Omantel Treads Growth Path

LONDON -- Oman research desk at Vision Securities has recently come out with its detailed study on Omantel, the leading telecom service provider in Oman. According to the report, Omantel’s business fundamentals remain strong with growth in mobile subscriber base, monopoly in fixed line internet market and a healthy balance sheet. Omantel’s 3Q 07 results were above par mainly due to favorable government ruling and partially by strong performance in interconnection revenue. The company reported broad based growth with mobile segment revenue increasing 12% year on year (YoY) while fixed line revenue increasing 13% YoY. The major highlight of 3Q 07 results were the announcement of ‘Worldcall’ acquisition which is expected to garner revenue and be accretive to earnings by FY09.

Omantel’s outlook remain good with new value-added and broadband services driving future growth. A robust economy and muted competition could translate into better volume growth and revenue. The company is focusing on customer retention and also augmenting revenue by increasing minutes of use, data and content. Omantel is expected to launch its 3G services by 1Q 08 which should enhance its top line and profit margins. Again, based on company reports, the actual mobile penetration is around 60-65%, which leaves plenty of space for growth for local telecom players. However, if Omantel is able to offer bundled services and is able to retain customers, one can expect higher revenues and increase in market share for the company.

Departing from its traditional focus on local business, the company recently ventured into international market with the acquisition of Pakistan based World Call Telecom Company (WCTC). From a long term business perspective, it is encouraging to see the company management’s pursuit to diversify its revenue stream while extenuating country specific risk. WCTC acquisition, though looks expensive at 18 times its expected FY08 earnings, is believed to enhance the current technological know-how of Omantel, to the next level of bundled services. Furthermore, the company has a healthy balance sheet and strong cash flows to expand even further, inorganically.

Oman’s Telecom industry is currently transforming with decreased involvement from Government and rapidly increasing competition on technological and pricing space. Mobile technology has been the front-runner in the advancement of the communication technology in the region and the future is expected to be broadband business. The Government of Oman is supporting the cause for radical upgrading of communication and information technology in the region, which we believe will open vistas for both the telecom companies, Omantel and Nawras. On the back of favorable ruling from Oman government the company reported 36% YoY rise in net income and net margin expansion of 540 basis points YoY to 31%, for 9M 07. In its pursuit to develop country’s mobile market and reduce tariff rates, Oman government reduced royalty charges (with retrospective effect from 1at Jan 2007) on both the telecom companies, Omantel and Nawras. The government reduced royalty rates to 7% on both fixed-lined revenue and mobile network revenue from previous rates of 10% and 12%, respectively.

Based on its multiple valuation methodology Vision Securities has arrived at a weighted average target price of RO 2.050 for the Omantel stock. This factors-in the company’s ability to generate stable free cash flow and provide shareholders with reasonable dividend yield. It has also used comparative valuation to highlight company’s performance compared to its peers in the region. The growth in other regional players has been due to their international exposure and capability to monetize the expansion. Hence lower EV/EBITDA and P/E multiples have been assigned to Omantel compared to its peers. According to Vision’s research, earnings growth from current operations is reflective in the market price though it would be interesting to watch out on the earnings additions from new acquisitions as well as data revenue from 3G launch.

Oman Telecommunications Co. (Omantel)