Etisalat: a stock that pays dividends [Gulf News (United Arab Emirates)]
(Gulf News (United Arab Emirates) Via Acquire Media NewsEdge) The country's largest telecom operator had a lacklustre third quarter with revenue declining by three per cent over the previous quarter to Dh8.01 billion. The operating margins however continue to improve. On a year on year basis, the decline was marginal, a mere 0.4 per cent. Competition from its local rival, du, resulted in revenue from the UAE declining, but international earnings have started to improve.
The share price of etisalat, is up 11.47 per cent for the year and 7.80 per cent for the last 12 months. The benchmark stock, which can only be held by UAE nationals, closed at Dh10.10 last Wednesday.
Analysts, disappointed by the latest quarter's results, feel there is very little upside for the stock in the short term, but are more optimistic about the long run.
Petr Molik, Group CFO and Head of Financial Advisory at Abu Dhabi-based MenaCorp, was not expecting a strong third quarter, but a drop of three per cent is "certainly disappointing," he said. However he pointed out that silver linings were higher than expected cost savings and earnings before interest, taxes, depreciation and amortization (Ebitda) margin.
Etisalat lost Dh 176 million in revenues but only Dh60 million in EBITDA (earnings before interest, taxes, depreciation and amotisation), meaning it made Dh100 million in cost savings. In fact the EBITDA margin improved to 60.2 per cent in the third quarter from 55.7 per cent a year earlier.
"Etisalat's direct cost of sales and other operating expenses declined nine per cent and 20 per cent [year on year] to Dh 1.5 billion and Dh 1 billion respectively in the third quarter, indicating that management's cost optimisation initiatives are benefitting the company's bottom-line," wrote Nishit Lakohotia, senior analyst at Securities and Investment Company (SICO), Bahrain.
"It's always nice to see more efficiency even if it can't replace the revenue growth in the long term," said Molik.
Net income increased from Dh1.87 billion (Q2) to Dh2.2 billion (Q3), but Molik pointed out that "the figure includes an Dh430m one-off net profit from the XL Asiata sale. There the recurrent net profit for Q3 [is] only Dh1.78 billion ,down four per cent from the previous quarter."
UAE operations continue to be challenge and were largely responsible for the 3.2 per cent decline in revenues to Dh5.47 billion. While etisalat added 70,000 mobile subscribers in the UAE during the quarter, du managed three times more-228000-at the same time.
UAE ARPU (average revenue per user) stayed flat at Dh129 in the third quarter (from Dh131 in Q2), which was 17% higher than the Dh110 for du.
Overseas operations saw a three per cent increase over the last quarter in revenue from Egypt. Asian and African operations had stable revenues, with profitability on the rise. "Etisalat's Asian operations continue to benefit from the absence of losses from its legacy Indian operations (Etisalat DB). Afghanistan operations benefitted from the launch of 3G services earlier this year," wrote Lakhotia in his latest report.
Overall Molik feels etisalat is in "excellent financial health, despite paying large amounts in royalties to UAE federal government, thanks to its great overall EBITDA margins.
"The company is in a net cash position, so there is no debt leverage to speak of. Also, given the current Dh80 billion market capitalisation, etisalat can easily raise a major amount of debt to finance an acquisition, bid for a license or infrastructure investment. The company currently generates enough cash to finance both its development and maintain its dividend policy without problem," he said.
Going forward, Lakhotia warns of: increasing competitiveness from du and saturation of UAE telecommunications market; margin pressure on Atlantique telecom's operations as a result of competition from the rival MTN group; and an escalation of losses from its Nigerian operations.
"I think that although the third quarter results were mildly disappointing, the cash generation is good," said Molik. "Etisalat's valuation is mainly driven by a dividend policy with a constant Dh0.6 dividend paid in two installments."
Price to earnings presently stand at 13.2x and SICO expects it to be 9.8x for 2012 and 2013. Price to book value is currently 1.9x and is expected to be 1.8x in 2012 and 1.7x in 2013.
The return on average equity (ROAE), which measures the company's profitability in relation to average shareholders' equity, is 14.8 per cent and is expected to rise to 18.6 per cent in 2012, but dip to 17.2% in 2013, according to SICO estimates.
The current earnings per share (EPS) stands at 0.8337.
Risk versus Reward:
Molik thinks a five years stock performance history may not relevant for etisalat, as it includes a clearly inflated maximum close of Dh20 in 2008. "By looking at historical pricing, we observe that from 2009 until today, the stock moved in a range of between Dh8.00 and Dh 12.00 [making it] mainly a â€˜buy and hold' dividend stock." According to Bloomberg, etisalat's five year dividend growth has been 10.82 per cent.
"The company is undergoing a review of its international holdings and some restructuring of its domestic operations. I would expect stable earnings in the short term with more significant growth later on, especially from its international operations, like Egypt, Nigeria," Molik said.
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