Surge in Etisalat shares expected to last well into 2016

Inclusion in FTSE indexes likely to further fuel stock.

Customers queue for services at the Etisalat kiosk in Mall Of the Emirates in Dubai. Antonie Robertson / The National

The stellar rise of Etisalat shares this year, on the back of the loosening of foreign ownership restrictions and the inclusion of the stock in MSCI’s emerging market index, could continue well into 2016 with its inclusion in FTSE indexes and the expectation of a higher dividend to shareholders.

According to investment bank EFG-Hermes, while Etisalat’s valuation is at “punchy” levels following its almost 61 per cent rally year to date, it sees “any sizeable correction in share price as an opportunity to invest in the stock” because of appealing fundamentals including “one of the most balanced combinations of value and growth”.

The Abu Dhabi share index is down 6.3 per cent for the year to date, in contrast as lower oil prices and weakening emerging market sentiment weighed.

In a research note from the Cairo-based bank this month, analysts said: “We have been fans of the stock for a long time, but could not defend it as a top pick, given the foreign ownership restrictions in the past. With this now behind us, any significant decline in stock price would constitute a good entry point.”

In June, the UAE Government announced the relaxation of the restriction on foreign ownership of Etisalat shares, opening up the country’s biggest publicly traded company to overseas investors for the first time. Its shares have rallied 34 per cent since the move alone. The landmark decision was the culmination of years of talks that allowed, from September, as much as 20 per cent of the telecoms company to be owned by foreign investors. The Government remains the largest shareholder, with the Emirates Investment Authority holding a 60 per cent stake. The Government’s influence will be the deciding factor in any higher dividends next year, EFG said.

“In the absence of sizeable M&A opportunities, we believe Etisalat could increase dividends, which would be well received by the market. Moreover, we think its majority shareholder, the Government, would favour higher dividend distributions to reduce deficits or balance the budget,” the note said.

EFG expects the stock to be “included in FTSE UAE, FTSE EM and other FTSE Global Equity Indices” by March providing estimated inflows of US$231.7 million.

Etisalat is one of the biggest telecom operators in the region – spread over 18 markets in the Middle East, Africa and Asia – and the company’s exposure ranges from mature telecoms markets such as the UAE and Saudi Arabia to other emerging markets such as Egypt and Pakistan.

Its recent acquisition of a stake in Maroc Telecom has helped boost shareholder value but the operator has faced costly regulatory issues this year in Saudi Arabia and Benin.

Despite its operations spread, Etisalat still makes the majority of its profit from its domestic market, which has been subject to increased competition from rival du.

Etisalat’s third quarter net profit was Dh1.95 billion, reflecting an 8.6 per cent decline year on year, as the operator’s expenses rose.

Moving forward, the main risks for the stock’s performance include “aggressive competition” across its footprint including the “infrastructure sharing” with du on fixed-voice and internet services across the UAE from next year.

However, Etisalat will expand its services to the “high-value” geographic areas in Dubai where du previously had exclusivity, which would further improve its performance in the UAE, according to EFG-Hermes.

Amid the continuing low oil price environment and efforts from GCC governments to cut budget deficits, EFG also foresees a risk of increase in royalty rates.

“The Government could decide to alter the current royalty structure upwards, or even charge a different tax on services, both of which would likely hurt valuations,” it said.

Etisalat is also “now well-placed to bank on the Iran story” because of the UAE’s position as a regional hub for trade, EFG said.

“While this is more of a long-term play and may not fully materialise, we believe the adjacent economy of Iran may turn into another source of value for Etisalat,” according to the research note.