Oman Telecom Sector February 28, 2011

Transcription

1 OTEL CMP (RO) Mcap (ROmn) 867 TP (RO) Upside (%) 19.3 P/E 11f (x) 7.9 P/E 12f (x) 7.7 EV/E 11f (x) 3.8 EV/E 12f (x) 3.5 Jaspreet Chhabra Research Analyst Marwan Naser Business Development Manager Adil Al Saidi Brokerage Officer Adil Al Raisi Brokerage Officer Shurooq Securities Co. LLC PO BOX: 982; PC: 112 Ruwi, Oman Tel: /300/400 Oman Telecom Sector Mobile subscriber addition slowing down; ARPUs to stabilize at current levels ARPUs to stabilize at current levels We believe mobile penetration level in Oman is near its peak level. Although it is the second lowest in the GCC region, any further increase in penetration level will not yield proportionate revenue for the sector. Blended ARPUs have fallen drastically over the past 8/12 quarters at a CQGR of 4.8%/4.4%. However we do not see the ARPUs falling drastically from the current levels. We believe that traction in post-paid subscriber base will help sustain blended ARPUs at the current levels. Mobile and SMS traffic have been growing at a CQGR of c4% over the past 7 quarters, however MoUs are still under 100. Fixed-line subscribers stagnant at less than 0.3mn Oman s fixed-line subscriber base has been stagnant for the past 2 years at c0.3mn subscribers. We do not foresee any significant change in the total fixed-line subscriber base over the next 2-3 years. Post-paid and pre-paid subscriber base has seen a fall in the past 2 years of up to 25%. Broadband set to drive the internet market Broadband internet users have grown at a rapid pace in Oman market. Fixed-line broadband users have increased from 32,000 to 45,000 from Dec08 to Sep10. Mobile broadband subscriber base has increased from 1.2mn in Dec09 to 1.6mn in Sep09 at a CQGR of 10%. Fixed-line dial-up users and mobile internet users have seen a decline in the past 2 years. We believe Oman s demographics provide ample opportunities in terms of young population increasing the use of data services. Initiate coverage on Omantel with an Add rating We initiate coverage on Omantel with an Add rating and Dec11f target price of RO 1.379, which implies an upside of c19% from the current levels. At our target price, the stock is likely to trade at Dec12f P/E of 9.2x and EV/EBITDA of 4.3x. We have given 40% weightage to DCF and 30% to P/E and EV/EBITDA each, to arrive at our target price of RO Shurooq Securities Research

2 Table of Contents Mobile ARPUs to stabilize at current levels... 3 Subscriber base in fixed-line segment stagnant over the past 2 years... 6 Grossly under-penetrated in internet broadband segment... 8 Oman Telecommunication Forecast mobile revenues to grow at a CAGR of 7.3% over FY10-13f Revenue and subscriber base in fixed-line segment has stabilized for past 2 quarters.. 15 Forecast a CAGR of 2.1% in net profit over FY10-13f with flat margins Worldcall acquisition a drag in financials Initiate coverage with an Add rating and a Dec11f TP of RO Financials and valuations Shurooq Securities Research

3 Mobile ARPUs to stabilize at current levels We believe mobile penetration levels in Oman are near its peak level. Although it is the second lowest in the GCC region, any further increase in penetration level will not yield proportionate revenue for the sector. Blended ARPUs have fallen drastically over the past 8/12 quarters at a CQGR of 4.8%/4.4%. However we do not see the ARPUs falling drastically from the current levels. We believe that traction in post-paid subscriber base will help sustain blended ARPUs at the current levels. Mobile and SMS traffic have been growing at a CQGR of c4% over the past 7 quarters, however MoUs are still under 100. Increase in mobile penetration not to yield proportionate revenues Mobile penetration in Oman is at c150%. Although the penetration levels are still the second lowest in the GCC region, we believe it is nearing its peak. We also believe that further increase in mobile penetration would not yield proportionate increase in revenues for the telecom sector. Exhibit 1: Mobile penetration in GCC (%) UAE Saudi Arabia Qatar Bahrain Oman Kuwait Source: Industry reports, Shurooq Research Mobile ARPUs have fallen drastically; to stabilize at current levels Blended ARPUs in the Oman mobile market have fallen over the past 2-3 years. It has come down from RO13.2 in Sep07 quarter to RO11.4 in Sep08 quarter and then further to RO7.7 in Sep10 quarter. It has fallen at a CQGR of 4.4% over the past 12 quarters and 4.8% over the past 8 quarters. However, we do not see any drastic fall in ARPUs from the current levels. 3 Shurooq Securities Research

4 Exhibit 2: ARPUs (in RO) Source: TRA Post-paid connections gaining traction; to help sustain total ARPUs The telecom market in Oman is still dependent on low-value pre-paid customers for growth. However, growth rate of last couple of quarters show that post-paid subscriber base is gaining traction in Oman. It has shown a y-o-y growth of c17% in the past 2 quarters, up from c10% in the previous quarters. Y-o-Y growth in pre-paid subscriber numbers has shown a decline in the same period. Traction in pre-paid subscriber number will help in sustaining the overall mobile ARPUs at current levels. Exhibit 3: Y-o-Y growth in pre-paid and post-paid mobile subscribers in Oman (%) Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Pre-paid Post-paid Source: TRA Total number of mobile subscribers in Oman is c4.5mn as on Sep09, of which c0.4mn are postpaid subscribers and c4.1mn are pre-paid subscribers. Pre-paid subscriber base has grown at a 4 Shurooq Securities Research

5 CQGR of 6.3% over the past 13 quarters, whereas post-paid subscriber base has grown only at 3.3% over the same period. Total mobile subscriber base has registered a CQGR of 5.9% in this period. Mobile and SMS traffic witnessing c4% sequential growth Mobile traffic in Oman has grown at 4.2% sequentially in the past 7 quarters. Total outgoing has grown from 982mn minutes in Mar09 to 1,255mn minutes in Sep10. Over the same period, SMS traffic has grown from 1,089mn to 1,333mn at a CAGR of 3.4%. Exhibit 4: Mobile and SMS traffic 1,500 1, Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Outgoing mobile traffic (mn mins) SMS (mn) Source: TRA however MoUs are still pretty low Minutes of usage (MoU) in Oman are still pretty low at less than 100 per month. We do not see any major changes in MoUs over the next 3-4 quarters. Exhibit 5: MoUs in Oman Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Source: TRA; Shurooq Research 5 Shurooq Securities Research

6 Subscriber base in fixed-line segment stagnant over the past 2 years Fixed-line penetration level in Oman is one of the lowest in GCC at c10%. Oman s fixed-line subscriber base has been stagnant for the past 2 years at c280,000 subscribers. We do not foresee any significant change in the total fixed-line subscriber base over the next 2-3 years. Post-paid and pre-paid subscriber base has seen a fall in the past 2 years of up to 25%. Penetration levels in fixed-line in Oman is lowest in GCC Fixed-line penetration level in Oman is one of the lowest in GCC at c10%. Total fixed-line subscriber base stands at c280,000 and this number has been stagnant at this level for the past 2 years. Exhibit 6: Fixed-line penetration level in fixed-line in GCC Oman Kuwait Qatar Saudi Arabia Bahrain UAE Source: Industry reports, Shurooq Research Exhibit 7: Fixed-line subscribers (in mn) Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Source: TRA 6 Shurooq Securities Research

7 With increased usage of mobile services, fixed-line has become less preferable by individual customers. We do not foresee any significant change in the total fixed-line subscriber base over the next 2-3 years. Post-paid and pre-paid connections have witnessed a fall Post-paid and pre-paid subscriber base has seen a fall in the past 2 years. Post-paid subscriber base has declined from c220,000 in Sep08 to c200,000mn in Sep10. Over the same period, prepaid connections have fallen from 50,000 to 37,000. Exhibit 8: Post-paid and pre-paid fixed-line subscriber base (in 000) Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Post-paid Pre-paid Source: TRA 7 Shurooq Securities Research

8 Grossly under-penetrated in internet broadband segment Penetration level in internet broadband is one of the lowest in Oman amongst the GCC countries. Penetration level is at c2% in Oman whereas in some of the other countries like Saudi Arabia, Bahrain and UAE, it is more than 10%. We see penetration level in this segment increasing to c5% over the next 2-3 years. Subscriber base of fixed-line broadband in Oman is still under 50,000. Broadband penetration is very low Penetration level in internet broadband in Oman is at a very level of c2%. Amongst the GCC countries, penetration level in Oman is the 2 nd lowest next to Kuwait. Countries like Saudi Arabia, Bahrain and UAE have broadband penetration level of over 10%. We see penetration level in broadband increasing over the next 2-3 years to at least c5% through increase use of fixed broadband and mobile broadband. Exhibit 9: Penetration level in broadband in GCC (%) Kuwait Oman Qatar Saudi Arabia Bahrain UAE Source: Industry reports, Shurooq Research Fixed broadband subscriber base still under 50,000 Total fixed-line internet subscribers in Oman have declined from 80,000 in Dec08 to 68,000 in Sep09. However over the same period, broadband users have increased from 32,000 to 45,000; whereas dial-up users have declined from 48,000 to 23,000. In spite of the increase in fixed broadband subscriber base, it is still at a very level of under 50, Shurooq Securities Research

9 Exhibit 10: Fixed-line internet subscriber base (in 000) Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Fixed dial-up subscribers Fixed broadband subscribers Source: TRA Demographics to help increase data revenues and sustain ARPUs As per Ministry of National Economy (MONE), c45% of Oman s total population is below 24 years. Also its expatriate population is c1.1mn, which is c36% of the total population. We believe Oman s demographics provide ample opportunities in terms of young population increasing the use of data services and expatriate population driving the international calls. Data revenues are likely to help the entire sector in sustaining ARPUs. Exhibit 11: Age-distribution Expats and local population 46% 36% 54% 64% Below and above Local Expats Source: MONE 9 Shurooq Securities Research

10 Rating Source: MONE ADD CMP (RO) Target price (RO) Implied upside (%) 19.3 Bloomberg Reuters OTELOM OTL.OM M Cap (RO mn) MCAP (USD mn) 2, Wk. H/L 1.406/ Wk. Avg. Vol. 184, Wk. Avg. T/O 231,010 Performance (%) 1m 12m Absolute (%) Relative (%) (ROmn) f 2012f Sales y-o-y (%) EBITDA EBITDA margins PAT y-o-y (%) PAT margins Shares o/s (mn) EPS (RO) P/E (x) EV/EBITDA (x) EV/Sales (x) RoE (%) RoCE (%) Jaspreet Chhabra Research Analyst jaspreet@shurooqsecurities.com Oman Telecommunication Initiate with an ADD rating and TP of RO1.379 Catching up with peers in mobile subscriber addition Growth in Omantel s subscriber base over the last 12 quarters have been lower than the industry average. The company lost market share to the new operator and resellers. However in the last 3 quarters, it has been catching up its peers in post-paid as well as pre-paid subscriber additions. It is also moving up the value chain, with its ARPU s at c15% premium to market. We forecast Omantel to take 40% share in the new subscriber addition over FY11-13f. Its revenue from mobile segment is forecast to grow at a CAGR of 7.3% over FY10-13f. Stable performance in fixed-line for the past 2 quarters Omantel s revenue and subscriber base in fixed-line segment has fallen in However the extent of fall in subscriber numbers has come down and subscriber numbers have stabilized at c250,000 for the past 2 quarters. We forecast its revenue from fixed line segment to fall at a CAGR of 1.1% over FY10-13f with subscriber base stabilizing at c246,000. Broadband has been the only savior in the fixed segment with a c20% CAGR in subscriber base over FY Forecast a CAGR of 2.1% in net profit over FY10-13f We forecast Omantel s EBITDA to grow at a CAGR of 2.6% over FY10-13f with stable EBITDA margins of c47%. Net profit is forecast to grow from RO 110.4mn in FY2010 to RO 117mn in FY2013f. Omantel s EBITDA margins fell in 9MFY10 due to decline in its wholesale revenues, lower interconnection revenue, increase in its operating and maintenance expenses and higher depreciation. We do not forecast any further fall in its EBITDA margins over FY10-13f. Initiate coverage with an Add rating We initiate coverage on Omantel with an Add rating and a Dec11f target price of RO 1.379, which implies an upside of c19% from the current levels. At our target price, the stock is likely to trade at Dec12f P/E of 9.2x and EV/EBITDA of 4.3x. We have given 40% weightage to DCF and 30% to P/E and EV/EBITDA each, to arrive at our target price of RO Shurooq Securities Research

11 Forecast mobile revenues to grow at a CAGR of 7.3% over FY10-13f Growth in Omantel s subscriber base over the last 12 quarters have been lower than the industry average. The company lost market share to the new operator and resellers. However in the last 3 quarters, the company has been catching up its peers in post-paid as well as pre-paid subscriber additions. It is also moving up the value chain, with its ARPU s at c15% premium to the total market ARPU. We forecast Omantel to take 40% market share in the new subscriber addition over FY f. We also forecast its revenue from the mobile segment to grow at a CAGR of 7.3% over FY10-13f. Subscriber addition in the last 3 years lower than industry Omantel has a total mobile subscriber base of 2.124mn as of Sep10 with a market share of c47%. Its mobile subscriber base has grown from 1.57mn in the quarter ended Mar08 to 2.12mn in the quarter ended Sep10 at a CQGR of 3.1%. The total mobile subscribers in the Sultanate of Oman has grown at a CQGR of 5.2% over the same period, thus reducing Omantel s market share from 57% to 47% in the past 3 years. Exhibit 12: Market-share of mobile operators (%) Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Source: TRA, Shurooq Research Omantel Nawras Resellers Lost market share to new operator and resellers Omantel had lost its market share to Nawras between the periods Mar08 to Mar09. During this time Nawras gained c5% market share at the expense of Omantel. However since then, resellers (MVNOs) have been gaining market share at the expense of Omantel and Nawras. In the past one-and-a-half years, resellers have gained a market share of c9%. however, no further fall in market share in the past 3 quarters A closer look at the market share data of recent quarters reveals that Omantel has held on to its market share of c47%, whereas Nawras has been losing its market to resellers. In the past 4 quarters, Nawras market share has come down to c44% from c47%, whereas Omantel s market share is unchanged at c47%. 11 Shurooq Securities Research

12 Catching up with peers in post-paid Omantel has not been able to scale up its post-paid subscriber base in line with other players. ARPUs of post-paid mobile subscribers is generally 3-4x that of pre-paid subscribers. Post-paid subscriber base for Omantel has grown at a CQGR of 0.8% in the past 12 quarters; whereas similar the total post-paid subscriber base has grown at a CQGR of 3.3% over the same period. Excluding Omantel, post-paid subscriber base has grown at a CQGR of 8.4% over the same period. Exhibit 13: Post-paid subscriber base at the end of the quarter (in 000) Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Omantel Total market Excl. Omantel Source: TRA, Omantel, Shurooq Research However the company has made conscious efforts to increase its share in the post paid market and the result of which is clearly visible in the past 2 quarters where its growth was in line with the market growth. Exhibit 14: Q-o-Q growth in post-paid subscriber base (%) Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Omantel Total market Excl. Omantel Source: TRA, Omantel, Shurooq Research as well as in pre-paid subscriber addition Omantel s prepaid subscribers have grown at a CQGR of 3.4% over Mar08 to Dec10, whereas the total pre-paid subscribers have grown at a CQGR of 5.4% over the same period. The CQGR in total pre-paid subscribers, excluding Omantel, has been much higher at 7.5% over the same period. We are of the view that initially Omantel lost market share to Nawras and resellers in both, the prepaid and the postpaid segments. Exhibit 15: Pre-paid subscriber base at the end of the quarter (in 000) Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Omantel 1,388 1,461 1,494 1,547 1,582 1,628 1,658 1,762 1,849 1,892 Total 2,582 2,769 2,895 3,021 3,224 3,431 3,612 3,844 3,996 4,120 Excl. Omantel 1,194 1,308 1,401 1,474 1,642 1,803 1,954 2,082 2,147 2,228 Source: TRA, Omantel, Shurooq Research However Omantel has been successful in limiting the fall in market share in the past 3 quarters, which is visible in the growth numbers delivered by Omantel as well as rest of the market. 12 Shurooq Securities Research

13 Exhibit 16: Q-o-Q growth in pre-paid subscriber base (%) Q-o-Q growth Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Omantel Total Excl. Omantel Source: TRA, Omantel, Shurooq Research Moving up the value chain; ARPU s at c15% premium Omantel s mobile ARPU is around RO 10 for the past 5-6 quarters as compared to total market s ARPU of around RO 8.5. The company has successfully increased the variance in its ARPU, compared to the total market s ARPU. Overall mobile ARPU in the Sultanate of Oman has fallen in every quarter in the past 3 years. However the fall in Omantel s ARPU has been lower than the total market. Exhibit 17: ARPU comparison of Omantel and total market (in RO) Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Omantel Total market Difference (%) Source: TRA, Omantel, Shurooq Research We forecast Omantel s mobile ARPU to remain at cro 9 over FY11f-13f. Forecast Omantel to take 40% share in new subscriber addition We forecast total mobile subscriber addition in the Oman market to be 100,000 every quarter till Dec13f which implies a CQGR of 2.3% over Dec10f to Dec13f. Out of the total additions, we forecast Omantel to garner 40%, Nawras 27% and resellers 33%. Exhibit 18: Forecast market share in new subscriber additions (%) Omantel 40.0 Nawras 27.0 Resellers 33.0 Source: Shurooq Research (%) 13 Shurooq Securities Research

14 Exhibit 19: Forecast mobile market share (%) Source: Shurooq Research Mobile revenue to grow at CAGR of 7.3% over FY10-13f We forecast Omantel s mobile revenue to grow at a CAGR of 7.3% over FY10-13f led by growth in its subscriber base and flat ARPUs. Exhibit 20: Forecast revenue from mobile segment for Omantel (in RO mn) 320 Omantel Nawras Resellers f 2012f 2013f Source: Shurooq Research Omantel s wholesale revenues have declined in the past couple of quarters, when quarterly revenue rate has come down from cro25mn to cro17mn. This is largely due to Nawras routing its international traffic through its own gateway. 14 Shurooq Securities Research

15 Revenue and subscriber base in fixed-line segment has stabilized for past 2 quarters Omantel s revenue and subscriber base in fixed-line segment has fallen in However the extent of fall in subscriber numbers has come down and subscriber numbers have stabilized at c250,000 for the past 2 quarters. We forecast its revenue from fixed line segment to fall at a CAGR of 1.1% over FY10-13f with subscriber base stabilizing at c246,000. Broadband has been the only savior in the fixed segment with a c20% CAGR in subscriber base over FY We forecast it to grow at a CAGR of c4% over FY10-13f. Declining trend in fixed line segment has stopped Omantel s revenue from fixed line segment has fallen in 2010 due to decline in its subscriber base from c280,000 to c250,000. However the extent of fall in subscriber numbers has come down and subscriber numbers have stabilized at c250,000 for the past 2 quarters. We forecast its fixed line subscribers to fall at a CAGR of 1% over FY10-13f and stabilize at c246,000. Exhibit 21: Fixed-line subscriber base ( 000) f 2012f 2013f Source: Omantel, Shurooq Research Its revenue from the fixed-line segment is forecast to fall at a CAGR of 1.1% over the same period. We forecast revenues from fixed-line to fall from RO 101mn in FY2010 to RO 98mn in FY Shurooq Securities Research

16 Exhibit 22: Revenue from fixed line (RO mn) f 2012f 2013f Source: Omantel, Shurooq Research Broadband, the only savior in this segment Fixed broadband subscribers for Omantel have been growing reasonably well over FY Subscriber base in this sub-segment has grown from 32,000 in FY08 to 45,000 in FY10 at a CAGR of 19.8%, albeit on a smaller base. We forecast fixed broadband subscriber base for Omantel to grow at a CAGR of 4.1% over FY10-13f. It is forecast to grow from 45,000 in FY10 to 51,000 in FY13. Exhibit 23: Fixed broadband subscribers (in 000) f 2012f 2013f Source: Omantel, Shurooq Research 16 Shurooq Securities Research

17 Forecast a CAGR of 2.1% in net profit over FY10-13f with flat margins We forecast Omantel s EBITDA to grow at a CAGR of 2.6% over FY10-13f with stable EBITDA margins of c47%. Net profit is forecast to grow from RO 110.4mn in FY2010 to RO 117mn in FY2013f. Omantel s EBITDA margins fell in FY10 due to decline in its wholesale revenues, lower interconnection revenue, increase in its operating and maintenance expenses and higher depreciation. We do not forecast any further fall in its EBITDA margins over FY10-13f. Forecast 2.6% and 2.1% CAGR in EBITDA & PAT, respectively We forecast Omantel s EBITDA to grow at a CAGR of 2.6% over FY10-13f with stable EBITDA margins of c47%. EBITDA is forecast to grow from RO 198.1mn in FY2010 to RO 213.8mn in FY2013f. Its net profit is forecast to grow at a CAGR of 2.1% over FY10-13f with stable PAT margins of c26%. Net profit is forecast to grow from RO 110.4mn in FY2010f to RO 117mn in FY2013f. Exhibit 24: EBITDA and net profit forecast (RO mn) EBITDA Net profit Source: Omantel, Shurooq Research Decline in wholesale revenues in FY10 Omantel s revenue (RO 416.5mn) in FY2010 grew marginally by 0.2% over FY2009 (RO 412.2mn). Revenues were adversely impacted by the wholesale revenues which declined 10.7% in FY2010 as compared to FY2009 (RO 80.6mn in FY2010 as against RO 90.3mn in FY2009). Wholesale revenues fell because of migration of international traffic of Nawras to Nawras own network. 17 Shurooq Securities Research

18 Exhibit 25: Segmental revenue break-up Fixed Mobile Wholesale Source: Omantel and increase in operating expenses Omantel s operating and maintenance expenses grew by c21% over FY whereas its revenue was flat over the same period. Some of the other expenses which saw an unproportionate increase vis-à-vis revenue were marketing expenses, advertising expenses, annual license fees and other regulatory charges. The increase in all these expenses also led to lower EBITDA margins in FY2010. Exhibit 26: Expenses (in RO mn) Marketing and advertising License fee Source: Omantel 18 Shurooq Securities Research

19 led to 400-bp fall in EBITDA margins Higher element of fixed operating expenses, investment for future and decline in wholesale revenues led to a fall of almost 400-bp in its EBITDA margins. EBITDA margins during FY2010 fell to 47.6% from 51.6% in FY2009. Exhibit 27: EBITDA margins (%) Source: Omantel Increasing capital expenditure led to higher depreciation Omantel is investing heavily into fixed assets for its 3.5G network expansion since FY2008. This has led to a CAGR of c20% in its depreciation over FY However capex is now expected to be around 16-18% of its revenues. We forecast an average capex of cro 75-80mn p.a. over FY11f-13f. Exhibit 28: Capital expenditure (RO mn) f 2012f 2013f Source: Omantel, Shurooq Research 19 Shurooq Securities Research

20 Worldcall acquisition a drag in financials Omantel acquired a controlling stake in Worldcall, a Pakistan based player engaged in WLL, Long Distance International Services, Payphones and cable television services. It acquired a 56.8% stake in the company for RO mn. Omantel has already made an impairment provision of RO 18.88mn in its books in 2008 for this investment. Over the past 6 quarters, Worldcall s revenue and EBITDA has fallen, whereas its net loss has widened. Acquired controlling stake in Pakistan based Worldcall Omantel acquired 56.8% stake in Worldcall on May 2, Omantel paid RO mn for the acquisition. Net cash outflow for the acquisition was RO mn. Worldcall is engaged in the provision of Wireless Local Loop, Long Distance International Services, Payphones and cable television services. Omantel recognized RO mn as goodwill in its books which arose out of the acquisition. Omantel has already made an impairment provision of RO 18.88mn in its books in 2008 for the investment in Worldcall. No sign of respite in Worldcall s performance In the past 6 quarters (from Sep09 to Dec10), Worldcall s quarterly revenues have fallen from RO 8.5mn to RO 5.9m, at a CQGR of -7.0%. Over the same period its EBITDA has fallen from RO 1.6mn to RO 0.1mn, whereas its net loss has increased from RO 0.3mn to RO 1.1mn. Exhibit 29: Worldcall s quarterly performance (in RO mn) Revenue EBITDA PAT -4 Sep08 Dec08 Mar10 Jun10 Sep10 Dec10 Source: Omantel 20 Shurooq Securities Research

21 Initiate coverage with an Add rating and a Dec11f TP of RO We initiate coverage on Omantel with an Add rating and a Dec11f target price of RO 1.379, which implies an upside of c19% from the current levels. At our target price, the stock is likely to trade at Dec12f P/E of 9.2x and EV/EBITDA of 4.3x. We have given 40% weightage to DCF and 30% to P/E and EV/EBITDA each, to arrive at our target price of RO A strong dividend yield play Omantel has been consistently paying dividends of 100% on its fair value over the past 4 years, translating dividend per share to RO0.1. At the current market price, the stock provides a dividend yield of c9%. Exhibit 30: Dividend per share (RO) Source: Omantel, Shurooq Research We are bullish on profitability front as compared to consensus Our revenue estimate for FY11f and FY12f is broadly in line with the consensus estimate. However we are more bullish on the profitability front. Exhibit 31: Comparison of our estimate with consensus (in RO mn) Shurooq's Estimates Consensus Variance Revenue EBITDA EBITDA Margin (%) Net Income Source: Zawya, Shurooq Research 21 Shurooq Securities Research

22 DCF gives us a fair value of RO 1.48 Our DCF valuation methodology gives us a value of RO 1.48 for Omantel. Our explicit forecast is for FY11-13f, post which we have assumed a terminal growth rate of 1.5%. Following are our assumptions in DCF: Exhibit 32: DCF assumptions: Assumptions Terminal growth rate 1.5% Risk free rate of return 4.5% Risk premium 6.5% Beta 1.0 Cost of equity 10.9% Cost of debt 8.0% Tax Rate 12.0% Cost of debt 7.0% WACC 10.7% Source: Shurooq Research We have given 40% weightage to DCF while arriving at fair value for Omantel. P/E and EV/EBITDA multiples unlikely to witness significant expansion Omantel is currently trading at FY11f P/E of 7.9x and EV/EBITDA of 3.8x. We expect its P/E and EV/EBITDA multiples to remain at the current levels. We have given 30% weightage to P/E and EV/EBITDA multiples each while arriving at our fair value for the stock. Our fair value for the stock is RO 1.379, which implies an upside potential of c19% from the current levels. Exhibit 33: Valuation methodology Methodology Fair value (RO) Weightage (%) Value DCF P/E EV/EBITDA Fair value (RO) Shurooq Securities Research

23 Exhibit 34: One-year forward P/E chart Feb10 May10 Aug10 Nov10 Feb11 Source: Zawya, Shurooq Research Key risks Initiation of intense price war in the Oman telecom market could have an adverse impact on our forecasts and rating. Lower than expected subscriber addition in mobile segment. Higher than expected fall in mobile ARPUs and revenues from fixed-line segment. 23 Shurooq Securities Research

24 Financials and valuations Income statement (RO '000) Fiscal year ending f 2012f 2013f Net sales 412, , , , ,416 Total operating income 412, , , , ,416 Total operating expenses 199, , , , ,561 Personnel 48,621 51,148 52,469 54,961 56,552 SG&A 121, , , , ,061 Royalty and license fee 30,049 30,693 31,734 33,085 33,948 EBITDA 212, , , , ,855 Other income 3,187 3,395 2,000 2,000 2,000 Depreciation and amortization 68,569 78,675 79,464 83,051 85,343 EBIT 147, , , , ,512 Interest -1,846 1, Recurring PBT 149, , , , ,512 Net extra ordinary items (5,874) PBT (reported) 143, , , , ,512 Total taxes 17,400 11,915 12,605 12,992 13,661 PAT (reported) 125, , , , ,851 Add: Share of earnings of associate (531) Net income (reported) 125, , , , ,335 Dividend 75,000 75,000 75,000 75,000 75,000 Diluted shares (in '000) 750, , , , ,000 EPS (RO) Growth ratios (%) Total operating income EBITDA EBIT Recurring PBT Net income EPS Operating ratios (%) EBITDA margin EBIT margin Net profit margin Effective Tax rate Shurooq Securities Research

25 Balance sheet (RO '000) Fiscal year ending f 2012f 2013f Equity capital 75,000 75,000 75,000 75,000 75,000 Reserves and surplus 345, , , , ,309 Net worth 420, , , , ,309 Minority interest 18,240 16,038 16,038 16,038 16,038 Total debt 45,461 18,241 18,241 18,241 18,241 Deferred tax liability 3, Total liabilities 487, , , , ,713 Gross block 843, ,370 1,005,370 1,085,370 1,170,370 less: Accumulated depreciation 464, , , , ,749 Net block 379, , , , ,621 Goodwill 17,302 17,355 17,355 17,355 17,355 License and other intangible assets 38,421 44,384 40,476 36,568 32,660 Investments 72,794 53,696 53,696 53,696 53,696 Cash and cash equivalents 106,482 97, , , ,620 Inventories 5,796 4,269 4,269 4,269 4,269 Debtors 62,957 62,386 62,386 67,377 72,767 Loans and advances 10,442 11,686 11,686 11,686 11,686 less: Current liabilities 187, , , , ,832 less: Provisions 18,392 18,129 18,129 18,129 18,129 Net working capital (20,260) (16,913) 22,223 62, ,381 Total assets 487, , , , ,713 Cash flow statement (RO '000) Fiscal year ending f 2012f 2013f Net profit 125, , , , ,335 Depreciation 65,545 74,879 75,556 79,143 81,435 Working capital changes 37,065-12,033-11,482-6,629 3,641 Less: Other income 3,187 3,395 2,000 2,000 2,000 Cash flow from operations 224, , , , ,410 Cash flow from investing -169,260-70,318-69,092-74,092-79,092 Cash flow from financing -92, ,157-74,914-75,000-75,000 Net change in cash -38,323-8,686 27,654 33,851 46, Shurooq Securities Research

26 Key Ratios Fiscal year ending f 2012f 2013f Valuation ratios (x) P/E (on EPS) P/CEPS P/BV Dividend yield (%) Market cap. / FCF Market cap. / Sales EV/Sales EV/EBITDA EV / FCF EV / Total Assets Net Cash / Market cap Per share ratios (RO) EPS Cash EPS Book Value Dividend per share Return ratios (%) EBIT / Capital Employed ROCE ROE FCF / IC OCF/Sales FCF/Sales Turnover ratios (x) Receivables (days) Payables (days) Working capital cycle (ex-cash) (days) Solvency ratios (x) Gross debt to equity Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) Shurooq Securities Research

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