Is STC loosing fuel in Saudi Arabia?
Following to my last post related to STC’s situation in 2009, I wanted to publish some interesting insights of the Saudi telecom industry coming from Al Rajhi Capital. In their opinion, the Saudi telecoms market is still booming and they expect 3.5G data to help drive mobile penetration towards 220% within five years. According to them, there are risks, but it is too early to prepare for a slowdown. I fully agree with this opinion.
As written before in this blog, STC’s foreign investments seem a distraction, even if they may bear fruit in the long run. Mobily is preferred as the leader in mobile data and is delivering strong growth while Zain (although is performing well for a no.3 player) is hobbled by excessive debt.
Relevant highlights
1) Saudi telecoms market: attractive overall. From a top-down perspective, the Saudi telecoms market is attractive. The country benefits from a young and fast growing population and from high GDP/capita. The mobile market, which accounts for 74% of the total, is growing fast and is also relatively concentrated.
2) Mobile market: data can drive growth further. Mobile broadband is expected to help drive mobile penetration in Saudi Arabia towards 220% within five years. Mobile broadband will fuel incremental growth, rather than replace existing voice revenues; however, it may threaten fixed-line DSL. In a core scenario mobile ARPU only declines modestly, but with RPM high by the standards of emerging markets there is a risk of sharper price falls.
3) New opportunities: don’t be distracted. Comparisons with historical overseas investment plans in the telecoms sector cast doubt on several aspects of STC‘s expansion strategy. STC‘s investments may boost growth in the future, but right now it has lost its way at home. Mobily is proving the near-term winner in Saudi telecoms; Zain is growing fast but remains in clear third place.
4) Stock conclusions. STC is inexpensive and its financial stability and dividend yield of 6.5% offer support; however, it lacks catalysts for performance. Al Rajhi Capital rates STC Neutral and set a price target of SAR46.4. Mobily offers strong near-term growth in their opinion and is not expensive for a fast-growing operator on a PE of 9.3x. They rate Mobily Overweight and set a target price of SAR64.9, implying 39% upside potential. With net debt 2.4x 2010 sales, these guys think fair value for Zain is more than 20% below the current price and rate it Underweight.
Interesting. Enjoy the reading, CVA.
Trends in the U.K. Broadband Market for the next year.
The UK broadband market is in a state of constant evolution and growth, as both private and public organisations push to get the fastest connections available to the largest number of people. Nearly 20 per cent of UK citizens are able to connect at high speeds in their homes and with the Digital Britain plan launched last year, by 2012 every single household should have a broadband connection of at least 2Mbps available. This aim for universal broadband is certainly an admirable one, but there are plenty of legislative and logistical hurdles to conquer as the plans progress.
In 2010 the broadband market is expected to grow significantly and experts predict that more people will connect to the internet using fibre optic cables as opposed to the traditional ADSL technology, which requires standard copper landlines and offers lower theoretical maximum download speeds. An estimated 4 million households will have a cable broadband connection by the end of 2010 and BT is continuing to roll out its fibre to the cabinet technology in urban areas, providing faster speeds with less invasive installation requirements for the end user.
At the moment the UK is doing well in terms of general broadband availability and growth, but the question of speed is what must be addressed in the coming months. It sits at 26th in the latest global league tables in terms of average download speeds, with South Korea dominating the charts by providing an average speed of 14.5Mbps for its citizens. This will be tackled in two ways in 2010, with cable broadband being joined by LTE mobile broadband by the year`s end. LTE (Long Term Evolution) is the next step on the road towards 4G mobile broadband and should offer considerably faster wireless connections than are currently available. Trials are being carried out by major UK network providers and mobile broadband will be used in areas in which the installation of fibre optic cabling would be unfeasible.
The one benefit that the UK broadband market has over most others around the world is the low cost of its broadband packages. In terms of download speeds it may not be at the top of the pile, but ADSL, Cable and Mobile broadband deals are cheaper here than anywhere else in the world. The lowest cost broadband has become a key asset in the UK because of the maturity of its telecommunications networks and the highly competitive market which exists. Both ADSL and Mobile Broadband are provided by a number of firms, both small and large, all competing for the same users.
As such the cost of the basic broadband packages has fallen to incredibly low levels. Some offer broadband free as part of a home phone bundle, whilst others cut out line rental payments or add sweeteners like free digital TV in order to entice over consumers from other networks. Broadband packages which are bundled with other communications and entertainment services have become popular, as has IPTV. With TalkTalk`s recent acquisition of Tiscali, BT has now got a serious rival to watch out for in 2010.
Enjoy the reading. Best, CVA
Trends for 2010 in the LatAm broadband services market
The Latin American broadband services market has presented high growth rates and is considered a very attractive telecommunications market in the region. Achieving 24.7 million subscribers and almost $8,000 million in revenues during 2008. The market grew 40 percent and 28.5 percent with respect to subscribers and revenues, respectively.
Telecom companies have been getting in on the act to push penetration through commercial promotions. These include reduced and free monthly charge for a fixed period of time, as well as bundled solutions, such as triple-play offers, around the whole region. Moreover, the launching of new applications and technologies increases the demand for the broadband connections. As an example, Brazil and Mexico have 70 percent of the region’s connections. However, in terms of penetration, the main countries were found to be Chile and Argentina. Mexico and Colombia are the most dynamic markets and showed growth rates above 60 percent.
An analysis of the total connections by technology shows that most of the broadband accesses in Latin America are DSL connections. This means that the Telco companies have, in general, the biggest portion of the market. On the other hand, the cable companies realized that they face a serious problem as Internet service providers, in terms of coverage, when competing with the DSL companies in this market. Hence, during the last couple of years, cable modem providers expanded their networks to a larger number of cities and have been gaining importance in Latin America. Therefore, currently more than 26 percent of the total accesses are cable modem connections. For a detailed revision of key KPIs please refer to the following presentation (in spanish):
Triple play market in Latin America – Colombia 2009
Our KC department has just completed a detailed benchmark of fixed line and wireline broadband providers in Latin America and I wanted to share some interesting figures of Colombia, one of the countries were we started our professional consulting adventure and were most of us lived during the start-up launch of the third mobile operator in the country.
As of the 3rd quarter of 2009, the Colombian telecoms market continues to grow across all sectors although fixed-line connections see minimal expansion and the penetration rate in the broadband segment remains low. Nonetheless, there are considerable opportunities for operators in these two markets. Colombian operators have been keen to offer bundled services with IPTV launches from at least two municipal operators in 2008. Certainly dual and triple play services will play a key roll in ensuring there is not a sharp decline in fixed-line connections.
However, we believe that the market will decline, although the growth in 2008 has led us to revise our estimates with little anticipation of a sudden drop off. The mobile market’ s continued growth will, however, continue to impact the fixed-line market. For fixed-line operators, the new area of growth will be in broadband services, with almost 2mn connections reported at the end of 2008. A detailed split of the maket competitive landscape can be see bellow:
Data from the CRT, the telecoms regulator, indicates that broadband subscriptions are not only growing but average download speeds are also increasing. As content available over the Internet needs ever increasing bandwidth to be run, the demand for faster Internet connections will continue to rise. Colombia’ s broadband market sees few subscriptions over 1Mbps, and improving networks will be a key area of development to push further growth. With strong competition in the market, prices should fall, allowing more subscribers to gain access to networks.
In this update we have concentrated on the fixed-line and broadband markets with regional breakdowns provided highlighting how rural areas are yet to be reached in most of the countries. In the Colombian case, Bogotá accounts for the largest number of fixed lines and broadband connections in Colombia followed by other major cities. For the market to continue to grow, networks will need to be expanded into rural areas to gain access to new subscribers. The mobile data analysis has remained largely unchanged owing to this fixed-line and broadband focus although forecasts have been fully updated. Case you need any further details about this benchmark feel free to contact me!.
Hope it helps. Flying to the Caribbean. Enjoy the reading,
CVA
Share and share alike – Update on network sharing
Tower sharing has been one of the telecom industry’s global hot topics for close to a decade. The first wave was seen in the US and Europe, while recently, India has taken center stage with several multi-billion dollar asset carve-outs. Reading Informa’s latest report on network sharing, we read that leading operators in Western Europe have instigated infrastructure sharing and outsourcing deals, but carriers in developing markets are now beginning to look into alliances that would relieve them of heavy costs and speed expansion into rural areas.
Network infrastructure sharing and outsourcing is finding strong acceptance with mobile operators around the world, they follow, as an effective way to cut down coverage costs, while reducing the time to market. Such initiatives are well established in Europe, where they have been adopted by leading players such as Vodafone and Telefonica, but they have also seen significant traction in India, and are poised to make their impact felt in the Middle East and Africa.
Operators across the world, both in mature and developing markets, face challenges in sustaining margins with declining ARPU. But population distribution patterns in developing markets complicate the situation, since access to telecom services varies significantly between urban and rural areas leaving operators in these countries to balance the cost of operations in congested and saturated urban setups with the costs of new network rollouts in other areas. So in many contexts, infrastructure sharing offers a compelling proposition.
In Europe, the UK makes an interesting showcase for network sharing, since Deutsche Telekom and France Telekom’s September announcement to merge their respective UK operations. The two European heavyweights plan to merge T-Mobile UK and Orange UK into a 50:50 joint venture, and the agreement, should it be approved by the competition authorities, will create a new market leader, with over 33 million subscribers and a 43 per cent share of the market, according to the latest figures from Informa’s WCIS. Current leader O2 has a user base of 22.44 million, which represents a 29 per cent market share.
The deal is expected to generate synergies in excess of €4bn, with estimated opex-based synergies reaching an annual run rate of over £445m from 2014 onwards, through saving in network and IT expenditure, marketing and distribution. The joint venture would also be expected to invest £600 – 800m in integration costs over the period from 2010 to 2014, related to the decommissioning of mobile sites and the streamlining of operations.
But more importantly, the UK deal brings the prospect of a single network market closer to reality. Orange and T-Mobile will have the opportunity to combine their 23,000 or so 2G base station sites as part of their merger. But any attempts to consolidate their 3G networks will bring Hutchison’s 3UK into the equation.
T-Mobile and 3 formed a 50:50 joint venture called Mobile Broadband Network Ltd (MBNL) in December 2007. This was the world’s largest known active 3G network sharing agreement at the time, and saw the two operators elect to share their masts and 3G access networks. MBNL was given the aim of making 13,000 combined base station deployments, and around 7,000 are currently in operation. The marriage of Orange and T-Mobile would bring another 7,000 3G sites to the table, and Hutchison wants to share the synergies afforded by the agreement, especially seeing as Orange UK already hosts 3’s 2G traffic. In a statement, 3UK said: “Our network infrastructure joint venture with T-Mobile inevitably makes us an interested party.”
The UK is one of the more interesting case studies in network sharing but in early 2009 the European market as a whole reached a tipping point-the result of a flurry of network outsourcing deals. An increasing number of mobile operators were deciding that running a network was no longer their core business.
Key questions of a scenario planning after recession.
In these fast-changing and turbulent times, businesses are facing an uncertain future and conventional business models may no longer be viable. Many management teams will need to re-assess their operations and consider a number of possible scenarios.
As explained before in several articles in this blog, mmC Group thinks nobody can predict what is likely to happen to the overall economy, or indeed, the impact the current downturn may have on the telecom (or any other) industry or on a particular corporate. There are likely to be a range of outcomes, but to survive, management teams need to plan for the potential eventualities.
Managing in a downturn is all about being flexible, anticipating and reacting quickly to changing circumstances. This helps mitigate risks, while also positioning companies to seize any opportunities which arise. Investing management time in planning for different scenarios is not a luxury – given the volatility of the current economic environment, it is a necessity.
We’ve been recently supporting a “Scenario planning” department within a telecom operator in a Assessment of an economic downturn scenario and its impact in their group operations in Europe. This group required business intelligence on the external environment and an objective assessment of internal situation across countries. A common assessment of the divergent scenarios help the operator identify the actions to be taken today in order to mitigate the negative impact or take advantage of the opportunities offered in the future.
The work was done for the CEO that came to us asking: What questions should I ask myself? Here are some of our suggestions:
- How will the telecom business be impacted by an extended economic downturn?
- What geographies in which the company operate in will be impacted most? What are the likely repercussions for the industry and geographies?
- To what extent have we stress-tested our forecasts to account for changes in performance and outlook?
- Have we stress-tested forecasts over different time periods to reflect a potentially extended economic downturn?
- How good are management reporting and information systems at highlighting potential issues?
- What areas need to be monitored carefully?
- What are the key vulnerabilities in the operator’s business model? Is my model flexible enough to allow us to adapt quickly to a new environment?
- What is my long-term financial position? How significant would a material loss of revenue be?
- What are my competitors doing and are there opportunities for organic growth in the sector?
- How bad should performance get before we face a covenant/facility breach?
- Am I appraising the board regularly on performance and scenario planning/management?
I won’t share the final outcome of the project but I would like to share some relevant slides related to the market and the general impact on some major telecom KPIs. Enjoy the reading.
CVA. Happy Thanksgiving weekend to all!
Portugal Telecom revenues drop 2.3%, net profit down
Once during this year, I was really impressed by one of the PT executives who just before starting a meeting told me: crack, if you are coming to the meeting to show me off charts populated with the data we publish in our site, you can directly go by that door. I was not even sit in the meeting room when he kindly received us with this comment, (we just wanted to discuss the top 3 strategic issues that we believed were in the top of his mind) but since that day, I apply that insightful comment in most of our presentations.
However, in the management consulting and advisory industry, it’s more than important to be regularly updated on the financial KPIs and performance of the operator to identify, address and suggest strategic solutions to those problems that appear every quarter after the figures speak. We normally follow the top 1st tier operators in the world and although PT is not within this set, I always remember this fruitful meeting and see how are they performing. For those interested, here’s the update on the last quarter.
Portugal Telecom reports revenues of EUR 1.742 billion in the third quarter of this year, decreasing 2.3 percent year-on-year, due to lower MTA fees. At the same time, the EBITDA dropped 2.7 percent to EUR 656.8 million in the third quarter and the net profit dropped by 36.2 percent to EUR 115.9 million, due to lower MTA fees and rising financial and depreciation costs after investment in new networks and equipment.
The capex dropped 7.6 percent to EUR 307 million, but the capex for the first nine months increased by 17.7 percent year-on-year to EUR 812.8 million, due to large investments in FTTH and set-top boxes and modems for Portugal Telecom’s extending base of triple-play customers. For the third quarter, Portugal Telecom reports a free cash flow of EUR 128 million compared with a negative cash flow of EUR 42.1 million in the third quarter of 2008.
The domestic mobile customer base has grown 5.2 percent year-on-year to 7.084 million on 30 September of this year, adding 104,000 during the third quarter. The number of fixed telephony lines decreased 3.8 percent to 2.76 million and ADSL customers grew 19.6 percent year-on-year to 812,000. Portugal Telecom’s IPTV service experienced a huge growth from 211,000 on 30 September 2008 to 505,000 on 30 September of this year.
Best, CVA.
ONO revenues fall 6.2% to EUR 371 mln in Q3
Reading today ONO’s performance indicators of the last quarter, I wanted to share some of this info in this post.
The Spanish cable operator reported third-quarter revenues of EUR 371 million, down 6.2 percent from EUR 396 million in the year-ago quarter. The decline was mainly as a consequence of the reduction in telephony and variable consumption and the reduction in the residential cable customer base in line with the strategy of acquiring quality customers implemented during the last year.
The EBITDA decreased 0.8 percent year-on-year to EUR 178 million and the EBITDA margin improved 2.6 percentage points to 48 percent. The gross margin grew to 78 percent from 76.7 percent previously. The company moved to a net profit of EUR 15 million from a net loss of EUR 4 million in the same period of the last year.
