated revenues, 6.5% in EBIDTA and 5.4% in net profit for the period The contribution of Kuwait operation to the group revenue was 52% in 2007, which we expect to decline to 49% in 2008, 45% in 2009, 41% in 2010 and 37% in 2011, due to increasing revenue contribution from other operations. Chart 4: Trend in Consolidated Revenues & Net Profit (in KD Mn) Source: Global Research (F) 2009 (F) 2010 (F) 2011 (F) Revenues EBITDA Net Profit August 2008 GCC Telecom Sector 37

42 The group s consolidated capex to sales ratio remained almost stable in last two years, 2006 and 2007, at 27.5%. Going forward, we expect capex to increase for international operations, however, overall capex to sales ratio is set to decline. Outlook and Valuation In the current portfolio of Wataniya s operations, Kuwait is accounting for almost 50% of the group revenues and will continue to witness strong growth in 2008 and However, it is likely to face more competitive pressure especially when the third operator, Saudi Telecom, will start its operations in Kuwait in Therefore, we expect that ARPU and margins are likely to come under pressure with the advent of third operator. Other high growth markets are Algeria and Tunisia, which will have significant contribution going forward and we believe that Algerian operation is likely to turnaround in this year. In Palestine, though it will be a second GSM operator and has good growth potential, the prevailing situation in the country is a major concern. At the current market price of KD1.86 (Aug. 31, 2008), Wataniya trades at 9.6x and 8.7x of its earnings and 2.8x and 2.5x of its book value for FY2008E and FY2009E respectively. We have used Sum-Of-The-Parts (SOTP) valuation method for company s operations in different countries. Based on consolidation of the individual country operations, our SOTP valuation estimates the fair value of Wataniya s stock at KD2.578, which is 38.6% higher than the current market price of the stock. We, therefore, revise our recommendation on the stock from HOLD to BUY. Table 1: SOTP Valuation Summary Country Operations Equity Value (in KD mn) Algeria Tunisia Kuwait - Wataniya (holding company) Maldives 4.3 Saudi Arabia 2.4 Palestine (1.3) Cash & Bank Balances Total Equity Value 1,299.4 Number of shares outstanding (nos.) Per share value (KD) Source: Global Research 38 GCC Telecom Sector August 2008

43 BALANCE SHEET National Mobile Telecommunications Company K.S.C. Amount in Kuwaiti Dinar 2005 (A) 2006 (A) 2007 (A) 2008 (F) 2009 (F) 2010 (F) 2011 (F) Assets: Bank & cash equivalents 19,122,000 30,549,000 8,550,000 7,192,729 4,871,456 10,822,735 15,979,148 Deposits (< 3 months) 14,550,000 12,657,000 53,390,000 74,746,000 77,735,840 85,509,424 98,335,838 Deposits (> 3 months) 15,197,000 12,657,000 17,529,000 21,034,800 23,138,280 27,765,936 33,319,123 Investments held for trading 33,868, Trade & billing receivable 30,082,000 28,293,000 38,902,000 49,993,301 58,154,978 66,830,713 78,144,829 Income receivable 2,948,000 7,049,000 8,344,000 9,622,545 10,849,862 11,571,513 12,880,376 Other receivables 28,096,000 39,921,000 40,005,000 50,518,362 61,030,472 72,321,956 82,802,417 Inventories 4,566,000 4,541,000 4,796,000 6,474,600 7,251,552 7,976,707 8,694,611 Provision for doubtful debt (4,463,000) (4,037,000) (7,557,000) (8,248,895) (8,868,634) (10,024,607) (10,940,276) Due from liquidator ,377, Total Current Assets 143,966, ,630, ,336, ,333, ,163, ,774, ,216,066 Non-trading investments 22,068,000 51,640,000 25,003,000 31,253,750 32,816,438 36,098,081 41,512,793 net fixed assets 305,121, ,650, ,683, ,823, ,391, ,642, ,908,686 Net Book Value-Intangible assets 169,558, ,354, ,448, ,613, ,303, ,643, ,587,042 Investment in Associates 5,324,000 5,987, Deferred Tax Asset relating to subsidiary 13,875,000 20,010,000 25,330,000 27,957,260 29,047,372 29,898,251 29,433,635 Total Assets 659,912, ,271, ,800, ,981, ,722, ,056, ,658,219 Liabilities: Trade payables & Accruals 117,280,000 84,387, ,970, ,974, ,922, ,547, ,984,864 Due to equipment suppliers & contractors 53,761,000 59,197,000 36,950,000 51,388,863 58,894,017 65,785,458 70,132,984 Other Payables 20,677,000 28,375,000 31,278,000 45,102,985 39,983,241 44,452,686 49,740,339 Short term debt 17,426,000 8,641,000 12,079,000 11,079,000 10,079,000 9,079,000 8,079,000 Current Portion of long-term debt 37,733,000 19,516,000 36,516,000 33,517,027 27,910,111 22,461,563 17,129,380 Total Current Liabilities 246,877, ,116, ,793, ,062, ,788, ,326, ,066,568 Employee Indemnity Provision 1,518,000 2,098,000 2,795,000 3,354,000 4,024,800 4,829,760 5,409,331 Long term Debt 157,277, ,654, ,456, ,063, ,972, ,014, ,342,227 Total non-current liabilities 158,795, ,752, ,251, ,417, ,997, ,843, ,751,559 Minorities Interest 26,898,000 61,614,000 24,170,000 19,829,214 19,886,210 23,216,236 29,927,849 Owner s Equity: paid-up equity capital 43,639,000 45,821,000 45,821,000 50,403,300 50,403,300 50,403,300 50,403,300 Share premium 66,634,000 66,634,000 66,634,000 66,634,000 66,634,000 66,634,000 66,634,000 statutory reserve 16,181,000 23,785,000 32,199,900 42,437,883 50,403,300 50,403,300 50,403,300 voluntary reserve 16,181,000 23,785,000 32,199,900 39,388,594 39,388,594 39,388,594 39,388,594 treasury shares (9,796,000) (9,796,000) (3,598,000) (3,598,000) (3,598,000) (3,598,000) (3,598,000) gain on sale of treasury shares 803, ,000 6,914,000 6,914,000 6,914,000 6,914,000 6,914,000 foreign currency translation reserve (456,000) (511,000) (2,805,000) (2,805,000) (2,805,000) (2,805,000) (2,805,000) Fair Value Reserve 492,000 2,200,000 (651,000) (651,000) (651,000) (651,000) (651,000) Retained earnings 93,664, ,068, ,871, ,948, ,360, ,980, ,223,050 Total Shareholder s Equity 227,342, ,789, ,586, ,672, ,049, ,669, ,912,244 Total Liabilities 659,912, ,271, ,800, ,981, ,722, ,056, ,658,219 Source: Company Reports and Global Research August 2008 GCC Telecom Sector 39

44 OPERATING STATEMENT National Mobile Telecommunications Company K.S.C. Amount in Kuwaiti Dinar 2005 (A) 2006 (A) 2007 (A) 2008 (F) 2009 (F) 2010 (F) 2011 (F) 176,218, ,561, ,649, ,262, ,709, ,216, ,474,006 Sales Revenue 306,495, ,482, ,569, ,127, ,493, ,575, ,351,234 Total Cost of Sales (118,426,000) (120,277,000) (151,857,000) (180,411,940) (216,125,626) (233,961,507) (248,701,694) Gross Profit 188,069, ,205, ,712, ,715, ,367, ,614, ,649,540 EBITDA 126,868, ,675, ,152, ,015, ,847, ,411, ,718,225 Financial Charges (9,131,000) (15,663,000) (18,142,000) (16,480,342) (13,722,475) (12,224,100) (11,212,043) Depreciation (57,792,000) (48,284,000) (53,792,000) (62,769,851) (67,246,729) (71,892,265) (76,357,202) Amortisation (15,115,000) (13,445,000) (14,254,000) (14,726,573) (15,438,554) (15,721,470) (15,474,981) Profit Before Minority Interests, KFAS & Taxes 44,830,000 51,283,000 74,964,000 98,039, ,439, ,573, ,673,999 Minority Interest 9,910,000 (24,924,000) 9,185,000 4,340,786 (56,996) (3,330,027) (6,711,613) Profit Before KFAS 54,740,000 26,359,000 84,149, ,379, ,382, ,243, ,962,386 KFAS (493,000) (684,000) (841,000) (1,023,798) (1,143,827) (1,182,438) (1,219,624) NLST (1,214,000) (1,886,000) (2,107,000) (2,533,901) (2,830,971) (2,926,535) (3,018,569) Zakat - - (52,000) (931,772) (1,469,499) (2,120,657) (2,783,061) Director s Fees (200,000) (300,000) (400,000) (500,000) (600,000) (700,000) (800,000) Net Profit for the year 52,833,000 23,489,000 80,749,000 97,390, ,338, ,314, ,141,132 Attributable to minority interests (9,910,000) 24,924,000 (9,185,000) (4,340,786) 56,996 3,330,027 6,711,613 Profit for the year from continuing operations 42,923,000 48,413,000 71,564,000 93,049, ,395, ,644, ,852,745 Profit from the discontinued operations - 49,675, Profit for the year 42,923,000 98,088,000 71,564,000 93,049, ,395, ,644, ,852,745 Profit attributable to equity holders of the parent co. from continuing operations - 53,294,000 80,749, Profit attributable to equity holders of the parent co. from discontinued operations P&L Appropriation Account: - 19,870, Op Balance of Retained Earnings 73,260,000 93,664, ,068, ,871, ,948, ,360, ,980,710 Adjustments Net Profit for the year 52,833,000 73,164,000 80,749,000 97,390, ,338, ,314, ,141,132 Trfr to Statutory Reserve (5,474,000) (7,604,000) (8,414,900) (10,237,983) (7,965,417) - - Trfr to Voluntary Reserve (5,474,000) (7,604,000) (8,414,900) (7,188,694) Proposed Dividend KD (21,481,000) (34,370,000) (50,116,000) (63,303,731) (70,961,622) (75,693,663) (79,898,793) Bonus Shares - (2,182,000) - (4,582,300) Cl Balance of Retained Earnings 93,664, ,068, ,871, ,948, ,360, ,980, ,223,050 Source: Company Reports and Global Research 40 GCC Telecom Sector August 2008

45 CASH FLOW STATEMENT National Mobile Telecommunications Company K.S.C. Amount in Kuwaiti Dinar 2005 (A) 2006 (A) 2007 (A) 2008 (F) 2009 (F) 2010 (F) 2011 (F) Operating Operating Activities 118,412, ,917, ,192, ,990, ,946, ,262, ,145,215 Net Profit 42,923,000 98,088,000 71,564,000 97,390, ,338, ,314, ,141,132 Depreciation & Amortisation 73,391,000 62,351,000 68,046,000 77,496,425 82,685,284 87,613,735 91,832,183 Interest income (2,654,000) (2,410,000) (3,182,000) Share of loss of associate 1,558,000 3,527, , (Gain)/Loss on investments - 5,400,000 (186,000) (Gain)/Loss on property & eqpt disposal 156,000 (573,000) Provision for receivables 852,000 (309,000) 3,626, , ,740 1,155, ,669 Deferred Costs (7,502,000) (5,678,000) (5,247,000) (2,627,260) (1,090,112) (850,879) 464,616 Dividend Income (1,228,000) (1,608,000) (1,191,000) Financing Expenses 9,131,000 15,663,000 18,142,000 16,480,342 13,722,475 12,224,100 11,212,043 Income from investments NLST 1,214,000 1,886,000 2,107, Provision for post employment benefits 571, , , , , , ,571 Working Capital 53,984,000 (7,463,000) 34,323,000 72,706,851 3,655,083 (427,756) (10,749,223) ( Increase)/ Decrease in investments held for trading (17,196,000) 22,390, Dec/(inc.) in trade and other receivables (24,078,000) (8,233,000) (14,970,000) (22,883,208) (19,901,104) (20,688,870) (23,103,440) Dec / (inc) in Inventories (1,966,000) 25, ,000 (1,678,600) (776,952) (725,155) (717,904) Inc/(dec) in trade & other payables 97,224,000 (21,645,000) 49,084,000 97,268,659 24,333,139 20,986,269 13,072,120 Total Operating 172,396, ,454, ,515, ,697, ,601, ,834, ,395,991 Investing Capex (209,883,000) (89,061,000) (112,953,000) (142,910,792) (93,814,424) (86,143,007) (82,623,510) Increase in intangible assets (698,000) (5,488,000) (1,716,000) (9,892,121) (10,128,012) (6,061,974) (418,515) Interest received 2,874,000 2,467,000 3,182, Dividend received 1,228,000 1,608,000 1,191, Proceeds from sale of property & eqpt 3,204, , Decrease/(increase) in term deposits 14,001,000 2,540,000 (4,872,000) (3,505,800) (2,103,480) (4,627,656) (5,553,187) Increase in investments available for sale (6,250,750) (1,562,688) (3,281,644) (5,414,712) Purchase of non trading investments (9,545,000) (27,864,000) 23,786, Investment in Associate (6,882,000) (4,190,000) Acquisition of subsidiary - - (1,624,000) Disposal of property and equipment , Due from liquidator ,377, Total Investing (205,701,000) (119,049,000) (92,476,000) (133,182,463) (107,608,604) (100,114,280) (94,009,923) Financing Increase/(decrease) in shareholders capital Increase/(decrease) in short term debt (19,375,000) (8,785,000) 3,438, Increase/(decrease) in long term debt 52,953,000 9,160,000 (31,041,000) (24,391,556) (14,697,354) (12,407,465) (11,004,018) Decrease in obligations under finance lease (10,060,000) Proceeds from sale of treasury shares 230,000-12,309, Financing expenses (9,324,000) (15,663,000) (18,142,000) (16,480,342) (13,722,475) (12,224,100) (11,212,043) Increase in dues to banks (1,000,000) (1,000,000) (1,000,000) (1,000,000) Increase in other non-current liabilities Payment of dividend (21,481,000) (34,370,000) (50,116,000) (63,303,731) (70,961,622) (75,693,663) (79,898,793) Total Financing (7,057,000) (49,658,000) (83,552,000) (105,175,629) (100,381,451) (101,325,228) (103,114,854) Minority Interest 8,960,000 9,792,000 4,809,000 (4,340,786) 56,996 3,330,027 6,711,613 Effect of Foreign Currency translation 9,643,000 (1,005,000) 13,004, Cash and cash equivalents classified as due from liquidator - - (12,566,000) Net Change in Cash (21,759,000) 9,534,000 18,734,000 19,998, ,566 13,724,862 17,982,827 Net Cash at beginning 55,431,000 33,672,000 43,206,000 61,940,000 81,938,730 82,607,296 96,332,158 Net Cash at end 33,672,000 43,206,000 61,940,000 81,938,730 82,607,296 96,332, ,314,985 Source: Company Reports and Global Research August 2008 GCC Telecom Sector 41

46 FACT SHEET National Mobile Telecommunications Company K.S.C (A) 2006 (A) 2007 (A) 2008 (F) 2009 (F) 2010 (F) 2011 (F) LIQUIDITY RATIO s - Current Ratio Quick Ratio Cash Flow from Operations ratio PROFITABILITY RATIOS - Gross Profit Margin 61% 63% 63% 63% 60% 60% 59% - EBITDA to Revenues 41.4% 39.8% 39.5% 40% 39% 38% 38% - Net Profit Margin 17% 16.5% 19.8% 20% 20% 19% 19% - Return on Average Assets 8% 3% 11% 12% 12% 12% 12% - Return on Average Equity 25% 10% 28% 30% 30% 28% 27% EFFICIENCY RATIOS - Inventory Turnover (times) Debtors Turnover (times) Creditors Turnover (times) LEVERAGE RATIOS - Interest Coverage (times) Debt to Equity (times) GROWTH RATES - Revenue growth rate 29.3% 5.5% 26.0% 18.1% 12.8% 6.7% 6.0% - Net income growth rate 32.0% 0.9% 51.5% 20.6% 11.2% 2.7% 2.5% - Equity growth rate 12.7% 17.8% 14.1% 11.2% 11.0% 9.4% 8.3% - Total assets growth rate 4.3% 8.5% 5.4% 13.5% 5.5% 5.2% 4.5% RATIOS USED FOR VALUATION - EPS (fils) Book Value Per Share (fils) Price Per Share (KD) Market Capitalisation ( KD Mn) 1, , , Enterprise Value (EV KD Mn) 1, , , , EV/EBITDA (x) P/E (x) P/BV (x) Source: Company Reports and Global Research * Market price for 2008 and subsequent years are as per closing prices on Kuwait Stock Exchange on Aug. 31, GCC Telecom Sector August 2008

47 Saudi Telecom - STC Tickers 7010.SE (Reuters) STC AB (Bloomberg) Recommendation BUY Listing: Saudi Stock Exchange Current Price: SR64.75 ( August 31, 2008) Key Data EPS* (SR) 7.2 Avg. daily vol. ( 000) 1,787.5 BVPS* (SR) week Hi / Lo (SR) 87.75/57.25 P/E (x) 8.9 Market Cap (SR mn) 129,500 P/BV (x) 3.4 Target Price (SR) Source: Global Research * Projected (2008) Background Saudi Telecom (STC), was established in 1998 as a shareholding company following a Royal decree issued to separate the facilities of Post, Telegraph and Telephone (P.T.T) from the ministry. STC offers fixed, mobile, data, and internet services to personal, homes and enterprise users. The Company offers four key services: (1) Home services, which includes PSTN, broadband DSL. (2) Personal services, which includes messaging services, (post paid and pre-paid lines), business services, data services, and roaming services; (3) Enterprise, which is a data business solutions provided to companies and enterprises; (4) Wholesale services, which provides network services to other local and international operators. STC provides its services under four main brands, Al Jawal for mobile services, Al Hatif for fixed line services, Saudi Data and Saudi Net for data and internet services. STC had a full monopoly over the telecom market until 2003, when the VSAT market was liberalized. Subsequently, STC s monopoly in the mobile market was ended when the second mobile license was granted in 2004 to Etihad Etisalat Company (Mobily). In March 2007, a consortium led by Zain of Kuwait won the third mobile license with a bid of US$6.1bn, and launched its services in The fixed market was liberalized when three consortia- led by Bahrain Telecommunications (Batelco), Hong Kong s PCCW and US based Verizon Communications won three fixed line licenses in April 2007, bringing the total number of fixed line licenses in the kingdom to four and ending STC s monopoly over fixed lines. August 2008 GCC Telecom Sector 43

48 STC is still playing a leading role in the internet and data markets. However, the company operates in a very competitive environment that includes more than 50 ISP providers, 8 VSAT operators, and another 2 data service providers namely Integrated Telecom company (ITC), and Bayanat Al Oula Co. STC was awarded a 3G license in July 2005 for SR753.7mn, and launched its 3G network in June The company selected Huawei Technologies Company, a leading provider of next generation telecommunications network solutions to deploy the first WiMAX e-based network in the Middle East, covering major cities including Riyadh, Jeddah and Dammam. Under the agreement, Huawei will design and deploy an end-to-end WiMAX e network including Base Station, Access Service Network Gateway, Network Management System, as well as an Authorization, Authentication and Accounting system. STC joined a consortium of nine leading international telecom firms including Bharti Airtel (India), Etisalat (UAE), France Telecom (France), OGERO (Lebanon), PTCL (Pakistan), Telecom Egypt (Egypt), Telecom Italia Sparkle (Italy) and VSNL (India) to construct a high-capacity fiber-optic submarine cable system that stretches from India to Italy and France via the Middle East. The I-ME-WE (India, Middle East, Western Europe) will be a three fiber pair, new generation submarine cable system covering a distance of approximately 13,000km and is expected to be completed by Q The project will provide the bandwidth that will help support the ongoing developments in the Middle East and Asia. The supply contract for the project has been awarded to Alcatel- Lucent, France. Analysis of operations Saudi operations STC s Mobile monopoly broken in 2005 The breakup of STC s monopoly over the mobile segment, resulted in around 41% loss of the company s market share to the second operator Mobily. Following the launch of Mobily s operations in 2005, competition resulted in the increase in subscribers growth, reduced prices and higher quality of services. By the end of 2007, mobile penetration reached 116% compared to 82% in 2006, with prepaid subscribers forming around 83% of all mobile subscribers in the kingdom. A third operator ( Kuwait s Zain) launched operations in August Chart 01: KSA Telecom penetration rates 140% 120% 100% 80% 60% 40% 20% 0% Source: CITC, Global Research Mobile Penetration Fixed Penetration Broadband Penetration 44 GCC Telecom Sector August 2008

49 Fixed, No Longer a Monopoly Fixed line subscribers approached 4mn subscribers at the end of 2007, translating into a penetration rate of 16.3%. The country s fixed market was controlled by the incumbent operator, STC, until April 2007, when the Communication and Information Technology Commission (CITC) liberated the market and issued three licenses to the three consortia led by Batleco, Hong Kong s PCCW, and US-based Verizon Communications. The combined capital of the three companies is expected to reach US$533mn. MCI-Verizon, announced that it would operate on a capital of US$300mn and invest an additional US$3bn to link 21 of the Kingdom s cities in seven years. Verizon is expected to operate wire-line connectivity while Batelco and PCCW will offer both wire-line and wireless communication solutions. The three companies are expected to go public before the end of 2008 with a stake of at least 25% that must be offered to the public-as well as a 10% offered to a state-owned pension fund. Broadband penetration increasing rapidly Broadband subscribers grew from 24,000 subscribers in 2004 to 623,000 subscribers in 2007, with approximately a 10 fold increase on y-o-y basis. Despite the remarkable growth, still KSA broadband penetration rate, which stood at 2.5% in 2007, is considered a very low rate when compared to both the world average of 5.25%. International operations As a result of increasing competition in the Saudi telecom market, the company started considering inorganic growth opportunities. STC adopted the 10 X 10 strategy which aims at generating as much as 10% of revenues from foreign operations by Accordingly, the company started expanding outside its home market beginning with the Maxis deal which gave STC foothold in Malaysia, India, and Indonesia, Later, STC won the bid for a 26% stake in Kuwait s third mobile service operator. Finally, STC acquired a 35% stake in Oger Telecom, which gave STC presence in Turkey and South Africa. Table 01: Foreign Acquisitions Deal Date Stake (%) Value (US$bn) Maxis Group Jun Kuwait third Mobile Operator Nov Oger Telecom Jan Source: Company Announcements, Global Research The Maxis Deal The year 2007 marked STC s first foreign acquisition. In June 2007, STC entered into a deal to form a strategic partnership with Binariang GSM (Binariang), the principal shareholder of Maxis Communications (Maxis), the Malaysian-based integrated telecommunications operator, and its subsidiary PT Natrindo Telepon Seluler (NTS) in Indonesia. The Maxis Group has operations in Malaysia, Indonesia and India. The deal was valued at SR11.4bn (US$3.05bn), including a SR3.4bn credit facility to be provided equally by the partners to finance the Indian expansion of Maxis Indian unit, Aircel. STC will participate in the recapitalization and restructuring of Binariang which will hold 100% of Maxis, and will invest together with the other shareholders of Binariang to fund the international operations August 2008 GCC Telecom Sector 45

50 of Maxis in India and Indonesia. Upon conclusion of the deal, STC had a 25% effective interest in Maxis and a 51% direct stake in NTS, Maxis subsidiary in Indonesia. Chart 02: Maxis Deal Saudi Telecom Company 25% Binariang GSM 100% 51% Maxis Communications 44% 74% PT Natrindo Telepon Seluler (NTS) AirCel Source: Company Reports, Global Research Overview of Maxis Operations Maxis group has operations in Malaysia, India, and Indonesia. The group offers mobile, fixed, and international gateway services. However, mobile services captures around 95% of operating revenues and almost 100% of the group s segment results ( profit before interest and tax). The Malaysian operations contributed 90.3% to the group s operating revenues in 2006, and 99.8% to the group s results in India operations, contributed 9.7% to the group s operating revenues in 2006, and contributed 6.5% to the group s segment results, while the Indonesian operations contributed a negative 6.3% to the group s segment results in Table 02: Snapshot of Maxis operations (2007) Malaysia India Indonesia Population (000) 27,450 1,141, ,857 Mobile Penetration (%) Company Maxis Aircel NTS No. of Mobile Operators Market Share (%) Source: Company Announcements, Global Research Malaysia Malaysia mobile market is competitive, and competition is expected to intensify further with the entry of new players and the introduction of mobile number portability (MNP), expected this year. Mobile penetration increased in Malaysia from 72.3% in 2006 to 85.1% in Maxis is considered to be Malaysia s cellular market leader with around 41.5% of the mobile market subscribers. The company had 9.72mn subscribers in Malaysia at end of The 46 GCC Telecom Sector August 2008

51 mobile market was mainly dominated by three mobile operators including Maxis (41.5%), Celcom (31%) and DiGi (27.5%). Another two players are expected to launch operations soon namely, a new 3G license holder U-Mobile and Tune Talk-MVNO (mobile virtual network operator). India India s mobile industry is growing rapidly. With a penetration rate of around 20% in 2007, the potential for further growth in India s wireless industry is immense. Aircel, Maxis Indian subsidiary, has operations in 9 of India s 23 telecoms regions and has obtained licenses for the rest. Aircel had 9.43mn subscribers at end of 2007, capturing a market share of around 4%. Indonesia Indonesia is one of the fastest growing mobile markets in South-East Asia. Mobile penetration increased to 42% at the end of 2007 compared to 28.3% in Indonesia s cellular market is currently dominated by unlisted PT Telkomsel, which has a 50% market share. PT Indosat Tbk (ISAT.JK) is second with nearly 24% of the market while PT Exelcomindo Pratama (EXCL.JK) is third with 16%. PT Natrindo Telepon Seluler (NTS) has a license to build and operate 2G and 3G networks in Indonesia. STC wins stake in Kuwait 3rd mobile operator During November 2007, Saudi Telecom Co. won a 26% stake in the third telecom operator in Kuwait with the highest bid of KD248.7mn (US$907.7mn). The capital of the new company amounts to KD50mn with 50% offered for public subscription, while the government will retain a 24% stake. The new company is expected to start operations in Kuwait Before STC won the license as the third telecom operator, Zain, and Wataniya (NMTC) were the only two mobile operators in Kuwait. The year 2007 witnessed a growth of 10% in total mobile subscribers to reach 2.77mn customers, which indicates penetration rate of 82% (based on total population) compared to a penetration rate of 79% in Table 03: Snapshot of Kuwait mobile market (2007) Zain Wataniya Mobile Subscribers (000) 1,576 1,198 Prepaid Customers (%) Market Share (%) Revenues* (KD 000) 336, ,200 EBITDA Margin (%) Source: Company Announcements, Global Research * From Kuwait operations Acquiring 35% of Oger Telecom During January 2008, STC acquired a 35% stake in Oger Telecom from Saudi Oger, the controlling shareholder of Oger Telecom, at a net price of US$2.56bn. Oger Telecom Limited is a company incorporated in the Dubai International Financial Centre. Its parent, Saudi Oger, is a construction company controlled by the family of late Lebanese prime minister Rafik al- Hariri. August 2008 GCC Telecom Sector 47

52 Chart 03: Oger Telecom s Subsidiaries Source: Oger telecom Gaining presence in Turkey and South Africa Oger Telecom owns 55% of fixed-line operator Turk Telekom and 75% of Cell C, South Africa s third largest mobile operator. It also operates as an ISP providing dial-up, ADSL, leased line and VPN services in Saudi Arabia, Lebanon and Jordan through Cyberia. Turk Telekom is the leading provider of fixed-line services in Turkey. Through its 81.12% shareholding in Avea, it also provides mobile communications services in Turkey. Avea is the third largest mobile operator in Turkey with an approximate 16.2% market share in Cell C offers mobile communications services to pre-paid and post-paid customers in South Africa with approximately 11% market share as of 31 December Turkey and South Africa have the largest telecom sectors in the Middle East and Africa respectively, driven by their large and relatively wealthy populations. The Turkish fixed-line market had approximately 18.4mn subscribers and a penetration rate of 24.6% in Turkey s mobile subscribers stood at 62mn subscribers in 2007 with a penetration rate of 83%. In addition, the Turkish market has witnessed rapid growth in broadband penetration with DSL adoption reaching over 4.5mn subscribers in 2007, up from 250,000 subscribers at the end of The mobile market in South Africa has also been exhibiting significant growth over the past years. Total mobile subscribers in South Africa stood at 42.3mn subscribers with a penetration rate of 87% in Financial performance Revenues grow by 6.4% in 2007 led by the growth in the wireless segment STC reported operating revenues of SR34.5bn for 2007, increasing by 6.4% over 2006 operating revenues. STC s operating revenues includes revenues from the wireline and wireless segments. Revenues from the wireline segment dropped by 4.8% to reach SR9.3bn, whereas revenues from the wireless segment grew by 11.2% to reach SR25.2bn in We expect further pressure in the wireline segment in STC s home market after the liberalization of the fixed line segment and the granting of three new licenses. In addition, the mobile 48 GCC Telecom Sector August 2008

53 market will have a third competitor in 2008, squeezing STC s market share. However, we expect operating revenues in both the wireline and wireless segment to improve on the back of STC s foreign acquisitions, after factoring in the company s recent acquisition of 35% of Oger Telecom, and the launch of Kuwait s third mobile operator, expected in Chart 04: Revenue Mix SRbn F 2009 F 2010 F 2011 F Wireline Wireless Source: Company Reports, Global Research Operating expenses increasing by 10.6%... Total operating expenses stood at SR21.8bn in 2007 increasing by 10.6% over Government charges formed 22% of total expenses and stood at SR4.4bn. In Feb-07, the Saudi government decided to reduce the fees levied by the government for land and mobile phone services from 15% to 10%. Access charges formed 20.3%, employee costs (19.6%), depreciation and amortization (18.8%), administrative and marketing (11.2%), and repairs and maintenance (8.1%). Operating expenses as a percentage of operating revenues stood at 63% in 2007, increasing from 61% in Chart 05: Operating Expenses SRbn Repairs and maintenance Administrative and marketing expenses Depreciation and amortization Employee costs Access charges Government charges Source: Company Reports, Global Research Further pressure on EBITDA margins EBITDA stood at SR16.71bn in 2007, increasing by a marginal 1.4% over 2006 EBITDA of SR16.48bn. EBITDA margin stood at 48.5% down from 51% in 2006, however still a high margin compared to industry norms. We expect further pressure on EBITDA margin in the short term considering STC s foreign expansions and start up operations outside its domestic market. August 2008 GCC Telecom Sector 49

54 Chart 06: EBITDA SRbn F 2009 F 2010 F 2011 F 56% 54% 52% 50% 48% 46% 44% 42% 40% EBITDA EBITDA Margin Source: Company Reports, Global Research Inorganic growth supporting bottom line going forward Net profit for 2007 stood at SR12bn, dropping by 6.1% on a y-o-y basis. Net profit margin declined from 39.5% in 2006 to 34.9% in Return on equity stood at 33.5% in 2007, while return on assets stood at 17.5% declining from 37.5%, and 27.8% in 2006 respectively. Going forward, despite the expected increase in competition in STC s domestic market, we expect earnings to improve on the back of STC s recent foreign acquisitions which are expected to add to the company s bottom line. Chart 07: Profitability SRbn F 2009 F 2010 F 2011 F 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% F 2009 F 2010 F 2011 F Net Profit NPM ROE ROA Source: Company Reports, Global Research Total assets increase on the back of consolidation Total assets increased by 49% to reach SR68.8bn in 2007 compared to SR46.1bn in 2006 on the back of consolidating the company s financial statements. Starting from fiscal year 2007, STC fully consolidated its investment in Arabian Internet and Communications Services Co. AwalNet, and Tejari Saudi Arabia in which the company holds 100%, and 50% respectively. In addition, it proportionately consolidated its 25% investment in Binariang, and its 51% investment in PT Natrindo Telepon Seluler (NTS). STC s intangible assets increased from SR731.7mn in 2006 to SR13.8bn in 2007, on the back of the goodwill arising on the consolidation and acquisition of Binariang, coupled with the goodwill arising on the acquisition of NTS. 50 GCC Telecom Sector August 2008

55 Chart 08: Asset Structure SRbn Investments Other non current assets Intangible assets Property, plant, and equipment Other current assets Cash Source: Company Reports, Global Research Increasing capex to sales ratio Capex to sales ratio increased from 10.4% in 2006 to 24.1% in Capex is expected to increase significantly in 2008 on the back of proportionate consolidation of the STC s recent acquisitions. Going forward, we expect capex to sales ratio to increase in line with the expansion in the company s overseas operations. Chart 09: Capex SRbn F 2009 F 2010 F 2011 F 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Capex Capex/Sales Source: Company Reports, Global Research Conservative financing policy STC s financing policy remains conservative. Before STC venture into foreign markets, the company was debt free. Starting from the year 2007, which marked STC s first expansion outside its home market, the company resorted to external sources of financing to partially fund its foreign expansions. STC s total debt stood at SR13.6bn at the end of 2007 including an SR6bn Murabaha agreement with Samba Financial Group, Riyad Bank, National Commercial Bank and Al Rajhi Bank to finance part of its 25% acquisition in Maxis Communications (Malaysia) which amounted to SR11.4bn. Total debt also included SR7.6mn representing STC s share in the Sukuk and bank facilities of Binariang. The Sukuk were used to finance Binariang s acquisition of the outstanding shares of Maxis, which raised Binariang ownership in Maxis to 100%. August 2008 GCC Telecom Sector 51

56 Chart 10: Debt to Equity SRbn F 2009 F 2010 F 2011 F Debt Equity Source: Company Reports, Global Research Growing debt to finance expansions STC received two credit ratings in Feb from Moody s and Standard &Poor s. Moody s assigned A1 long term local and foreign currency ratings, whereas Standard &Poor s assigned A+ Long Term and A-1 Short term foreign currency corporate credit ratings, with a stable outlook. We expect the company s debt levels to increase going forward in line with STC s foreign expansion plans. Foreign expansions boost H results STC reported strong results in H compared to the same period in The company s total revenues grew by 36.3% to reach SR21.6bn. Fixed line revenues witnessed a higher growth rate than that of the mobile segment, growing by 59.1% to reach SR6.6bn, while revenues from the mobile segment grew by 28.3% to reach SR14.9bn. STC s net profit for H stood at SR6.8bn compared to SR5.8bn reported in the same comparative period in GCC Telecom Sector August 2008

57 Outlook and Valuation We expect the company s mobile market share in its home market to shrink further after the third operator, Zain launched its operations in August In addition, we expect STC s fixed line segment to be impacted when the three awarded companies Batelco- Atheeb, Hong Kong s (PCCW), and MCI International-Verizon begin their commercial operations, expected at the end of However, despite the increase in competition in STC s local market which is likely to put pressure on the company s market shares and pricing strategies, we believe that the Saudi market still holds potential giving the size of the market, and favorable demographics with around 32% of the population in the age of 10 to 24, coupled with the relatively lower mobile penetration rate, and a very low penetration rates in the broadband and data segment. Despite the intensive competition in its home market, we expect STC s performance to improve on the back of the company s overseas expansions. We expect that STC s expansion strategy to pay off starting from 2008 onwards, the company s Oger Telecom deal is expected to boost STC s fixed line revenue through Turkey s fixed line operator, Turk Telecom. In addition, through its recent acquisitions, STC gained presence in the mobile segment of Malaysia, Indonesia, and India through Maxis, as well as Turkey, and South Africa through Oger Telecom. We expect STC s revenues to grow by a CAGR of 9.2% during our forecast period ( ), with an 8.5% CAGR for the fixed line segment and a 9.4% CAGR for the mobile segment. At the current market price (Aug ), STC trades at 8.9x and 8.2x its earnings and 3.4x and 3.2x its book value for 2008F and 2009F respectively. We have used the Discounted Cash Flow (DCF) to value STC. The DCF model is based on a 4-year (FY2008- FY2011) explicit forecast period for the Free Cash Flow to Firm (FCFF). Our DCF valuation estimates the fair value of STC s stock at SR78.75, which is 21.6% higher than the current market price of the stock. We therefore reiterate our Buy recommendation for STC. August 2008 GCC Telecom Sector 53

58 BALANCE SHEET Saudi Telecom - STC (SR 000 s) F 2009 F 2010 F 2011 F Cash on hand & at Bank 4,004,821 2,909,321 7,613,786 8,657,966 9,590,329 10,325,293 11,127,316 Short-term investments 3,695,000 5,599, ,319 1,582 1,820 2,002 Net Notes & Account Receivable 3,623,634 3,938,639 4,972,988 10,275,965 11,830,521 13,116,112 14,186,338 Inventory 153, , , ,847 1,079,259 1,186,446 1,297,021 Advance Payments 473, ,622 1,018,644 3,931,389 4,317,034 4,745,782 5,188,083 Total current assets 11,950,144 13,362,282 13,973,093 23,849,487 26,818,726 29,375,452 31,800,760 Property, plant, and equipment 30,532,590 30,128,383 34,369,297 49,389,357 52,665,334 54,718,610 56,596,579 Intangible assets 753, ,766 13,855,574 31,794,742 36,563,953 38,392,151 40,311,759 Other non current assets 515, ,183 4,202,315 1,147,283 1,366,679 1,496,933 1,626,487 Investments in associates (Equity Method) 892, , ,764 1,087,640 1,196,404 1,316,045 1,447,649 Investments and advances 100, ,033 1,417,861 1,559,647 1,715,612 1,887,173 1,981,532 Total Long-term Assets 32,793,732 32,759,491 54,833,811 84,978,670 93,507,983 97,810, ,964,006 Total Assets 44,743,876 46,121,773 68,806, ,828, ,326, ,186, ,764,766 Current portion of long term debt ,448 3,453,300 2,958,000 2,286,400 1,479,000 Accounts payable 2,605,975 1,959,937 3,082,080 6,879,931 7,554,810 8,305,119 9,079,146 Dividend payable 207,249 65,006 56, Other payables - 2,355,215 6,160,443 5,544,399 6,098,839 6,708,722 7,379,595 Accrued Expenses 5,312,230 3,749,277 5,586,722 7,862,778 8,634,069 9,491,564 9,857,358 Other credit balances 1,329,277 1,394,028 1,773,107 2,753,480 3,009,202 3,296,000 3,581,255 Total current liabilities 9,454,731 9,523,463 17,219,660 26,493,887 28,254,920 30,087,805 31,376,354 Long term debt ,019,303 25,580,000 29,580,000 28,580,000 29,580,000 Other non-current liabilities 2,433,708 2,443,971 2,680,401 9,178,266 10,030,675 10,986,666 11,937,517 Total Long-term Liabilities 2,433,708 2,443,971 15,699,704 34,758,266 39,610,675 39,566,666 41,517,517 Paid in Capital 15,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 Reserves 4,538,568 5,818,458 7,020,710 8,468,657 10,055,631 10,055,631 10,055,631 Unrealized gains on other investments (3,342) (3,342) Financial statements translation differences , , , , ,612 Retained earnings 13,320,211 8,339,223 8,654,362 9,088,746 9,882,233 12,448,363 14,284,574 Total Shareholders Equity 32,855,437 34,154,339 35,871,911 37,911,713 40,380,751 43,035,459 44,924,816 Minority interest 15,629 9,664,290 12,080,363 14,496,435 15,946,079 Total Equity 32,855,437 34,154,339 35,887,540 47,576,003 52,461,114 57,531,894 60,870,895 Total Liabilities and Equity 44,743,876 46,121,773 68,806, ,828, ,326, ,186, ,764,766 Source: Company Reports, Global Research 54 GCC Telecom Sector August 2008

59 INCOME STATEMENT Saudi Telecom - STC (SR 000 s) F 2009 F 2010 F 2011 F Revenues 32,539,943 32,393,571 34,457,807 45,891,331 50,153,373 54,933,329 59,687,584 COGS (13,200,898) (13,977,222) (15,299,147) (19,656,945) (21,585,172) (23,728,910) (25,940,417) S,G&A (1,868,388) (1,932,412) (2,442,472) (5,048,046) (5,516,871) (6,042,666) (6,565,634) EBITDA 17,470,657 16,483,937 16,716,188 21,186,339 23,051,330 25,161,752 27,181,533 Depreciation & Amortization (3,836,211) (3,835,792) (4,098,287) (5,696,424) (6,020,207) (6,717,835) (7,368,568) Operating Income (EBIT) 13,634,446 12,648,145 12,617,901 15,489,915 17,031,122 18,443,917 19,812,965 Interest income 207, Investment income 106, ,631 30, , , , ,671 Other non-operating income 356, Provisions (272,393) Non-operating expense (1,293,053) (24,911) (535,394) (711,316) (752,301) (824,000) (895,314) Commissions - 416, , , , , ,012 Earnings before Minority interests, Zakat and Tax 12,739,110 13,141,478 12,446,213 15,235,420 16,786,655 18,187,777 19,533,333 Provision for Zakat (292,249) (342,576) (384,631) (396,121) (436,453) (472,882) (507,867) Provision for Tax - - (42,020) (76,177) (125,900) (181,878) (195,333) Income before extra items 12,446,861 12,798,902 12,019,562 14,763,122 16,224,302 17,533,017 18,830,133 Minority interest - - 2, , , , ,028 Net income 12,446,861 12,798,902 12,017,391 14,479,469 15,869,736 17,107,537 18,362,106 P&L Appropriation account (SR 000 s) F 2009 F 2010 F 2011 F Beginning retained earnings 12,618,036 13,320,211 8,339,223 8,654,362 9,088,746 9,882,233 12,448,363 Net income 12,446,861 12,798,902 12,017,391 14,479,469 15,869,736 17,107,537 18,362,106 Net Distributable Income 25,064,897 26,119,113 20,356,614 23,133,831 24,958,482 26,989,770 30,810,469 Reserves (1,244,686) (1,279,890) (1,202,252) (1,447,947) (1,586,974) - - Common dividends (10,500,000) (11,500,000) (10,500,000) (12,597,138) (13,489,275) (14,541,407) (16,525,895) Ending retained earnings 13,320,211 8,339,223 8,654,362 9,088,746 9,882,233 12,448,363 14,284,574 Source: Company Reports, Global Research August 2008 GCC Telecom Sector 55

60 CASH FLOW STATEMENT Saudi Telecom - STC (SR 000 s) F 2009 F 2010 F 2011 F Net Income After Taxes 12,446,861 12,798,902 12,017,391 14,479,469 15,869,736 17,107,537 18,362,106 Depreciation & Amortization 3,836,211 3,835,792 4,098,287 5,696,424 6,020,207 6,717,835 7,368,568 Doubtful debts expense - 435, , Investment income - (101,631) (30,561) Gain/Loss of disposal of PP&E - (12,600) 15, Losses on sale of other investments - 2,450 3, Provision for capital work in progress - (24,057) Change in Working Capital Notes & Account Receivable (490,072) (750,607) (1,557,404) (5,302,977) (1,554,556) (1,285,591) (1,070,226) Inventories 64,362 3,588 (217,975) (615,172) (96,411) (107,187) (110,575) Advanced Payments (276,850) (292,221) (253,022) (2,912,745) (385,646) (428,748) (442,301) Other non-current assets (433,338) (243,828) (3,443,132) 3,055,032 (219,396) (130,254) (129,554) Accounts Payables (122,626) (646,038) 1,122,143 3,797, , , ,027 Other payables 0 219,719 4,116,092 (616,044) 554, , ,872 Accrued Expenses 853, ,543 1,837,445 2,276, , , ,794 Other credit balances 5,466 75, , , , , ,255 Total Cash From Operations 15,883,193 15,872,628 18,536,207 20,838,266 21,890,267 24,378,078 26,073,967 Cash From Investments Fixed Assets (2,165,134) (3,372,944) (8,317,381) (8,235,834) (20,716,485) (9,296,184) (8,771,112) Projects Under-Construction (1,422,025) - - (12,480,651) 11,420, ,072 (475,426) Short-term Investments (1,960,000) (1,904,000) 5,599,000 (1,319) (264) (237) (182) Non-current liabilities (216,302) - - 6,497, , , ,851 Intangible Assets (753,750) - (12,846,116) (17,939,168) (4,769,211) (1,828,198) (1,919,608) Investments in affiliates (89,986) - - (98,876) (108,764) (119,640) (131,605) Investments and advances 55,649 (48,941) (1,354,479) (141,786) (155,965) (171,561) (94,359) Total Cash From Investments (6,551,548) (5,325,885) (16,918,976) (32,399,769) (13,477,979) (9,934,757) (10,441,439) Short-term debt ,448 2,892,852 (495,300) (671,600) (807,400) Long-term debt ,019,303 12,560,697 4,000,000 (1,000,000) 1,000,000 Change in Equity Dividends Paid (10,340,529) (11,642,243) (10,508,146) (12,653,998) (13,489,275) (14,541,407) (16,525,895) Translation Difference ,471 88,578 88,578 53,147 Minority Interest 15,629 9,648,661 2,416,073 2,416,073 1,449,644 Total Cash From Financing (10,340,529) (11,642,243) 3,087,234 12,605,683 (7,479,925) (13,708,357) (14,830,505) Change in Cash & Equivalents (1,008,884) (1,095,500) 4,704,465 1,044, , , ,023 Beginning Cash Balance 5,013,705 4,004,821 2,909,321 7,613,786 8,657,966 9,590,329 10,325,293 Ending Cash Balance 4,004,821 2,909,321 7,613,786 8,657,966 9,590,329 10,325,293 11,127,316 Source: Company Reports, Global Research 56 GCC Telecom Sector August 2008

61 FACT SHEET Saudi Telecom - STC F 2009 F 2010 F 2011 F LIQUIDITY RATIOS Current ratio (times) Quick ratio (times) Cash ratio (times) PROFITABILITY RATIOS Gross Margin 59.4% 56.9% 55.6% 57.2% 57.0% 56.8% 56.5% EBITDA Margin 53.7% 50.9% 48.5% 46.2% 46.0% 45.8% 45.5% Net Profit Margin 38.3% 39.5% 34.9% 31.6% 31.6% 31.1% 30.8% ROE 37.9% 37.5% 33.5% 38.2% 39.3% 39.8% 40.9% ROA 27.8% 27.8% 17.5% 13.3% 13.2% 13.5% 13.7% ACTIVITY RATIOS A/R Turnover (times) A/P Turnover (times) A/P average repayment period (days) LEVERAGE RATIOS Debt to equity (times) Debt to total assets 0.0% 0.0% 18.9% 23.5% 24.6% 22.5% 22.1% GROWTH RATES Revenue growth rate 6.7% -0.4% 6.4% 33.2% 9.3% 9.5% 8.7% Net income growth rate 33.6% 2.8% -6.1% 20.5% 9.6% 7.8% 7.3% Equity growth rate 6.3% 4.0% 5.0% 5.7% 6.5% 6.6% % Total assets growth rate 6.2% 3.1% 49.2% 58.2% 10.6% 5.7% % RATIOS USED FOR VALUATION BV per share (SR) - Adjusted EPS (SR) - Adjusted Market Price (SR) Market capitalization (SR 000) 247,800, ,000, ,500, ,500, ,500, ,500, ,500,000 Enterprise Value (SR 000) 251,804, ,909, ,534, ,124, ,552, ,958, ,568,316 EV / EBITDA PE ratio PBV ratio Dividend yield 3.8% 6.9% 6.3% 9.7% 10.4% 11.2% 12.8% Source: Company Reports, Global Research * Market price for 2008 and subsequent years as on August 31, 2008 August 2008 GCC Telecom Sector 57

62 Etihad Etisalat Company - Mobily Tickers 7020.SE (Reuters) EEC AB (Bloomberg) Recommendation BUY Listing: Saudi Stock Exchange Current Price: SR46 ( August 31, 2008) Key Data EPS* (SR) 3.8 Avg. daily vol. ( 000) BVPS* (SR) week Hi / Lo (SR) 76.75/40.25 P/E (x) 12.2 Market Cap (SR mn) 23,000 P/BV (x) 3.0 Target Price (SR) Source: Global Research * Projected (2008) Background Etihad Etisalat Company (Mobily), is Saudi s second mobile operator. The company was founded by the UAE-based, Emirates Telecommunications Corporation (Etisalat), which won the second GSM license in Saudi Arabia for a period of 25 years, thus ending Saudi Telecom Company s monopoly in the wireless business segment. Etisalat paid US$3.45bn for the license which included a 3G license as well. Mobily launched its services in May 2005, and ended the year with a market share of 16% of the Saudi mobile market. Within three years of operations, the company managed to grab a market share of 41% by the end of 2007, with 11.1mn subscribers. In addition, it broke-even in 2006 with an EBITDA of SR2bn and net income of SR700.36mn. Mobily was the first company to introduce Blackberry services in Saudi Arabia, in cooperation with Research in Motion (RIM), and Emitac Mobile Solutions (EMS). It was also the first mobile operator in the Kingdom that introduced the value added services of MMS, locations based service (LBS), international roaming for prepaid SIM cards in addition to GPRS and GPRS EDGE roaming, as well as other services such as kalemni (call me), enabling disconnected mobile to send free SMS. Similarly, the company was the first Saudi mobile operator to launch in-flight calls aboard in select airlines, through an agreement with AeroMobile, a specialized aviation mobile operator, and launched the first video mail service in the Kingdom. The company was also the first to launch 3.5G services in the kingdom in June The infrastructure was set up by Erikson, Nokia, and Chinese Huawei. In November 2007, the company began the first phase of the second expansion of its 3.5G network across Saudi Arabia in order to keep pace with the latest 3.5G technologies and expand its network to reach new cities and provinces. Mobily has allocated SR1bn for the second expansion plan that started in collaboration with Ericson, Nokia and Huawei. 58 GCC Telecom Sector August 2008

63 Mobily is keen on enhancing its market position in the broadband internet services market. In June 2007, the company doubled the broadband mobile Internet speed on its network, with an HSDPA (high-speed downlink packet access) speed of 3.6 Mbps. Later in September 2007, the company introduced a 7.2 Mbps modems and data service SIM cards also based on HSDPA. In November 2007, Mobily launched the Mobily Connect router, which is based on Huawei s E960 3G router, and distributes broadband Internet service using WiFi to serve up to 32 users. Mobily s subscribers in the mobile Internet service has exceeded 100,000 by the end of The company underwent an IPO on the Saudi Stock Exchange in October 2004, which raised US$267mn for 20% of its shares. In April 2008, Mobily s founders floated another 20% for public subscription in order to comply with the royal decree which stipulates floating 20% of the company s equity in the third year after formation. Accordingly, Etisalat s total share in the company has been reduced to 26.25% from 35%. Chart 01: Old Structure Chart02: New Structure Public 20% Etisalat 26% Etisalat 35% Public 40% Others 45% Others 34% Source: Company Releases, Global Research Mobily s started with a paid-up capital of SR5bn with a par value of SR50 per share. In April 2006, the company effected a 1:5 stock split increasing the number of outstanding shares to 500mn with a par value of SR10 per share. During 2008, the BOD met and approved a 40% rights issue that will increase the company s capital to SR7bn. After the rights issue, the founders will hold 60% of the company s capital and the public will hold 40%. August 2008 GCC Telecom Sector 59

64 Analysis of operations Mobily managed to grab a 41% market share by the end of 2007 The Saudi mobile market has been a monopoly since Saudi Telecom (STC) was established in 1998, however after Mobily won the second license and launched its operation in 2005, STC has been losing market share to Mobily which managed to grab a market share of 16% in the first year of operations and increased it to 41% in In March 2007, the duopoly was broken when a consortium led by Zain of Kuwait won the third license. By the end of 2007, mobile penetration in Saudi reached 116% compared to 82% in Chart 03: KSA Mobile subscribers & penetration rates In '000 30,000 25,000 20,000 15,000 10,000 5, % 120% 100% 80% 60% 40% 20% 0% STC Subscribers Mobily Subscribers Mobile Penetration Source: CITC, Companies reports, Global Research Broadband penetration increasing, however lower than world average Broadband subscribers grew from 24,000 subscribers in 2004 to 623,000 subscribers in 2007, with approximately a 10 fold increase on y-o-y basis. Despite the remarkable growth, still KSA broadband penetration rate, which stood at 2.5% in 2007, is considered a very low rate when compared to both the world average of 5.25%. Chart 04: Broadband subscribers & penetration rates In' % 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% T o ta l Bro a d b a n d Su b s c rib ers Bro a d b a n d Pe n e tra tio n Source: CITC, Global Research Strategic alliances to expand value added services Mobily has been targeting the data and internet segment aggressively. In Sep. 2007, the company signed a memorandum of understanding (MOU) to buy a 99.9% stake of the local 60 GCC Telecom Sector August 2008

65 data provider Bayanat Al-Oula for SR1.5bn (US$400mn). In Mar. 2008, the acquisition was approved by the Communications and Information Technology Commission. The acquisition increases Mobily s share in the 12,000-kilometer national fiber optic project from 33% to 66%. Bayanat had recently entered into a strategic arrangement with Samsung to roll out the largest WiMAX network in the region and start offering the service commercially in the three main cities Riyadh, Jeddah and Dammam in the first phase. The acquisition should enhance the company s position in the wireless broadband internet segment, with the WiMAX technology along with Mobily s current HSDPA technology. During 2007, the company also set up a fully owned subsidiary in India, Mobily InfoTech, which will provide information technology and consulting services for the parent company from India. In 2008, Mobily got the approval to acquire 96% of Zagel International Communication Network Company which is specialized in providing internet services in Saudi Arabia for SR80mn (U$21.33mn). Speeding with fiber optics locally Mobily has entered into landmark infrastructure projects that are expected to support the company s ongoing plans of providing highly sophisticated and advanced services at higher speed. In February 2006, the company entered into a deal with two other companies, Integrated Telecom Company and Bayanat Al-Oula for Network Services, to build, deploy and operate the Kingdom s largest fiber optic network with a total value of SR1bn (US$266mn). The fiber optic network is expected to cover 12,600 km long with seven rings and covering the whole of Saudi Arabia. In January 2007, Integrated Telecom Company and Bayanat Al-Oula for Network Services announced the completion of the first phase of their fiber optic network project, which covers the major three rings of central, western and eastern regions. The other four rings are expected to be completed by October And internationally Mobily has also signed a memorandum of understanding with U.A.E-based Etisalat and Egypt s Etisalat Misr to set up a high-capacity fiber optics cable (E-Cable) at a total cost of SR562.5mn (US$150mn). The cable will run from Fujairah in the United Arab Emirates, across Saudi Arabia, passing through Jeddah, and through the Suez Canal and Alexandria in Egypt, by Italy in the Mediterranean and entering Europe through France. Upon completion, which is expected by the end of Q2 2009, the E-Cable will allow faster browsing speeds and more cost-effective rates for regional and international calling. The E-Cable will also allow more internet and voice traffic to transit between Asia and Europe through the Middle East. Financial performance Revenues grew by 44.5% in 2007 Mobily reported services revenues of SR8.4bn for 2007, an increase of 44.5% over 2006 revenues. Airtime time usage was the main contributor to revenues, contributing 76% to total revenues in 2007, and increased by 46.9% on a y-o-y basis. Interconnection revenues, which formed 17% of total revenues, increased by 31.7% on y-o-y basis. Other revenues, which constitutes revenues from other value added services and formed 1.6% of revenues, surged by 180.7% in We expect the share of value added services in revenues to increase going forward considering the company s planned infrastructure upgrades which will allow the company to expand its broadband internet services and provide higher quality services at higher speed. August 2008 GCC Telecom Sector 61

66 Chart 05: Revenue Mix SRmn 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Others Visitor roaming Interconnect revenue Usage Rental fees Activation fees Source: Company Reports, Global Research Higher ARPUs from broadband services With increasing competition in the market, Mobily s ARPU declined from SR80 in 2006 to SR64. We expect further pressure on ARPUs going forward with the entry of Zain, the third mobile operator, which launched its operations in August However, we do not expect a steep decline in ARPUs since we do not foresee price wars in the market, we believe that competition will be leading to higher quality value added services rather than slashing rates. In addition, Mobily is planning to increase its post-paid subscribers base, and expand its broadband internet services after the completion of its fiber optic cable by the end of 2008, and the completion of the E-cable project by the end of Q Accordingly, giving higher ARPUs from the postpaid segment, and from broadband services, we expect a slight drop in 2008 ARPU, then we expect it to pick up from 2009 onwards. Chart 06: Revenues & ARPUs SRbn F 2009F 2010F 2011F SR Revenues ARPU Source: Company Reports, Global Research Total costs grew by 41.5% in 2007 Total costs of services stood at SR3.8bn in 2007, increasing by 41.5% over 2006 total costs of SR2.7bn. Interconnection expenses formed 46.5% of total costs, and increased by 42% on a y-o-y basis. Government revenue share formed 25% of total costs, and increased by 113.1% on a y-o-y basis. We expect government revenue share costs to keep increasing going forward as per the revenue sharing agreement with the government which requires the company to pay fees equivalent to 5% of net revenues in the first year of operation, 10% in the second year, and 15% in the third year onward. In addition, the company pays annual license fees of 1% of net revenues. 62 GCC Telecom Sector August 2008

67 Chart 07: Costs Breakdown F Consumption of Inventories Interconnection Expenses National and International Roaming Costs License Fees Government Revenue Share Frequency Charge and Rental Transmission and International Gateway Cost Technical Repair & Maintenance Cost Sites Rental Others Source: Company Reports, Global Research National and international roaming costs formed 3% of total costs in 2007 compared to 14% in Transmission and international gateway costs formed 7% of total costs in 2007 compared to 8% in We expect a decline in transmission and international gateway costs as Mobily completes the fiber optic and E-Cable projects which will allow for more cost-effective rates for regional and international calling. Similarly, we expect a decline in rental fees as the company develops its own fiber optic network. Improving gross profit margin. Costs to revenues ratio stood at 44.9% in 2007, down from 45.9% in Accordingly, Gross margin improved from 54.1% in 2006 to 55.1% in Going forward, we expect the ratio to come down with the expected decline in international gateway costs and rental fees, along with achieving economies of scale as the company is still in its growth phase. Chart 08: Operating Efficiency 48% 46% 44% 42% 40% 38% 58.0% 58.4% 56.5% 55.1% 55.5% 54.1% F 2009F 2010F 2011F 60% 58% 56% 54% 52% 50% Cost to Rev. Ratio Gross Profit Margin Source: Company Reports, Global Research Increasing selling, marketing, and G&A expenses Selling and marketing expenses stood at SR466.5mn in 2007, increasing by 27.8% on a y- o-y basis, while general and administrative expenses (G&A) increased by 40.7% to reach SR943mn. Staff expenses formed 59% of G&A expenses in 2007, and increased by 55% on a y-o-y basis. G&A expenses also include annual management fees of SR37.5mn (US$10mn) paid to the Emirates Telecommunication Corporation (Etisalat). Given the expected increase in competition and the expansion in the company s services, we expect further increases in selling, marketing, and G&A expenses. August 2008 GCC Telecom Sector 63

68 Improving EBITDA margin EBITDA margin stood at 34.9% in 2007, improving slightly from 34.3% in Going forward, we expect EBITDA margin to improve further. The improvement will most likely result from the expected decline in operational costs as mentioned earlier after the completion of the fiber optic network and the E-Cable in 2008, and 2009 respectively. We expect EBITDA to grow at CAGR of 11.2% during our forecast period ( E). Chart 09: EBITDA SRbn % 34.9% 35.2% 36.6% 38.5% F 2009F 2010F 2011F 39.0% 40.0% 39.0% 38.0% 37.0% 36.0% 35.0% 34.0% 33.0% 32.0% 31.0% EBITDA EBITDA margin Source: Company Reports, Global Research Improving Profitability The company reported net income of SR1.38bn in 2007 compared to SR700.4mn in 2006, with a net profit margin of 16.3% compared to a net profit margin of 12% in Return on Equity stood at 23.3% in 2007, while Return on Assets stood at 6.9%. Return on Equity is expected to decline in 2008, as the company increases its capital base by 40% to reach SR7bn. We expect Net profit to grow at CAGR of 14.3% during our forecast period ( E). SRbn Chart 10: Profitability 12.0% % 16.3% 18.1% 19.4% 21.0% 21.8% 20.0% 15.0% 10.0% 5.0% 0.0% 2008F 2009F 2010F 2011F 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 15.5% % 24.9% 24.5% 23.7% 22.5% F 2009F 2010F 2011F 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Net Profit NPM ROE ROA Source: Company Reports, Global Research Total assets grew by 12.4% in 2007 Mobily s total assets stood at SR19.8bn in 2007, and grew by 12.4% on a y-o-y basis. Net license acquisition fees constituted 56.8% of total assets. License acquisition fees are amortized over the license period of 25 years. Net property and equipment formed 27.6% of total assets. We expect Mobily s balance sheet to grow by 17.3% in 2008 on the back of the 40% rights issue which will increase the capital base by SR2bn. We expect total assets to grow at CAGR of 7.4% during our forecast period ( E). 64 GCC Telecom Sector August 2008

69 Chart 11: Asset Structure SR bn F 2009F 2010F 2011F Net License Fees Property & Equipment Others Source: Company Reports, Global Research During 2007, capex stood at SR2bn, increasing by 48% from SR1.5bn in Capex to sales ratio stood at 25% in We expect a gradual decline in capex to sales ratio to reach 9% by Chart 12: Capex SR'000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000-25% 25% 24% 20% 16% 13% F 2009F 2010F 2011F 30% 25% 20% 15% 10% 5% 0% Capex Capex to Sales Source: Company Reports, Global Research New subsidiary in India The company reported investments of SR1.84mn on its balance sheet in 2007, representing Mobily s investment in Mobily InfoTech India. In March 2008, Mobily announced that it plans to invest an additional SR66mn over the next three years to expand its operations in India. Declining debt to equity ratio Debt to equity ratio stood at 1.5x in 2007, declining from 2x in The company s total debt amounted to SR8.9bn in Mobily signed a long term Islamic financing agreements for SR10.78bn. The company used the proceeds to repay its short term loans and the founding shareholders loan which stood at SR7.8bn and SR1.6bn in 2006 respectively. In April 2008, Mobily raised SR1.5bn one-year Islamic financing facility, from Samba Financial Group, the Saudi British Bank and National Commercial Bank to finance Bayanat Al Oula acquisition. August 2008 GCC Telecom Sector 65

70 Chart 13: Debt to equity SR bn F 2009F 2010F 2011F Debt Equity Source: Company Reports, Global Research Revenues grew by 24% in H Mobily reported revenues of SR4.8bn for H1 2008, increasing by 24.2% over reported revenues in the same comparative period in Net profit grew by 39.7% during the same period from SR554.5mn in H to SR774.4mn in H Outlook and Valuation Although mobile penetration rates in Saudi Arabia crossed the 100% mark in 2007, we believe that there is still a room for growth as penetration rates are relatively lower than its GCC peers. In addition, a third mobile operator, Zain (MTC) joined the market in 2008 which will force market players to strive to offer new and innovative services at the best prices, thus attracting more demand. We expect the entry of Zain to have a greater effect on the operator with the largest market share, STC, than on Mobily. Though, we expect further reduction in mobile tariffs with increased competition, we believe that the focus on higher quality value added services will be the main differentiator between the competitors. Mobily has been also expanding broadband services. In 2007, it doubled the broadband mobile Internet speed and introduced a 7.2 Mbps modems and data service SIM cards based on HSDPA (high-speed downlink packet access). Going forward, we believe that key growth areas for the company would be broadband and 3.5G services, especially with a penetration of only 2.5% in Saudi Arabia which is lagging behind many developed countries. We believe that Mobily s latest acquisition of Bayanat Al Oula and Zagel will strengthen its position in the wireless broadband internet segment. The company s expected capital increase which will add SR2bn to Mobily s current SR5bn capital should also support the company s future investments and expansions. At the current market price (Aug ), Mobily trades at 12.2x and 10.x its earnings and 3.0x and 2.3x its book value for 2008F and 2009F respectively. We have used the Discounted Cash Flow (DCF) to value Mobily. The DCF model is based on a 4-year (FY2008-FY2011) explicit forecast period for the Free Cash Flow to Firm (FCFF). Our DCF valuation estimates the fair value of Mobily s stock at SR68.84, which is 49.6% higher than the current market price of the stock. We therefore reiterate our Buy recommendation for Mobily. 66 GCC Telecom Sector August 2008

71 BALANCE SHEET Etihad Etisalat Company Mobily SR F 2009 F 2010 F 2011 F Cash and Cash Equivalents 185, , ,198 1,604,602 2,761,420 3,916,295 4,676,361 Accounts Receivable (Net) 166, ,066 1,459,733 2,348,307 2,683,026 2,773,844 2,869,871 Due from Related Parties - 5,162 71, , , , ,793 Inventories 32,075 38,048 69,190 92, , , ,156 Other Current Assets 782, , ,295 1,053,384 1,369,399 1,711,748 2,054,098 Total Current Assets 1,166,834 2,041,487 3,113,477 5,202,775 7,033,825 8,628,013 9,836,280 Property & Equipment (Net) 2,723,840 3,847,532 5,478,552 7,225,764 8,617,085 9,505,497 9,978,590 License Acquisition Fees (Net) 12,313,626 11,800,160 11,286,694 10,773,228 10,259,762 9,746,296 9,232,830 Investments - - 1,836 1,523,836 1,545,836 1,567,836 1,567,836 Total Non Current Assets 15,037,466 15,647,692 16,767,082 19,522,828 20,422,683 20,819,629 20,779,256 Total Assets 16,204,300 17,689,179 19,880,559 24,725,603 27,456,507 29,447,642 30,615,535 Short-Term Loans 7,348,129 7,839,943-1,500,000 1,500, Current portion of Long Term Loans - - 1,010, , , , ,455 Creditors 876,118 2,526,019 3,076,067 4,488,351 4,864,299 4,903,491 5,089,909 Due to Related Parties 193, , , , , , ,422 Other Current Liabilities 218, , , , , , ,099 Accrued Expenses 2,133, ,513 1,207,463 2,313,583 1,536,094 1,806,549 1,875,230 Total Current Liabilities 10,769,029 11,543,104 6,029,327 9,989,494 9,605,314 8,432,762 8,706,113 Provision for Employees End of Service Benefits 2,650 13,096 26,349 40,927 56,963 74,603 94,007 Founding Shareholders Loan 1,600,000 1,600, Long Term Debt - - 7,912,356 6,901,731 7,966,277 9,030,822 8,095,367 Total Non Current Liabilities 1,602,650 1,613,096 7,938,705 6,942,658 8,023,240 9,105,425 8,189,374 Total Liabilities 12,371,679 13,156,200 13,968,032 16,932,152 17,628,554 17,538,187 16,895,487 Paid up Capital 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 Reserves , , , ,648 1,093,707 Proposed Dividends , ,000 1,000,000 1,250,000 Retained Earnings/ Accumulated Losses (1,167,379) (467,021) 774,572 2,217,404 3,773,456 5,096,807 6,376,341 Total Shareholders Equity 3,832,621 4,532,979 5,912,527 7,793,451 9,827,954 11,909,455 13,720,048 Total Liabilities and Shareholders Equity 16,204,300 17,689,179 19,880,559 24,725,603 27,456,507 29,447,642 30,615,535 Source: Company Reports, Global Research August 2008 GCC Telecom Sector 67

72 INCOME STATEMENT Etihad Etisalat Company Mobily SR * F 2009 F 2010 F 2011 F Service Revenue 1,661,737 5,840,815 8,440,432 10,393,938 11,757,324 12,289,451 12,879,323 Cost of Services (967,240) (2,680,466) (3,792,193) (4,627,166) (5,120,314) (5,161,570) (5,357,799) Gross Margin 694,497 3,160,349 4,648,239 5,766,772 6,637,009 7,127,882 7,521,525 Selling & Marketing Expenses (274,298) (365,200) (466,553) (597,651) (646,653) (553,025) (476,535) General & Administrative Expenses (480,316) (670,471) (943,030) (1,263,985) (1,383,714) (1,512,234) (1,647,415) Provisions (52,650) (124,174) (291,847) (247,403) (298,212) (332,250) (369,721) Earnings Before Interest, Tax, Depreciation, Amortization (112,767) 2,000,504 2,946,809 3,657,733 4,308,431 4,730,373 5,027,853 (EBITDA) Depreciation & Amortization (739,141) (844,979) (1,030,919) (1,230,093) (1,415,484) (1,572,949) (1,707,737) Earnings Before Interest, Tax (EBIT) (851,908) 1,155,525 1,915,890 2,427,641 2,892,947 3,157,423 3,320,116 Financing Costs (347,641) (478,680) (555,391) (560,231) (624,104) (597,977) (541,849) Other Revenues 32,170 23,513 43,251 51,901 62,281 74,738 89,685 Net Income before Zakat (1,167,379) 700,358 1,403,750 1,919,311 2,331,125 2,634,185 2,867,952 Zakat - - (24,202) (38,386) (46,623) (52,684) (57,359) Net Income (1,167,379) 700,358 1,379,548 1,880,924 2,284,502 2,581,501 2,810,593 * From 14/12/2004 to 31/12/2005 P&L Appropriation account Opening Balance of Retained Earnings (1,167,379) (467,021) 774,572 2,217,404 3,773,456 5,096,807 Net Income /Loss (1,167,379) 700,358 1,379,548 1,880,924 2,284,502 2,581,501 2,810,593 Reserves , , , , ,059 Dividends Paid , ,000 1,000,000 1,250,000 Closing Balance of Retained Earnings (1,167,379) (467,021) 774,572 2,217,404 3,773,456 5,096,807 6,376,341 Source: Company Reports, Global Research 68 GCC Telecom Sector August 2008

73 CASH FLOW STATEMENT Etihad Etisalat Company Mobily SR * F 2009 F 2010 F 2011 F Net Income before zakat (1,167,379) 700,358 1,403,750 1,919,311 2,331,125 2,634,185 2,867,952 Amortization of License Acquisition Fee 665, , , , , , ,466 Depreciation 73, , , , ,018 1,059,483 1,194,271 Provision For Employees End Of Service Benefits 2,650 10,698 15,006 14,578 16,036 17,640 19,404 Provision For Doubtful Accounts 50, , , , , , ,318 Financing charges - 668, , Changes in Working Capital 2,389,238 (409,877) (1,088,651) 1,076,232 (1,387,209) (479,159) (582,526) Accounts Receivable (216,822) (680,720) (977,146) (1,121,399) (616,895) (405,427) (446,346) Due from Related Parties - (5,162) (65,899) (32,878) (13,634) (5,321) (5,899) Inventories (32,075) (5,973) (31,142) (23,353) (9,863) (825) (3,925) Other Current Assets (782,765) 66,077 (93,607) (243,089) (316,015) (342,350) (342,350) Creditors 876, , ,914 1,412, ,948 39, ,418 Due to Related Parties 193,251 (13,916) (67,849) 4,459 4,638 4,823 5,016 Other Current Liabilities 218, , ,393 12,474 12,723 12,978 13,237 Accrued Expenses 2,133,514 (39,700) 505,749 1,106,120 (777,489) 270,455 68,680 Payment of Employees End of Service Benefits - (252) (1,753) Financing charges paid - (430,213) (938,311) Zakat (38,386) (46,623) (52,684) (57,359) Net Cash From Operating Activities 2,013,650 1,928,010 2,153,202 4,473,038 2,657,612 4,060,225 4,362,884 Purchase of Property and Equipment (2,797,368) (1,819,310) (1,876,341) (2,463,839) (2,293,338) (1,947,896) (1,667,363) Investments (1,836) (1,522,000) (22,000) (22,000) - Payment for license Fees (12,979,239) Net Cash From Investing Activities (15,776,607) (1,819,310) (1,878,177) (3,985,839) (2,315,338) (1,969,896) (1,667,363) Share Capital 5,000, Short Term Debt 7,348, ,651 (7,706,850) 1,500,000 - (1,500,000) - Founding Shareholders Loan 1,600,000 - (1,600,000) Long Term Debt - - 9,187,500 (1,085,796) 1,064,546 1,064,546 (935,455) Dividends Paid - - (250,000) (500,000) (1,000,000) Net Cash From Financing Activities 13,948, ,651 (119,350) 414, ,546 (935,455) (1,935,455) Net Cash Flows during the year 185, , , ,404 1,156,819 1,154, ,066 Cash & Cash equivalents at the beginning of the year - 185, , ,198 1,604,602 2,761,420 3,916,295 Cash & Cash equivalents at the end of the year 185, , ,198 1,604,602 2,761,420 3,916,295 4,676,361 Source: Company Reports, Global Research August 2008 GCC Telecom Sector 69

74 FACT SHEET Etihad Etisalat Company Mobily F 2009 F 2010 F 2011 F LIQUIDITY RATIOS Current ratio (times) Quick ratio (times) Cash ratio (times) PROFITABILITY RATIOS Gross Margin 41.8% 54.1% 55.1% 55.5% 56.5% 58.0% 58.4% EBITDA Margin -6.8% 34.3% 34.9% 35.2% 36.6% 38.5% 39.0% Net Profit Margin -70.3% 12.0% 16.3% 18.1% 19.4% 21.0% 21.8% ROE -30.5% 15.5% 23.3% 24.9% 24.5% 23.7% 22.5% ROA -7.2% 4.0% 6.9% 7.6% 8.3% 8.8% 9.2% ACTIVITY RATIOS A/R Turnover (times) NA Inventory Turnover (times) NA A/P Turnover (times) NA LEVERAGE RATIOS Debt to equity (times) Debt to total assets 55.2% 53.4% 44.9% 37.8% 37.9% 33.8% 29.5% GROWTH RATES Revenue growth rate NA 252% 45% 23% 13% 5% 5% Net income growth rate NA -160% 97% 36% 22% 13% 9% Equity growth rate NA 18% 30% 32% 26% 21% 15% Total assets growth rate NA 9% 12% 24% 11% 7% 4% RATIOS USED FOR VALUATION BV per share (SR) EPS (SR) NA Market price share (SR) Market capitalization (SR 000) 70,000,000 26,000,000 36,500,000 23,000,000 23,000,000 23,000,000 23,000,000 Enterprise Value (EV SR 000) 78,762,957 34,892,420 44,719,783 30,732,584 30,640,311 29,049,982 27,354,461 EV / EBITDA NA P/E ratio NA P/BV ratio Source: Company Reports, Global Research Market price for 2008 and subsequent years as on August 31, GCC Telecom Sector August 2008

75 Emirates Telecommunications Corporation- Etisalat Tickers ETEL.AD (Reuters) ETISALAT UH (Bloomberg) Recommendation BUY Listing: Abu Dhabi Stock Market (ADSM) Current Price: AED18.0 ( August 31, 2008) Key Data EPS* (AED) 1.66 Avg. daily vol. ( 000) 2,051.6 BVPS* (AED) week Hi / Lo (AED) 22.05/14.38 P/E (x) 10.8 Market Cap (AED mn) 107,811 P/BV (x) 3.4 Target Price (AED) Source: Global Research * Projected (2008) Background Emirates Telecommunications Corporation (Etisalat) was founded in 1976, and is one of the oldest telecom players in the region. In 1982, Etisalat was the first telecom operator in the region to introduce a mobile phone service, and introduced the GSM technology to customers in Since then it has established itself as a regional leader by introducing both 3G and MMS in 2003, and most recently, the BlackBerry service in Etisalat is 60% owned by the government of UAE, while the remaining 40% are publicly traded. Etisalat was the sole provider of telecommunication in the UAE until its monopoly was broken when Emirates Integrated Telecommunications Company (EITC) know as DU won the second license for fixed line, mobile, and internet services in 2005, and launched its services in Feb Recently, Etisalat has turned its focus towards international expansions with a current focus on Asia and Africa. Etisalat began its international expansion when it won Saudi Arabia second GSM license for AED12.67bn (US$3.45bn) in It won the license to become Afghanistan s fourth GSM operator in May 2006 for AED147.3mn (US$40.1mn). At the end of 2006, Etisalat acquired a stake in Pakistan Telecommunication Company (PTCL) for AED9.6bn (US$2.6bn). In Africa, Etisalat acquired stakes in Atlantique Telecom, Emerging Markets Telecommunications Services (EMTS) in Nigeria, Zantel in Tanzania, and led the consortium who won the license to manage the third GSM operator in Egypt, for EGP16.7bn (US$2.9bn) in July Also in Sudan, Etisalat is one of 10 founders of Canar Telecom, a fixed-line operator. In Sept. 2007, Etisalat increased its shares in Canar, from 37% to 82% for AED584.17mn (US$159mn). August 2008 GCC Telecom Sector 71

76 Etisalat s first acquisition in the Far East was in Dec with a 15.97% stake in the Indonesia-based PT Excelcomindo Pratama, for AED1.6bn (US$438mn). During 2008, Etisalat received positive ratings from Moody s (Aa2), Standard & Poor s (A +) and Fitch Ratings (AA-), reflecting the sound financial position of the group. According to Etisalat, these positive ratings should support the group s future expansion plans and investments as it taps debt markets for medium and big-size investments Etisalat has restructured its operations into three separate divisions, Etisalat UAE, Etisalat International, and Etisalat services. Etisalat UAE provides full telecommunication, internet and Cable TV services within the UAE, while Etisalat International is handling all the group s international investments, and seeking new growth opportunities in the global telecom market. Etisalat services is responsible for the efficiency of operations, enhancing customer services, and also responsible for all the group s non-core activities. Chart 01: Etisalat Major Business Units Etisalat Etisalat UAE Etisalat International Etisalat Services Enterprise Solutions Atlantique Telecom ( West Africa) e-facility Management Small and Medium-Sized Business Canar (Sudan) e-real Estate Consumer EMTS ( Nigeria) Etisalat Academy Customer Care Etisalat Misr ( Egypt) Ebtikar Card System E- Vision Zantel ( Tanzania) Emirates Data Clearing Network & Data Etihad Etisalat ( Mobily) e-marine Mobile Thuraya (UAE) Special Projects Fixed Line Etisalat Afghanistan Directory Services Internet Excelcomindo Pratama (Indonesia) Etisalat Software Solutions Ltd. Pakistan Telecommunication (PTCL) Source: Etisalat 72 GCC Telecom Sector August 2008

77 Analysis of operations UAE operations Etisalat has capitalized on the UAE s booming economy, which is one of the fastest growing economies in the world. The attractive business environment has attracted a lot of business activity to the UAE leading to an increase in expatriate workforce, which was one of the main drivers of the growth of population and the growth in the number of the group s subscribers in UAE. Within the Mena and GCC regions, the UAE has the highest mobile, fixed, and internet penetrations rates. Fixed line subscribers stood at 1.38mn subscribers by the end of 2007, with residential lines forming 48% of total fixed line subscribers. Mobile subscribers stood at 7.6mn subscribers in 2007, with prepaid subscribers forming 91% of total mobile subscribers. Internet subscribers stood at 904 thousand in Broadband subscribers formed 42% of internet subscribers in 2007 compared to 35% in 2006, indicating faster growth than dial-up subscriptions. Chart 02: UAE Telecom penetration rates 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Mobile Penetration Fixed Penetration Internet Penetration* Source: TRA, Global Research * Estimated number of users per Internet subscription = 2.5 Mobile competition intensifying, however no price wars After a long period of monopoly by incumbent operator Etisalat, competition has been introduced into the market when du launched its services in Feb. 2007, and managed to grab a 16% market share by year end. Chart 03: UAE mobile subscribers mn Etisalat Susbscribers Du Subscribers Source: TRA, Etisalat August 2008 GCC Telecom Sector 73

78 The advent of competition has not resulted in price wars resulting in ARPUs remaining relatively stable. The UAE telecom market is regulated by the Telecommunications Regulatory Authority (TRA) which reviews the marketing offers and services prices of the two telecom operators within its Price Control Policy (PCP). ARPUs for the fixed segment have been declining since 2004, however, it witnessed a 5% increase in 2007 on the back of higher broadband subscriptions. Chart 04: ARPUs AED Mobile ARPU Fixed ARPU Source: Etisalat, Global Research UAE Mobile Market near saturation When du entered the market in 2007, the number of mobile subscribers in UAE shot up by 38% with a penetration rate of 166.4% in 2007 compared to a penetration rate of 127.6% in In our view, the mobile market in the UAE is near saturation, though there are still some growth opportunities in line with the economic boom in the country, and the growth in population. Chart 05: Subscribers ( Mobile vs. Fixed) mn % 35% 30% 25% 20% 15% 10% 5% 0% Mobile Subscribers Fixed Subscribers Mobile Subs. Growth Fixed Subs. Growth Source: TRA, Global Research Fixed lines growth stabilizing Moving with the global trend, fixed to mobile substitution has led to a stabilization of fixed line penetrations in the UAE. Mobile subscribers grew by a CAGR of 27% during the period from 2004 to 2007, while fixed line subscribers grew by a CAGR of 5% during the same period. The launch of Du s services in 2007 has led to the jump of mobile subscribers in the UAE by 38% compared to a growth rate of 22% in GCC Telecom Sector August 2008

79 Chart 06: Internet Subscribers ( Broad-band vs. Dial-up) In ' Dial-up Broad-band Dial-up Subs. Growth Broad-band Subs. Growth 140% 120% 100% 80% 60% 40% 20% 0% Source: TRA, Global Research Future belongs to broadband Internet subscribers grew by a CAGR of 29% during the period from 2004 to However, broadband subscriptions are growing at a faster rate than dial-up. Broadband subscribers grew by a CAGR of 89% during the period from 2004 to 2007, while dial-up subscribers grew by 13% during the same period. Broadband use is increasing rapidly in the region, however, penetration levels are still relatively low compared to developed countries, representing high growth potential. International operations Etisalat s core expansion strategy is to target populated markets with low penetration rates, and growing economies. Etisalat have been seeking growth opportunities in MENA and Asia regions. The group is present in 15 countries in Africa and Asia with majority stakes in Etisalat Afghanistan, PTCL (Pakistan), Atlantique Telecom (West Africa), Canar (Sudan), Etisalat Misr (Egypt), and Zantel (Tanzania). In addition, it has equity stakes in Mobily (Saudi), and Etisalat Nigeria. Most of the Etisalat s subsidiaries, and associates offer mobile services except for PTCL which offers both mobile and fixed services, and Canar which offers fixed lines, voice and data services. Chart 07: Etisalat s International Markets 140% 15% 120% 13% 100% 10% 80% 8% 60% 40% 5% 20% 0% CAR Burkina Faso Niger Afghanistan Togo Sudan* Tanzania Penetration Tanzania* Benin Nigeria Nigeria* Ivory Coast GDP Growth Rate Ept Indonesia Pakistan Pakistan* Gabon Saudi Arabia 3% 0% Source: Etisalat, ITU, UN * Fixed lines penetration August 2008 GCC Telecom Sector 75

80 Revenues from international operations formed around 6% of Etisalat s consolidated revenues in Operations in West Africa constituted 46% of revenues from international operations in 2007, followed by Egypt (40%), Tanzania (10%), Sudan (3%), and Afghanistan (1%). However, only four subsidiaries and associates reported profits in 2007 namely PTCL, Mobily, Zantel, and Excelcomindo, while the remaining associates and subsidiaries reported a loss as most of them are still in the start up phase. Chart 08: International Revenue Mix by Country Tanzania 10% Sudan 3% Afghanistan 1% West Africa 46% Egypt 40% Source: Etisalat Africa West Africa - Atlantique Telecom (AT) Snapshot of AT (2007) Etisalat s Ownership (%) 82 Business Segment Subscribers- Mobile (mn) 2.9 Mobile Market Share (%)* 22 Ivory Coast - MTN, Orange, Comium Competitors Benin - MTN, BBcom, Libercom Burkina Faso - Celtel, Onatel (Telmob) CAR - Acell, Nationlink, Libercom Gabon - Celtel, Libertis Niger - Celtel, Sahelcom Togo - Togo Cellular Source: Etisalat * Average of seven countries Atlantique Telecom s acquisition marked Etisalat s first venture into West Africa. Etisalat acquired 50% of AT in April 2005 for AED432.1mn. Subsequently, Etisalat increased its stake in AT to 70% in 2007, and to 82% in In 2007, AT had seven GSM operations in Benin, Burkina Faso, Togo, Niger, Central African Republic (CAR), Gabon and Ivory Coast with a total population of 64mn in 2007 and a combined penetration rate of 21%. During 2008, AT ended its operations in Benin, and a new license was acquired by Etisalat. AT s total subscribers stood at 2.9mn subscribers in 2007 compared to 1.4mn subscribers in GCC Telecom Sector August 2008

81 Chart 09: AT s ownership of subsidiaries (2007) Atlantique Telecom Ivory Coast CAR Niger Burkina Faso Gabon Togo Benin 100% 97% 90% 79% 70% 63% 51% Source: Etisalat AT s current strategy in West Africa focuses on network upgrading and re-branding. During 2007, AT upgraded its network with the GPRS-Edge technology, and initiated a new network rollout, which is expected to be completed in 2008, and is expected to expand network coverage by over 60%. AT also launched a new brand Moov, and started with rebranding its operations in Ivory Coast, then later re-branded its operations in Gabon, and Togo, and is expected to rebrand its remaining operations by Earlier AT used to operate under Telecel brand. Chart 10: West Africa Market Shares (2007) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Ivory Coast Benin Burkina Faso CAR Gabon Niger Togo Moov MTN Orange Comium BBCom Celtel Onatel Acell Nationlink Libercom Libertis SahelCom Togo Cellular Source: Etisalat Sudan - Canar Snapshot of Canar (2007) Etisalat s Ownership (%) 82 Business Segment Fixed, Data services Subscribers- Fixed (mn) 0.2 Market Share (%) 54 Competitors Sudatel Source: Etisalat Initially, Etisalat had a 37% stake in Canar, which was later increased to 82% in Sudan is a large market with population around 40mn, and low penetration rates of 19% for the August 2008 GCC Telecom Sector 77

82 mobile market and 0.9% for fixed market. There are three mobile operators in Sudan (Areeba, Mobitel, & Sudani), and two fixed line operators (Sudatel and Canar). Canar was awarded fixed license in November 2004, and launched operations in Jan Competition in the market is intense, which forced operators to slash their tariffs resulting in lower ARPUs. In 2007, Canar s subscribers grew by over 50%, increasing the company s market share to 54%. Canar uses the Next Generation Network (NGN) and Wireless Loop (WLL) technologies. The company extended its fiber optic network 1,500km nationally and 250km locally in major cities to serve mobile operators, ISPs, and corporate and business clients. The company launched several voice and data services in 2007 including a new voice package, relaunching its wireless broadband internet service, Canar Go with flat-rate packages and prepaid options. With a negligible broadband penetration of only 0.01% in Sudan, we believe that there is a huge potential for Canar to expand in the broadband segment. Nigeria - EMTS Snapshot of EMTS (2007) Etisalat s Ownership (%) 40 Business Segment Subscribers- (mn) - Mobile, Fixed, Data services Market Share (%) - Competitors Mobile MTN, Celtel (Zain), Globacom, MTEL Fixed NITEL, Globacom Source: Etisalat Etisalat acquired a 40% in Emerging Markets Telecommunication Services (EMTS), which acquired a new license to provide integrated telecommunication services in Nigeria. The license is a 15-year renewable Universal Access Service License (UASL), and will make EMTS the fifth mobile operator in Nigeria, and the third in fixed service provider. This investment will enable Etisalat to form synergies with its operations in West Africa through Atlantique Telecom (AT). The Nigerian operations is expected to start in the second half of Nigeria is considered to be one of the fastest growing markets in Africa, and also one of the most populated countries with a population of nearly 150mn, and a low mobile penetration of 27%, fixed penetration of 1%, and internet and broadband penetration of less than 1%. The transformation of Nigeria s telecommunications sector came with the licensing of three GSM networks in 2001 and a fourth one in In addition, the telecom regulator introduced a new unified licensing regime in 2006 which is expected to intensify the competition between fixed and mobile operators. Nigeria s underdeveloped fixed-line infrastructure has been the main reason behind low fixed and internet penetration. Mobile on the other hand has been witnessing remarkable growth. Mobile subscribers grew at a CAGR of 91.5% during the period from 2002 to 2007 surpassing the growth rate of Africa which stood at 48.8% during the same period. We believe that mobile will be the main driver for growth. However, with internet and broadband penetration less than 1%, there is an enormous growth potential for this segment. We believe that as competition intensifies between fixed and mobile network operators on the back of the new unified licensing regime introduced in 2006, and as the country develops its infrastructure, new technologies will enable providers to deliver wireless broadband access which are in strong demand. 78 GCC Telecom Sector August 2008

83 Egypt - Etisalat Misr Snapshot of Etisalat Misr (2007) Etisalat s Ownership (%) 66 Business Segment Subscribers- Mobile (mn) 3.1 Market Share (%) 10 Competitors Source: Etisalat Mobile Mobinil, Vodafone Etisalat Misr is Egypt s third mobile operator following the country s two operators (Mobinil and Vodafone Egypt). Etisalat won a 15-year license in July 2006 including 3G and 2G services for US$2.9bn in addition to 6% royalty fees of gross revenues. The company launched its operations in May 2007, and managed to attract 3.1mn subscribers by the end of 2007, representing a market share of 10%. Etisalat Misr was the first to launch 3.75G (HSDPA) services in the country. The company was also the first to acquire an international gateway license, thus ending Telecom Egypt s monopoly in that segment, and allowing Etisalat Misr to provide international services to its subscribers bypassing Telecom Egypt s networks and thus lowering the company s interconnection fees. The company s coverage extended over 75% of the population at launch and is expected to be fully completed by the end of Although, Etisalat is the third operator in Egypt, with a 75mn population, and a mobile penetration rate of only 42%, we believe that there is still room for more growth. In addition, the introduction of Mobile Number Portability (MNP) in April 2008, might encourage dissatisfied customers from the other two operators to switch to Etisalat. We expect that competition will lead to declining ARPUs in the short term, however, on the other hand, it will lead to better service quality. Therefore, growth for mobile operators will be mainly derived through the provision of attractive packages, and advanced services. Another area of potential growth in the Egyptian market is broadband which is very low penetrated, under 1%. Numerous measures to cut the cost of broadband access and to raise PC penetration in Egypt should benefit the market going forward. Tanzania - Zantel Snapshot of Zantel (2007) Etisalat s Ownership (%) 51 Business Segment Subscribers- Mobile (mn) 0.7 Mobile, Fixed Subscribers- Fixed (mn) Market Share (%) Mobile 8 Fixed 3 Competitors Mobile Vodacom, Celtel (Zain), Mobitel, TTCL Fixed Tanzania Telecommunications Co. (TTCL) Source: Etisalat Zantel (Zanzibar Telecom Ltd.) began as a joint venture between Etisalat (34%), and the government of Zanzibar (18%), and other local investors. During 2007, Etisalat acquired an additional share of 17% in Zantel to increase its stake to 51%. Zantel won a 15 year August 2008 GCC Telecom Sector 79

84 mobile license in 1999, and a 25 year fixed license in Tanzania is a very competitive market with five mobile operators and two fixed line operators including Zantel. Yet, market penetration rate is still very low with 20% mobile penetration, and fixed lines penetration is less than 1%. When Zantel began operations in Zanzibar in 1999, its operational territory was limited to Dares Salam, with national service provided through roaming agreement. However, the company replaced its network in 2007 with a new network and rolled out its own infrastructure. Zantel is expected to provide coverage to over 75% of the population by the end of In addition, the company also operates an international gateway and has established a reputation as an international calls service hub for Internet Service Providers and other mobile operators. Zantel ended the year 2007 with 0.7mn mobile subscribers, and 5.4 thousand fixed line subscribers representing a market share of 8%, and 3% respectively. We believe that Tanzania is still an underpenetrated market, and with the proper infrastructure, higher penetration rates are expected. The East African Submarine Cable System (EASSy), which is set to launch by the end of 2008, would also help in improving the quality of services in Tanzania. Asia Saudi Arabia Etihad Etisalat ( Mobily) Snapshot of Mobily (2007) Etisalat s Ownership (%) 26.25% Business Segment Subscribers- Mobile (mn) 11.1 Market Share (%) 41 Competitors Source: Etisalat Mobile, Internet, Data Services Saudi Telecom Company, Zain Etisalat won the second GSM license in Saudi Arabia for a period of 25 years, thus ending Saudi Telecom Company s monopoly in the wireless business segment. Etisalat paid US$3.45bn for the license which included a 3G license as well. The company underwent an IPO on the Saudi Stock Exchange in October 2004, which raised US$267mn for 20% of its shares. In April 2008, Mobily s founders floated another 20% for public subscription in order to comply with the royal decree which stipulates floating 20% of the company s equity in the third year after formation. Accordingly, Etisalat s total share in the company has been reduced to 26.25% from 35%. Saudi Arabia is one of biggest economies, and highly populated countries in the region, a favorable environment for telecom operators. Saudi Population has been growing at a CAGR of 2.7% from During 2006, KSA population grew by 3.8% to reach a total population of 24mn, and is estimated to have reached 24.7mn in Expatriate population form around 30% of the total population of Saudi Arabia. The increasing young population has been one of the underlying factors of the increasing mobile phone usage in Saudi Arabia, with around 32% of the population in the age of 10 to 24. The Saudi mobile market has been a monopoly since STC was established in The monopoly was broken when Mobily won the second license and launched its operation in In March 2007, the duopoly was 80 GCC Telecom Sector August 2008

85 broken when a consortium led by MTC of Kuwait (now Zain) won the third license. The mobile market has been growing at fast rates with penetration rate increasing from 82% in 2006 to 116% in Mobily launched its services in May 2005, and managed to grab a market share of 41% by the end of 2007, with 11.1mn subscribers. In February 2006, the company entered into a deal with two other companies, Integrated Telecom Company and Bayanat Al-Oula for Network Services, to build, deploy and operate the Kingdom s largest fiber optic network with a total value of SR1bn (US$266mn). The fiber optic network is expected to cover 12,600 km long with seven rings and covering the whole of Saudi Arabia. In January 2007, Integrated Telecom Company and Bayanat Al-Oula for Network Services announced the completion of the first phase of their fiber optic network project, which covers the major three rings of central, western and eastern regions. The other four rings are expected to be completed by October Mobily s network now covers 93.7% of the Saudi population. The company has been also targeting the data and internet segment aggressively, after acquiring majority stakes in two companies, a 99.9% stake in the local data provider Bayanat Al-Oula for SR1.5bn (US$400mn) and 96% in internet service provider Zajil for SR80mn (U$21.33mn). We expect value added services to be a major revenue driver going forward considering the company s planned infrastructure upgrades which will allow the company to expand its broadband internet services and provide higher quality services at higher speed. Afghanistan Etisalat Afghanistan Snapshot of Etisalat Afghanistan (2007) Etisalat s Ownership (%) 100 Business Segment Mobile Subscribers- Mobile (mn) 0.11 Market Share (%) 4 Competitors Roshan (TDCA), Afghan Wireless Communications Company (AWCC), Areeba Source: Etisalat In May 2006, Etisalat signed an agreement with Afghan authorities to operate a GSM network across Afghanistan and become the fourth GSM operator in the country. Etisalat Afghanistan started operations in August The company is fully owned by Etisalat, which bought the 15-year GSM license for US$40mn. Afghanistan has a population of 30mn with mobile penetration of 17.2%. During 2007, Etisalat injected capital into the company and is planning a major network rollout in The company ended the year 2007 with 0.11mn mobile subscribers representing a market share of 4%, and reported revenues of AED6.4mn, and a net loss of AED48mn in With a mobile penetration rate of only 17%, we believe that there is huge potential for that market as there is a high demand for new technologies and services. Afghanistan Telecom Regulatory Authority announced that it is targeting a 30% mobile penetration rate by We expect Etisalat Afghanistan to break even in August 2008 GCC Telecom Sector 81

86 Pakistan Pakistan Telecommunications Company Limited (PTCL) Snapshot of PTCL (2007) Etisalat s Ownership (%) 26 Business Segment Subscribers- Mobile (mn) 16.2 Subscribers- Fixed (mn) 4.6 Mobile (Ufone), Fixed (PTCL), Data Services (Paknet) Subscribers- WLL (mn) 1.2 Mobile 21 Market Share (%) Fixed - 94 WLL 58 Mobile - Mobilink, Zong, Instsphone, Telenor, Warid Competitors Fixed -NTC, Brain Ltd, World Call, Union Com, Naya Tel WLL Telecard, World Call, Great Bear, Burraq, Wateen, Mytel Source: Etisalat, Regulator Etisalat holds a 26% stake of PTCL through Etisalat International Pakistan (EIP), in which Etisalat owns a 90% stake. PTCL offers fixed line, mobile, and data services. By the end of 2007, PTCL s market share stood at 21%, 94%, 58% in the mobile, fixed, and WLL (Wireless Local Loop) segments respectively, making PTCL the market leader in the fixed line, and the WLL segments, and the second in the mobile segment following Orascomowned Mobilink. Pakistan is one of the largest markets with a population of over 162mn.The mobile segment was main driver of Pakistan s telecommunication sector. PTCL offers mobile services under the brand name Ufone. The mobile segment is growing rapidly in Pakistan with penetration rates growing from 22.21% in 2006 to 48% in With 6 players, the market is highly competitive, and is characterized by having one of the lowest call rates in the world with a monthly ARPU of US$3.2. Major players are Mobilink with a market share of 39.8% in 2007, Ufone (21%), Telenor (19%), and Warid (17.2%). The fixed line segment in Pakistan has been facing tough competition with the increase in the number of players as well as the migration to mobile services, leading to tariff cuts in both fixed and WLL segments. Fixed line penetration decreased from 3.4% in 2006 to 3% in On the other hand, WLL penetration increased from 0.66% in 2006 to 1.08% in We believe that the mobile segment will be the main catalyst for PTCL, and although the growth for the fixed line seems limited, there is potential in the data services segment. PTCL made several investments in infrastructure development and network capacity expansions such as the introduction of the Vfone, the new CDMA-based WLL platform, which is expected to be the largest fixed wireless phone network in Pakistan. The company is the largest CDMA operator in Pakistan with 0.8mn V-fone customers. In the wireless broadband segment, the company upgraded the WLL CDMA network to provide broadband services in 17 major cities. The company also obtained an IPTV license which will enable PTCL to provide Triple Play services over a single fixed line connection. 82 GCC Telecom Sector August 2008

87 Indonesia PT Excelcomindo Pratama Snapshot of Excelcomindo (2007) Etisalat s Ownership (%) 16 Business Segment Mobile Subscribers- Mobile (mn) 15.5 Market Share 16 Competitors Source: Etisalat Telkomsel, PT Indosat In Dec. 2007, Etisalat acquired 15.97% stake in PT Excelcomindo Pratama (XL) for a value of US$438mn, which marks Etisalat s first venture into the southeast Asian markets. Excelcomindo is Indonesia s third mobile operator. The company s mobile subscribers stood at 15.5mn by the end of Though crowded with several mobile operators, Indonesia s cellular market is dominated by three operators, PT Telkomsel, which has a 50% market share. PT Indonesia Satellite Corp. (Indosat) is second with nearly 24% of the market, while PT Exelcomindo Pratama is third with 16%. Indonesia is one of the biggest and fastest growing mobile markets in South-East Asia with population over 230mn population. It is the third largest wireless market in Asia in terms of subscribers. Mobile penetration increased to 42% at the end of 2007 compared to 28.3% in Excelcomindo revamped its pricing strategy in 2007, resulting in attracting good quality subscribers in 2007, which was reflected by slightly higher ARPU as compared to 2006 contrary to the general declining ARPU trend in the market. The company increased its population coverage to 90% in 2007, and is currently in the final stages for further expanding a terrestrial digital fiber-optics network across Java, high-capacity digital microwave networks in Kalimantan, Sumatera and Sulawesi; and digital fiber-optics submarine cables linking different islands in Indonesia and Malaysia. During 2008, the government of Indonesia decided to cut mobile interconnection tariff by 20-40%. Despite intense competition in the market, we expect more pricing pressure, however, we anticipate continued growth in revenues especially with the introduction of the new interconnection tariff which will encourage operators to increase their market share through offering attractive lower costs packages. Thuraya Satellite Telecommunications Company (Thuraya) Thuraya Satellite Telecommunications Company (Thuraya) was founded in the UAE in 1997 through a strategic partnership between national communications companies and major investment companies in the region. Thuraya offers satellite, cellular (GSM) service and location determination system (GPS) through handsets which offer voice, data, fax and short messaging services. The company owns and operates mobile telecom satellite system, covering more than 100 countries in Europe, Africa, the Middle East, and Asia. The company has 2 geostationary satellites in orbit, and a third one (Thuraya-3) extending coverage to the Asia-Pacific region started commercial activities in June The expanded coverage towards Asia-Pacific, including such major markets as China, Australia, Japan, Korea and Indonesia, is expected double the current market size and population covered by the Thuraya system. Etisalat currently holds 28% of Thuraya. August 2008 GCC Telecom Sector 83

88 Financial Performance Revenues increased by 31% despite competition in home market Despite the entrance of a second operator in Etisalat s home market in 2007, Etisalat reported consolidated revenues of AED21.3bn in 2007, growing by 31% on y-o-y basis. The mobile segment revenues still dominates the group s consolidated revenues, forming 64% of the group s consolidated revenues in 2007 compared to a share of 63% in The fixed lines segment on the other hand witnessed a declining share in consolidated revenues, forming 14% of revenues compared to a share of 17% in 2006, while the data services segment share increased from 8% in 2006 to 10% in 2007, and also witnessed the highest growth rate, growing by 50% on a y-o-y basis. Chart 11: Revenues break-up by segment AEDbn Mobile Fixed Lines Internet Data Services Misc Source: Etisalat UAE forms 94% of group revenues Revenues from the UAE operations grew by 25%, and formed around 94% of the group s consolidated revenues in Going forward we expect the contribution of revenues form international operations to witness an increasing trend as most of Etisalat s overseas operations in Africa and Asia are in expansion phase. In addition, the Africa and Asia regions are still in their growth phase while the UAE market is approaching maturity. Chart 12: Revenues break-up by geography AEDbn F 2009F 2010F 2011F UAE Revenues International Revenues Source: Etisalat, Global Research 84 GCC Telecom Sector August 2008

89 Start-up operations pressure EBITDA margin EBITDA margin for the entire group declined from 77% in 2006 to 73% in 2007, while EBITDA margin for the UAE operations improved from 78.3% in 2006 to 79.4% in This is due to the fact that most of Etisalat s operations are in the start-up phase, therefore reporting negative EBITDA margins. Going forward, we expect the Group s EBITDA margin to continue its declining trend, however at a decreasing rate as international operations break-even. In addition, we expect improvement in EBITDA margin of the UAE operations following the rollout of the Fiber to the Home (FTTH) network, which is provided through optic fiber cable across the country, which should decrease operating costs. Chart 13: EBITDA AEDbn F 2009F 2010F 2011F 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% EBITDA EBITDA Margin Source: Etisalat, Global Research One off gain from selling a stake in Mobily in 2008 Etisalat has to pay a royalty equivalent to 50% of its annual net profit, according to government regulations. In 2007, Etisalat s net profit after the payment of royalty grew by 25% to reach AED7.3bn compared to AED5.8bn in During Q2 2008, Etisalat, posted a profit of AED2.4bn from selling part of its stake in Saudi s Mobily,, reducing Etisalat s stake in Mobily to 26.35% from 35%. Accordingly, we have factored in that profit into our projections for We are expecting net profit to grow by 37% in Chart 14: Net profit AEDbn F 2009F 2010F 2011F Source: Etisalat, Global Research August 2008 GCC Telecom Sector 85

90 Capex to sales set to decline The Group s consolidated capex to sales ratio jumped from 8.8% in 2006 to 16.2% in 2007, on the back of increasing capex for the Group s start-up international operations. The UAE operation s capex to sales ratio on the other hand witnessed a decline from 7.7% in 2006 to 7.5% in Etisalat s current coverage in the UAE extends to 97% of UAE populated area with 3G and 3.5G. Going forward, we expect capex to increase for international operations, however, overall capex to sales ratio is set to decline. Chart 15: Capex AEDbn F 2009F 2010F 2011F 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% UAE Capex International Capex Capex to Sales Source: Etisalat, Global Research Strong results in H Etisalat posted strong results for H1 2008, posting consolidated revenues of AED12.4bn, an increase of 24% over AED10bn reported in H Net profit stood at AED5.1bn compared to AED4bn reported in the same period in Outlook and Valuation With the UAE mobile market approaching saturation, we believe that the two mobile operators must rely on high quality value added services in order to grow. Etisalat has been adding extra value and diverse services to its subscribers. The migration to NGN (Next Generation Network) in UAE will enable Etisalat to further introduce more value added services. Going forward, we believe that mobile, and data services segments would still be the main revenue drivers for Etisalat UAE. However, the highest growth rates would be witnessed in data and internet services revenues. The group has also expanded its portfolio of regional and international investments in order to offset the impact of its shrinking market share in its home market. We expect the share of international operations of the group s top line results to increase from 6% in 2007 to 11% in We also expect to revenues from international operations to grow by a CAGR of 25% during our forecast period ( ), while a CAGR of 11% is expected for revenues from the UAE operations during the same period. We are particularly bullish on the group s operations in West Africa, and Egypt, and we believe that they will be the main contributors to the group s international revenues, and will also witness the highest growth rates in subscribers and revenues. In terms of associates, Mobily would still be the main contributor to revenue from associates. 86 GCC Telecom Sector August 2008

91 At the current market price (Aug ), Etisalat trades at 10.8x and 10.8x its earnings and 3.4x and 2.9x its book value for 2008F and 2009F respectively. We have used Sum-Of-The Parts (SOTP) valuation method for the company s operations in different countries. Based on the consolidation of the individual company operations, our SOTP valuation estimates the fair value of Etisalat s stock at AED27, which is 50% higher than the current market price of the stock. We therefore initiate our coverage for Etisalat with a Buy recommendation. SOTP Valuation Summary All in AED 000 Valuation EV Stake Etisalat EV Major operations Method Etisalat UAE DCF 133,987, % 133,987,145 Etisalat Afghanistan DCF 38, % 38,040 Atlantique Telecom (West Africa) DCF 2,071,000 82% 1,698,220 Canar (Sudan) DCF 293,703 82% 240,836 Etisalat Misr (Egypt) DCF 24,352 66% 16,072 Zantel (Tanzania) DCF 946,362 51% 482,645 EMTS (Nigeria) DCF 40,334 40% 16,133 Mobily (Saudi) DCF 43,313,856 26% 11,369,887 PTCL (Pakistan) DCF 7,877,824 26% 2,048,234 Excelcomindo (Indonesia) DCF 19,572,474 16% 3,125,724 Thuraya (UAE) DCF 6,062,892 28% 1,697,610 Other operations UT Technologies LLC Book value 50,000 Qatar Telecom QSC Book value 120,154 Sudan Telecom. Company Ltd. Book value 74,886 Dubai Global Sukuk FZCO Book value 128,590 Wings FZCO Book value 91,850 Emirates Sudan Bank Book value 9,277 New ICO Global Communications Book value - Cash & Bank Balances 13,392,873 Debt 6,724,884 Total Equity Value 161,863,292 Number of shares outstanding (in 000) 5,989,500 Per share value (AED) Source: Global Research August 2008 GCC Telecom Sector 87

92 BALANCE SHEET Emirates Telecommunications Corporation Etisalat AED F 2009F 2010F 2011F Fixed assets 8,480,300 8,495,580 11,875,953 13,783,805 15,621,002 17,296,205 18,734,914 Intangibles - - 1,686,847 2,108,559 2,319,415 2,435,385 2,557,155 Licenses - 11,230,398 12,199,498 11,737,994 11,329,260 10,967,688 10,644,683 Investments in joint ventures and associates 2,207,715 11,853,648 13,407,470 15,851,702 17,130,634 19,158,430 21,779,001 Other investments 365, , , , , , ,471 Loans to associated undertaking 35, , Deferred tax asset ,124 96, , , ,438 Total long term assets 11,088,697 32,355,011 39,547,102 44,035,565 47,000,888 50,494,303 54,391,662 Stores 104,545 65, , , , , ,455 Debtors and prepayments 3,115,976 1,090,684 2,046,838 3,070,257 4,298,360 5,587,868 6,705,441 Dues from associates - 1,721, , Loans to associates 8,868 56, Amounts due from other telecommunication administrations 350, ,118 1,035,477 1,553,216 2,174,502 2,826,852 3,392,223 Bank and cash balances 9,658,510 10,304,033 9,432,564 13,779,093 13,683,892 13,720,929 12,839,652 Total current assets 13,238,845 13,553,451 12,900,556 18,621,574 20,419,564 22,437,881 23,269,771 Total assets 24,327,542 45,908,462 52,447,658 62,657,139 67,420,453 72,932,184 77,661,433 Creditors and accruals 6,227,544 8,568,450 13,230,521 16,191,089 16,878,893 17,358,407 17,486,475 Amounts due to other telecommunications administrations 1,049, ,494 1,299,178 1,753,890 2,104,668 2,420,369 2,662,406 Amounts payable on acquisition of investments and licenses - 978,883 1,045,734 1,171, , ,883 0 Short term loans from investment partners - 1,537, Bank borrowings ,000 3,780,130 2,835,098 2,268,078 1,436,450 Proposed dividend 907,500 1,588,125 1,746, Total current liabilities 8,184,374 13,605,378 17,665,370 22,896,452 22,797,542 23,025,737 21,585,330 Bank borrowings - 6,980,600 3,140,921 1,806,397 1,987,037 2,185,740 2,295,027 Advances from investment partners - 551, , , , , ,658 Long term loans from investment partners - - 1,642,955 1,774,391 1,863,111 1,956,267 2,054,080 Amounts payables on acquisition of investments and licenses - 2,936,653 2,057,634 1,957, , Provision for staff terminal benefits 416, , , , , ,477 1,006,207 Deferred tax liability , , , , ,724 Non current portion of creditors , , , , ,826 Total long term liabilities 416,832 10,908,607 8,887,296 8,003,171 7,746,687 7,295,170 7,613,522 Total liabilities 8,601,206 24,513,985 26,552,666 30,899,623 30,544,230 30,320,907 29,198,851 Share capital 3,630,000 4,537,500 4,991,250 5,989,500 5,989,500 5,989,500 5,989,500 Reserves 12,020,000 14,418,604 18,876,586 23,856,845 28,869,478 34,293,208 39,943,745 Gain on dilution of interest in an associate - 163, , , , , ,831 Unappropriated profit 76,306 67,168 25, , , , ,973 Minority interest 30 2,207,780 1,838,006 1,248,509 1,067,717 1,276,817 1,596,533 Total equity 15,726,336 21,394,477 25,894,992 31,757,516 36,876,223 42,611,277 48,462,582 Total liabilities & equity 24,327,542 45,908,462 52,447,658 62,657,139 67,420,453 72,932,184 77,661,433 Source: Company Reports and Global Research 88 GCC Telecom Sector August 2008

93 INCOME STATEMENT Emirates Telecommunications Corporation Etisalat AED F 2009F 2010F 2011F Revenues 12,865,894 16,290,257 21,339,852 27,387,345 32,109,515 35,867,993 38,578,483 COGS (2,942,997) (3,387,399) (5,134,248) (7,668,457) (9,472,307) (10,939,738) (13,116,684) Gross profit 9,922,897 12,902,858 16,205,604 19,718,888 22,637,208 24,928,255 25,461,799 Regulatory expenses (126,172) (388,215) (644,316) (784,000) (900,029) (991,119) (1,012,332) EBITDA 9,796,725 12,514,643 15,561,288 18,934,888 21,737,179 23,937,137 24,449,467 Amortization - (5,729) (593,756) (617,789) (596,277) (577,247) (560,247) Depreciation expense (1,372,873) (1,391,349) (1,368,182) (1,696,635) (1,922,198) (2,151,820) (2,381,003) Net operating profit 8,423,852 11,117,565 13,599,350 16,620,464 19,218,704 21,208,070 21,508,218 Interest expense - (261,692) (503,139) (601,511) (565,668) (551,458) (508,154) Interest income 280, , , , , , ,256 Share of results of associated undertakings (251,312) 267, , , , ,956 1,495,824 Other income 59,020 71,049 40,398 2,444,438 48,478 58,173 63,990 Minority interest - 49, , , ,792 (209,100) (319,716) Net profit before taxes and royalty fees 8,512,062 11,719,494 14,715,584 20,224,402 20,355,869 22,137,674 23,063,419 Taxes - - (122,296) (303,366) (305,338) (442,754) (461,268) Net profit before royalty fees 8,512,062 11,719,494 14,593,288 19,921,036 20,050,531 21,694,920 22,602,151 Royaltee fees (4,256,031) (5,859,747) (7,296,644) (9,960,518) (10,025,265) (10,847,460) (11,301,075) Net profit 4,256,031 5,859,747 7,296,644 9,960,518 10,025,265 10,847,460 11,301,075 P&L Appropriation account Retained earnings (Beg.) 35,275 76,306 67,168 25, , , ,984 Net profit 4,256,031 5,859,747 7,296,644 9,960,518 10,025,265 10,847,460 11,301,075 Dividends (1,815,000) (2,722,500) (2,994,750) (4,482,233) (4,711,875) (5,315,256) (5,763,548) Reserves (2,400,000) (3,146,250) (4,827,273) (4,980,259) (5,012,633) (5,423,730) (5,650,538) Transfer to statutory reserve - (135) (3,273) Adjustments 487,209 Retained earnings (End.) 76,306 67,168 25, , , , ,973 Source: Company Reports and Global Research August 2008 GCC Telecom Sector 89

94 CASH FLOW STATEMENT Emirates Telecommunications Corporation Etisalat AED F 2009F 2010F 2011F Net profit 4,256,031 5,859,747 7,296,644 9,960,518 10,025,265 10,847,460 11,301,075 Depreciation 1,372,873 1,391,349 1,368,182 1,696,635 1,922,198 2,151,820 2,381,003 Amortisation of licenses 0 5, , , , , ,247 Other adjustments (33,954) (538,352) (896,711) (391,041) (309,977) 15,266 5,401 Operating cash flows before changes in working capital 5,594,950 6,718,473 8,361,871 11,883,901 12,233,763 13,591,792 14,247,726 Stores (18,159) 38,688 (46,960) (43,802) (43,802) (39,422) (30,223) Debtors and prepayments (1,547,177) (375,655) (262,364) (1,023,419) (1,228,103) (1,289,508) (1,117,574) Amounts due from/to other telecom administrators (201,832) (81,008) (353,675) (63,026) (270,508) (336,650) (323,334) Creditors and accruals 1,398,463 2,208,252 3,175,454 2,960, , , ,068 Net cash from operating activities 5,226,245 8,508,750 10,874,326 13,714,222 11,379,155 12,405,726 12,904,663 Investments (651,547) (4,823,902) (2,488,938) (2,535,535) (1,301,757) (2,033,503) (2,621,998) Intangibles (421,712) (210,856) (115,971) (121,769) Dividends received 29, , , Purchases of fixed assets (1,258,513) (1,432,084) (3,460,275) (3,604,487) (3,759,395) (3,827,023) (3,819,712) Acquisition of subsidiaries - - (754,466) 25,741 (1,171,343) (978,883) (978,883) License fees paid - (11,236,127) (126,696) (156,286) (187,543) (215,674) (237,242) Interest income received 280, , , , , , ,256 Net cash used in investing activities (1,599,638) (16,756,613) (6,012,729) (6,126,324) (5,804,148) (6,350,020) (6,956,348) Due from associates - - 1,174, , Loans to associates (44,340) (422,105) Loans instalements repaid by associates , Advances/loans from investment partners 6,980 2,088,485 57, , , , ,316 Repayment/proceeds from bank borrowings, net - 6,980,600 (4,131,956) 2,005,611 (566,626) (282,617) (675,207) Amounts contributed by minority shareholders - 2,175, , Finance costs paid - (129,038) (443,462) (601,511) (565,668) (551,458) (508,154) Dividends paid (1,732,500) (2,041,875) (2,835,938) (6,229,170) (4,711,875) (5,315,256) (5,763,548) Changes in capital , Net cash from financing activities (1,769,860) 8,651,388 (5,924,313) (3,241,369) (5,670,208) (6,018,669) (6,829,593) Net change in cash 1,856, ,525 (1,062,716) 4,346,529 (95,201) 37,037 (881,278) Beginning cash 7,801,763 9,658,510 10,304,033 9,432,564 13,779,093 13,683,892 13,720,929 Exchange differences on translation of overseas operations - 241, , Cash at end 9,658,510 10,304,033 9,432,564 13,779,093 13,683,892 13,720,929 12,839,652 Source: Company Reports and Global Research 90 GCC Telecom Sector August 2008

95 FACT SHEET Emirates Telecommunications Corporation Etisalat F 2009F 2010F 2011F LIQUIDITY RATIOS Current ratio (times) Cash ratio (times) PROFITABILITY RATIOS Gross Margin 77.1% 79.2% 75.9% 72.0% 70.5% 69.5% 66.0% EBITDA Margin 76.1% 76.8% 72.9% 69.1% 67.7% 66.7% 63.4% Net Profit Margin 33.1% 36.0% 34.2% 36.4% 31.2% 30.2% 29.3% ROE 27.1% 27.4% 28.2% 31.4% 27.2% 25.5% 23.3% ROA 17.5% 12.8% 13.9% 15.9% 14.9% 14.9% 14.6% ACTIVITY RATIOS A/R Turnover (times) A/P Turnover (times) LEVERAGE RATIOS Debt to equity (times) Debt to total assets Dividends payout ratio 42.6% 46.5% 41.0% 45.0% 47.0% 49.0% 51.0% GROWTH RATES Revenue growth rate 23.3% 26.6% 31.0% 28.3% 17.2% 11.7% 7.6% Net income growth rate 24.5% 37.7% 24.5% 36.5% 0.7% 8.2% 4.2% Equity growth rate 18.4% 36.0% 21.0% 22.6% 16.1% 15.6% 13.7% Total assets growth rate 19.3% 88.7% 14.2% 19.5% 7.6% 8.2% 6.5% RATIOS USED FOR VALUATION BV per share- Adjusted (AED) EPS - Adjusted (AED) Market price share (AED) Market capitalization (AED 000) 61,637,400 58,443,000 95,931, ,811, ,811, ,811, ,811,000 Enterprise Value (EV AED 000) 51,978,890 56,656,993 92,382, ,052, ,669, ,442, ,746,730 EV / EBITDA P/E ratio P/BV ratio Source: Company Reports and Global Research * Market price for 2008 and subsequent years as on August 31, 2008 August 2008 GCC Telecom Sector 91

96 Qatar Telecom (Qtel) Ticker: QTEL.QA (Reuters) QTEL QD (Bloomberg) Recommendation BUY Listing: Doha Securities Market, Abu Dhabi, Bahrain & London Stock Exchanges Current Price: QR159.4 (August 31, 2008) Key Data EPS* (QR) 17.4 Avg. daily vol. ( 000) 61.0 BVPS* (QR) week High / Low (QR) / P/E (x) 9.2 Market Cap (QR mn) 23,383 P/BV (x) 2.0 Target Price (QR) Source: Global Research * Projected (2008) Background Qatar Telecom (Qtel) was formed in June 1987 as Qatar Public Telecommunications Corporation to provide domestic and international telecommunication services within the state of Qatar. In November 1998, the corporation was transformed into a Qatari shareholding company under the name of Qatar Telecom. Currently Qtel along with its subsidiaries provides domestic and international telecommunication services in Qatar and wireless telecommunication services in the Asia and MENA region. The year 2007 was a transformative one for Qtel characterized by many partnerships and acquisitions in the MENA and Asia regions. These activities have broadened Qtel s geographic presence to 16 countries ( countries) with the ability to reach over 560mn people. In 2007, the Qtel group s subscriber base has grown from 1.72mn in 2006 to over 16mn an increase of over 850%. In March 2007, Qatar Telecom (Qtel) acquired 51% of Wataniya Telecom shares from Kuwait Projects Company Holding KSC (KIPCO) group for a total cash consideration of US$3.8bn. Wataniya Telecom has grown rapidly through acquisitions in Asia and MENA region. Apart from Kuwait, Wataniya Telecom has operations in Maldives (100% stake), Saudi Arabia (55.61% stake), Tunisia (50% stake), Algeria (71% stake) and in 2007 it got a license to launch second mobile services in Palestine (57% stake). Major Developments Launched 3.5G Network in Qatar In July 2007, Qtel launched 3.5G network, which allows customers to use mobile internet 92 GCC Telecom Sector August 2008

97 services at up to six times the previous 3G speeds. Qtel s 3.5G network covers most of the East Coast of Qatar including Doha, Wakrah, Rayyan, Messaieed, Khor and Ras Laffan. Qtel is continuously working on improving the coverage further within these areas and also to roll out the 3.5G network to other areas. Acquisition of 40.8% holding in Indonesia-based PT Indosat In June 2008, Qtel acquired a 40.8% stake in PT Indosat Tbk, Indonesia s second-largest phone company, from its subsidiary Asia Mobile Holding Pte. Ltd. In June, Qtel and Singapore Technologies Telemedia Pte Ltd (ST Telemedia) announced that their jointly held subsidiary, Asia Mobile Holding Pte. Ltd. (AMH), will sell its 40.8% interest in PT Indosat Tbk to Qtel. As per the terms of the Agreements, Qtel has agreed to pay US$1.8bn in cash to acquire AMH s total interest in Indosat. Qtel plans to further increase its stake in PT Indosat, however, Qtel will be restricted to buy 49% of PT Indosat as indicated by Communication Minister of Indonesia. PT Indosat is an integrated telecom operator providing a full complement of national and international telecommunications services in Indonesia. It is the second-largest cellular operator, as measured by number of cellular subscribers, and one of the providers of international long distance services in Indonesia. It also provide MIDI services (fixed data services, which include multimedia, data communications and Internet) to Indonesian and regional corporate and retail customers. During 2007, its operating revenues totaled US$1,755.4mn (Rp16,488.5bn). Rights Issue In June 2008, Qtel raised its capital by 33.3% through rights issue. It offered 36.7mn shares in the ratio of 1:3. The offer price was QR160 per share, consisting of a par value of QR10 and a premium of QR150 per share. Analysis of Company s Operations Telecom Sector in Qatar Qatar telecom market is characterized as monopolistic in nature since Qtel is the only player providing whole range of telecommunication services in the country. However, recently in June 2008 the telecom regulatory authority, ictqatar, granted the second mobile license to Vodafone Qatar. It won a US$2.12bn tender for the second GSM license in Qatar and is planning to launch its services during the first quarter of ictqatar has also opened a tender to operate the country s second fixedline network, receiving offers from eight international firms or consortia. Therefore going forward, from 2009 onwards Qatar will have a duopoly market structure for both GSM as well as fixed line network with the advent of second operators in both the segments. Penetration Rate Over the last few years, GSM penetration rate has been rising rather steeply in Qatar, which went up from 64.9% in 2004 to 143.4% in Going forward Qatar s GSM segment will have a duopoly market structure from 2009 onwards with the advent of a second GSM operator. Till then Qtel will keenly focus on market penetration to have a larger market share. August 2008 GCC Telecom Sector 93

98 Chart 1: GSM Market Penetration & Growth in Subscribers 1,400, % 1,200, % 140% 1,000, , , % 90.0% 109.7% 120% 100% 80% 60% 400,000 40% 200, % 0% Subcribers Penetration Source: Company Reports & Global Research Till the end of Q the penetration rate is estimated to have crossed 150% in Qatar. Going forward, we believe that as part of Qtel s aggressive focus on promotional campaigns and value added services there will be a faster growth in GSM penetration level. Growth in Subscribers Over , Qtel s subscriber base grew at a CAGR of 37.1%. During 2007, it added 344,433 new customers with this total subscriber base reached to 1.26mn. Qtel s prepaid customer base has seen strong growth in 2007, a 43.5% increase over the last year brought the count of prepaid customers to 1.05mn customers. Qtel s postpaid subscriber base grew at the rate of 13.4% in 2007 to reach 209, 307. With this the customer segmentation between prepaid and postpaid changed to 83:17 in 2007 from 80:20 in In Q1-2008, the GSM subscriber base increased further by 143,411 to 1.41mn. During the current year we believe that Qtel will aggressively try to increase its GSM subscriber base. Going forward, with the advent of competition in 2009, Qtel s market share is projected to fall to 92% and 85% in 2009 and 2010 respectively. Trend in ARPU Over the last few years, Qtel has been enjoying the highest blended ARPU in the region, its blended ARPU was at QR210 (US$57.7) for 2007 which was at QR229 (US$62.9) for Going forward, we expect that ARPU is likely to come under further pressure especially from 2009 onwards due to competitive pressure. Fixed Line Over the last few years, fixed line penetration rate has been rising marginally and hovered in the range of 25%-26%, however in 2006 and 2007 it went up to 27.2% and 28.3% respectively. Over , subscriber base under this segment grew at a CAGR of 7.5% and ended the year 2007 with a subscriber base of 237,368, adding 9,041 new customers during the year. In Q the number of subscriber base increased to 243,276 over 2007 year-end numbers. 94 GCC Telecom Sector August 2008

99 Internet In the last few years, internet penetration level in Qatar had grown at a faster pace. The penetration level, though stands in single digit, have increased to 9.9% in 2007 from just 4.8% at the end of The internet subscriber base grew at a CAGR of 33.5% during The internet subscribers increased from 69,527 in 2006 to 86,959 at the end of 2007, witnessing a growth of 25% per annum. During Q1-2008, the company witnessed a y-t-d growth of 8.7% in internet subscriber base which increased to 94,555, indicating a growing internet culture. Going forward, we believe that there will be a substantial expansion in the internet subscriber base in the country. Cable Vision In this segment, over the last few years, Qtel has been continuously losing its subscriber base and during 2007 it witnessed 28.4% decline in subscriber numbers to 8,194. In Q1-2008, the subscriber base under this segment declined further to 7,567. Triple Play In 2006, Qtel launched its Triple Play, a three-in-one service that offers audio, video and data through a single line. A key feature of Triple Play is that all the three services it offers can be used simultaneously. In other words, the line will not get engaged if any of the three services is made operational. At the end of 2007, the subscriber base was at 5,446 under this segment, which declined to 5,204 at the end of Q Nawras Telecom - Oman Nawras Telecom (Omani Qatari Telecommunications Company) had a 41% market share of Omani GSM segment at the end of The year end penetration rate for 2007 was 96.2% for Omani GSM segment. We expect that at the end of 2008 the GSM penetration in Oman will reach 115%-plus. In 2007, the country witnessed a growth of 38% in its GSM subscriber base to reach 2.5mn. Out of the total new customer additions of 681,976 in Oman, Nawras acquired 65% of the total market additions. During 2007 Nawras added 444,950 new customers, a growth of 78%, and ended the year with 1.02mn customer base. Out of the total subscribers, 92% were prepaid and the rest were postpaid. At the end of Q1-2008, Nawras s subscriber base increased to 1.16mn. Financial Performance Revenue Composition In FY2007, Qtel reported a y-o-y growth of 134.7% in its consolidated revenue which increased to QR10,373.4mn from QR4,420.4mn achieved in FY2006. The acquisition of Wataniya and Asia Cell aided the growth in group revenues for The revenue from its domestic operations accounted for 42.9% of Qtel s total revenue, Wataniya accounted for 41.4%, Oman operation accounted for 8.6% and Iraq (Asia Cell) contributed 7.1%. With regard to Qtel s domestic operations, wireless segment accounted for 70.3% of Qtel s total domestic revenue and wireline segment accounted for the remaining 29.7%. August 2008 GCC Telecom Sector 95

100 Chart 2: Qtel s Revenue Compositions 2007 Wi-tribe 0.1% Asia Cell Iraq 7.1% Qatar 42.9% Wataniya 41.4% Oman - Nawras 8.6% Source: Qatar Telecom and Global Research Wireless Segment - Qatar Qtel s GSM business witnessed a growth of 22.1% in its revenues which increased to QR3,128.3mn in FY2007 from QR2,562.8mn in FY2006. The major revenue drivers for GSM segment are high ARPU levels, though declining, apart from 37.4% growth in total subscriber base. Wireline Segment Fixed line, internet, other revenue (consisting of equipment sales and rental incomes of wireline segment) and cable TV are the three business components under wireline segment. In FY2007, Qtel s wireline revenue declined by 5% to reach QR1,319.1mn. The fixed line business, the major revenue contributor to wireline segment, witnessed a growth of 7.8% while internet business witnessed a revenue growth of 19.6%. The company s revenue from cable TV segment grew by 25.6% to reach QR35mn in FY2007. Revenue, Margins & Profitability In FY2007, Qtel s business in Qatar saw revenue growth of 12.6% which increased from QR3,950.8mn to QR4447.3mn. This growth in revenue continues to be driven predominantly by wireless segment as revenue from fixed line segment registered a decline in FY2007. Its EBITDA from Qatar operations grew by 12.9% to QR2,924.6mn. Its net profit for Qatar operations declined by 22.5% to QR1,354.7mn. Significant increase in finance cost had a dampening effect on the company s net profit from Qatar operations as it increased to QR790.9mn from QR658,000 in FY2006. Qtel s total revenue stood at QR10,373.4mn at the end of FY2007, which displayed a growth of 134.7% over FY2006. Its EBITDA margin declined to 49.9% in FY2007 from 59.2% in FY2006. With a y-o-y growth of 97.5% in FY2007, its EBITDA reached to QR5,171.7mn as compared to QR2,626.6mn in FY GCC Telecom Sector August 2008

101 In FY2007 the company s net profit margin declined to 16.1% from 38.3%. The company s consolidated net profit stood at QR1,674.3mn at the end of FY2007 as compared to QR1,692.1mn in FY2006. At the end of March 2008, Qtel s group customer base increased to 16.84mn, registering a YoY growth of 83.6%. During Q1-2008, Qtel s group revenue increased by 144.2% on y-o-y basis to reach QR3,547.1mn. Its EBITDA margin declined to 50.6% from 57.6% in Q EBITDA grew by 114.4% to QR1,794.2mn. The company reported a growth of 9.5% in consolidated net profit to QR556.9mn for Q Future Trend in Consolidated Revenues & Profitability Our financial projections consist of consolidated financials of entire Qtel group, including Wataniya Telecom and PT Indosat. Going forward we forecast a 4 year ( ) CAGR of 16.5% in consolidated revenues, 14.3% in EBIDTA and 26% in net profit. The contribution of Qatar operation to the group revenue was 42.9% in 2007, which we expect to decline to 27.7% in 2008, 23.5% in 2009, 22.8% in 2010 and 21.7% in 2011, due to increasing revenue contribution from other operations. Chart 3: Trend in Consolidated Revenues, EBITDA & Net Profit 35,000 30,000 25,000 (in QR Mn) 20,000 15,000 10,000 5, (E) 2009 (E) 2010 (E) 2011 (E) Revenues EBITDA Net Profit Source: Global Research Outlook and Valuation Qtel s significant thrust on capturing market before the advent of competition in Qatar, especially in GSM segment, is clearly visible in steep growth in penetration level over the last three years. However, further growth in its market is coming at reduced ARPU, which is likely to decline further with the advent of competition in With regard to Nawras Telecom, the company is strongly focusing on increasing its market share in Oman. With regard to Iraq operation, it has high growth potential and it will continue to drive the growth further. With regard to Qtel s expansion plans, the acquisition of Wataniya has significantly widened Qtel s geographical presence. In Wataniya s portfolio of operations, Kuwait is accounting for almost 50% of Wataniya s group revenues and will continue to witness August 2008 GCC Telecom Sector 97

102 strong growth in 2008 and However, it is likely to face more competitive pressure especially when the third operator, Saudi Telecom, start its operation in Kuwait. Therefore, we expect that ARPU and margins are likely to come under pressure with the advent of third operator in Kuwait. Another high growth markets under Wataniya are Algeria and Tunisia, which will have significant contribution going forward and we believe that Algerian operation is likely to turnaround in this year. In Palestine, though it will be a second GSM operator and has good growth potential, the prevailing situation in the country is of major concern. With regard to PT Indosat, which is second largest phone company in Indonesia, it is likely to witness gradual expansion in its market share especially in the GSM segment, however, we expect that ARPU and margins are likely to come under pressure. Going forward, raising of debt for acquisitions will have significant impact on Qtel s profitability for the next two to three years. At the current market price of QR159.4 (Aug. 31, 2008), Qtel trades at 9.2x and 5.7x its earnings and 2.0x and 2.1x of its book value for FY2008E and FY2009E respectively. We have used Sum-Of-The-Parts (SOTP) valuation method for the company s operations in different countries. Based on consolidation of the individual country operations, our SOTP valuation estimates the fair value of Qtel s stock at QR282.4, which is 77.2% higher than the current market price of the stock. We, therefore, revise our recommendation on the stock from HOLD to BUY. Table: 1 SOTP Valuation Summary Country Operations Equity Value (in QR mn) Qtels Qatar Operations 17,901 Nawras Telecom - Oman 1,940 Iraq - Asia Cell 2,080 Wataniya Telecom - Kuwait 8,946 Algeria (9% direct stake) 351 PT Inodsat - Indonesia 5,759 Others 4,451 Total Equity Value 41,428 Number of shares outstanding (in mn) Per share value (QR) Source: Global Research 98 GCC Telecom Sector August 2008

103 BALANCE SHEET Amount in Qatari Riyal (A) 2006 (A) 2007 (A) 2008 (E) 2009 (E) 2010 (E) 2011 (E) Assets: Cash & cash equivalents 1,645,359 1,416,683 3,250,092 1,091,693 2,309,130 2,848,081 3,600,539 Accounts receivable and prepayments 710,656 1,135,033 2,366,025 3,479,604 3,665,526 4,088,026 4,519,759 Inventories 23,869 27, , , , , ,476 Provision for doubtful debt (168,923) (173,470) (260,841) (385,323) (447,631) (502,945) (529,713) Other current assets , , , ,946 Amounts due from liquidator 389, Total Current Assets 2,210,961 2,405,490 5,872,532 5,017,101 6,474,293 7,475,298 8,741,008 Qtel Available-for-sale investments 1,198,683 1,753,026 2,333,384 2,714,616 3,056,641 3,492,921 4,016,787 Investment in associates - 100,253 2,523,960 2,537,202 2,537,202 2,537,202 2,537,202 Net property, plant & equipment 2,491,227 3,043,280 9,462,192 36,313,850 40,136,067 44,063,309 47,994,617 Net intangible assets 380, ,658 26,547,074 29,356,037 28,423,857 27,437,975 26,382,545 Other Assets 94, , , , , , ,476 Deferred tax asset - 3, , , , , ,358 Total Assets 6,376,306 7,801,952 47,263,592 76,542,398 81,284,430 85,699,006 90,380,993 Liabilities: Accounts payable & Accruals 923,165 1,170,976 7,272,765 10,682,555 9,280,279 11,580,499 13,538,788 Amounts due to other international carriers 66,461 92, , , , , ,747 Current Account with the State of Qatar 397, ,827 1,134,786 1,248,265 1,373,091 1,510,400 1,661,440 Deferred income - 132, , , , , ,827 Interest bearing loans and borrowings ,146 2,101,463 2,020,234 1,987,579 1,959,109 Other current liabilities ,846,342 3,533,470 3,877,607 4,276,679 Proposed dividend ,782,944 3,275,804 4,037,384 4,842,305 Total Current Liabilities 1,386,695 1,965,613 9,596,430 19,933,816 22,923,053 25,258,806 27,371,891 Other Non-Current Liabilities 129, , ,529 7,687,772 8,759,975 9,152,032 10,094,431 Long Term Loan from Banks 573, ,177 20,904,031 24,752,955 22,901,652 22,264,035 21,705,636 Minorities Interest 25,555 60,783 9,605,706 10,832,480 12,545,424 14,421,210 16,351,254 Shareholders s Funds: Share capital 1,000,000 1,000,000 1,000,000 1,466,960 1,466,960 1,466,960 1,466,960 Legal reserve 713, ,761 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Premium ,504,400 5,504,400 5,504,400 5,504,400 Retained earnings 2,167,560 2,767,651 3,555,462 4,019,581 4,838,532 5,287,130 5,541,988 Fair value reserve 380, , , , , , ,759 Translation reserve , , , , ,675 Equity Attributable to Parent Shareholders 4,261,592 4,983,687 6,899,896 13,335,375 14,154,326 14,602,924 14,857,782 Total Liabilities 6,376,306 7,801,952 47,263,592 76,542,398 81,284,430 85,699,006 90,380,993 Source: Company Reports and Global Research August 2008 GCC Telecom Sector 99

104 Consolidated Operating Statement Qtel Amount in QatariRiyal (A) 2006 (A) 2007 (A) 2008 (E) 2009 (E) 2010 (E) 2011 (E) Revenues 2,982,400 4,420,437 10,373,430 19,494,588 25,681,980 28,221,508 30,817,857 Total Cost of Sales (330,809) (597,806) (2,053,276) (5,427,472) (7,479,385) (8,193,376) (8,972,453) Gross Profit 2,651,591 3,822,631 8,320,154 14,067,115 18,202,596 20,028,133 21,845,404 EBITDA 1,743,889 2,618,658 5,010,100 9,701,770 12,559,533 13,520,505 14,492,567 Financial Charges (4,497) (19,740) (993,791) (1,801,180) (1,850,823) (1,888,488) (1,856,147) Depreciation (317,737) (502,937) (1,844,878) (2,509,306) (3,619,424) (4,029,855) (4,444,807) Amortisations (968,771) (977,198) (961,507) (938,277) Other Income & Expenses 76, , ,231 (46,196) (214,267) (184,006) (129,032) Deferred tax income - 3,698 91, Earnings Before Taxes 1,498,440 2,243,925 2,485,630 4,376,317 5,897,821 6,456,649 7,124,305 Royalty Payment to Govt. (404,968) (597,509) (607,637) (602,482) (90,122) (94,882) (97,098) Minority Interest 96,975 45,724 (203,683) (1,226,774) (1,712,944) (1,875,786) (1,930,044) Net Profit 1,190,447 1,692,140 1,674,310 2,547,062 4,094,755 4,485,982 5,097,163 P&L Appropriation Account: Op Balance of Retained Earnings 1,962,692 2,167,560 2,767,651 3,555,462 4,019,581 4,838,532 5,287,130 Net Profit for the year 1,190,447 1,692,140 1,674,310 2,547,062 4,094,755 4,485,982 5,097,163 Final dividend paid for previous year (485,000) (485,000) (575,000) (200,000) Bonus shares issued (100,000) Trfr to Legal Reserve (130,879) (175,562) (111,239) Interim Dividend (365,000) (425,000) (200,000) Proposed Directors Remuneration (4,700) (6,300) Revaluation of investment property Net adjustment to minority interests - (187) (260) Proposed Dividend (1,782,944) (3,275,804) (4,037,384) (4,842,305) Retained Earnings Carried Forward 2,167,560 2,767,651 3,555,462 4,019,581 4,838,532 5,287,130 5,541,988 Source: Company Reports and Global Research 100 GCC Telecom Sector August 2008

105 CASH FLOW STATEMENT Amount in Qatari Riyal (A) 2006 (A) 2007 (A) 2008 (E) 2009 (E) 2010 (E) 2011 (E) Operating Operating Activities 1,356,852 2,085,236 4,371,643 8,878,966 11,981,222 12,912,710 13,851,359 Profit Before Tax 1,498,440 1,646,416 1,877,993 3,773,836 5,807,700 6,361,767 7,027,207 Depreciation & Amortisation 317, ,937 1,844,878 3,478,077 4,596,621 4,991,362 5,383,083 Investment and interest income (76,709) (98,321) (196,372) (298,608) (336,231) (384,221) (441,847) Provision for doubtful receivables ,482 62,309 55,314 26,768 Financial Charges 4,497 19, ,791 1,801,180 1,850,823 1,888,488 1,856,147 Loss/ (gain) on disposal of property, plant & equipment (369) (1,184) (5,044) Provision for employees end of service benefits 29,481 22,093 40, Employees end of service benefits paid (6,850) (4,267) (390.00) Royalty Payments (404,968) Directors remuneration (4,700) Deferred taxes 293 (3,698) (91,968) Share of results of an associate - 1,520 (92,237) Working Capital 177, ,215 3,182,439 13,176,919 (785,345) 2,687,063 2,944,560 Decrease / (increase) in inventories (579) (3,375) 108,801 (68,678) (27,252) (24,382) (26,549) Decrease / (increase) in accounts receivable (86,470) (340,888) (468,858) (1,113,579) (185,921) (422,501) (431,733) (Decrease) / increase in payables to other international - 10,911 12,002 13,202 14,522 carriers (net) (Decrease) / increase in accounts payable (130,657) 483,478 3,527,569 10,840,033 (330,073) 2,692,277 2,900,689 Movement in current account with the State of Qatar 395, , , , ,040 Held for trading investments Bank overdraft , Amount due from liquidator , Deferred income (206,395) 22,834 17,506 19,257 Decrease / (increase) in other current assets (634,833) (88,890) (70,486) (81,738) Decrease / (increase) in other current liabilities ,846,342 (312,872) 344, ,071 Total Operating 1,534,680 2,224,451 7,554,082 22,055,885 11,195,877 15,599,773 16,795,919 Investing Activities Purchase of property, plant & equipment (1,022,809) (1,028,203) (2,062,225) (29,360,964) (7,441,641) (7,957,097) (8,376,114) Investment in an associate - (101,827) (2,331,470) (13,242) Increase in other assets (2,468) (47,923) 60 (18,130) (13,169) (13,077) (14,252) Deferred tax assets (61,010) (39,610) (22,854) (2,282) Net increase in investments (284,885) (633,304) (205,767) (381,232) (342,025) (436,280) (523,866) Proceeds from sale of property, plant & equipment 604 1,270 90, Proceeds from sale of investments 283,886 16, , Investment and interest income 64, , , , , , ,847 Additions to license costs (18,028) (13) (4,603,465) (3,777,734) (45,017) 24, ,154 Acquisition of subsidiaries, net of cash acquired - - (13,490,902) Acquisition of minority interests - - (364,150) Total Investing (979,106) (1,682,167) (22,454,705) (33,313,705) (7,545,232) (8,020,711) (8,357,514) Financing Increase/(decrease) in long term debt 573,413 72,881 17,717,992 3,848,924 1,281,788 (1,843,164) (1,763,946) Rights Issue ,871, Additions to deferred financing costs - - (119,779) Increase/(decrease) in overdraft ,380,317 (81,229) (32,654) (28,470) Financial Charges (4,497) (17,857) (976,602) (1,801,180) (1,850,823) (1,888,488) (1,856,147) Dividends paid (850,000) (910,000) (775,000) (200,000) (1,782,944) (3,275,804) (4,037,384) Minority Interest - 84,016 36, Net movement in minority interests , Total Financing (281,084) (770,960) 15,916,515 9,099,421 (2,433,208) (7,040,111) (7,685,947) Qtel Net Change in Cash 274,490 (228,676) 1,015,892 (2,158,399) 1,217, , ,459 Net foreign exchange differences 817,517 Net Cash at beginning 1,370,869 1,645,359 1,416,683 3,250,092 1,091,693 2,309,130 2,848,081 Net Cash at end 1,645,359 1,416,683 3,250,092 1,091,693 2,309,130 2,848,081 3,600,539 Source: Company Reports and Global Research August 2008 GCC Telecom Sector 101

106 FACT SHEET Qtel 2005 (A) 2006 (A) 2007 (A) 2008 (E) 2009 (E) 2010 (E) 2011 (E) LIQUIDITY RATIOS - Current Ratio Quick Ratio Cash Flow from Operations ratio PROFITABILITY ANALYSIS - Gross Profit Margin 88.9% 86.5% 80.2% 72.2% 70.9% 71.0% 70.9% - EBITDA to Revenues 58.5% 59.2% 48.3% 49.8% 48.9% 47.9% 47.0% - Net Profit Margin 39.9% 38.3% 16.1% 13.1% 15.9% 15.9% 16.5% - Return on Average Assets 20.8% 23.9% 6.1% 4.1% 5.2% 5.4% 5.8% - Return on Average Equity 29.9% 36.6% 28.2% 25.2% 29.8% 31.2% 34.6% ACTIVITY RATIOS - Inventory Turnover (times) Debtors Turnover (times) Creditors Turnover Ratio LEVERAGE RATIO s - Interest Coverage (times) Debt / Equity GROWTH RATES - Revenue growth rate 27.1% 48.2% 134.7% 87.9% 31.7% 9.9% 9.2% - Net income growth rate -19.5% 42.1% -1.1% 52.1% 60.8% 9.6% 13.6% - Equity growth rate 15.1% 16.9% 38.4% 93.3% 6.1% 3.2% 1.7% - Total assets growth rate 26.2% 22.4% 505.8% 61.9% 6.2% 5.4% 5.5% RATIOS USED FOR VALUATION - EPS (QR) Book Value Per Share (QR) Market Price per share(qr) Market Capitalisation (QR Mn) 30,013 28,399 28,537 23,383 23,383 23,383 23,383 - Enterprise Value (EV QR Mn) 28,941 27,630 46,912 49,146 45,996 44,787 43,448 - EV/EBITDA (x) P/E P/BV Source: Company Reports and Global Research * Market price for 2008 and subsequent years are as per closing prices on Doha Securities Market on Aug. 31, GCC Telecom Sector August 2008

107 Bahrain Telecommunications Company Ticker: BTEL.BH (Reuters) BATELCO BI (Bloomberg) Recommendation BUY Listing: Bahrain Stock Exchange CMP: BD0.705 (Aug 31, 2008) Key Data EPS (BD)* Average daily volume ( 000) BVPS (BD)* week High / Low (BD) 0.883/ P/E (x) 11.4 Market Cap (BD mn) 1,015.2 P/BV (x) 2.8 Estimated Fair Value per share (BD) Source: Bloomberg & Global Research * Actual (2007) Background Bahrain Telecommunications Company (Batelco) was established in 1981 as a Bahraini Shareholding Company. It evolved from a local telephone company with a capacity for 66,000 lines to become a regional leader specialising in a broad range of communications services including mobile, national and international telephony; business network services; internet and satellite services. The company was listed on Bahrain Stock Exchange in Jan 97. Batelco meets the telecommunications needs of residential, business and public sectors and provides services and capacity to other communications companies. Batelco s services cover the full spectrum of telecommunications solutions for residential and business customers including ICT solutions. Comprehensive array of mobile services, international roaming, high speed Internet connections, WiFi, MPLS IP-VPN network provisioning and management, Datacoms services, Provision and Support of PABX, high-tech, reliable fixed line services including National and International carrier class voice and VoIP. It provides services and capacity to other communications companies in Bahrain. It was one of the first in the Middle East to launch GSM Network in Analysis of Country Operations Batelco in an attempt to diversify and invigorate the growth of its revenues and profits is venturing beyond its borders. A snapshot of its activities in various geographies is discussed. Batelco is aiming to grow geographically into the MENA region with a goal to generate 70.0% of its revenues from international operations by the end of August 2008 GCC Telecom Sector 103

108 Table 1: Snapshot of country operations Country of operations Subsidiary Type of services Shareholding Since Bahrain Middle East Company Cellular, Fixed Line and 1981, GSM Bahrain 100.0% SPC Broadband since 1995 Jordan Batelco Jordan PSC Broadband ADSL 80.0% Umniah Mobile Cellular and Broadband- Jordan 96.0% Jun 06 Communications Wimax Kuwait Qualitynet Internet 44.0% Yemen Sabafon Cellular 20.0% Mar 07 Egypt Batelco, Egypt Internet 100.0% Saudi Arabia Atheeb, Saudi Arabia Cellular and Broadband 15.0% 3Q08 Source: Company Reports and Global Research Bahrain Operations Batelco provides Cellular, Fixed Line and Broadband services in the Kingdom of Bahrain. Additionally it provides ICT (Integrated Communications Technology) solutions through ANIS. Anis is an ICT specialist provider & systems integrator (SI) offering turnkey complex mission critical systems and integrated solutions to Batelco as well as to Batelco s corporate clients namely government, banking & finance and corporate enterprises. INFORT, Batelco s Data Centre, is powered and run by Anis. The state-of-the-art Data Centre provides uninterrupted services round the clock to host clients critical data to ensure business continuity in the face of environmental or technical disaster. Cellular Services Bahrain is one of the GCC countries with greater than 100% of cellular penetration. The entry of second cellular player MTC (Zain) has resulted in increasing penetration and also a market share loss for Batelco. The cellular penetration in Bahrain has increased from 102.6% in 2005 to 148.8% in Batelco s Bahrain cellular ARPUs have dropped significantly from US$28.5 in 2005 to US$24.9 in A third player is expected to enter the already saturated cellular services market by end of 2008 or early Table 2: Batelco s Bahrain Cellular Services Snapshot 000s Bahrain Cellular Subscribers , Bahrain Cellular Penetration 102.6% 122.6% 148.8% Pre paid subscribers % 75.0% 75.0% 75.0% Post paid subscribers % 25.0% 25.0% 25.0% Blended ARPU (US$) Batelco s Cellular Subscribers Market Share 65.3% 66.6% 59.9% Source: Company Reports and Global Research We expect the cellular ARPUs to register only a minor growth in medium term. In the long term Bahrain cellular ARPUs are set to decline as a result of increasing competition. Batelco s Bahrain cellular revenues as a percentage of group cellular revenues have declined from 104 GCC Telecom Sector August 2008

109 69.5% in 2005 to 46.4% in This was as a result of increased competition in Bahrain and also emergence of Jordan as a major contributor of group cellular revenues. Fixed Line Services Bahraini fixed line services market is interplay of three players Batelco, Kalaam Telecom and Lightspeed Communications. Increasing competition and loss of customers to cellular segment is negatively affecting the performance in this segment. Table 3: Batelco s Bahrain Fixed Line Services Snapshot Fixed Line Subscribers 193, , ,359 Fixed Line Penetration % 26.5% 26.2% 25.9% ARPU (BD) Source: Company Reports and Global Research Fixed line ARPUs have declined considerably since the past two years. In 2007, fixed line ARPUs were down by 12.7% from BD11.8 in 2006 to BD10.3 in The competition within the three players is expected to lead to a further decline in fixed line revenues in the medium and long term. Broadband Services As evident in most of the GCC states, the broadband penetration in Bahrain is low at 8.6%. This provides ample scope for the players to expand and add to their revenue. Table 4: Batelco s Bahrain Broadband Services Snapshot Broadband Subscribers 42,832 52,683 64,800 Broadband Penetration % 5.9% 7.1% 8.6% ARPU (BD) Source: Company Reports and Global Research ARPUs have declined substantially in the recent years in view of improvements in technology that has resulted in higher download speeds and lower subscription rates. We see this declining trend to continue in future. Jordan Operations Batelco operates in Jordan through Batelco Jordan and Umniah Mobile Communications (Umniah). It is the Kingdom s 3rd largest mobile operator exceeded 1mn customers in 2007 doubling its customer base since Batelco s purchase. In 2007 Umniah launched UMAX to offer high quality, and affordable internet connectivity across Jordan. Batelco Jordan operates its own core telecommunications network in Amman using fiber and microwave and has begun to expand its network reach outside Amman. Services include managed data communications based on IPVPN-MPLS with the business customer base now exceeding 500 Managed Data Communication links and 200 Internet Leased Lines. Batelco Jordan is currently leading the competition in the internet market by exceeding 10,000 ADSL accounts to win a 17.0% market share from peers in Jordan. Umniah also launched WiMax under the trademark UMAX in 2007, becoming the first operator to offer the long awaited services that will increase the competition in Jordan. August 2008 GCC Telecom Sector 105

110 Cellular Services Batelco provides cellular services in Jordan through Umniah. Though Batelco does not publish the country results except for Bahrain, we have derived revenues and market shares by comparison with other cellular operators in Jordan. A snapshot of competition in the cellular space in Jordan is discussed. Table 5: Batelco s Jordan Cellular Services Snapshot Cellular penetration in Jordan 55.0% 74.4% 80.6% Batelco (Umniah) Cellular Subscribers 309, ,686 1,193,153 Total Cellular Subscribers in Jordan per ITU 3,137,700 4,343,100 4,770,600 Blended ARPU (BD) Prepaid % 20.0% 9.0% 6.5% Postpaid % 80.0% 91.0% 93.5% Source: Company presentation, ITU and Global Research Batelco through Umniah and Jordan Telecom through Orange have gained market share from MTC (Zain) in the recent years as evident from growth in their subscribers. As a result of competition, blended cellular ARPUs have declined from BD9.4 in 2005 to BD7.8 in However, a low penetration level of 80.6% still provides enough room for growth. We estimate that Batelco s Jordan cellular revenues should contribute to about 53.6% of Batelco group cellular revenues. Also, we expect this pie to grow larger in the medium term as Umniah is gaining share from MTC on a progressive basis. Broadband Services Batelco started providing broadband services in Jordan through Umniah in The Jordanian broadband market is characterized by a very low penetration rate of 1.6%. There is only one additional player Jordan Telecom that provides through Orange Internet. The broadband subscribers were up by 89.5% from 48,600 subscribers in 2006 to 92,100 in Table 6: Batelco s Jordan Broadband Services Snapshot Broadband Subscribers 24,200 48,600 92,100 Broadband Penetration % 0.4% 0.8% 1.6% ARPU (BD) Source: ITU, Company Reports and Global Research Kuwait Operations A 44% Batelco-controlled subsidiary company, Qualitynet meets the challenges of an era of convergence by providing total ICT solutions. Qualitynet remains the clear market leader in terms of both its Internet business and data communications services and continues to be the main service provider to government and the business community in Kuwait City. 106 GCC Telecom Sector August 2008

111 Yemen Operations Batelco increased its shareholding in Sabafon to 26.9% in May 08. It had earlier purchased a 20.0% shareholding in Yemen s leading mobile communications company Sabafon in Mar 07. SabaFon is the largest GSM mobile operator in Yemen with 1.6mn mobile subscribers and offering national coverage with over 550 base stations across Yemen. Egypt Operations Batelco Egypt is a wholly owned subsidiary of the Batelco Group. The company s managed global frame relay service, managed international private lines service and a global Internet access service, combine to form a one-stop-shop service, in a bid to cater for all of its customers global needs. Saudi Arabia Operations Batelco has a 15.0% equity stake in Atheeb Telecommunications Consortium formed in Saudi Arabia. The Royal Decree is expected to be issued in the 1Q08 and the company will roll out wireless broadband, data solutions and voice services nationwide in Saudi Arabia by the end of 3Q08. As part of an Atheeb/Batelco consortium Batelco has won one of two WiMax licences which will allow them to offer wireless broadband, data solutions and voice services nationwide in Saudi Arabia. Financial Review Batelco s revenues were up by 25.0% from BD234.4mn in 2006 to BD293.1mn in Net income posted a double digit YoY growth rate of 13.6% increasing from BD89.3mn in 2006 to BD101.5mn in The company posted an EPS of BD0.070 in 2007 compared to BD0.062 in 2006, up by 13.6%. Gross margin declined from 74.0% in 2006 to 70.7% in This was due to only a marginal growth in ARPUs in the Bahrain cellular services segment and loss of market share to the competitor MTC (Zain). Batelco s market share in the Bahrain cellular services market declined from 67.2% in 2006 to 59.9% in EBITDA margin also declined from 48.8% in 2006 to 45.0% in 2007 on the back of a higher SG&A expense ratio of 25.7% in 2007 as compared to 25.2% in Table 7: Income Statement Highlights BD mn Revenues Y-o-Y increase % 25.0% Gross Profit Gross Margin 72.6% 74.0% 70.7% EBITDA EBITDA Margin 48.7% 48.8% 45.0% EBIT EBIT Margin 36.5% 36.0% 32.1% Net Income Net Margin 40.5% 38.1% 34.6% EPS (BD) Y-o-Y increase % 13.6% Source: Company Reports and Global Research August 2008 GCC Telecom Sector 107

112 Analysis of revenue composition in 2005 and 2007 indicates that geographic expansion plans of Batelco is yielding result as revenue from other regions has increased from 14.1% of total revenues in 2005 to 35.0% of revenues in We believe that Jordan cellular segment contributed to the majority of growth in the international segment. Chart 1: Geographic Segmentation of Revenues 14.1% 35.0% 85.9% 65.0% Bahrain Revenues Other Region Revenues Bahrain Revenues Other Region Revenues Source: Company Reports and Global Research The positively growing group EBITDA profile has also translated into better ROE for the company. However, the growth in 2007 has been at a slower pace and the ROE has only marginally increased from 24.1% in 2006 to 24.4% in Chart 2: EBITDA (BD mn) and ROE % % % 30.0% 25.0% 20.0% 15.0% EBITDA ROE 10.0% Source: Company Reports and Global Research Batelco s ROA has declined from 20.6% in 2006 to 16.7% in 2007 due to the compounding effect of slacking growth in EBITDA and a very speedy growth in the balance sheet size due to investments in associates made during GCC Telecom Sector August 2008

113 Chart 3: EBITDA (BD mn) and ROA % % 25.0% % % 20.0% 15.0% EBITDA ROA 10.0% Source: Company Reports and Global Research Batelco s total assets increased by 52.8%; from BD480.7mn in 2006 to BD734.5mn in The assets capitalized were lower in 2007 at BD51.1mn compared to BD113.9mn in Batelco s net profit declined by 2.8% at BD50.8mn in 1H08 compared to BD52.2mn in 1H07. The 1H08 results were impacted by a number of one-off adjustments which had a net negative impact of BD1.2mn. During 1H07, one-off adjustments had a net positive impact of BD4.7mn. The revenues were up by 17.7% from BD136.4mn in 1H07 to BD160.5mn in 1H08. Growth was driven mainly by overseas operations which now represent 33.0% of Batelco s revenues. The Group s 96.0% owned subsidiary in Jordan, Umniah, has delivered significant YoY revenue growth of 59.0% buoyed by a 61.0% increase in the number of mobile subscribers, with a customer base now standing at 1.3mn. Sabafon, in which the Group holds a 26.9% equity investment, has delivered a 30.0% YoY growth in revenue with the mobile subscribers base increasing by 16.0%, for a total customer base of 1.9mn. August 2008 GCC Telecom Sector 109

114 Table 8: Balance Sheet Highlights BD mn Cash & Near Cash Items Y-o-Y increase % 366.9% Other Current Assets Y-o-Y increase % 31.3% Fixed Assets Y-o-Y increase % 3.7% Other Assets Y-o-Y increase % 212.8% Total Assets Y-o-Y increase % 52.8% % composition Cash & Near Cash Items 42.0% 9.5% 29.1% Current Assets 9.8% 10.0% 8.6% Fixed Assets 39.1% 74.8% 50.8% Other Assets 9.1% 5.6% 11.5% Total Assets 100.0% 100.0% 100.0% Current Liabilities Y-o-Y increase % 34.5% Debt Y-o-Y increase - nm % Shareholders Equity Y-o-Y increase % 12.3% Other Liabilities Y-o-Y increase - nm -6.4% Total Liabilities & equity Y-o-Y increase % 52.8% % composition Current Liabilities 14.5% 17.0% 15.0% Debt 0.0% 2.1% 26.0% Shareholders Equity 85.5% 77.2% 56.7% Other Liabilities 0.0% 3.7% 2.3% Total Liabilities & equity 100.0% 100.0% 100.0% Source: Company Reports and Global Research Strong revenue performance has also impacted Batelco s cost base, particularly in network operating expenses. Payments to other telecom operators increased as a result of significant growth in international traffic minutes, particularly wholesale resulting in a drop in gross margin that declined from 72.9% in 1H07 to 68.3% in 1H08. Net margin declined from 38.3% in 1H07 compared to 31.7% in 1H08 as a result of negative impact of one-offs. 110 GCC Telecom Sector August 2008

115 Outlook & Valuation Batelco has adopted the right strategy of exploring and investing in low penetrated markets both in cellular and broadband space. Its aim to grow geographically into the MENA region with a goal to generate 70.0% of its revenues from international operations by the end of 2010 seems to be achievable given the success they have achieved so far in their investments. Jordan is a positively influencing investment with increasing revenue and profit contribution to the group revenues and margins. The group s investment in SabaFon Yemen and Atheeb consortium is also expected to yield robust results in the high growth cellular and broadband markets respectively in the long term. In the home market in view of high level of cellular penetration and increased competition, we expect the revenue and profit contributions to diminish in long term. However, we expect that the company should do well on the back of its expansion plans. At the current market price of BD0.705 per share (as at Aug 31, 2008), the stock trades at 9.8x and 9.2x of its earnings and 2.0x and 1.8x of its book value for FY2008E and FY2009E respectively. The estimated fair value for BATELCO works out to BD0.837 per share which offers an upside of 18.7% on the market price of BD0.705 per share (as at Aug 31, 2008). Hence, we initiate on the stock with a BUY recommendation. August 2008 GCC Telecom Sector 111

116 BALANCE SHEET Bahrain Telecommunications Company (BATELCO) BD A 2006A 2007A 2008E 2009E 2010E 2011E Assets Cash and Cash Equivalents 162, , , , , , ,803.8 Other Investments , , , , ,921.0 Inventories , , , , , ,050.1 Trade and Other Receivables 34, , , , , , ,401.1 Amounts Due from Telecom Operators 3, , , , , , ,542.6 Total Current Assets 200, , , , , , ,718.6 Property, Plant and Equipment 151, , , , , , ,057.1 Goodwill - 124, , , , , ,380.0 Intangible Assets - 32, , , , , ,758.0 Investment in Associate , , , , ,394.0 Other Investments 35, , , , , , ,586.9 Total Non-Current Assets 186, , , , , , ,176.0 Total Assets 387, , , , , , ,125,894.6 Liabilities Trade and other payables 51, , , , , , ,777.1 Amounts due to telecom operators 4, , , , , , ,793.9 Current tax liabilities - - 1, , , , ,350.0 Current portion of debt - 3, , , , , ,420.0 Total Current Liabilities 56, , , , , , ,340.9 Trade and other payables - 10, , , , , ,177.0 Non current portion of debt - 6, , , , , ,356.8 Deferred tax liabilities - 7, , , , , ,456.0 Total Non Current Liabilities - 24, , , , , ,989.8 Share Capital 100, , , , , , ,000.0 Statutory Reserve 51, , , , , , ,651.0 General Reserve 15, , , , , , ,000.0 Foreign Currency Translation Fair Value Reserve - - 1, , , , ,595.0 Retained Earnings 157, , , , , , ,770.9 Minority Interest 6, , , , , , ,988.9 Total Equity 330, , , , , , ,563.9 Total Liabilities 56, , , , , , ,330.7 Total Equity and Liabilities 387, , , , , , ,125,894.6 Source: Company Reports and Global Research 112 GCC Telecom Sector August 2008

117 INCOME STATEMENT Bahrain Telecommunications Company (BATELCO) BD A 2006A 2007A 2008E 2009E 2010E 2011E Revenue 211, , , , , , ,506.6 Network operating expense (57,916.0) (61,016.0) (85,904.0) (111,101.3) (123,891.3) (146,590.3) (173,985.6) Gross profit 153, , , , , , ,521.0 Employee benefits expense (29,814.0) (34,917.0) (45,439.0) (56,289.5) (67,241.9) (78,650.2) (89,621.9) General and administrative expense (20,827.0) (24,177.0) (29,837.0) (31,963.9) (35,828.6) (39,437.7) (43,540.8) EBITDA 103, , , , , , ,358.3 Depreciation and amortization (25,714.0) (29,922.0) (37,875.0) (39,203.7) (44,089.8) (48,157.9) (51,981.8) EBIT 77, , , , , , ,376.5 Finance Costs - (445.0) (6,430.0) (6,549.6) (6,058.4) (5,149.7) (4,377.2) Finance Income 4, , , , , , ,606.5 Share of profit of associate net of tax - - 1, , , , ,665.5 Investment income 1, Gain on sale of investment 1, Other income 1, , , , , , ,537.6 Profit before tax 86, , , , , , ,809.0 Taxes - - (1,259.0) (2,160.1) (2,297.6) (2,683.1) (3,236.2) Profit for the year 86, , , , , , ,572.8 Minority interest 1, , , , , , ,964.3 Net Profit Attributable to Equity holders 85, , , , , , ,608.5 P&L Appropriation account Opening Balance of Retained Earnings 131, , , , , , ,042.4 Profit for the year 85, , , , , , ,608.5 Dividends paid (30,000.0) (25,000.0) (33,600.0) (24,000.0) (28,800.0) (28,800.0) (28,800.0) Bonus Shares - (20,000.0) - (24,000.0) Donations (1,653.0) (1,757.0) (1,750.0) (1,750.0) (1,750.0) (1,750.0) (1,750.0) Directors remuneration paid (159.0) (275.0) (330.0) (330.0) (330.0) (330.0) (330.0) Transfer to statutory reserve (8,228.0) (8,254.0) (8,434.0) (4,217.0) Interim dividend (20,000.0) (24,000.0) (24,000.0) Closing Balance of Retained Earnings 157, , , , , , ,770.9 Source: Company Reports and Global Research August 2008 GCC Telecom Sector 113

118 CASH FLOW STATEMENT Bahrain Telecommunications Company (BATELCO) BD A 2006A 2007A 2008E 2009E 2010E 2011E Operating Activities Net Income 85, , , , , , ,608.5 Depreciation 25, , , , , , ,981.8 Other Income , , , , , ,809.7 Interest Cost , , , , ,377.2 Other Operating Cash Flows -1, , , , , ,080.0 Minority Interest 1, , , , , , ,964.3 Change in Net Working Capital 10, , , , , , ,871.5 Total Operating Cash Flows 120, , , , , , ,913.6 Investing Activities Purchase of Plant & Property -23, , , , , , ,482.7 Intangible Assets , , Investment in Associates , , Purchase of Investments -11, , , , , , ,517.4 Other Investment Activities , , , , , ,827.9 Total Investment Activities -34, , , , , , ,172.2 Financing Activities Current portion of debt - 3, , Trade and other payables -9, , Non current portion of debt - 6, , , , , ,474.7 Interest Cost , , , , ,377.2 Minority Interest Final Dividend Paid -30, , , , , , ,800.0 Interim Dividend Paid -20, , , Total Financing Activities -60, , , , , , ,651.9 Opening Balance 136, , , , , , ,714.2 Total Change in Cash 26, , , , , , ,089.5 Ending Balance 162, , , , , , ,803.8 Source: Company Reports and Global Research 114 GCC Telecom Sector August 2008

119 FACT SHEET Bahrain Telecommunications Company (BATELCO) 2005A 2006A 2007A 2008E 2009E 2010E 2011E Liquidity Ratios Current ratio (times) Quick ratio (times) Cash ratio (times) Profitability Ratios Gross Margin % 72.6% 74.0% 70.7% 67.4% 67.2% 66.2% 65.4% EBITDA Margin % 48.7% 48.8% 45.0% 41.4% 39.8% 39.0% 38.9% EBIT Margin % 36.5% 36.0% 32.1% 29.9% 28.2% 27.9% 28.5% Net Profit Margin 40.5% 38.1% 34.6% 30.3% 29.1% 29.5% 30.8% ROE % 25.9% 24.1% 24.4% 20.8% 19.0% 18.9% 19.2% ROA % 22.1% 18.6% 13.8% 12.9% 12.5% 13.0% 13.7% Efficiency Ratios A/R Turnover (times) Inventory Turnover (times) A/P Turnover (times) COGS/Sales 27.4% 26.0% 29.3% 32.6% 32.8% 33.8% 34.6% SG&A /Sales 9.8% 10.3% 10.2% 9.4% 9.5% 9.1% 8.7% Financing Ratios Debt to equity (times) Debt to total assets % - 2.1% 26.0% 22.0% 18.0% 15.0% 12.0% Dividends payout ratio % - 0.0% 0.0% 0% 0% 0% 0% Growth Rates Revenue growth rate % 25.0% 16.2% 10.8% 15.0% 15.8% Net income growth rate - 4.4% 13.6% 1.7% 6.4% 16.8% 20.6% Equity growth rate % 12.3% 19.1% 16.5% 17.4% 18.8% Total assets growth rate % 52.8% 8.9% 9.9% 12.1% 14.2% Sustainable growth rate 25.9% 24.1% 24.4% 20.8% 19.0% 18.9% 19.2% Valuation Ratios Number of shares (in 000) 1,440,000 1,440,000 1,440,000 1,440,000 1,440,000 1,440,000 1,440,000 Par Value per share (BD) BV per share (BD) EPS (BD) Market price share (BD) Market capitalization (BD 000) 1,100,160 1,140,480 1,157,760 1,015,200 1,015,200 1,015,200 1,015,200 Enterprise Value (BD 000) 937,413 1,104,725 1,135, , , , ,173 EV / EBITDA P/E ratio P/BV ratio Source: Company Reports & Global Research Historical P/E & P/B multiples pertain to respective year-end prices, while those for future years are based on closing price as at Aug. 31, August 2008 GCC Telecom Sector 115

120 Oman Telecommunications Company Ticker: OTL.OM (Reuters) OTEL OM (Bloomberg) Recommendation BUY Listing: Muscat Securities Market CMP: RO1.983 (Aug 31, 2008) Key Data EPS (RO)* Average daily volume ( 000) BVPS (RO)* week High / Low (RO) 2.442/ P/E (x) 11.4 Market Cap (RO mn) 1,487.3 P/BV (x) 3.8 Estimated Fair Value per share (RO) Source: Bloomberg and Global Research * Actual (2007) Background Oman Telecommunications Company (OTEL) is the incumbent and the leading telecom operator in the Sultanate providing fixed line, cellular and internet services to corporate, government and individual customers. The company was established in 1980 pursuant to Law No. 43 of 1980 as the General Telecommunications Organization (GTO), and has been a monopoly provider of telecommunications services since then until Mar 05 when the mobile segment was opened up for competition. In view of emerging competition in the mobile market, Omantel Group established Oman Mobile in 2004, as a subsidiary company. OTEL became a publicly listed company in Jul 05, when its shares were listed in the Muscat Securities Market (MSM). The company is 70.0% owned by the Omani government, 9.0% by the Civil Service Employees Pension Fund of Oman and 21.0% by the public. Analysis of Country Operations OTEL s main operations are within the telecom market in Oman. The Omani government started implementing the sector liberalization in line with World Trade Organization (WTO) agreement in The industry witnessed competition in the mobile sector through the licensing of a 2nd mobile operator Nawras in Mar 05. Currently, two mobile operators have been licensed. The sector liberalization process which began in the Sultanate in year 2005 has gained further momentum in year 2007 with the signing of Free Trade Agreement with the US. Telecommunication Regulatory Authority (TRA) has already requested applications 116 GCC Telecom Sector August 2008

121 from interested parties for the resale of mobile calls offered by the country s two mobile operators through pre-paid cards. Also, following the TRA directive, OTEL has submitted the Reference Access offer (RAO) as part of the market liberalization of Internet and Value Added services. Oman Operations Cellular Services The opening up of the cellular services market in Oman has worked well to improve the cellular penetration that has increased considerably from 51.9% in 2005 to 96.2% in OTEL currently has 1.4mn cellular subscribers. Cellular subscribers in Oman have increased at a 5-year ( ) CAGR of 40.1% from 0.5mn subscribers in 2002 to 2.5mn in Table 1: OTEL s Oman Cellular Services Snapshot 000s Oman Cellular Subscribers 1, , ,500.0 Oman Cellular Penetration 51.9% 69.7% 96.2% Pre paid subscribers % 63.0% 65.0% 72.0% Post paid subscribers % 37.0% 35.0% 28.0% Sector Blended ARPU (US$) OTEL Cellular Subscribers , ,364.6 Market Share 71.1% 64.2% 54.6% Source: Company Reports, ITU and Global Research OTEL is adopting various measures like introduction of value added services to improve the customer retention and various promotion packages to improve customer loyalty. However, the arrival of competition in 2005 in the form of Nawras Telecom (a Qatar Telecom group company) has drived down the market shares of OTEL from 71.1% in 2005 to 54.6% in To further its efforts to improve the customer access to technological advancements OTEL is planning to implement 3G services by 3Q08 that would provide high-speed internet and data transfer access through HSDPA. Cellular services (including interconnect revenues) are the major contributor to the overall revenues of OTEL. In 2007, they contributed about 77.6% of total revenues compared to 74.4% in Though the overall cellular revenues (including interconnect revenues) registered a YoY increase of 17.7% in 2007, the cellular ARPUs increased only marginally by 0.7% from RO17.2 in 2006 to RO17.3 in ARPUs excluding interconnect revenues declined by 6.0% from RO14.0 in 2006 to RO13.1 in This was as a result of price cuts on account of competition. Fixed Line Services OTEL is the only player providing fixed line services in the sultanate. The TRA is contemplating to open up the fixed line services also to competition; however the timelines have not been specified. The fixed line subscribers declined by 0.6% from 269,700 in 2006 to 268,100 in The increasingly convenient cellular services are causing erosion in the subscriber base of fixed August 2008 GCC Telecom Sector 117

122 line services and this migration is also adversely affecting the fixed line revenues. Fixed line ARPUs have declined considerably since the past two years. In 2007, fixed line ARPUs were down by 9.3% from RO18.6 in 2006 to RO16.9 in Table 2: OTEL s Oman Fixed Line Services Snapshot 000s Fixed Line Subscribers Fixed Line Penetration % 10.1% 10.3% 10.3% ARPU (RO) Source: Company Reports and Global Research We expect that the fixed line services are set to see a higher decline in the coming years on account of erosion to the cellular services and also due to higher competition within this segment from prospective fixed line players when it would be opened to competition. Broadband Services The Sultanate of Oman has a very low level of 0.7% broadband penetration on account of difficult terrain and lower expenditure to develop networks supporting broadband services. Table 3: OTEL s Oman Broadband Services Snapshot 000s Broadband Subscribers Broadband Penetration % 0.3% 0.7% 0.7% ARPU (RO) Source: Company Reports and Global Research The broadband subscribers increased only marginally from 18,800 in 2006 to 18,900 in This is a segment that has a huge potential to grow in the coming years. Technological improvements should see more and more ADSL and Wimax services being taken up compared to the dial up internet connections. In 2007, the broadband ARPUs were up by 8.1% from RO20.5 in 2006 to RO22.1 in Currently there are no competitors to OTEL in this segment and increased focus to this segment with high ARPU can positively influence the revenue as well as profit growth of the company. Pakistan Operations In view of increasing competition on the home turf, OTEL is forging its efforts to diversify its revenue streams to high growth sectors in Asian region. In this connection they have acquired a significant stake in Worldcall Telecom which is a pioneer and high growth player in the Wireless Local Loop (WLL) market segment in Pakistan. Though the current investment should only allow operations in the WLL segment, by buying into the Pakistani telecoms sector, OTEL should be able to enter the cellular segment in future gaining a share of one of the world s fastest growing mobile phone markets. According to the Pakistan Telecommunications Authority, there are already 50mn subscribers in the country, with a further 1.5mn being added every month. Within two years, half of Pakistan s 118 GCC Telecom Sector August 2008

123 population of 160mn are expected to have a mobile phone, giving OTEL a chance to tap into the upcoming boom. Wireless Local Loop services were introduced in Pakistan after deregulation of local loop sector in Seventeen WLL licenses were issued out of which PTCL, World Call, Telecard, Great Bear, Burraq, Mytel and Wateen are operational. WLL customer base has shown rapid growth since Table 4: OTEL s Pakistan Operations Snapshot 000s WLL Subscribers , ,127.3 YoY Growth Rate - 288% 107% WLL Penetration % 0.2% 0.7% 1.3% Blended ARPU (US$) Market Share of the players: World call s Market Share 1.01% 11.25% 17.65% PTCL s Market Share 61.76% 64.36% 58.17% Telecard s Market Share 37.15% 22.31% 21.41% Great Bear s Market Share 0.08% 2.08% 2.58% Wateen s Market Share 0.00% 0.00% 0.19% Source: Pakistan Telecom Authority and Global Research Currently, there are 2.1mn subscribers of WLL services in Pakistan and we see that number growing in the coming years on account of increasing penetration. One of the major reasons for higher uptake of WLL in Pakistan is their usage in the PCOs (Public Call Office). Burraq and Mytel are new entrants in the WLL arena in Card payphone services in Pakistan were deregulated in 1990s. Telecard is the first to introduce this service in Pakistan. Growth of fixed line PCOs remained impressive till where it was going at an outstanding pace. PTA allowed mobile companies to establish their PCOs. After growth trend of fixed line PCO declined but wireless PCO services flourished in Pakistan. PCO service is functional in all four provinces and majority of them are wireless. Overall growth of the PCOs remained 10.0% in the year which was 26.0% in the year PTA allowed mobile companies to establish their PCOs. Mobilink was the first to start its PCO service and is operating of 57,936 PCOs. August 2008 GCC Telecom Sector 119

124 Chart 1: PCO Contribution by Service 12.0% 32.0% 56.0% WLL Fixed Line Mobile Source: PTA and Global Research Recent Developments In Jul 08, the government of Oman has amended the timetable for the possible sale of a 25.0% stake in OTEL. The deadline for parties selected to submit first-round proposals has been moved to September from August. Second-round bids are due in the fourth quarter. Earlier in May 08, the Government expressed intention to sell 25.0% shareholding in OTEL so as to increase competitiveness of the company. This stake sale would bring the government s shareholding in OTEL from the current 70.0% to 55.0%. It has indicated that prospective bidders for the stake must be able to demonstrate expertise as an integrated telecom operator, have an operational presence in multiple countries and provide telecom services to at least 5mn active subscribers, including 2mn in a single market. In Jun 08, OTEL concluded a US$205.0mn credit facility agreement with a consortium of Omani banks to fund its investment in Pakistan s Worldcall Telecom. OTEL and Belgacom International Carrier Services (Belgacom) have signed a joint investment agreement in May 08 for deployment of Europe-India fiber optics gateway project. Under the agreement, Belgacom will contribute US$10.0mn to join OTEL in investing in Europe India fiber optics gateway. OTEL has recently announced that it would pay around US$40.0mn as direct investment in this international project, thus bringing the total investment in the project to US$50mn. The Europe-India Gateway, the first direct, high-bandwidth fiber optics submarine cable system from the United Kingdom to India would facilitate telecommunication traffic between Middle East and Africa. In Mar 08, the TRA of Oman announced its intentions to provide a second fixed line license to successful bidders by end of It has also invited feedback from public on a possible third cellular services provider. 120 GCC Telecom Sector August 2008

125 In furtherance to its efforts to develop the communications sector, in Nov 07 the government announced a cut in the royalties on fixed and cellular services by the service providers in Oman from the earlier 12.0% and 10.0% on cellular (excluding sale of terminal equipment and interconnect expense) and fixed services respectively to a unified 7.0% rate with retrospective effect from beginning of This had provided a positive boost to the profits of the service providers. In Oct 07, OTEL launched the first phase of the prestigious hi-speed ADSL internet project. The project has a provision of around 14,000 new lines in several districts. The maximum number of lines can go up to 170,000 lines. Financial Review OTEL registered a topline YoY growth of 12.9% increasing from RO323.6mn in 2006 to RO365.3mn in The net profit increased from RO80.7mn in 2006 to RO112.0mn in 2007 registering a YoY growth rate of 38.8%. The EPS also increased at the same rate from RO0.108 in 2006 to RO0.149 in Gross profit margin improved from 70.3% in 2006 to 72.3% in 2007 on the back of slight increase in the blended ARPU (including interconnect revenues). EBITDA margin also improved from 49.8% in 2006 to 52.9% in 2007 on the back of a lower SG&A expense ratio of 19.4% in 2007 as compared to 20.5% in The increase in revenues was due to increase in cellular revenues. Analysis of revenue composition in 2005 and 2007 indicates that cellular revenues have increased from 68.6% of annual revenues in 2005 to 77.6% in Table 5: Income Statement Highlights RO mn Revenues Y-o-y increase % 12.9% Gross Profit Gross Margin 72.0% 70.3% 72.3% EBITDA EBITDA Margin 48.8% 49.8% 52.9% EBIT EBIT Margin 28.4% 29.0% 34.3% Net Income Net Margin 25.0% 24.9% 30.7% EPS (RO) Y-o-y increase % 38.8% Source: Company Reports and Global Research The ARPUs in the fixed line segment decreased by 9.3% whereas; those in cellular segment registered only a minor YoY growth of 0.7% leading to a slower YoY growth in the revenues of 12.9% in OTEL had registered a higher YoY growth rate of 19.6% in August 2008 GCC Telecom Sector 121

126 Chart 2: Composition of Revenues 6.9% 7.0% 24.5% 15.4% 68.6% 77.6% Cellular Services Fixed Line Services Broadband Services Cellular Services Fixed Line Services Broadband Services Source: Company Reports and Global Research The positively growing EBITDA profile has also translated into better ROE for the company. The ROE has increased from 26.8% in 2005 to 32.9% in Chart 3: EBITDA (RO mn) and ROE % 28.7% 32.9% 35.0% 30.0% % % 15.0% % EBITDA ROE% Source: Company Reports and Global Research OTEL s ROA also has improved from 15.0% in 2005 to 22.9% in 2007 on the back of superior EBITDA growth profile. Chart 4: EBITDA (RO mn) and ROA % 17.7% 15.0% % 22.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% EBITDA ROA% Source: Company Reports and Global Research 122 GCC Telecom Sector August 2008

127 OTEL s total assets increased by 7.7%; from RO457.3mn in 2006 to RO492.4mn in The capital expenditure was lower in 2007 at RO29.9mn compared to RO57.5mn in In 1Q08, OTEL achieved a net profit of RO38.4mn compared to RO24.0mn in 1Q07 registering a YoY growth of 60.0% on the back of double digit revenue growth with lower spending in operating expenses compared to the previous year. The revenues for the quarter ended Mar 08 rose by 14.6% to RO98.2mn compared to RO85.7mn in 1Q07. The operating expenses declined by 2.7% to RO56.9mn compared to RO58.5mn for the same period of last year. The major reason for decline in operating expenditure came from Royalty charges, Provision of impairment of receivables and Depreciation. Table 6: Balance Sheet Highlights RO mn Cash & Near Cash Items Y-o-y increase % 94.1% Current Assets Y-o-y increase % 50.2% Fixed Assets Y-o-y increase % -12.1% Other Assets Y-o-y increase % -3.9% Total Assets Y-o-y increase - 0.6% 7.7% % composition Cash & Near Cash Items 10.5% 12.0% 21.6% Current Assets 8.9% 10.0% 14.0% Fixed Assets 70.4% 68.5% 55.9% Other Assets 10.2% 9.5% 8.5% Total Assets 100.0% 100.0% 100.0% Current Liabilities Y-o-y increase - 5.9% 11.3% Debt Y-o-y increase % -74.4% Shareholders Equity Y-o-y increase % 21.2% Other Liabilities Y-o-y increase % 15.8% Total Liabilities & equity Y-o-y increase - 0.6% 7.7% % composition Current Liabilities 24.1% 25.3% 26.2% Debt 19.2% 11.4% 2.7% Shareholders Equity 55.9% 61.7% 69.4% Other Liabilities 0.9% 1.5% 1.6% Total Liabilities & equity 100% 100% 100% Source: Company Reports and Global Research August 2008 GCC Telecom Sector 123

128 The EPS for 1Q08 was RO0.051, which is 59.8% higher than the corresponding period of the previous year. Total subscriber base (including cellular, fixed line and broadband) increased to 1.97mn as of Mar 08 compared to 1.67mn as of Mar 07, a YoY growth of 17.8%. Outlook & Valuation We believe that the Omani telecom sector is to see unprecedented competition in the coming years attracting cellular players now that TRA is considering a third cellular player. Also, a prospective second fixed line player is expected to spice up the competition in this segment. Broadband is huge opportunity yet untapped to its full potential as reflected in the penetration rate. Future growth is expected to come from broadband and other international expansion. The sale of government shareholding to strategic telecom partners is expected to improve internal efficiencies and also the competitiveness of the company. OTEL should continue to retain its market share in this competitive scenario by enhancing revenue growth in Fixed and Mobile segment, while retaining valued customers through loyalty programs. Also, the focus should be directed on enhancing internal efficiency to control operating costs, while cautious infrastructure investment to abreast new technologies that enhance the customer experience. The investment in 3G is a best bet to increase the subscriber base in the cellular space. The international expansion strategies of OTEL are yet to show results as those investments are in a nascent stage and are gaining market share in the respective geographies gradually. With focus on profitable growth and steps to handle the competition we have a positive outlook on OTEL in the medium term. We believe that the stock is oversold on the news of a possible third player as the TRA is inviting bids on Aug 25, Also, after factoring in the potential loss of market share and decline in future ARPUs we believe that the stock has an upside potential at current valuation level. At the current market price of RO1.983 per share (as at Aug 31, 2008), the stock trades at 10.4x and 8.9x of its earnings and 3.8x and 3.1x of its book value for FY2008E and FY2009E respectively. The estimated fair value for OTEL works out to RO2.339 per share which offers and upside of 18.0% on the market price of RO1.983 per share (as at Aug 31, 2008). Hence, we initiate on the stock with a BUY recommendation. 124 GCC Telecom Sector August 2008

129 BALANCE SHEET Oman Telecommunications Company (OTEL OM) RO A 2006A 2007A 2008E 2009E 2010E 2011E Assets Cash & cash equivalents 47, , , , , , ,946.6 Trade & other receivables 41, , , , , , ,376.3 Less: Provision for impairment (5,703.0) (4,797.0) (1,389.0) (5,601.2) (6,324.3) (6,292.1) (6,855.6) Inventories 5, , , , , , ,756.0 Investments held for trading - - 4, , , , ,215.8 Current assets 88, , , , , , ,439.2 Investments in associated companies 2, , , , , , ,413.0 Investments at fair value through profit or loss 4, , , , , , ,988.3 Licenses 39, , , , , , ,850.0 Property, plant and equipment 544, , , , , , ,744.2 Accumulated depreciation (224,427.0) (288,891.0) (348,659.0) (414,800.2) (485,008.6) (563,290.8) (650,575.5) Net property land and equipment 320, , , , , , ,168.7 Total assets 454, , , , , , ,859.1 Liabilities Short-term Borrowings 35, , , Amount payable to the government 2, , , , , ,830.3 Trade & other payables 60, , , , , , ,102.8 Dividend payable Royalties payable 36, , , , , , ,914.6 Taxation 9, , , , , , ,548.0 Current liabilities 145, , , , , , ,395.8 Long term debt 51, , , , , ,462.5 Deferred tax 2, , , , , , ,452.1 End of service benefits 1, , , , , , ,687.1 Total liabilities 200, , , , , , ,997.5 Share capital 75, , , , , , ,000.0 Legal reserve 30, , , , , , ,280.0 Voluntary reserve 42, , , , , , ,875.0 Capital contribution 44, , , , , , ,181.0 Retained earnings 61, , , , , , ,386.1 Minority interest , , , ,139.6 Shareholders Equity 253, , , , , , ,861.7 Total liabilities and Shareholders Equity 454, , , , , , ,859.1 Source: Company Reports and Global Research August 2008 GCC Telecom Sector 125

130 INCOME STATEMENT Oman Telecommunications Company (OTEL OM) RO A 2006A 2007A 2008E 2009E 2010E 2011E Revenues 270, , , , , , ,352.1 Cost of Services (75,899.0) (96,254.0) (101,085.0) (113,867.1) (125,828.1) (124,139.9) (135,258.5) Gross profit 194, , , , , , ,093.5 Staff costs (30,225.0) (34,208.0) (39,650.0) (46,615.9) (53,359.4) (59,427.9) (64,523.9) Administrative expenses (7,907.0) (6,438.0) (6,540.0) (6,736.1) (6,921.9) (7,095.7) (7,274.2) Commission (11,368.0) (16,505.0) (19,595.0) (23,697.4) (26,756.5) (29,040.2) (34,277.9) Marketing and advertising expenses (5,865.0) (4,283.0) (3,842.0) (4,308.6) (4,864.8) (4,840.0) (5,273.5) Provision for impairment of receivables (5,703.0) (4,797.0) (1,389.0) (5,601.2) (6,324.3) (6,292.1) (6,855.6) Provision against penalties (1,703.0) EBITDA 131, , , , , , ,888.5 Depreciation (52,377.0) (64,548.0) (65,210.0) (66,141.2) (70,208.3) (78,282.3) (87,284.7) Amortization of license fee- net (2,793.0) (2,793.0) (2,793.0) (2,793.0) (2,793.0) (2,793.0) (2,793.0) EBIT 76, , , , , , ,810.8 Finance costs (2,154.0) (3,615.0) (2,441.0) (1,483.8) (2,967.6) (2,819.2) (2,374.1) Interest income 1, , , , , , ,200.3 Dividend income Exchange gain/ (loss) (214.0) Fair value gain on investments at fair value through profit or loss Fair value gain on investments held for trading - - 1, Other income 1, ,054.7 Share of profit / (loss) from associated companies Profit before tax 77, , , , , , ,765.1 Taxes (9,634.0) (11,011.0) (16,692.0) (19,562.6) (22,940.0) (21,015.6) (22,651.8) Profit for the year 68, , , , , , ,113.3 Minority Interest Profit attributable to equity holders 67, , , , , , ,282.7 P&L Appropriation account Opening Balance of Retained Earnings 79, , , , , , ,103.4 Profit for the year 67, , , , , , ,282.7 Dividends paid (78,835.0) (52,500.0) (52,500.0) (90,000.0) (90,000.0) (90,000.0) (90,000.0) Transfer to legal reserve (3,710.0) (3,062.0) Transfer to voluntary reserve (3,710.0) (4,297.0) (2,860.0) Closing Balance of Retained Earnings 61, , , , , , ,386.1 Source: Company Reports and Global Research 126 GCC Telecom Sector August 2008

131 CASH FLOW Oman Telecommunications Company (OTEL OM) RO A 2006A 2007A 2008E 2009E 2010E 2011E Profit before tax 77, , , , , , ,765.1 Depreciation 52, , , , , , ,284.7 Provision for impairment of receivables 5, , , , (32.2) Amortization of goodwill Amortization of licenses 2, , , , , , ,793.0 Fair value gains on investments (262.0) (118.0) (2,474.0) Interest income (1,570.0) (1,291.0) (3,194.0) (2,071.5) (3,145.2) (4,098.6) (5,200.3) Dividend income (58.0) - (68.0) (74.8) (82.3) (90.5) (99.6) Share of profit / loss from associated companies (157.0) (142.0) (302.0) (396.3) (508.6) (699.6) (973.8) Profit / loss on sale of property, plant and equipment (39.0) (11.0) Interest expense 2, , , , , , ,374.1 End of service benefits expenses Payment of end of service benefits (182.0) (309.0) (226.0) Working capital changes: Inventories ,771.0 (339.0) (2,705.9) (1,174.8) (832.3) (1,286.0) Trade and other receivables (25,677.0) (12,114.0) (16,511.0) (7,011.9) (8,899.1) (6,935.8) Royalty payable 5, ,205.0 (10,730.0) (2,135.7) 3,893.4 (173.5) 3,034.4 Amount payable to the government - (1,999.0) 1, Trade and other payables 8, , ,544.0 (13,399.7) 8,342.9 (371.7) 6,502.3 Cash generated from operations 127, , , , , , ,497.1 Interest received 1, , , , ,826.2 Tax paid (10,419.0) (9,056.0) (7,864.0) (18,666.2) (21,909.2) (19,830.1) (21,288.5) Net cash generated from operating activities 118, , , , , , ,034.8 Purchase of property, plant and equipment (82,360.0) (57,472.0) (29,941.0) (74,876.9) (80,367.9) (89,610.2) (99,915.3) Proceeds from sale of fixed assets Net acquisition of investments (612.0) - (3,041.0) (81,403.5) (3,098.1) (3,872.7) (4,840.8) Proceeds from sale of investments at fair value through profit or loss 2, Dividend received Net cash used in investing activities (80,051.0) (57,292.0) (32,769.0) (155,809.3) (82,875.1) (92,692.7) (103,682.8) Amount paid to the government (15,000.0) (41,240.0) (38,883.0) Bank borrowings 4,560.0 (4,560.0) - 65,546.0 (7,892.5) (15,785.0) (15,785.0) Dividends paid (49,002.0) (52,922.0) (52,829.0) (90,000.0) (90,000.0) (90,000.0) (90,000.0) Repayment of loan to government (664.0) Interest paid (124.0) (4,902.0) (1,873.0) Amount paid to contractors on behalf of the Ministry of Finance (9,200.0) Amount recovered to contractors from the Ministry of Finance - 9, Net cash used in financing activities (69,430.0) (94,424.0) (93,585.0) (24,454.0) (97,892.5) (105,785.0) (105,785.0) Net change in cash and cash equivalents (31,218.0) 7, , , , , ,567.0 Cash and cash equivalents at the beginning of the year 78, , , , , , ,379.6 Cash and cash equivalents at the end of the year 47, , , , , , ,946.6 Source: Company Reports and Global Research August 2008 GCC Telecom Sector 127

132 Fact Sheet Oman Telecommunications Company (OTEL OM) 2005A 2006A 2007A 2008E 2009E 2010E 2011E Liquidity Ratios Current ratio (times) Quick ratio (times) Cash ratio (times) Profitability Ratios Gross Margin % 72.0% 70.3% 72.3% 73.6% 74.1% 74.4% 74.4% EBITDA Margin % 48.8% 49.8% 52.9% 53.4% 53.9% 52.3% 51.9% EBIT Margin % 28.4% 29.0% 34.3% 37.4% 38.9% 35.6% 34.9% Net Profit Margin 25.1% 24.9% 30.7% 33.1% 34.4% 31.7% 31.3% ROE % 26.8% 28.7% 32.9% 36.3% 35.5% 28.7% 27.1% ROA % 15.0% 17.7% 22.9% 24.0% 24.7% 21.1% 20.7% Efficiency Ratios A/R Turnover (times) Inventory Turnover (times) A/P Turnover (times) COS/Sales 28.1% 29.7% 27.7% 26.4% 25.9% 25.6% 25.6% SG&A /Sales 23.2% 20.5% 19.4% 20.2% 20.2% 22.0% 22.4% Financing Ratios Debt to equity (times) Debt to total assets % 19.2% 11.4% 2.7% 13.2% 10.4% 7.6% 4.9% Dividends payout ratio % 77.5% 65.1% 80.3% 63.1% 53.8% 58.7% 58.7% Growth Rates Revenue growth rate % 12.9% 17.9% 12.9% -0.5% 9.0% Net income growth rate % 38.8% 27.4% 17.3% -8.4% 7.8% Equity growth rate % 21.2% 15.6% 19.8% 13.5% 14.2% Total assets growth rate - 0.6% 7.7% 21.3% 14.1% 7.3% 9.8% Sustainable growth rate 6.1% 10.0% 6.5% 13.4% 16.4% 11.8% 11.2% Valuation Ratios Number of shares (in 000) 750, , , , , , ,000 Par Value per share (RO) BV per share (RO) EPS (RO) Market price share (RO) Market capitalization (RO 000) 1,260, ,500 1,282,500 1,487,250 1,487,250 1,487,250 1,487,250 Enterprise Value (RO 000) 1,299, ,946 1,189,496 1,447,806 1,375,596 1,323,118 1,257,766 EV / EBITDA P/E ratio P/BV ratio Source: Company Reports & Global Research Historical P/E & P/B multiples pertain to respective year-end prices, while those for future years are based on closing priceas at Aug 31, GCC Telecom Sector August 2008

133 The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Recommendation Ticker Price Disclosure Mobile telecommunications Company Hold Wataniya Telecom Buy Saudi Telecom -STC Buy Etihad Etisalat Company - Mobily Buy Etisalat Buy Qatar Telecom (Qtel) Buy Bahrain Telecommunications Co. Buy Oman Telecommunications Co Buy ZAIN.KW NMTC.KW 7010.SE 7020.SE ETEL.AD QTEL.QA BTEL.BH OTL.OM KD1.72 KD1.86 SR64.75 SR46.00 AED 18.0 QR159.4 BD0.705 RO ,10 1,10 1,10 1,10 1,10 1,10 1,10 1,10 1. did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in. 3. makes a market in securities issued by this company. 4. acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of serves on the board of directors of this company. 7. Within the past year, has managed or co-managed a public offering for this company, for which it received fees. 8. has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. expects to receive or intends to seek compensation for investment banking services from this company in the next three months. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global rating Buy Hold Reduce Sell Definition Fair value of the stock is >10% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is between -10% and -20% from the current market price Fair value of the stock is < -20% from the current market price This material was produced by KSCC ( Global ),a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time,to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities ( securities ), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgement. Global shall have no responsibility or liability whatsoever in respect of any inac curacy in or ommission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice.past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment what so ever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations.

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