x Abu Dhabi, UAEThursday 27 July 2017

Telecoms operator a must-du for investors

Du, is a top pick among telecommunications stocks for next year, with its continued strength in earnings, low valuations and prospects for dividends.

Emirates Integrated Telecommunications Company is an earnings powerhouse.

The company, also known as du, is a top pick among telecommunications stocks for next year, with its continued strength in earnings, low valuations and prospects for dividends.

"We continue to favour single-country telecoms operators, focused on organic growth opportunities, coupled with increasing free cash flows and dividends," said Simon Simonian, an analyst at Shuaa Capital, based in Dubai. "The number two telecoms player in the UAE" meets this criteria, he added.

The operator should expect another year of double-digit growth. Earnings before interest, taxes, depreciation and amortisation is forecast to increase 15.4 per cent for this year to 2013, and profit before royalty to grow 18.8 per cent during the same period

Du this year has outperformed both its rival and the UAE stock markets: du is up 1 per cent and Etisalat, the country's first telecoms operator, is down 15.7 per cent. The Abu Dhabi Securities Exchange General Index is down 13.5 per cent for the year, while the Dubai Financial Market General Index is down 18.4 per cent. Despite du's advance, the stock is trading at only four times forecast earnings for next year.

Mr Simonian increased the target price to Dh4.50 from Dh4.32, while maintaining his "buy" rating on the stock.

With an underleveraged balance sheet, the company can start paying dividends.

"Stronger than expected operating cash flow and lower capital expenditures this year allowed du to pay down its debt at a faster pace," Mr Simonian said.

He forecasts a dividend of Dh0.06 a share for this year and Dh0.13 next year.

There are no plans to issue new licences until after 2015, according to comments last month by Mohamed Al Ghanim, the director general of the Telecom Regulatory Authority.

Du is still awaiting a decision from the Ministry of Finance on the royalty rate for this year. The operator paid a royalty rate of 15 per cent on its earnings last year. The market is not pricing a long-term royalty rate below 50 per cent, Mr Simonian said.

Du's stock last traded on Wednesday, closing down 2.6 per cent to Dh2.89.

halsayegh@thenational.ae