GCC Telecom Sector 2012

Limited growth from traditional services
Regional telecom operators overall continue to post revenue gains. However, the high penetration rates in GCC telecom sector show that the region is likely approaching saturation levels, a trend underscored by high penetration rates, and therefore revenue growth is slowing. In GCC telecom sector, telecoms are experiencing slowing or declining ARPU (average revenues per user) and face the need to prepare for limited growth from traditional services (voice and sms). In fiscal year 2011, incumbent operators in Saudi Arabia, the UAE, Qatar, and Bahrain began to experience flat or declining revenue growth. As a result, telecom sector will need to rely on efficiency gains rather than scale alone to maintain its bottom lines.

Competition likely to get tougher in 2012
The year 2011 witnessed aggressive competition within telecom sector in GCC. We expect competition is likely to get tougher on the pricing front and therefore margins are likely to get impacted. Telecom sector companies in GCC will continue to increase capital expenditure, investing in network infrastructure to improve network quality and offer more value-added services to customers.

Broadband – high growth connection
With the high competition GCC telecom sector is becoming increasingly saturated, the GCC telecom sector operators are jostling for position. Central to all of their strategies is a greater focus on mobile data services. Data contribution to total revenue is at its early stage and therefore has huge growth potential. Revenue from data services and the Internet will continue to rise for local operators with a drop in the share of voice segment revenues to total revenues.

M&A’s – did not materialize in 2011
Besides the organic and inorganic growth plans pursued by regional telecoms, consolidation will be another force shaping the regional telecom competitive landscape. We are of the opinion that in GCC, factors like maturing level of SIM penetration, stiff competition (leading to ARPU dilution) and further deregulation (issuance of further licenses, implementation of MNP) all these factors are likely to affect profitability margins. Therefore, we expect that M&As are likely to continue within the region as well as cash rich operators will continue to eye overseas acquisitions to offset the declining trend in core home markets. However, we have seen that 2011 was somewhat muted on this front. In string of “almost deals” but failure to strike an agreement were UAE-based telecom giant Etisalat scrapped its USD12bn offer to buy a controlling stake in Kuwait-based Zain. The deal would have made Etisalat the regional heavyweight, but it had been plagued by delays and disputes. Similarly Batelco and Kingdom Holding scrapped their plans to acquire a 25% stake in Zain KSA.

Overseas expansion
The theme for the incumbent operators in GCC is similar as they have invested in overseas markets to hedge against the decline in revenues and market share in the domestic markets. The performance of these companies are increasingly become dependent on overseas operations. We are of the opinion that going forward in home markets growth is likely to be limited and careful diversification in other markets is the only way forward for further growth.

Outlook for GCC telecom sector 2012
The large and transient expatriate populations in the Gulf countries are also a factor in encouraging competition, and thus growth and penetration rates – with a fluid population new operators (2nd & 3rd operators) had a better chance of gaining market share. However, in GCC telecom sector 2012, competition is likely to get more fierce going forward. Customers will eventually benefit from lower tariffs and bundled offers are likely to increase in the near future. In 2012, operators will continue to focus on cost optimization and driving efficiencies to manage their growth, margins and profitability expectations.

In GCC telecom sector each company in the region has different operational dynamics depending on its reach in the domestic market, its strategy for overseas expansions and funding strategy. Out of our coverage of 9 Telcos in GCC, Qtel (Qatar), Wataniya Telcom (Kuwait), and Mobily (KSA) remain our preferred picks for 2012.

This press release “GCC Telecom Sector 2012” was prepared by “Global Investment House”` as a part of “GCC Investment Strategy – 2012”, released January 2012.