Bucking the trend

10 May 2002

A telecoms IPO involving a company that has just announced profits of over $1,000 million a year and whose debts account for only 8 per cent of its balance sheet is a rare thing in today's world of hard-pressed, debt-laden telcos. Yet that is precisely what is in prospect for Saudi investors with the upcoming offering of shares in Saudi Telecom Company (STC). The company has issued its results for its first two periods of operation since it was incorporated in May 1998. Chief executive Khaled al-Molhem says the third set of results, for 2001, will be issued in the next few weeks, allowing for active preparations to start for the launch of the IPO.

The STC listing would add at least $10,000 million to the capitalisation of the Saudi share market, which now stands at about $70,000 million. For investors in GCC telecoms it will add weight to a portfolio that is already delivering handsome returns. The opening up of STC's capital is also part of a process of broader market liberalisation in the region, with competition and the development of new services marching on apace.

The STC flotation is expected to entail 10-15 per cent of the company's equity. It is not yet clear whether the issue will be restricted to Saudi investors, or whether it will be open for other GCC investors, or even have an international tranche. Another crucial question will be the pricing of the IPO. 'I suggest that the pricing would be on the back of the other listed telecom companies in the GCC,' says Tristan Clube, investment adviser to the EFG-Hermes Telecom Fund. The price/earnings (PE) ratios of four of these five firms in 2001 were in a tight range between 10.5 and 12.9. The only exception was Kuwait's Wataniya Telecom, a relative newcomer to the scene whose PE ratio is expected to converge with the other four in 2002.

Based on STC's most recent income statement, showing net profit of SR 3,953 million ($1,054 million), and assuming a PE ratio of 10, the company would have a market capitalisation of SR 39,530 million ($10,540 million). An IPO according to this valuation would be priced at SR 165 ($44), compared with a nominal share price of SR 50 ($13.3).

'There is a strong appetite for telecoms in the Gulf region, and the STC offering should go well, provided that it is priced right and has a good dividend yield,' says Clube. 'The one area of concern is that, if it is principally a local issue, it might suck too much liquidity out of the market.'

Since the appointment of a regulator for the Saudi telecoms sector in mid 2001, there has been scope for more diversity in the range of services available in Saudi Arabia. The advent of competition is only a matter of time.

Saudi Arabia's fixed-line teledensity is a relatively low 14.5 per cent, according to the International Telecommunications Union (ITU). The number of GSM subscribers has grown fast over the past 18 months, but from a low base. The ITU says cellular teledensity in the kingdom is 11.3 per cent. Once the government decides to take telecoms off the list of activities that are excluded from foreign investment, there is expected to be a surge of new project activity aiming to fill the gap in the supply of services.

'There is still room for growth in the Gulf,' says Robert Baker, business development support manager at the UK's Vodafone. 'Countries like Saudi Arabia, which is potentially a huge market, still have a relatively low fixed-line and GSM penetration.' However, he says foreign operators are waiting to see more results from promised structural reforms before they consider investing in the sector. 'The market needs to be opened up to foreign competition.'

Oman and Bahrain are gearing up to be the first Gulf countries to open their local networks to competition. In Oman, the passage of a telecoms law in March established the legal and regulatory framework for investors to come into the local market. The plan is to allow competition for cellular, internet and private leased-line services starting from January 2003. This will be followed 12 months later by fixed-line voice and data services. But first the government plans to move ahead with the partial privatisation of Oman Telecommunications Company (Omantel).

A strategic investor is being sought to take a 40 per cent stake in the company. A further 9 per cent will be sold to private investors and pension funds through an IPO, while the government will retain a 51 per cent controlling interest. The National Economy Ministry has gone back to the drawing board with the sale of Omantel after failing to attract a strategic investor last year. The original intention was to sell only 34 per cent of the company to an international operator in return for a commitment to invest in boosting Oman's fixed-line network.

Few takers came forward, as the cost of extending networks into the sultanate's mountainous interior proved too high a price to pay. However, the option of stripping out GSM services, which are recognised as the chief attraction for international operators, was deemed unacceptable, and the government is making another attempt to sell the company as a whole. 'We have been advised that now is a better time to go to market with Omantel,' says a government source in Muscat.

Oman has just over 200,000 fixed-line subscribers from a total population of about 2.6 million. But the most profitable side of the business is undoubtedly cellular services, which were first introduced in 1996. The company has some 322,994 pre-paid and post-paid subscribers and this figure is set to grow with the implementation of new general packet radio services (GPRS) and third-generation (3G) networks.

Bahrain Telecommunications Company (Batelco) is another regional operator that has to face up to the prospect of relinquishing its local monopoly. The company, which has the smallest local market of any of the GCC operators, has been one of the most active in expanding its business across the region, primarily through setting up internet service provider (ISP) joint ventures in Saudi Arabia, Jordan, Egypt and Kuwait. It has also invested heavily in rolling out new services in the local network. Since the introduction of MobilePlus in 1995, Batelco has invested almost BD 60 million ($158 million) to develop the local network. More than 330,000 people in Bahrain are now using its GSM services.

The government is now assessing whether this market can accommodate another operator. UK consultant Intercai Mondiale is preparing a report on the possible opening up of the kingdom's telecoms services. 'It's unlikely that the government would formulate an industry structure that would be disadvantageous to Batelco,' says Shahid Hameed, head of research at Bahrain's Securities & Investment Company (SICO). 'The government might stipulate that new private operators invest in the telecoms infrastructure. This will prevent a repeat of what has happened in some other economies where infrastructure investment has not kept pace with the growth in telephony demand following liberalisation.'

The Bahraini and Omani experiences will be monitored closely by the other major players in regional telecoms, notably Emirates Telecommunications Corporation (Etisalat) of the UAE and Qatar Telecom (Q-Tel). Their interest will be both from the perspective of seeing how the transition from monopoly to competition is managed, and, possibly, with a view to becoming active participants in these newly opened markets.

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