As Middle Eastern and African economies witness a period of unprecedented economic development that is fuelling governmental and consumer spending, the telecom industry presents investors with a unique opportunity to capture this growth. With mobile penetration rates in the region well below the global average, it is no surprise that the Middle East and Africa are commonly referred to as “frontier markets”. As well as being relatively untapped, the unique blend of growth and profitability that the markets in the region offer adds impetus to the investment case.
As the industry matures, and as greenfield opportunities become increasingly limited, many operators are taking advantage of their solid financial standing to fund acquisitions to capture growth beyond their national borders, resulting in a re-rating of valuations across the sector. The sector’s underperformance so far this year compared to other areas has resulted in it trading at a discount. The underperformance, coupled with the high financial outlook for the second half of 2008, has led to an increase in performance expectations. With a unique opportunity set that combines value and growth, the telecom sector is well positioned to exhibit robust growth in the medium term.
Africa is the world’s single fastest-growing mobile market. According to ITU’s African Telecommunications ICT Indicators 2008 Report, the continent has the highest annual growth rate in mobile subscribers and added approximately 65 million new subscribers during 2007. At the beginning of 2008, there were over a quarter of a billion mobile subscribers on the continent and it is forecasted to pass the magic 50% mobile penetration mark in 2009. Analysts predict there will be more than 690 million mobile subscribers in Africa by 2013 — highlighting the unique market opportunity. If we examine the MENA region, it underscores the opportunity that exists. Morgan Stanley predicts that MENA subscribers will increase by 24% in 2008 to 240 million and a further 17% in 2009.
Increased subscriber numbers are not the only indicator for significant growth to come. Analysts are also predicting an increase in the already high average revenues per user (ARPU) rates across the region and in particular the GCC. High ARPU is a catalyst for telecom companies to invest in other markets like Africa, in turn creating growth opportunities in those countries. The UAE’s leading telecom operator, Etisalat, is not only investing in cash-rich companies in the GCC, but has also acquired stakes in telecom companies in Egypt, Nigeria and Sudan.
The era of the monopoly has come to end with a wave of liberalization across the region. There are at least two telecom operators in all countries across the MENA region, and in some places three. Greenfield licenses are not being issued and the value of an existing license has therefore vastly increased. This scarcity premium is re- rating the value of existing telecom assets which is in turn fuelling an increasing number of mergers and acquisitions. Zain obtained the most expensive GSM license ever globally, by spending $6.1 billion for KSA’s third mobile license. South Africa’s MTN bought Dubai-based Investcom for $5.5 billion in 2006 — becoming the largest operating group in the Middle East and Africa with 40.75 million subscriptions by June 2008 through its operations in 21 countries in the region. MTN also launched Iran’s second network, Irancell, in the third quarter of 2006 and is now in talks with India’s Reliance Communications ltd. to forge a partnership.
Regional regulators are demanding that telecom operators awarded new licenses issue an initial public offering (IPO) on the local exchange — most recently evidenced by Vodafone in Qatar. This brings with it higher profit margins for not only the telecom operator, but also investors.
March 2008 also saw the launch of the much anticipated Kenyan Safaricom IPO — East Africa’s largest ever listing with 10 billion shares on offer to investors. The IPO was oversubscribed by 532% in the first two days and on the first day of trading (June 9, 2008) shares soared as much as 60%, illustrating strong appetite for the sector.
In the last eight months, telecom indices in African & Middle Eastern markets have significantly underperformed indices for the respective markets. For example, telecom indices in Saudi Arabia, Egypt and South Africa have lost 17.9%, 8.59% and 5.1% respectively during this period, while their overall markets have gained 10.3%, 3.3% and 10.2%. With telecom companies reporting strong earnings growth across the board, a reversal of this trend is expected in the second half of 2008.
In a July report titled ‘Be Brave and Buy’, Merrill Lynch analyzed the global telecom sector and concluded that strong fundamentals and continuing growth make the sector extremely appealing. Moreover, the Middle East and Africa were highlighted as the fastest growing regions in the world. The report also highlighted the significant underperformance of telecom indices relative to MSCI World and MSCI Emerging Markets. In terms of valuations, the report emphasized the attractive multiples across the industry as a compelling reason to invest.
As global investors seek a way to tap into the MENA’s frontier markets, the telecom industry presents a unique proxy to capture the regional growth. The industry offers a chance to invest in a growth market that trades at a deep discount to other sectors and markets.
Hashim Omran is the vice president of EFG-Hermes Asset Management.
