July 2012
Buy or Sell
It’s Time to hang up on Vodafone Qatar

Three years of losses, slowing subscriber growth and intense competition from its chief rival are prompting analysts and investors to say ’yalla bye’ to Qatar’s state-owned telecom operator

O ne would think that one of Qatar’s leading telecom operator would be raking in cash. After all, the small Gulf state has the world’s highest GDP per capita and its largest proven oil and natural gas reserves. Instead, Vodafone Qatar is slashing its prices and offering 30% lifetime discounts to new subscribers in an attempt to cope with rising competition, prompting leading equity analysts and investors to shun the stock in recent months.

State-owned Qatar Telecom maintained a tight grip over the telecom sector in Qatar for almost a decade before the country granted a second operating license to Vodafone Qatar in December 2007. Since then, the latter has managed to grow its subscriber base from 15,000 in June 2010 to 837,000 at the end of its latest fiscal year in March.

Since then, however, Vodafone’s metrics appear to have hit a rough patch. The company’s market share grew to 30.5% at the end of September from 28% a year earlier, a much slower improvement when compared with a 22% share in September 2010 and 7% in 2009. The number of subscribers rose 15% year-over-year to 936,000 at the end of September, compared to a 35.5% growth rate a year earlier.

In a report issued in late November, NBK Capital said Vodafone Qatar’s share price carries little potential upside, citing unfavorable market dynamics and deteriorating financial metrics.

’We feel that the stock is fairly valued at current levels and presently see more potential risks than catalysts for the stock, including irrational competition in mobile postpaid and data services, slower than anticipated roll-out of the fixed-line network, and the EBITDA margin falling short of forecasts due to weaker-than-expected cost management or greater competitive pressure,’ the report noted. NBK Capital still maintained a ’Hold’ recommendation with a 12-month fair value of QAR9.3, 11% above the closing price of QAR8.35 on 29 Nov.

More ominously, NBK Capital is not alone in its gloomy outlook for the stock. In total, two equity analysts out of six who cover the stock have ’Sell’ recommendations on shares of Vodafone Qatar and three have ’Hold’ ratings, compared with only one advising clients to snap up shares of the telecom operator.

Analyst pessimism over the stock may not be too obvious from looking at Vodafone’s revenues, which grew 15.7% year-over-year to QAR346 million in the September quarter.

However, the company hasn’t earned a profit since it launched its operations a couple of years earlier, and in fact said its losses widened 5.8% year-over-year to QAR121.7 million during the quarter ending in September.

Investors may be willing to ignore short-term profitability given higher capital expenditures, but some worrying trends appear less transient. The company is struggling to fend off fierce competition from Qatar Telecom, the country’s largest telecom operator and from illegal VoIP providers, and has seen its average revenue per user (ARPU) fall 5.1% sequentially to QAR115, down from QAR122 in the previous quarter.

As a result of massive marketing efforts and competitive pricing, Vodafone’s margins and ARPU are expected to suffer. ’Promotional activity has increased post-Ramadan, which has negative connotations for ARPU,’ said QNB Financial Services in a research note published last month. QNB lowered its target price on the stock to QAR9.36 from QAR9.48 citing ’lower-than-expected profitability and weaker-than-anticipated ARPU, along with higher costs and subdued EBITDA.’

Besides the dynamics of a newly established telecom operator, Vodafone Qatar holds a structural disadvantage over Qatar Telecom and other major listed companies on the Qatar Exchange. As Vodafone Group’s subsidiary in Qatar, the company lacks the regional diversification that its chief rival enjoys, leaving investors highly vulnerable to fluctuations in the Qatari economy and the telecom sector. On the other hand, Qatar Telecom’s customer base reached 89.2 million subscribers at the end of September, spread over 15 countries.

Qatar’s strong economic growth is offering a plethora of bounties to investors, but Vodafone Qatar appears to be offering little in the short-to-medium term. The company’s shares fell 7.2% in November, compared with a 1.4% drop for the market index, as investors politely hang up on a company with a 14-quarter losing streak.


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