Qatar Telecom Equity Research Update
A member of the Arab Jordan Investment Bank Group
Qatar Telecom Reuters (QTEL.QA)
Leveraging its strong position in its home market, Qtel plans to continue its aggressive expansion globally. With high penetration rates in Qatar, Qtel is concentrating on serving its customers with high quality products and latest technologies in a defensive move against the upcoming duopoly competition in the cellular and fixed services markets; as Vodafone and Qatar Foundation Consortium are expected by ictQATAR to launch their services on or before March 1, 2009.
Equity Research Update
Qtel also continues to expand its operations beyond Qatar borders. During the past two years, several acquisition transactions took place: These include the purchase of a controlling stake in Kuwait-based National Mobile Telecommunications Company KSC (Wataniya), buying a 25.0% stake in Asia Mobile Holdings, and a 65% controlling stake in PT Indosat TBK. Qtel registered remarkable results in YTD (Year-To-Date) Q3 2008 as total revenues came in at QR14.27 billion increasing by 106.8% when compared to the QR6.90 billion achieved during the corresponding period of 2007. 27.8% of the revenues came from Qtel operations within Qatar while the remaining 72.2% came from operations outside the country. Qtel's net profit surged 50.2% to QR 2.34 billion up from QR 1.56 billion achieved during the first nine months of 2007.
November 2008
The balance sheet revealed enormous growth in Qtel’s assets which increased by 60.0% due to the consolidation of the newly acquired subsidiaries. Shareholders equity also increased significantly as Qtel distributed 10% in bonus shares in March 2008, and had a 33.3% rights issue, bringing its share capital to QR1.47 billion. As a consequence, Qtel's previously reported earnings per share (QR 12.99) for YTD Q3 2007 has been restated to QR 11.36. Accordingly, YTD Q3 2008 earnings per share registered a 28.96% growth coming in at QR 14.65.
Research Analyst Ahmad Dia [email protected] Hussam Barhoush [email protected]
Financial Markets Research Tel +962.6.5828849 Fax +962.6.5828809 P.O.Box 2374 Amman 11821
Copyright notice and disclaimer: Copyright 2008 by Arab Advisors Group. All rights reserved. No material contained in this report may be reproduced in whole or in part without the prior written permission of the publisher. The information contained in this report has been obtained from sources we believe to be reliable, but the Arab Advisors Group and Arab Jordan Investment Bank (AJIB) do not warrant its completeness or accuracy. Opinions expressed and estimates represent our own judgment and interpretation of the available information and are subject to change without notice. The recipient of this report must make its independent decisions regarding and securities or financial instruments mentioned and the Arab Advisors Group and Arab Jordan Investment Bank (AJIB) accepts no responsibility or liability regarding such decisions. Feedback: Our clients’ satisfaction is of our utmost concern. We welcome all feedback regarding our research and products. Please send us your notes on this report, what you found useful in it and future research directions that would help you in your business. Send feedback emails to: [email protected]
Qatar Telecom Update Report – November 2008
Table of Contents 2007-2008 Highlights ........................................................................................................................... 3 Financial Results and Analysis................................................................................................................ 6 Balance Sheet ........................................................................................................ 6 Qtel Consolidated Balance Sheets ............................................................................. 8 Income Statement .................................................................................................. 9 Qtel Consolidated Income Statement....................................................................... 11 Cash Flow Statement ............................................................................................ 12 Qtel Consolidated Cash Flow Statement ................................................................... 13 Key Performance Indicators and Ratios ................................................................................................. 14 Company Valuation ............................................................................................................................ 15
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Qatar Telecom Update Report – November 2008
2007-2008 Highlights Qtel acquired 51% stake in Wataniya in March 2007, signaling the start of an aggressive expansion strategy.
•
In March 2007, Qtel acquired 51.0% of the share capital of Kuwait based National Mobile Telecommunications Company KSC (Wataniya) from Kuwait Projects Company (KIPCO) for a total cash consideration of US3.8 billion. To part finance that acquisition, US2.50 billion Bridge Loan was obtained.
•
In April 2007, Qtel successfully established a US2.00 billion revolving credit facility with a broad group of leading international banks, where Qatar National Bank was the financial advisor.
•
Qatar Telecom and A.A. Turki Corporation for Trading and Contracting of Saudi Arabia (ATCO) announced the completion of their joint venture investment to purchase a 75.0% stake in Burraq Telecom Limited of Pakistan (Burraq) in May 2007.
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In August 2007, the Asiacell Consortium was informed that it was successful in bidding for one of the three GSM licenses being tendered by the Communications and Media Commission of Iraq. The successful consortium is comprised of Asiacell Iraq, Qtel and Merchant Bridge investment. The Asiacell Consortium will operate through a new company Asiacell Communications LLC (ACL).
•
Qtel successfully signed a US3.00 billion syndicated term loan facility agreement in November 2007. The Facility will be used to refinance the company’s existing US2.50 billion bridge loan signed in March 2007 to finance the acquisition of Wataniya and for general corporate purposes. The five year term loan carries an initial margin of [LIBOR+0.65%] per annum, for the first 12 months and tied to a leverage grid thereafter.
•
On June 22, 2008 Qtel indirectly acquired 2,217,590,000 Series B shares through its purchase of capital stock of Indonesia Communications Limited (ICLM), and Indonesia Communications Pte. Ltd (ICLS). Qtel acquired the shares of ICLM and ICLS from Asia Mobile Holdings Pte Ltd, which is 75% indirectly owned by STT and 25% indirectly owned by Qtel.
•
The Qtel Group’s wireless broadband vision received a boost on June 21, 2008 with the launch, in Jordan, of the first wireless broadband services of wi-tribe, the group’s all-new broadband Internet subsidiary.
•
On July 29, 2008, Wataniya Palestine Mobile Telecommunications Company (WPT) and its shareholders Wataniya (51% owned by Qtel), and the Palestine Investment Fund (PIF) announced the conformation that an agreement has been reached for spectrum to be allocated to the Palestinian National Authority (PNA).
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On August 18, 2008, Qtel denied rumors concerning its alleged interest in bidding for the 25% stake in Oman's monopoly fixed line operator, Omantel.
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On September 1, 2008, Qtel announced that it is studying opportunities in the third GSM license in The Islamic republic of Iran. Qtel denied rumors spread in the media that it had already entered a partnership in relation with the license.
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On September 13, 2008, Qtel announced that the Indonesian Supreme Court allowed Qtel to keep the shares in Indosat which were acquired in June 2008.
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Qatar Telecom Update Report – November 2008
Total assets & owners' equity mark respective increments of 60.0% and 85.6%
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On October 27 2008, Qatar Telecom announced its gratification of the Indonesian authority's decision concerning Qtel’s ownership of shares in Indosat, as the authority permitted Qtel to own up to 65% in the operator. Upon receiving formal notice of the clarification from the authorities, Qtel should shortly be in a position to proceed with coordinated tender offers in Indonesia and the United States. Subject to confirmation by the Indonesian market regulator, under the new mandatory tender offer procedures, the offer price for each Series B share will be set at 6,416 Indonesian rupiahs.
•
On November, 3, 2008, Qtel announced that the Board has decided to recommend to the General Assembly of Shareholders, the distribution of a cash dividend of 100% of the nominal value per share for year 2008, which results in a 13.6% dividend yield based on Qtel's average stock price in November 2008.
•
Qatar Telecom (Qtel) posted revenues of QR 14.27 billion while net profits came in at QR 2.34 billion in the first nine months of 2008. These results compared to revenues of QR6.90 billion and profits of QR 1.54 billion in YTD Q3 of 2007 marking respective increments of 106.8% and 52.4%.
•
The following chart illustrates the progress in Qtel’s revenues and net income over the 5-year period including YTD Q3 2008.
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Total assets rose by 60.0% to reach QR75.64 billion compared to QR47.26 billion by end of year 2007. Shareholders equity marked an 85.6% increment over the QR16.51 billion balance in the previous year to reach QR30.63 billion.
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Qatar Telecom Update Report – November 2008
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Qtel stock price movement in the past two years compared to the market index is illustrated in the graph below. Number of shares traded during YTD Q3 2008 reached 11.51 million shares with a value of QR2.23 billion.
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Qatar Telecom Update Report – November 2008
Financial Results and Analysis Balance Sheet 60.0% growth in total assets over the end of year 2007
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The Qtel Group ended its first nine months of 2008 marking a growth of 60.0% in total assets to reach QR75.64 billion, in comparison to the year-end 2007 figure of QR47.26 billion. The growth was mainly attributed to the expanding non-current assets that grew 55.4%, constituting 80.83% of the total assets increment. The remaining 19.17% was an outcome of the 92.6% increase in total current assets over the previous year’s figure to reach QR11.31 billion. o
o
Total Liabilities grew by 46.3% in YTD Q3 2008
•
Non-current assets growth included:
Available-for-sale investments, increased by 3.8% or QR88.8 million, made 0.39% of the overall increase in the non-current assets. This line item includes quoted and unquoted investments along with investments in hedge and mutual funds.
The property, plant and equipment balance, grew by 154.0%, which constitutes a significant 63.54% of the non-current assets increase.
Investments in associates grew by QR388.07 million to come in at QR2.91 billion at the end of Q3 2008.
Intangible assets soared by QR7.20 billion to arrive at QR33.74 billion due to the acquisition of new subsidiaries, resulting in a 31.40% of the non-current assets increase.
Current assets growth, encompassed:
An 86.1% increase in accounts receivable and prepayment to reach QR 3.91 billion by end of September 2008. This line item formed 33.32% of the total current assets growth.
Inventories, marking a 98.4% increment over the previous year figure of QR127.6 million to close the first nine months with QR253.1 million.
Cash and cash equivalents, soared by 119.7% to come in at QR7.14 billion.
Total Liabilities came in at QR45.01 billion marking a growth of 46.3% over the QR30.76 billion balance of 2007. The growth mainly came from the 46.2% growth in non-current liabilities that constituted 68.62% of the total liabilities increment, while current liabilities increased by 46.6% to constitute 31.38% of the total liabilities increment. o
Current liabilities rose by 46.6% from the 2007 year-end figure of QR9.59 billion to reach QR14.06 billion by Q3 2008. Current liabilities are mainly comprised of:
Accounts payable and accruals, which represent 62.96% of the current liabilities increment, amounted to QR10.19 billion, up 38.2% from the previous year. This line item is
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Qatar Telecom Update Report – November 2008
composed of trade accounts payables, other payables, accrued expenses and amounts due to international carriers.
o
85.6% growth in shareholders equity over YE 2007
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Current account with the State of Qatar accounted for 13.68% of the current liabilities increment. It grew by 53.9% to reach QR1.74 billion from the 2007 balance of QR1.13 billion.
The current portion of the interest bearing loans and borrowings balance at the end of Q3 2008 reached QR1.67 billion to register a growth of 132.6% compared to 2007 year-end figure of QR721.14 million.
Non-current liabilities increment was an outcome of:
Interest bearing loans and borrowings increased to reach QR26.95 billion growing by 28.9%. This was a result of the facility agreement signed by Qtel in order to finance the activities and acquisitions. This line item made up 61.86% of the non- current liabilities increment during the first quarters of 2008.
An outstanding 172.4% increase in employee benefits liabilities. While other liabilities grew by QR2.79 billion to come in at QR2.85 billion.
Shareholders equity posted a substantial 85.6% growth, coming in at QR30.62 billion in Q3 2008 compared to QR16.51 billion in 2007.
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Qatar Telecom Update Report – November 2008
Qtel Consolidated Balance Sheets Consolidated Balance Sheet QR (000s) Assets Non-current assets Property, plant & equipment Intangible assets Investment in an associate Available-for-sale investments Other financial assets Deferred tax asset Total non-current assets Current assets Inventories Accounts receivable and prepayments Amounts due from liquidator Bank balances and cash Total current assets Total assets Equity and Liabilities Attributable to equity holders of the parent Share capital Legal reserve Fair value reserve Translation reserve Retained earnings Minority interest Total shareholders equity Liabilities Non-current liabilities Interest bearing loans and borrowings Employee benefit liabilities Deferred tax liability Other liabilities Current liabilities Accounts payable and accruals Current account with State of Qatar Deferred income Interest bearing loans and borrowings Total liabilities Total liabilities & shareholders.
2007
Q3 2008
Variance %
9,462,192 26,547,074 2,523,960 2,333,384 143,848 380,602 41,391,060
24,038,176 33,749,472 2,912,038 2,422,220 765,727 441,812 64,329,445
154.0% 27.1% 15.4% 3.8% 432.3% 16.1% 55.4%
127,616 2,105,184 389,640 3,250,092 5,872,532
253,130 3,917,470 7,141,302 11,311,902
98.4% 86.1% -100.0% 119.7% 92.6%
47,263,592
75,641,347
60.0%
1,000,000 1,000,000 600,759 743,675 3,555,462 6,899,896 9,605,706 16,505,602
1,466,667 6,494,137 642,266 772,551 5,086,429 14,462,050 16,166,763 30,628,813
46.7% 549.4% 6.9% 3.9% 43.1% 109.6% 68.3% 85.6%
20,904,031 191,075
28.9% 172.4%
66,454 21,161,560
26,954,734 520,572 611,079 2,857,039 30,943,424
4199.3% 46.2%
7,381,874 1,134,786 358,624 721,146 9,596,430 30,757,990 47,263,592
10,198,068 1,746,863 447,142 1,677,037 14,069,110 45,012,534 75,641,347
38.2% 53.9% 24.7% 132.6% 46.6% 46.3% 60.0%
Source: Qtel Financial Statements
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Qatar Telecom Update Report – November 2008
Income Statement
YTD Q3 2008 Revenues reached QR 14.27 billion; 106.8% growth over YTD Q3 2007
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Qatar Telecom ended the first nine months of 2008 with a substantial 106.8% growth in revenues over the QR 6.90 billion achieved in Q3 2007, to come in at QR 14.27 billion. (QR 000s) YTD Q3 2008 Revenues % of total General and administrative expenses % of total Other operating expenses % of total Finance costs % of total Operating profit % of total Other income % of total Share of results of associates % of total Royalties % of total Profit for the period % of total
3,974,472
Other countries 10,299,899
14,274,371
28% (1,386,165) 21%
72% (5,061,893) 79%
100% (6,448,058) 100%
(435,256)
(3,439,658)
(3,874,914)
11%
89%
100%
(557,270)
(631,667)
(1,188,937)
47%
53%
100%
1,595,781
1,166,681
2,762,462
58%
42%
100%
113,358
154,398
267,756
42%
58%
-
(32,260)
(32,260)
(610,323)
100% (47,713)
100% (658,036)
93%
7%
100%
1,241,106
2,339,922
53%
100%
Qatar
1,098,816 47%
Total
100%
Source: Qtel Financial Statements
The above table shows that 72% of Qtel YTD Q3 2008 revenues came from operations outside Qatar, while the remainder came in from operations inside Qatar. Meanwhile, 58% of the operating profits are from Qtel’s operations in Qatar and the remaining 42% from outside Qatar; this is related to the high general and administrative expenses outside the country. Net income for the first three quarters of 2008 came in at QR2.34 billion. The growth registered in Qtel's revenues during the first nine months of 2008 mainly resulted from a 111.0% increase in wireless service revenues, where this revenue stream reached QR12.51 billion compared to QR5.93 billion in YTD Q3 2007. This is mainly attributed to the strong 229.3% increase in the total proportionate subscriber base which resulted in a total of 55,678,786 customers by the end of Q3 2008 compared to 14,421,813 customers for the same period of the previous year.
114.6% increase in other operating expenses
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General and administrative expenses pointed a notable 142.6% increase to arrive at QR6.45 billion, a QR3.78 billion increase over the YTD Q3 2007 figure.
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Other operating expenses came in at QR 3.87 billion by the end of the first three quarters of 2008, posting a noteworthy 114.6% increase over last year’s YTD Q3.
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100.6% EBITDA growth in YTD Q3 2008 over YTD Q3 2007
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Coming in at QR6.99 billion, EBITDA for YTD Q3 2008 revealed a significant 100.6% increment over the QR3.49 billion achieved in YTD Q3 of the previous year. On the other hand, the EBITDA margin declined by 1.5% percentage points below the previous year to come in at 49.0% compared to 50.5% in Q3 of last year.
Net income increased QR 804 million over YTD Q3 2007
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Qtel’s bottom line fared well and increased by 52.4% to post QR2.34 billion, while the net income attributable to equity holders of the company reached QR1.83 million pointing a growth of 40.9% as compared to YTD Q3 2007.
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Registering a growth of 28.96%, Earnings per Share (EPS) came in at QR14.65 compared to the QR11.36 achieved in the first nine months of last year.
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Qatar Telecom Update Report – November 2008
Qtel Consolidated Income Statement Consolidated Income Statement
YTD Q3 2007
YTD Q3 2008
Variance %
6,902,898
14,274,371
106.8%
5,930,986
12,515,356
111.0%
971,912
1,759,015
81.0%
191,065 (2,658,143)
267,756 (6,448,058)
40.1% 142.6%
(1,805,753)
(3,874,914)
114.6%
(661,564)
(1,188,937)
79.7%
57,416
(32,260)
-156.2%
Royalty
(490,877)
(658,036)
34.1%
Profit for the period
1,535,042
2,339,922
52.4%
1,299,490
1,830,967
40.9%
235,552
508,955
116.1%
11.36
14.65
28.96%
QR (000s) Revenues Wireless Wireline Other income General & administrative expenses Other operating expenses Finance costs Share of results of an associate
Attributable to Equity holders of the parent Minority interests Basic and diluted earnings per share (EPS) Source: Qtel Financial Statements
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Cash Flow Statement Cash and cash equivalents increased by QR 3.67 billion in YTD Q3 2008
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Cash and cash equivalents increased by QR3.67 billion (106.3%) to come in at QR 7.13 billion by end of September 2008.
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Cash generated from operating activities increased by QR 1.57 billion, a growth of 37.7% over the same period of last year.
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Return On average Assets (ROaA) came in at 3.81% in YTD Q3 2008; below the previous year's figure of 5.72%. This was the result of the outstanding increase in average assets.
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Return On average Equity (ROaE) revealed a 20.4% drop coming in at 21.91% in YTD Q3 2008 in contrast to 27.51% recorded in YTD Q3 2007. Again, this was the result of the greater shareholder’s equity figure in YTD Q3 2008.
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Qatar Telecom Update Report – November 2008
Qtel Consolidated Cash Flow Statement Qtel summary consolidated cash flow statement QR (000s) Operating activities Profit for the period Adjustments for: Depreciation and amortization Dividend and interest income Profit on sale of available-for-sale investments Profit on disposal of plant and equipment Finance costs Provision for employees’ end of service benefits Deferred tax income Share of results of associates
YTD Q3 2007
YTD Q3 2008
1,535,042
2,339,922
904,859 (109,348) (68,382) (4,655) 661,564 35,882
2,706,486 (221,503) (10,290) (2,868) 1,188,937 93,343
(57,416)
32,260
Operating profit before working capital changes Inventories Accounts receivable Payables
2,897,546 (56,005) (381,481) 2,382,802
6,126,287 (48,732) (416,861) 1,285,112
Cash from operations Finance Costs paid Employees' end of service benefits paid Net cash from operating activities
4,842,862 (661,564) (2,665) 4,178,633
6,945,806 (1,188,937) (2,332) 5,754,537
(1,106,448) (2,277,974) (12,938,411) (364,150) (2,329,123) (114,535) (32,659) 17,793 301,706 868 109,348 (18,733,585)
(2,932,147) (1,091,913) (2,484,210) (4,005) (92,908) (143,185) (684) 7,165 68,146 (62,912) 221,503 (6,515,150)
17,291,861
(556,946)
(775,000)
16,573,145
(200,000) (151,538) 279,038 (20,661) 5,860,804 5,210,697
Increase/(Decrease) in cash and cash equivalents
2,018,193
4,450,084
Net foreign exchange differences Cash and cash equivalents at January 1 Cash and cash equivalents at 30 September
22,544 1,416,683 3,457,420
(553,728) 3,235,165 7,131,521
Investing activities Purchase of property, plant & equipment Additions to intangible assets Acquisition of subsidiaries, net of cash acquired Acquisition of minority interest Investment in associate Purchase of available-for-sale investments Net movement in deferred tax Proceeds from disposal of plant and equipment Proceeds from available-for-sale investments Net movement in other financial assets Dividend and interest income Net cash used in investing activities Financing activities Net movements in Interest bearing loans and borrowings Dividends paid to equity holders of the parent Dividends paid to minority interests Minority interest holders' contribution Net movement in minority interests Proceeds from rights issue Net cash from (used in) financing activities
44,932 11,352
Source: Qtel Financial Statements
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Key Performance Indicators and Ratios Below are the key performance indicators for Qtel’s shares in addition to a number of relative financial and operational ratios for YTD Q3 2007 and YTD Q3 2008. Share KPIs EPS (TTM, QR) P/E (TTM) Share Book Value (QR) Share Price/Book Value Share Price/Sales Dividends/Share (QR) Dividend Yield Payout Ratio Share closing price Highest share closing price (TTM,QR) Lowest share closing price (TTM, QR) Value traded (QR 000s) Number of shares traded (000s)
YTD Q3 2007 12.99 15.10 69.00 2.84 2.84 10.00 5.10% 65.1% 196.2 223 189.3 885,545 4,335
YTD Q3 2008 12.48 11.83 98.60 1.50 1.52 5.00 3.39% 25.1% 147.7 250.7 131.6 2,232,064 11,519
Variance % -3.9% -21.6% 42.9% -47.3% -46.6% -50.0% -33.6% -61.5% -24.7% 12.4% -30.5% 152.1% 165.7%
Profitability Ratios Net Profit Margin Return on average Equity (ROaE) Return on average Assets (ROaA) Operating Cashflow/Sales Operating Cashflow/Equity Operating Cashflow/Total Liabilities
YTD Q3 2007 22.2% 14.78% 5.72% 60.5% 60.6% 13.6%
YTD Q3 2008 16.4% 9.93% 3.81% 40.3% 39.8% 12.8%
Variance % -26.3% -32.8% -33.5% -33.4% -34.3% -5.9%
Free Cash Flow Free cash flow before dividends (QR 000s) Free cash flow before dividends/Share (QR) Free cash Flow after dividends (QR 000s) Free cash flow after dividends/Share (QR) Free cash flow after dividends/Revenue
YTD Q3 2007 3,072,185 30.72 3,117,117 31.17 0.45
YTD Q3 2008 2,822,390 19.24 3,101,428 21.15 0.22
Variance % -8.1% -37.4% -0.5% -32.2% -51.9%
Asset/Gearing Ratios Total assets/Equity Total liabilities/Equity Total liabilities/Total assets Sales/Average total assets
YTD Q3 2007 6.85 4.46 0.65 0.26
YTD Q3 2008 5.23 3.11 0.60 0.23
Variance % -23.6% -30.2% -8.6% -9.8%
Source: Company Reports, Arab Advisors Group
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Company Valuation The valuation methodology used to project Qtel’s intrinsic value is based on a combination of a Discounted Cash Flow (DCF) model and peer-based P/E multiple analysis. Both methods rely on actual historical information and a number of justified assumptions. In the DCF based model, we use the free cash flow to equity (FCFE) model to forecast the cash flows of the company. The model uses the actual and forecasted revenues and the associated total costs for Qtel to arrive at the free cash flow figure. The present value of the projected free cash flows is then calculated using the applicable discount rate. This resulting amount is then added to the present value of the firm’s terminal value (again using the applicable/estimated discount and terminal growth rates) to arrive at the total present value of the firm. The logic behind using the mentioned method lies in the growth potential created for the Qtel Group following its string of acquisitions carried out through 2007 and 2008, in addition to the capital restructuring of the company including the 10% bonus shares issue and the 1 for 3 rights offering. While this additional equity capital will put the pressure in terms of the ROE indicator, it will on the other hand provide short-term de-leveraging and capacity for growth. With Qtel's aggressive strategy of expansion, the DCF model would better analyze/estimate its different revenue and cost accounts; it is designed to value the equity in a firm that will witness tangible growth/change over the forecast period. Moreover, using the DCF model for this case would help in understanding the trend and contribution of each of Qtel's subsidiaries. The starting point in the valuation is forecasting revenues for the period chosen. This requires projections of revenues for each of the subsidiaries according to its ARPU and historical growth figures, bearing in mind the following assumptions:
Qtel's earnings in its local market will witness decelerating growth with the end of the company's monopoly; Vodafone won the second license of Qatar and is expected to launch services in 2009.
Wataniya Telecom current contribution to the group's total revenues stands at 32%. Wataniya is expected to carry on with its significant results due to high growth percentages and EBITDA margins in each of WataniyaKuwait, Tunisiana-Tunisia and Nedjma-Algeria.
Newly acquired PT Indosat TBK has the second highest market share in Indonesia and is expected to maintain its growth rates and ever increasing number of customers in a country with a population of 237.8 million.
Asiacell-Iraq and Nawras-Oman registered the highest growth rates in revenues during the first three quarters of 2008 and are expected to maintain their healthy results.
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The DCF uses a Capital Asset Pricing Model (CAPM) to calculate the cost of equity; this is used as the discount rate. This CAPM return a cost of equity at 10.29%. The risk free rate was set at 5.75%, market premium at 6.98% and the company's beta stands at 0.650. CAPM
Terminal Growth Rate %
Total Value, FCFE (QR 000s )
4.00% 5.00% 6.00%
21,107,025 21,512,140 22,106,252
10.29%
The DCF model returns a total present value range for Qatar Telecom between JD 21.1 billion and JD 22.1 million which corresponds to a share value range between QR 143.91 and QR 150.72. The weaknesses of the DCF model come as a result of the high sensitivity of value to the growth rate assumed and the high dependency on the net borrowing projections, in addition to the fact that most of the stock value is realized from the present value of the terminal value, which give rise to uncertainty risk. Thus, we have also incorporated another valuation approach to find Qtel's value per share, namely the peer-based P/E multiple analyses. Using this model, we have looked at the P/E values for five comparable peers. The final share fair value assigns a 25%. Using YTD Q3 2008 results and market prices for the week ending September 30, 2008, the P/E multiple values for the selected peer companies were as follows:
Zain – 13.27 Batelco – 9.18 Etisalat – 10.64 Orascom Telecom – 1.57 Saudi Telecom – 9.93
Using the figures above, the intrinsic characteristics of each of these companies, their growth prospective compared to those of Qtel, in addition to considering Qtel's own growth opportunities, we assign Qtel a target P/E multiple of 10x. This falls above the current P/E multiple of 7.37, and returns a fair value for Qtel’s share price at QR 183.1. Applying the models explained above, we derive the following results: Qtel's Valuation Total Value under FCFE FCFE weight Total Value Under Peers P/E P/E weight Final Value of the Company (QR/Share)
Terminal growth rate 4% 5% 143.91 146.67 75% 75%
6% 150.72 75%
183.1 25%
183.1 25%
183.1 25%
153.71
155.78
158.82
Qtel's fair value ranges between QR 153.71 and QR 158.82 per share, which is over November's average market price of QR 136.00 per share. Therefore, the company is considered undervalued and its stock price does not justify Qtel's growth opportunities.
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Qatar Telecom Reuters (QTEL.QA)
Leveraging its strong position in its home market, Qtel plans to continue its aggressive expansion globally. With high penetration rates in Qatar, Qtel is concentrating on serving its customers with high quality products and latest technologies in a defensive move against the upcoming duopoly competition in the cellular and fixed services markets; as Vodafone and Qatar Foundation Consortium are expected by ictQATAR to launch their services on or before March 1, 2009.
Equity Research Update
Qtel also continues to expand its operations beyond Qatar borders. During the past two years, several acquisition transactions took place: These include the purchase of a controlling stake in Kuwait-based National Mobile Telecommunications Company KSC (Wataniya), buying a 25.0% stake in Asia Mobile Holdings, and a 65% controlling stake in PT Indosat TBK. Qtel registered remarkable results in YTD (Year-To-Date) Q3 2008 as total revenues came in at QR14.27 billion increasing by 106.8% when compared to the QR6.90 billion achieved during the corresponding period of 2007. 27.8% of the revenues came from Qtel operations within Qatar while the remaining 72.2% came from operations outside the country. Qtel's net profit surged 50.2% to QR 2.34 billion up from QR 1.56 billion achieved during the first nine months of 2007.
November 2008
The balance sheet revealed enormous growth in Qtel’s assets which increased by 60.0% due to the consolidation of the newly acquired subsidiaries. Shareholders equity also increased significantly as Qtel distributed 10% in bonus shares in March 2008, and had a 33.3% rights issue, bringing its share capital to QR1.47 billion. As a consequence, Qtel's previously reported earnings per share (QR 12.99) for YTD Q3 2007 has been restated to QR 11.36. Accordingly, YTD Q3 2008 earnings per share registered a 28.96% growth coming in at QR 14.65.
Research Analyst Ahmad Dia [email protected] Hussam Barhoush [email protected]
Financial Markets Research Tel +962.6.5828849 Fax +962.6.5828809 P.O.Box 2374 Amman 11821
Copyright notice and disclaimer: Copyright 2008 by Arab Advisors Group. All rights reserved. No material contained in this report may be reproduced in whole or in part without the prior written permission of the publisher. The information contained in this report has been obtained from sources we believe to be reliable, but the Arab Advisors Group and Arab Jordan Investment Bank (AJIB) do not warrant its completeness or accuracy. Opinions expressed and estimates represent our own judgment and interpretation of the available information and are subject to change without notice. The recipient of this report must make its independent decisions regarding and securities or financial instruments mentioned and the Arab Advisors Group and Arab Jordan Investment Bank (AJIB) accepts no responsibility or liability regarding such decisions. Feedback: Our clients’ satisfaction is of our utmost concern. We welcome all feedback regarding our research and products. Please send us your notes on this report, what you found useful in it and future research directions that would help you in your business. Send feedback emails to: [email protected]
Qatar Telecom Update Report – November 2008
Table of Contents 2007-2008 Highlights ........................................................................................................................... 3 Financial Results and Analysis................................................................................................................ 6 Balance Sheet ........................................................................................................ 6 Qtel Consolidated Balance Sheets ............................................................................. 8 Income Statement .................................................................................................. 9 Qtel Consolidated Income Statement....................................................................... 11 Cash Flow Statement ............................................................................................ 12 Qtel Consolidated Cash Flow Statement ................................................................... 13 Key Performance Indicators and Ratios ................................................................................................. 14 Company Valuation ............................................................................................................................ 15
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Qatar Telecom Update Report – November 2008
2007-2008 Highlights Qtel acquired 51% stake in Wataniya in March 2007, signaling the start of an aggressive expansion strategy.
•
In March 2007, Qtel acquired 51.0% of the share capital of Kuwait based National Mobile Telecommunications Company KSC (Wataniya) from Kuwait Projects Company (KIPCO) for a total cash consideration of US3.8 billion. To part finance that acquisition, US2.50 billion Bridge Loan was obtained.
•
In April 2007, Qtel successfully established a US2.00 billion revolving credit facility with a broad group of leading international banks, where Qatar National Bank was the financial advisor.
•
Qatar Telecom and A.A. Turki Corporation for Trading and Contracting of Saudi Arabia (ATCO) announced the completion of their joint venture investment to purchase a 75.0% stake in Burraq Telecom Limited of Pakistan (Burraq) in May 2007.
•
In August 2007, the Asiacell Consortium was informed that it was successful in bidding for one of the three GSM licenses being tendered by the Communications and Media Commission of Iraq. The successful consortium is comprised of Asiacell Iraq, Qtel and Merchant Bridge investment. The Asiacell Consortium will operate through a new company Asiacell Communications LLC (ACL).
•
Qtel successfully signed a US3.00 billion syndicated term loan facility agreement in November 2007. The Facility will be used to refinance the company’s existing US2.50 billion bridge loan signed in March 2007 to finance the acquisition of Wataniya and for general corporate purposes. The five year term loan carries an initial margin of [LIBOR+0.65%] per annum, for the first 12 months and tied to a leverage grid thereafter.
•
On June 22, 2008 Qtel indirectly acquired 2,217,590,000 Series B shares through its purchase of capital stock of Indonesia Communications Limited (ICLM), and Indonesia Communications Pte. Ltd (ICLS). Qtel acquired the shares of ICLM and ICLS from Asia Mobile Holdings Pte Ltd, which is 75% indirectly owned by STT and 25% indirectly owned by Qtel.
•
The Qtel Group’s wireless broadband vision received a boost on June 21, 2008 with the launch, in Jordan, of the first wireless broadband services of wi-tribe, the group’s all-new broadband Internet subsidiary.
•
On July 29, 2008, Wataniya Palestine Mobile Telecommunications Company (WPT) and its shareholders Wataniya (51% owned by Qtel), and the Palestine Investment Fund (PIF) announced the conformation that an agreement has been reached for spectrum to be allocated to the Palestinian National Authority (PNA).
•
On August 18, 2008, Qtel denied rumors concerning its alleged interest in bidding for the 25% stake in Oman's monopoly fixed line operator, Omantel.
•
On September 1, 2008, Qtel announced that it is studying opportunities in the third GSM license in The Islamic republic of Iran. Qtel denied rumors spread in the media that it had already entered a partnership in relation with the license.
•
On September 13, 2008, Qtel announced that the Indonesian Supreme Court allowed Qtel to keep the shares in Indosat which were acquired in June 2008.
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Qatar Telecom Update Report – November 2008
Total assets & owners' equity mark respective increments of 60.0% and 85.6%
•
On October 27 2008, Qatar Telecom announced its gratification of the Indonesian authority's decision concerning Qtel’s ownership of shares in Indosat, as the authority permitted Qtel to own up to 65% in the operator. Upon receiving formal notice of the clarification from the authorities, Qtel should shortly be in a position to proceed with coordinated tender offers in Indonesia and the United States. Subject to confirmation by the Indonesian market regulator, under the new mandatory tender offer procedures, the offer price for each Series B share will be set at 6,416 Indonesian rupiahs.
•
On November, 3, 2008, Qtel announced that the Board has decided to recommend to the General Assembly of Shareholders, the distribution of a cash dividend of 100% of the nominal value per share for year 2008, which results in a 13.6% dividend yield based on Qtel's average stock price in November 2008.
•
Qatar Telecom (Qtel) posted revenues of QR 14.27 billion while net profits came in at QR 2.34 billion in the first nine months of 2008. These results compared to revenues of QR6.90 billion and profits of QR 1.54 billion in YTD Q3 of 2007 marking respective increments of 106.8% and 52.4%.
•
The following chart illustrates the progress in Qtel’s revenues and net income over the 5-year period including YTD Q3 2008.
•
Total assets rose by 60.0% to reach QR75.64 billion compared to QR47.26 billion by end of year 2007. Shareholders equity marked an 85.6% increment over the QR16.51 billion balance in the previous year to reach QR30.63 billion.
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Qatar Telecom Update Report – November 2008
•
Qtel stock price movement in the past two years compared to the market index is illustrated in the graph below. Number of shares traded during YTD Q3 2008 reached 11.51 million shares with a value of QR2.23 billion.
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Qatar Telecom Update Report – November 2008
Financial Results and Analysis Balance Sheet 60.0% growth in total assets over the end of year 2007
•
The Qtel Group ended its first nine months of 2008 marking a growth of 60.0% in total assets to reach QR75.64 billion, in comparison to the year-end 2007 figure of QR47.26 billion. The growth was mainly attributed to the expanding non-current assets that grew 55.4%, constituting 80.83% of the total assets increment. The remaining 19.17% was an outcome of the 92.6% increase in total current assets over the previous year’s figure to reach QR11.31 billion. o
o
Total Liabilities grew by 46.3% in YTD Q3 2008
•
Non-current assets growth included:
Available-for-sale investments, increased by 3.8% or QR88.8 million, made 0.39% of the overall increase in the non-current assets. This line item includes quoted and unquoted investments along with investments in hedge and mutual funds.
The property, plant and equipment balance, grew by 154.0%, which constitutes a significant 63.54% of the non-current assets increase.
Investments in associates grew by QR388.07 million to come in at QR2.91 billion at the end of Q3 2008.
Intangible assets soared by QR7.20 billion to arrive at QR33.74 billion due to the acquisition of new subsidiaries, resulting in a 31.40% of the non-current assets increase.
Current assets growth, encompassed:
An 86.1% increase in accounts receivable and prepayment to reach QR 3.91 billion by end of September 2008. This line item formed 33.32% of the total current assets growth.
Inventories, marking a 98.4% increment over the previous year figure of QR127.6 million to close the first nine months with QR253.1 million.
Cash and cash equivalents, soared by 119.7% to come in at QR7.14 billion.
Total Liabilities came in at QR45.01 billion marking a growth of 46.3% over the QR30.76 billion balance of 2007. The growth mainly came from the 46.2% growth in non-current liabilities that constituted 68.62% of the total liabilities increment, while current liabilities increased by 46.6% to constitute 31.38% of the total liabilities increment. o
Current liabilities rose by 46.6% from the 2007 year-end figure of QR9.59 billion to reach QR14.06 billion by Q3 2008. Current liabilities are mainly comprised of:
Accounts payable and accruals, which represent 62.96% of the current liabilities increment, amounted to QR10.19 billion, up 38.2% from the previous year. This line item is
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Qatar Telecom Update Report – November 2008
composed of trade accounts payables, other payables, accrued expenses and amounts due to international carriers.
o
85.6% growth in shareholders equity over YE 2007
•
Current account with the State of Qatar accounted for 13.68% of the current liabilities increment. It grew by 53.9% to reach QR1.74 billion from the 2007 balance of QR1.13 billion.
The current portion of the interest bearing loans and borrowings balance at the end of Q3 2008 reached QR1.67 billion to register a growth of 132.6% compared to 2007 year-end figure of QR721.14 million.
Non-current liabilities increment was an outcome of:
Interest bearing loans and borrowings increased to reach QR26.95 billion growing by 28.9%. This was a result of the facility agreement signed by Qtel in order to finance the activities and acquisitions. This line item made up 61.86% of the non- current liabilities increment during the first quarters of 2008.
An outstanding 172.4% increase in employee benefits liabilities. While other liabilities grew by QR2.79 billion to come in at QR2.85 billion.
Shareholders equity posted a substantial 85.6% growth, coming in at QR30.62 billion in Q3 2008 compared to QR16.51 billion in 2007.
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Qatar Telecom Update Report – November 2008
Qtel Consolidated Balance Sheets Consolidated Balance Sheet QR (000s) Assets Non-current assets Property, plant & equipment Intangible assets Investment in an associate Available-for-sale investments Other financial assets Deferred tax asset Total non-current assets Current assets Inventories Accounts receivable and prepayments Amounts due from liquidator Bank balances and cash Total current assets Total assets Equity and Liabilities Attributable to equity holders of the parent Share capital Legal reserve Fair value reserve Translation reserve Retained earnings Minority interest Total shareholders equity Liabilities Non-current liabilities Interest bearing loans and borrowings Employee benefit liabilities Deferred tax liability Other liabilities Current liabilities Accounts payable and accruals Current account with State of Qatar Deferred income Interest bearing loans and borrowings Total liabilities Total liabilities & shareholders.
2007
Q3 2008
Variance %
9,462,192 26,547,074 2,523,960 2,333,384 143,848 380,602 41,391,060
24,038,176 33,749,472 2,912,038 2,422,220 765,727 441,812 64,329,445
154.0% 27.1% 15.4% 3.8% 432.3% 16.1% 55.4%
127,616 2,105,184 389,640 3,250,092 5,872,532
253,130 3,917,470 7,141,302 11,311,902
98.4% 86.1% -100.0% 119.7% 92.6%
47,263,592
75,641,347
60.0%
1,000,000 1,000,000 600,759 743,675 3,555,462 6,899,896 9,605,706 16,505,602
1,466,667 6,494,137 642,266 772,551 5,086,429 14,462,050 16,166,763 30,628,813
46.7% 549.4% 6.9% 3.9% 43.1% 109.6% 68.3% 85.6%
20,904,031 191,075
28.9% 172.4%
66,454 21,161,560
26,954,734 520,572 611,079 2,857,039 30,943,424
4199.3% 46.2%
7,381,874 1,134,786 358,624 721,146 9,596,430 30,757,990 47,263,592
10,198,068 1,746,863 447,142 1,677,037 14,069,110 45,012,534 75,641,347
38.2% 53.9% 24.7% 132.6% 46.6% 46.3% 60.0%
Source: Qtel Financial Statements
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Income Statement
YTD Q3 2008 Revenues reached QR 14.27 billion; 106.8% growth over YTD Q3 2007
•
Qatar Telecom ended the first nine months of 2008 with a substantial 106.8% growth in revenues over the QR 6.90 billion achieved in Q3 2007, to come in at QR 14.27 billion. (QR 000s) YTD Q3 2008 Revenues % of total General and administrative expenses % of total Other operating expenses % of total Finance costs % of total Operating profit % of total Other income % of total Share of results of associates % of total Royalties % of total Profit for the period % of total
3,974,472
Other countries 10,299,899
14,274,371
28% (1,386,165) 21%
72% (5,061,893) 79%
100% (6,448,058) 100%
(435,256)
(3,439,658)
(3,874,914)
11%
89%
100%
(557,270)
(631,667)
(1,188,937)
47%
53%
100%
1,595,781
1,166,681
2,762,462
58%
42%
100%
113,358
154,398
267,756
42%
58%
-
(32,260)
(32,260)
(610,323)
100% (47,713)
100% (658,036)
93%
7%
100%
1,241,106
2,339,922
53%
100%
Qatar
1,098,816 47%
Total
100%
Source: Qtel Financial Statements
The above table shows that 72% of Qtel YTD Q3 2008 revenues came from operations outside Qatar, while the remainder came in from operations inside Qatar. Meanwhile, 58% of the operating profits are from Qtel’s operations in Qatar and the remaining 42% from outside Qatar; this is related to the high general and administrative expenses outside the country. Net income for the first three quarters of 2008 came in at QR2.34 billion. The growth registered in Qtel's revenues during the first nine months of 2008 mainly resulted from a 111.0% increase in wireless service revenues, where this revenue stream reached QR12.51 billion compared to QR5.93 billion in YTD Q3 2007. This is mainly attributed to the strong 229.3% increase in the total proportionate subscriber base which resulted in a total of 55,678,786 customers by the end of Q3 2008 compared to 14,421,813 customers for the same period of the previous year.
114.6% increase in other operating expenses
•
General and administrative expenses pointed a notable 142.6% increase to arrive at QR6.45 billion, a QR3.78 billion increase over the YTD Q3 2007 figure.
•
Other operating expenses came in at QR 3.87 billion by the end of the first three quarters of 2008, posting a noteworthy 114.6% increase over last year’s YTD Q3.
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100.6% EBITDA growth in YTD Q3 2008 over YTD Q3 2007
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Coming in at QR6.99 billion, EBITDA for YTD Q3 2008 revealed a significant 100.6% increment over the QR3.49 billion achieved in YTD Q3 of the previous year. On the other hand, the EBITDA margin declined by 1.5% percentage points below the previous year to come in at 49.0% compared to 50.5% in Q3 of last year.
Net income increased QR 804 million over YTD Q3 2007
•
Qtel’s bottom line fared well and increased by 52.4% to post QR2.34 billion, while the net income attributable to equity holders of the company reached QR1.83 million pointing a growth of 40.9% as compared to YTD Q3 2007.
•
Registering a growth of 28.96%, Earnings per Share (EPS) came in at QR14.65 compared to the QR11.36 achieved in the first nine months of last year.
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Qatar Telecom Update Report – November 2008
Qtel Consolidated Income Statement Consolidated Income Statement
YTD Q3 2007
YTD Q3 2008
Variance %
6,902,898
14,274,371
106.8%
5,930,986
12,515,356
111.0%
971,912
1,759,015
81.0%
191,065 (2,658,143)
267,756 (6,448,058)
40.1% 142.6%
(1,805,753)
(3,874,914)
114.6%
(661,564)
(1,188,937)
79.7%
57,416
(32,260)
-156.2%
Royalty
(490,877)
(658,036)
34.1%
Profit for the period
1,535,042
2,339,922
52.4%
1,299,490
1,830,967
40.9%
235,552
508,955
116.1%
11.36
14.65
28.96%
QR (000s) Revenues Wireless Wireline Other income General & administrative expenses Other operating expenses Finance costs Share of results of an associate
Attributable to Equity holders of the parent Minority interests Basic and diluted earnings per share (EPS) Source: Qtel Financial Statements
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Qatar Telecom Update Report – November 2008
Cash Flow Statement Cash and cash equivalents increased by QR 3.67 billion in YTD Q3 2008
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Cash and cash equivalents increased by QR3.67 billion (106.3%) to come in at QR 7.13 billion by end of September 2008.
•
Cash generated from operating activities increased by QR 1.57 billion, a growth of 37.7% over the same period of last year.
•
Return On average Assets (ROaA) came in at 3.81% in YTD Q3 2008; below the previous year's figure of 5.72%. This was the result of the outstanding increase in average assets.
•
Return On average Equity (ROaE) revealed a 20.4% drop coming in at 21.91% in YTD Q3 2008 in contrast to 27.51% recorded in YTD Q3 2007. Again, this was the result of the greater shareholder’s equity figure in YTD Q3 2008.
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Qatar Telecom Update Report – November 2008
Qtel Consolidated Cash Flow Statement Qtel summary consolidated cash flow statement QR (000s) Operating activities Profit for the period Adjustments for: Depreciation and amortization Dividend and interest income Profit on sale of available-for-sale investments Profit on disposal of plant and equipment Finance costs Provision for employees’ end of service benefits Deferred tax income Share of results of associates
YTD Q3 2007
YTD Q3 2008
1,535,042
2,339,922
904,859 (109,348) (68,382) (4,655) 661,564 35,882
2,706,486 (221,503) (10,290) (2,868) 1,188,937 93,343
(57,416)
32,260
Operating profit before working capital changes Inventories Accounts receivable Payables
2,897,546 (56,005) (381,481) 2,382,802
6,126,287 (48,732) (416,861) 1,285,112
Cash from operations Finance Costs paid Employees' end of service benefits paid Net cash from operating activities
4,842,862 (661,564) (2,665) 4,178,633
6,945,806 (1,188,937) (2,332) 5,754,537
(1,106,448) (2,277,974) (12,938,411) (364,150) (2,329,123) (114,535) (32,659) 17,793 301,706 868 109,348 (18,733,585)
(2,932,147) (1,091,913) (2,484,210) (4,005) (92,908) (143,185) (684) 7,165 68,146 (62,912) 221,503 (6,515,150)
17,291,861
(556,946)
(775,000)
16,573,145
(200,000) (151,538) 279,038 (20,661) 5,860,804 5,210,697
Increase/(Decrease) in cash and cash equivalents
2,018,193
4,450,084
Net foreign exchange differences Cash and cash equivalents at January 1 Cash and cash equivalents at 30 September
22,544 1,416,683 3,457,420
(553,728) 3,235,165 7,131,521
Investing activities Purchase of property, plant & equipment Additions to intangible assets Acquisition of subsidiaries, net of cash acquired Acquisition of minority interest Investment in associate Purchase of available-for-sale investments Net movement in deferred tax Proceeds from disposal of plant and equipment Proceeds from available-for-sale investments Net movement in other financial assets Dividend and interest income Net cash used in investing activities Financing activities Net movements in Interest bearing loans and borrowings Dividends paid to equity holders of the parent Dividends paid to minority interests Minority interest holders' contribution Net movement in minority interests Proceeds from rights issue Net cash from (used in) financing activities
44,932 11,352
Source: Qtel Financial Statements
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Key Performance Indicators and Ratios Below are the key performance indicators for Qtel’s shares in addition to a number of relative financial and operational ratios for YTD Q3 2007 and YTD Q3 2008. Share KPIs EPS (TTM, QR) P/E (TTM) Share Book Value (QR) Share Price/Book Value Share Price/Sales Dividends/Share (QR) Dividend Yield Payout Ratio Share closing price Highest share closing price (TTM,QR) Lowest share closing price (TTM, QR) Value traded (QR 000s) Number of shares traded (000s)
YTD Q3 2007 12.99 15.10 69.00 2.84 2.84 10.00 5.10% 65.1% 196.2 223 189.3 885,545 4,335
YTD Q3 2008 12.48 11.83 98.60 1.50 1.52 5.00 3.39% 25.1% 147.7 250.7 131.6 2,232,064 11,519
Variance % -3.9% -21.6% 42.9% -47.3% -46.6% -50.0% -33.6% -61.5% -24.7% 12.4% -30.5% 152.1% 165.7%
Profitability Ratios Net Profit Margin Return on average Equity (ROaE) Return on average Assets (ROaA) Operating Cashflow/Sales Operating Cashflow/Equity Operating Cashflow/Total Liabilities
YTD Q3 2007 22.2% 14.78% 5.72% 60.5% 60.6% 13.6%
YTD Q3 2008 16.4% 9.93% 3.81% 40.3% 39.8% 12.8%
Variance % -26.3% -32.8% -33.5% -33.4% -34.3% -5.9%
Free Cash Flow Free cash flow before dividends (QR 000s) Free cash flow before dividends/Share (QR) Free cash Flow after dividends (QR 000s) Free cash flow after dividends/Share (QR) Free cash flow after dividends/Revenue
YTD Q3 2007 3,072,185 30.72 3,117,117 31.17 0.45
YTD Q3 2008 2,822,390 19.24 3,101,428 21.15 0.22
Variance % -8.1% -37.4% -0.5% -32.2% -51.9%
Asset/Gearing Ratios Total assets/Equity Total liabilities/Equity Total liabilities/Total assets Sales/Average total assets
YTD Q3 2007 6.85 4.46 0.65 0.26
YTD Q3 2008 5.23 3.11 0.60 0.23
Variance % -23.6% -30.2% -8.6% -9.8%
Source: Company Reports, Arab Advisors Group
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Company Valuation The valuation methodology used to project Qtel’s intrinsic value is based on a combination of a Discounted Cash Flow (DCF) model and peer-based P/E multiple analysis. Both methods rely on actual historical information and a number of justified assumptions. In the DCF based model, we use the free cash flow to equity (FCFE) model to forecast the cash flows of the company. The model uses the actual and forecasted revenues and the associated total costs for Qtel to arrive at the free cash flow figure. The present value of the projected free cash flows is then calculated using the applicable discount rate. This resulting amount is then added to the present value of the firm’s terminal value (again using the applicable/estimated discount and terminal growth rates) to arrive at the total present value of the firm. The logic behind using the mentioned method lies in the growth potential created for the Qtel Group following its string of acquisitions carried out through 2007 and 2008, in addition to the capital restructuring of the company including the 10% bonus shares issue and the 1 for 3 rights offering. While this additional equity capital will put the pressure in terms of the ROE indicator, it will on the other hand provide short-term de-leveraging and capacity for growth. With Qtel's aggressive strategy of expansion, the DCF model would better analyze/estimate its different revenue and cost accounts; it is designed to value the equity in a firm that will witness tangible growth/change over the forecast period. Moreover, using the DCF model for this case would help in understanding the trend and contribution of each of Qtel's subsidiaries. The starting point in the valuation is forecasting revenues for the period chosen. This requires projections of revenues for each of the subsidiaries according to its ARPU and historical growth figures, bearing in mind the following assumptions:
Qtel's earnings in its local market will witness decelerating growth with the end of the company's monopoly; Vodafone won the second license of Qatar and is expected to launch services in 2009.
Wataniya Telecom current contribution to the group's total revenues stands at 32%. Wataniya is expected to carry on with its significant results due to high growth percentages and EBITDA margins in each of WataniyaKuwait, Tunisiana-Tunisia and Nedjma-Algeria.
Newly acquired PT Indosat TBK has the second highest market share in Indonesia and is expected to maintain its growth rates and ever increasing number of customers in a country with a population of 237.8 million.
Asiacell-Iraq and Nawras-Oman registered the highest growth rates in revenues during the first three quarters of 2008 and are expected to maintain their healthy results.
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The DCF uses a Capital Asset Pricing Model (CAPM) to calculate the cost of equity; this is used as the discount rate. This CAPM return a cost of equity at 10.29%. The risk free rate was set at 5.75%, market premium at 6.98% and the company's beta stands at 0.650. CAPM
Terminal Growth Rate %
Total Value, FCFE (QR 000s )
4.00% 5.00% 6.00%
21,107,025 21,512,140 22,106,252
10.29%
The DCF model returns a total present value range for Qatar Telecom between JD 21.1 billion and JD 22.1 million which corresponds to a share value range between QR 143.91 and QR 150.72. The weaknesses of the DCF model come as a result of the high sensitivity of value to the growth rate assumed and the high dependency on the net borrowing projections, in addition to the fact that most of the stock value is realized from the present value of the terminal value, which give rise to uncertainty risk. Thus, we have also incorporated another valuation approach to find Qtel's value per share, namely the peer-based P/E multiple analyses. Using this model, we have looked at the P/E values for five comparable peers. The final share fair value assigns a 25%. Using YTD Q3 2008 results and market prices for the week ending September 30, 2008, the P/E multiple values for the selected peer companies were as follows:
Zain – 13.27 Batelco – 9.18 Etisalat – 10.64 Orascom Telecom – 1.57 Saudi Telecom – 9.93
Using the figures above, the intrinsic characteristics of each of these companies, their growth prospective compared to those of Qtel, in addition to considering Qtel's own growth opportunities, we assign Qtel a target P/E multiple of 10x. This falls above the current P/E multiple of 7.37, and returns a fair value for Qtel’s share price at QR 183.1. Applying the models explained above, we derive the following results: Qtel's Valuation Total Value under FCFE FCFE weight Total Value Under Peers P/E P/E weight Final Value of the Company (QR/Share)
Terminal growth rate 4% 5% 143.91 146.67 75% 75%
6% 150.72 75%
183.1 25%
183.1 25%
183.1 25%
153.71
155.78
158.82
Qtel's fair value ranges between QR 153.71 and QR 158.82 per share, which is over November's average market price of QR 136.00 per share. Therefore, the company is considered undervalued and its stock price does not justify Qtel's growth opportunities.
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