Etisalat in Nomura downgrade

Etisalat's growth across the Middle East and Africa is beginning to draw the attention of analysts concerned about its spending plans.

The UAE's largest telecommunications operator is planning to aggressively expand across the region after offering to buy a 51 per cent stake in Kuwait's Zain in a deal that would be worth about Dh44 billion (US$11.97bn). It is also bidding for licences in Syria and Libya and extending its operations in Nigeria and India, two potentially lucrative markets.

Competition in the UAE comes from, du, which has signed up significantly more mobile and internet users in the past year than the bigger company.

Etisalat's increased international spending and pressure from du should make investors wary, said Martin Mabbutt, a telecoms analyst with the Japanese investment bank Nomura. He downgraded the operator from "buy" to "neutral".

"Etisalat has been one of the most ambitious of the GCC operators in terms of its expansion in recent years, but control of Zain would be a major stepping stone in cementing its position in the Middle East region," Mr Mabbutt said.

He said Etisalat's prospective purchase of Zain and its increased spending on capital-intensive subsidiaries in India and Nigeria would dilute its value. The operator's stock now falls firmly into a "value" category with its earnings in the near-term expected to remain weak, the analyst said. In the third quarter of last year, Etisalat said its net profit declined 23 per cent to Dh1.74bn from Dh2.25bn a year earlier.

"On the basis of current forecasts, the valuation of Etisalat still makes it one of the more attractive stocks in the region at an [enterprise value] multiple of 3.5 times [this year]," Mr Mabbutt said.

"However, the scale of the dilution likely from the prospective acquisition of a controlling interest in Zain will lead to a significant increase in the multiple in the near and medium term."

He said Etisalat's intended Zain purchase should not be viewed as a "catalyst for considerable change" in the region's telecoms market.

"Zain is already an operator with very well established operations in all of its markets [except] Saudi Arabia. This latter operation will either be sold or floated as part of the deal given that Etisalat is already represented in Saudi Arabia through its stake in Mobily," Mr Mabbutt said.

Etisalat stock rose 0.5 per cent yesterday to Dh10.75.

dgeorgecosh@thenational.ae