x Abu Dhabi, UAESunday 21 January 2018

Earnings growth fears for UAE's du after fees rise

What's Down: Du was cut to sell from buy at Naeem Brokerage after the UAE Government said it would raise royalty fees paid by the operator.

Du was cut to sell from buy at Naeem Brokerage after the Government said it would raise royalty fees on the nation's second phone company, prompting concern that earnings growth could suffer.

Naeem lowered the price estimate of Emirates Integrated Telecommunications Company, as du is formally known, to Dh2.07 from Dh4.88.

The mobile operator's shares tumbled 9.8 per cent yesterday to Dh3.5 after the Finance Ministry said the company will be required to pay 17.5 per cent of profit and 5 per cent of revenue in royalties this year. That compares with 15 per cent and 5 per cent respectively last year, according to the company's financial statement.

"The new royalty rates are extremely negative for du and materially hurt its valuation," Naeem analysts wrote in a note yesterday. "The application of the rates reflects a significant wealth transfer from the du shareholders to the UAE Government."

Du broke the monopoly of Etisalat when it started operations in 2007 and the company estimates its mobile phone market share at 47 per cent.

The shares have returned 21 per cent this year compared with a decrease of 1.4 per cent in the period for Etisalat, which also had its royalty rates rejigged. Du trades at a price-to- earnings ratio of 11.3 times, compared with 10.8 times for Etisalat and 11.5 times for the benchmark Dubai Financial Market.

Du was poised to post a 30 per cent increase in full-year profit to Dh1.43 billion, according to the mean estimate of nine analysts on Bloomberg. Five analysts have a buy rating on the shares, while four recommend investors hold and two say sell.

"In the coming days, the operators may petition the Government to reconsider the rates," said Naeem analysts. "For now, we have cut our target price to reflect the announced rates, despite the fact that we remain strongly positive on du from an operational perspective."

Du was also lowered to underweight at EVA Dimensions this week, according to data compiled by Bloomberg.

The stock was raised to neutral from underweight at JPMorgan Chase, which increased the price estimate to Dh4 from Dh3, the data show. Etisalat shares dropped 0.4 per cent to Dh9.03 after tumbling 8.9 per cent yesterday. Four analysts recommend investors buy the shares, while seven say sell.

* Bloomberg News