Turmoil leaves MidEast telecoms weak but not broken: Beltone

Ahram Online, Thursday 31 Mar 2011

Telecom markets, according to Beltone Financial, are suffering and their share prices should drop, aside from the Gulf market, which may be boosted in 2011

As a result of the political unrest and disruption in operations across the Middle East and North Africa (MENA) region in the first quarter 2011, telecom markets are expected to witness a slowdown in 2011, according to a report by the investment bank Beltone Financial issued today.

"We foresee a likely change in the consumption pattern of subscribers on the back of an anticipated economic slowdown," reads the report, entitled "The MENA Region Telecoms Digest — 1Q2011." "This should result in slower revenue growth, tightened earnings and weaker earnings growth, compared to previous years, especially in light of the already expected slowdown in the markets’ overall growth momentum, as mobile penetration rates soar," the report says.

The report foresees the that mergers and acquisitions interest in the region’s telecom markets "will cool," but despite the heightened political instability in the region it will not completely disappear. An example is France Telecom’s finalised joint agreement in March 2011 to acquire 44 per cent of third place Iraqi operator, Korek, rather than competing to increase its current exposure in the MENA region, which already includes the Egyptian and Tunisian markets.

On the other hand, Beltone highlighted their “buy high-risk” recommendation for Orascom Telecom (OT), owned by Egyptian leading tycoon Naguib Sawiris, (upside of 46.5 per cent), due to the higher likelihood that the VimpelCom deal will be completed successfully, providing significant support for OT’s financial position amidst an inability to repatriate cash outside Algeria, alleviating concerns regarding OT’s significant debt caused by refinancing.

VimpelCom, Russia's top cell phone operator, is expected to close a merger deal with Wind Telecom, owned by Sawiris, within a month, a deal that if finalised will create the world's fifth largest telecom operator, VimpelCom head Alexander Izosimov said Tuesday. 

Whilst, Telecom Egypt's risk, as highlighted by the report, is upside of 30.8 per cent, due to the healthy dividend yield (of 8.1 per cent), diversified revenues streams, and relative resilience amidst political instability.

The report for the MENA region's telecoms sets very low expectations in light of a possible increase in telecom companies’ dividend payout ratios, as operators tend to opt for higher liquidity during unstable times. However, the investment bank doesn’t anticipate the same impact on the Gulf markets, as they were relatively more stable.

"We foresee a rise in the overall telecom spending in Saudi Arabia in 2011, as a result of the recently announced stimulus packages by the government (worth over  $108 billion in total) and their potential positive impact on consumer spending on telecom services," the outlook continues. "We view this as significantly positive for the future of the region’s telecom markets, given the potential for capitalising on the constantly growing need for larger bandwidth capacities and higher broadband speeds by subscribers."

The report also gave high recommendations to the region's telecom operators to decrease share prices more to make up for the drop in market prices. "We view that most of the MENA region telecom stocks are still not at a sufficient discount to peers globally," the report says. "We think the MENA region’s telecoms deserve to see a further decline in their stock prices, in order to offer better value compared to their global peers. This could, then, provide a better opportunity for investors to find value in the midst of regional political noise."

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