Royalty windfall for telecoms operator du

Du's royalty rates are a relief to investors.

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The telecommunications operator du is preparing to pay the Federal Government a royalty fee for the first time, but investors are cheering because the charge is much less than expected.

Unlike its larger rival, Etisalat, du has been exempt from paying any money to the Government since its launch in 2007. In preparation for the start of royalty payments, the company has been setting aside half of its net profit. But the announced royalty was only 15 per cent of total profit.

The company is due to report on March 3 its results for last year's fourth quarter. Those figures will be used to determine exactly how much it has to pay. The company expects to recover h

undreds of millions of dirhams from the set-asides, money it now will be able to use to pay down debt.

Shares in du yesterday climbed to their highest since 2009, closing up 3.1 per cent at Dh3.31 in Dubai. Etisalat already pays the government 50 per cent of its profit, but analysts expect the company to renew its calls for a reduction in fees. Last week it announced a profit of Dh7.63 billion for last year.

"This development implies there is a review, an exercise that is being done [by Etisalat]," said Simon Simonian, a telecoms analyst at Shuaa Capital.

Etisalat and some of its major shareholders have in recent months spoken out against the royalties, which take a bite out of the operator's profit.

Kaj-Erik Relander, the chief telecoms investment officer at the Emirates Investment Authority, which has a substantial holding in Etisalat, said in July the royalties were unsustainable.

The levy, which is decided annually, is a form of indirect tax that the Government can charge in the absence of any formal income tax regime.

It is still unclear how much du and Etisalat will be asked to pay this year. Du earned Dh795 million in the first three quarters of last year and had more than 4 million active mobile subscribers. Etisalat has 7.76 million mobile users.

Though it has been in operation for only a few years, as against Etisalat's 30 years, du has made significant headway in the UAE market.

If investors continue to see the royalty rates as favourable, the company's future should be even brighter.