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Moody’s: Stable Outlook for GCC Integrated Telecoms Industry

Global Arab Network - - George Haddad

Monday, 26 October 2009 10:56

The outlook for the integrated telecommunications industry in the Gulf Cooperation Council (GCC) countries remains stable, as companies continue to demonstrate above-average credit metrics, clear conservative financial policies and solid liquidity backed by strong cash flow generation, says Moody’s Investors Services in a new report. Furthermore, the industry is expected to benefit from moderate positive revenue growth and a benign regulatory environment. The report, entitled "GCC Integrated Telecommunications Industry: Industry Outlook," expresses the rating agency"s expectations for fundamental credit conditions in the industry for the next 12-18 months.

Moody’s recognises that the integrated telecoms industry in the GCC is changing, not only due to the recent economic crisis, but also due to more open markets, increasing competition and nearly saturated penetration rates. "Intensifying domestic competition will negatively affect profitability and market share; however, Moody’s expects the incumbent GCC integrated telecoms companies to retain their leadership positions and EBITDA margins to be in excess of 50% in the medium term," says Martin Kohlhase, an Assistant Vice President-Analyst in Moody’s Corporate Finance Group.

Furthermore, expansions abroad have intensified to help increase revenue bases and diversify cash flow streams. Indeed, GCC operators have recently engaged in rapid and significant international acquisitions to compensate for the loss of monopoly positions and increasing domestic penetration rates. Most companies are expected to remain acquisitive over the medium to long term, and M&A activity is likely to comprise mostly small to medium-sized acquisitions in emerging markets in the next 18 months. "Moody’s expects the companies to maintain their conservative financial policies and to continue to conservatively manage their capital structures, which supports a stable outlook," adds Mr. Kohlhase. "Furthermore, if a large acquisition were to be undertaken, Moody’s believes that its funding mix would include a form of support from government-majority shareholders."

Moody’s notes that most of the rated GCC issuers have solid liquidity profiles and have been able to generate solid cash flows that cover capital spending, which is expected to continue in the medium term. "Moderate revenue growth for mobile telecoms services coupled with acceleration in the provision of data, broadband and other value-added services should also help the operating margins of GCC integrated telecoms companies stay well above their global peers – despite potential margin dilution arising from the consolidation of lower-margin foreign subsidiaries," explains Martin Kohlhase.

Furthermore, the regulatory environment in which the companies operate is expected to remain benign. Moody’s understands that regulators across the GCC, which were established to implement competition at a national level, are willing to ensure a smooth transition that will create a balance between firmly establishing new entrants and preserving operators" historical interests. Therefore, a threat from aggressive or restrictive policies is remote.

Moody’s believes upgrades are unlikely at this time due to the already high level of standalone creditworthiness of the rated issuers. However, negative pressure on the rated GCC telecoms operators could develop due to (i) loss of market leadership that leads to EBITDA margins to levels well below 50%; (ii) debt-financed acquisitions or investments that place leverage close to or above comfort levels for an extended period of time, affecting cash flow and coverage metrics; and/or (iii) a significant reduction in government ownership and indications of lower implicit government support. Furthermore, rapid loss of market shares along with severe margin deterioration could lead to a revision of the outlook for the industry to negative.

Moody’s currently rates three integrated telecoms service providers in the GCC region: Qatar Telecom S.A. (A1/stable); Emirates Telecommunications Company (Aa2/stable); and Saudi Telecom Company (A1/positive).

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