Telecommunication AED 8.9 billion. Pakistan operations capital expenditure

Telecommunication
Industry :

 

 Etisalat
Company 1.

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Emirates Telecommunications Corporation, branded trade
name Etisalat, is a multinational UAE based telecommunications services provider, currently
operating in 17 countries across Asia, the Middle East and Africa. As of February 2014, Etisalat is the 13th largest mobile network operator in the world, with a total customer base of more than 167
million. Etisalat was named the most powerful company in the United Arab Emirates by Forbes Middle East in 2012.

 

Key financial figures of Etisalat

Details

2011

2012

2013

2014

2015

Total Revenue

32,241,873

32,946,300

38,853,238

48,766,875

51,737,018

Total operating expenses

19,964,444

19,533,493

24,397,205

31,832,583

33,048,845

Gross profit

4,602,818

5,399,345

8,432,125

10,208,180

11,321,938

Net Income

5,839,000

6,742,000

7,078,000

8,892,000

9,510,918

Current assets

19,462,816

26,399,090

28,197,405

37,641,214

41,680,494

Total Assets

71,891,642

80,146,363

85,715,534

129,584,558

128,264,547

Current liabilities

24,184,684

25,466,629

26,893,239

39,970,618

42,344,526

Total Liabilities

31,187,791

33,871,507

36,122,838

68,657,687

68,889,448

Inventory

345,219

46,035

75,475

51,816

176,155

Total Equity

41,703,851

46,274,856

49,592,696

60,926,871

59,375,099

Evaluation of various aspect of Etisalat

Capital expenditure

Etisalat has
been focusing its expenditures on the acquisition of new 3G and 2G licenses in
various countries, most notably in Pakistan; also some of its spending was
dedicated to enhancing its servers’ capacity in some countries.

 

Notable
expenditures:

Consolidated
capital expenditure increased by 41% to AED 8.9 billion.

Pakistan
operations capital expenditure was AED 3.0 billion, Adjusting for the 3G
license acquisition and 2G license renewals.

In Egypt,
capital expenditure exceeded AED 1.0 billion; Capital spending in Egypt is
focused on capacity enhancement to address the increased demand for data.

These
expenditures will most likely result in an increase in the profit of the firm,
because these expenditures are meant to meet the demand of the public for
better internet capacity and faster internet, which is highly satisfactory for
customers and investors alike.

 

Sources of finance

Borrowings
(AED m)

2014

2015

Secured/unsecured
loans
 

22,229,170

22,080,162

Bonds
 

14,382,800

14,777,200

Shares (18 AED)

8,000,000

8,000,000

 

As we can see, Etisalat didn’t issue anymore shares since 2014, and
there is an decreased reliance on debt through bonds.

This can be explained by the recent expenditures on acquisitions
and other improvements that required urgent additional funds.

The firm might seem over-reliant on debt, however it only started
incurring debt recently, and equity is still high, which is satisfactory to
most of the investors.

Overall, the increasing over-reliance on debt is big a concern for
investors, but they shouldn’t be too worried, as this situation seems temporary.

 

 

Weighted
Average Cost of Capital

 

Details

2011

2012

2013

2014

2015

Cost
of debt(RB)

18.72%

19.90%

19.59%

12.95%

13.81%

Cost
of equity (RS)

14.00%

14.57%

14.27%

14.59%

16.02%

Tax
rate

0.55%

1.29%

7.66%

10.75%

15.98%

Debt/Value(B)

42.79%

42.26%

42.14%

52.98%

53.71%

Equity/Value(S)

57.21%

57.74%

57.86%

47.02%

46.29%

WACC

15.93%

16.61%

15.25%

12.25%

12.46%

                                                          

The WACC of Etisalat has been fluctuating around similar values in
the past year.

However, we can notice an increase of 12.46% in the last year,
which can be explained by the large amount of debt incurred, Etisalat has
exceeded its limit of debt that usually reduces WACC.

The large sum of debt incurred in the past year is very worrisome
to a lot of investors, however; the WACC is still at a stable point and
investors shouldn’t worry about it unless debt increases even more in the
future, which is unlikely.

 

Details

2011

2012

2013

2014

2015

ROA

6.41%

5.4%

6.74%

6.42%

7.42%

Asset/Liabilities

2.3

2.36

2.37

1.88

1.86

Working
capital

0.81

1.04

1.05

0.94

0.98

Current
ratio

0.80

1.04

1.05

0.94

0.98

EPS

0.74

0.85

0.90

1.12

1.19

Gross
profit ratio

0.14

0.16

0.22

0.21

0.22

Net profit
ratio

18%

20 %

18%

18%

18%

ROE

14.00%

14.57%

14.27%

14.59%

16.02%

Quick
ratio

0.79

1.03

1.05

0.94

0.98

Total
assets turn over

0.45

0.41

0.45

0.38

0.403

Performance
of Etisalat

 

Most of the firm’s ratios have been either fluctuating around the same
point or noticeably decreasing in the past few years.

 

 

 

Through the following changes in the
financial performance of  Etisalat we note the ROA has decreased significantly
since the year 2011, which indicates the poor management of assets. And the EPS
increased slightly in the last year, which is a good indicator for
shareholders.

Also
the current ratio is below the universal benchmark , which indicates a
liquidity problem with the firm.

The
NP and GP ratios are relatively constant, which is a good indicator of the firm
maintaining profitability.

 

Company performance
summary

Etisalat’s performance over the years has been constant, with
slight changes in some of its financial ratios, which can be explained by the
large sum of debt incurred through Bonds in the year 2014.

The performance of Etisalat is expected to increase substantially
in the upcoming years, due to its series of acquisitions of licenses and
facilities all around the world; especially in countries like Pakistan and
Malaysia.

Overall, Etisalat’s performance is considered excellent by most
investors in the past few years, and it’s expected to keep this performance and
improve much more in the future.

 

 

 

 

 

 

 

 

 

 

 

 2. Ooredoo Company

 

Ooredoo (Previous name Qtel) is an international telecommunications
company headquartered in Doha, Qatar. Ooredoo offers mobile, wireless,
wire line, and content services with market share in national and international
telecommunication markets, and in business (corporations and individuals) and
residential markets. It is one of the world’s largest mobile telecommunications companies, with over 114 million customers worldwide
as of September 2015.

Ooredoo has
operations in the Middle East, Europe and Asia, including Algeria, Indonesia,
Iraq, Kuwait, Myanmar, Maldives, Oman, Palestine, Qatar and Tunisia. 68% of
Ooredoo is owned by the State of Qatar. 

Ooredoo’s
shares are listed on the Qatar Stock Exchange and the Abu Dhabi
Securities Exchange.

Ooredoo has a market capitalization of QAR 301.2 billion as of
September 2015, and was named “Best Mobile Operator of the Year” at
the World Communication Awards 2013.

 

Key financial figures of Ooredoo

2015

2014

2013

2012

2011

Details

32,160,855

 33,207,209

33,851,340

33,475,609

31,765,346

Total Revenue

2,293,483

2,481,662

3,283,257

4,835,526

5,943,194

Gross Profit

11,400,368

9,958,384

10,363,051

11,084,389

9,958,384

Total Operating
Expenses

2,293,483

6,154,607

3,768,768

3,293,330

6,154,607

Net Income

331,466

975,547

611,889

598,796

910,996

Income tax

2,624,949

5,693,385

3,895,146

3,080,458

4,546,248

EBT

26,453,597

21,466,805

28,052,523

25,687,415

27,409,457

Current Assets

26,375,717

20,480,056

23,223,278

26,638,488

27,104,539

Current Liabilities

320,320

297,815

320,320

320,320

263,120

Shares Outstanding

94,152,065

94,229,029

97,107,099

97,999,347

102,334,277

Total Assets

65,779,200

57,339,359

64,679,767

67,530,834

62,941,483

Total Liabilities

697,069

6,036

666,670

412

4,394

Inventory

36,889,670

32,427,332

30,468,513

28,372,865

39,392,794

Total Equity

 

Evaluation of various aspects of Ooredoo

Capital
expenditure

Ooredoo’s CAPEX has been focused on the strategic investments
across the business in broadband networks, customer acquisition and retention,
global brand roll-out, service launches and customer experience.

Which resulted in decreasing the Revenue for the year 2015 by 2
percent to QR 32,160,855 million (FY 2014: QR 33,207,209 million). EBITDA
increase at QR 13,018 million (FY 2014: QR 12,948 million) with EBITDA margin
increasing to 40% (FY 2014: 39 percent).

The slight decrease in revenue shouldn’t be worrisome to investors
and other interested parties, as it is only the result of Ooredoo’s plan of
developing the company and making it align with the current technologies of
telecommunications, in the GCC and internationally.

With most of its expenditures focused on customer service and
experience, it’s forecasted for Ooredoo to have much brighter years to come,
financially.

 

of finance : Sources

BORROWINGS (QAR,000)

2015

2014

SECURED LOANS

1,624,120

745,676

UNSECURED LOANS

14,382,975

11,890,895

ISLAMIC FINANCE

4,863,044

6,559,277

BONDS

22,230,503

23,989,343

Shares (33 USD)

320,320

320,320

 

Noticing that the issuance of bonds is taking the majority in the
total borrowings, Ooredoo is rated A2 by Moody’s, A- by S and A+ by
Fitch.

The reliance on debt has been increasing while the number of shares
outstanding has been constant for the past year.

Ooredoo, like many corporations and financial institutions in the
Gulf, is looking to tap the international debt markets instead of seeking loans
from local banks, as low oil prices have shrunk regional governments’ energy
revenues, hitting banking sector liquidity.

Also, it’s noticeable that the firm is interested in Islamic
Finance, which is a good indicator for investors, because Islamic sources of
finance are less risky than conventional sources.

Excessive reliance on bonds may be bad for investors, with
creditors claiming that the company is at its highest level ever, which is bad
for shareholders.

 

Weighted
Average Cost of Capital

Details

2011

2012

2013

2014

2015

Cost
of debt(RB)

9.78%

6.57%

5.09%

3.74%

3.49%

Cost
of equity (RS)

15.62%

10.22%

10.16%

8.30%

8.08%

Tax
rate

20.04%

16.78%

15.71%

19.44%

12.63%

Debt/Value(B)

61.51%

60.85%

66.61%

68.91%

69.86%

Equity/Value(S)

38.49%

39.15%

33.39%

31.09%

30.14%

WACC

9.62%

6.66%

5.72%

4.16%

4.26%

 

The Company significantly reduced the
average cost of capital from 2011 to 2015 to 2015. The cost of capital ratio of
4.26% is that the company should pay its investors 0.066 billion for each loan
in additional financing.

Having the above WACC, investors and shareholders may be attracted
to such increasing returns but to keep in mind that the rivals in the same
industry might have a better positioned WACC.

However, it’s worth noting that this substantial decrease in WACC
is attributed to the over-reliance on debt through bonds, which is not
satisfactory for a lot of investors who don’t like to take risks through
incurring debt.

There is a large debt burden that will increase the average cost of
capital.

 

Performance of Ooredoo

                       Details

2011

2013

2012

2014

2015

ROA

6.01%

4.00%

3.39%

2.58%

2.44%

Asset/Liabilities

1.6259

1.6434

1.5014

1.4512

1.4313

Working
Capital

1.0112

1.0482

1.2079

0.9643

1.0031

EPS

23.3909

12.6547

10.2814

7.8933

7.1599

Gross
profit ratio

18.71%

14.44%

9.70%

7.47%

7.13%

Net
profit ratio

19.38%

11.26%

9.73%

7.61%

7.13%

ROE

15.62%

10.22%

10.16%

8.30%

8.08%

Quick
ratio

1.01

1.05

1.21

0.94

0.98

Total
assets turn over

31.04%

35.53%

34.86%

33.89%

34.16%

 

We can determine the company’s position and
performance through some ratios that reflect the financial position.

Through the following changes we note that
the return on assets fell from 6.01% to 2.44%, indicating that the company is
dealing with its weak assets and the GP decreased from about 18.71% in 2011 to
7.13% in 2015.

Through working capital we can see the
company’s low liquidity.

 

Company Performance Summary

Overall, the company does not work well,
and is financially unstable, as its performance indicators announce more and
more each year. This lends itself to the fact that the company is struggling to
raise its numbers and needs to come up with something in line with competitors.

However, investors should not give up the
company yet, because they have not finished their plan to develop their
structure and are in line with major telecom technology from around the world,
but the company will flourish again as already already well-known company in
the Gulf Cooperation Council GCC wants to support them.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparison between Etisalat, Ooredoo, and the Telecommunications
industry :

 

Etisalat
Company

 The king of Telecommunications in the Arab
world, however its performance has been fluctuating, which lead to other
companies in the GCC to take the lead, such as STC.

Ooredoo
Company

Is Qatar’s main
telecommunications firm, however it has not been doing as good as it used to
perform, it is worth noting that the customer service of this firm is
considered excellent in comparison with other firms in the industry.

Ratio comparison for the year 2015:

 

Industry average

Etisalat

Ooredoo

GP margin

12%

22%

7%

ROA

2%

7%

2%

ROE

8.50%

16%

8%

NP margin

8%

18%

7%

 

It seems as if Etisalat’s performance is excellent in comparison
with the industry, with all the exhibited ratios exceeding the industry
average.

On the other hand, Ooredoo is performing badly in comparison with
the industry and Etisalat.

 

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