Wednesday, June 15, 2005

Omantel IPO analysis



Folks, it appears like the nation's press have been given a gag order when it comes to the massive Omantel IPO. This is the biggest thing to ever hit our marke and yet I haven't read a single piece of analysis in the local press. All what we get is repetitive flowery pieces about how this IPO is some sort of gift from the government to the people. I'm not here to tell you that it isn't. In fact there's money to be made in this IPO. I did a quick analysis of the IPO prospectus. I've been debating whether to put it on the blog or not- partly because the analysis gets a bit dry and most people will find it really boring. However, I decided that there might be one or two of you out there who might find this interesting. I apologize for the length. Skip to the next topic or wait till the next one if this doesn't interest you at all.

So the whole country now knows what an IPO is

Half a million application forms have been printed for the Omantel IPO. There's a frenzy of people registering new names and accounts at the depository. I heard as many as 2000 names were being a registered a day in the week before the IPO began. A guy at work told me that rich people are going into poor neighborhoods and buying people's names and IDs (i.e. the right to subscribe for shares in their name). The guy who told me was upset at his brother for giving his own ID to a guy against RO. 500 (the guy sold his brother's ID) and now he can't apply for himself.

Omanel was hoping to get about 55,000 applications which would be twice as many as the biggest previous IPO. If that was the case they'd be able to give 3000 shares to each applicant. It now looks like the number of applicants will definitely be much more than that. People are afraid of subscribing for 3000 shares like Omantel advises. Even people who only have enough for 3000 shares are splitting the applications into as many as 5 or 6 names.


But is it a good deal?

The Omantel IPO is definitely a good deal. The question that should be asked is: "how good a deal is it?" That's where things start to get a bit fuzzy. Quite glaringly, Omantel's prospectus doesn't have a single year's revenue projection. Unbelievable, an IPO prospectus that doesn't talk about the future at all. It's 128 pages long and it took me close to 4 hours to read. And yet there's so much missing from it. One thing that's quite obvious, this company has been horrendously mismanaged in the past. Buying into the share, if you're buying as a long term investment, is basically a bet on the current management that they can turn the company into a more efficient organization. In the short term the company's growth will be strained and it's expenses will increase. In it's effort to recruit higher quality staff and to retain their best employees they have been increasing salaries. As a result the company's staff cost has increased 14% last year despite the actual number of employees growing by just 39. In 2005 costs might grow even more because the company is still hiring and it has been promising its staff that it will raise their salaries after the IPO.

Let's be clear about what this IPO is about. It might be called Omantel, but what we're really buying is Oman Mobile, Omantel's 99% subsidiary. Omantel, i.e. the fixed line and internet company, has very little growth potential. In fact, the fixed line revenue is declining and the internet revenue has shown some growth although quite incredibly the number of internet subscribers has actually dropped. Can you believe that. What kind of statement is that about the country, not the company but the country, is it when the number of internet subscribers drops?!! In 2002 there were 44,000 internet subscribers, in 2003 it increased to 51.7 and the year after it dropped to 48.6.

Oman Mobile is where all the growth is at. Presently Oman Mobile contributes about 60% of Omantel's revenue. In the future this will probably increase. We're constantly told that Oman has huge potential when it comes to mobile communications. That mobile penetration is still low despite Oman Mobile having about 900,000 mobile subscribers in a country of 2.6 million of which 60% of the nationals are under the age 16. This is why Qtel paid over $100 million for the country's second GSM license, right? Well there are two ways to measure Omantel's mobile revenue: either gross revenue or average revenue per user (ARPU). If you look at the gross revenue then it's all rosy, 32 million rial increase in revenue in 2004. But if look at ARPU you'd see that for the last 3 years it's been constant. Post-paid users spend about 23.9 rials a month and pre-paid users spend about 13.4 a month. What does this mean? Quite simply that Omantel has been focusing on increasing the number of subscribers but haven't done anything to make those subscribers spend more. For Oman Mobile the days of selling Hayyak kits at the sinful price of RO. 25 are long over. They can kiss that kind of rip-off revenue goodbye. Nawras is now selling SIM kits for RO. 14 which include 14 rials of credit. They're basically giving it away for free. Now that Oman Mobile finally has competition, they have to focus on getting their users to spend more. Talk more. Use more value added services. Send more picture messages. Buy ring tones from Oman Mobile's portal, etc. Just selling SIM cards and packages isn't enough. Now Oman Mobile has to transform itself. They need content managers and partners.

And Omantel needs to get working on their billing and collections system pronto. OIFC, the company that takes care of Omantel's billing and factoring, made RO. 11.2 million in commission just from collecting and factoring Omantel's bill payments. I'm sure the people in Omantel's finance department are thinking "how much it would cost us to do it on our own and do away with OIFC? can't be 10 million a year, that's money for us to keep."

Enough of the mumbo-jumbo, how much will I make?

The shares are priced at RO. 1.28 each. Some people are dreaming that they'll soar to 4 rials. That's not very likely, although it's not impossible. It may go that high based entirely on speculation but the analysis says that's way too optimistic. One thing's for sure, the share is definitely being offered at a discount by the government. Omantel's shares are priced on a 13.2 P/E ratio. In other words if you divide the price per share over the earnings per share, you get 13.2 multiples. In the world of telecoms stocks, this is considered cheap. This is considered a discount because if you look at the P/E ratio for other listed telecom companies in our neighboring countries you'd find that they are all trading at much higher multiples. The UAE's Etisalat was trading last year at as high as 44.1 P/E. Batelco went at 19X, Saudi Telecom 25.7X, Jordan Telecom 30X, and Qtel at 19X.

In 2004, Omantel's earnings per share (EPS) was 0.097. Hence, if the price shoots up to an Etisalat-like multiple of 44X then yes, a price of RO. 4.268 is possible. But if it goes to a more reasonable multiple like Batelco and Qtel it will be just RO. 1.8. If, 2005 expected EPS is 0.099 and the P/E goes to 20, then a price of close to 2 rials is possible. However, most people seem to think that RO. 2.6 is the most likely post-IPO price. That's a 26X P/E ratio and definitely not impossible, especially since National Bank of Oman traded at a P/E greater than 46 last year even though it was making losses. However, most blue chip stocks in in our market are all trading below 20X.

You must also keep in mind that in the first 90 days of trading the share will be restricted to Omanis only. Many people believe that after the 90 day period ends, many Gulf investors will come into the market to buy Omantel shares. Gulf investors have a bigger appetite for higher P/E companies because their own shares are now more expensive. For that we'll have to wait and see. But speculators who believe that GCC investors are willing to pay up to RO. 4 for the share have stated their intention to buy from the market in the 2 rial range during the 90 day restricted period.

Conclusion

It is extremely unlikely that anyone will lose their investment. The minimum expected upside is about 500 baisas a share and that's a more than decent 40% return on your investment. There is potential for even 100% return.

If you invest try to spread your applications in as many names (spouse, kids, siblings, etc if they're not investing themselves). Don't get greedy, and don't sell to quick either.


Postscript: I read in another blog that there's been a fatwa decreeing that the Omantel IPO is not a halal investment. The fatwa is based on the fact that the company places its revenue in bank deposits and earns interest on them. In fact in some years Omantel makes as much as RO. 1 million just from interest. To some this taints the income and makes it haram. If you think this is haram, don't invest. More shares for the rest of us to have.

24 comments:

muscati said...

Talk about double- and triple-dipping.

Omantel is 100% owned by the government, hence its entire profit is paid as dividend to the government. However Omantel's net profit took a huge hit in 2004 which was not announced to the public until the IPO prospectus came out last week. It turns out that since the establishment of the TRA (telecoms regulatory authority), the government has been double taxing the company. Here's how: The TRA charges a royalty of 10% on the gross revenue from fixed line telephony and 12% on the gross income from mobile telephony. That alone results in a steep 31.6 million rial haircut right off the topline. Then the TRA charges about RO. 2 million as a license fee. Once Omantel nets off all its expenses and comes out with a net profit, the taxman comes in and takes a further 12% as corporate tax. The amount that's left is what the company pays as a dividend to the government.

Quite amusingly, not only does the TRA take a huge royalty, Omantel is also obliged to pay a share of the TRA's operating expenses. Now why would an agency that gets an income of over 30 million rials from Omantel need them to participate in their operating expense. Simple: because the royalty goes from the TRA straight to the treasury. In other words while the three different government bodies take fees/royalties/taxes from Omantel, all the money ends up in the same place in the country's treasury.

Blue Chi said...

I think that the number of internet subscribes decreased due to the introduction of the prepaid internet cards. The decrease in the number of 'subscribers' does not necessarily mean a decrease in the profit made I assume.

illogicist said...

Interesting point Blue Chi. I wonder if theres figures available for pre paid net cards.


I hope my dad is currently buying some of this stuff...

muscati said...

Blue_chi and Z - Regardless of the pre-paid internet cards, the drop in internet users is still shameful.

Anyhow, all that doesn't matter. Internet revenue all together is like RO. 8 million out of the total revenue of well over RO. 200 million. Maybe that's why Omantel doesn't give a damn about it.

In developing countries like Oman, the government needs to set national connectivity targets. It can't be left to just the telecom companies.

Sowhat said...

really nice analysis Muscati thanks alot ..

i would like to add one point .. that many ppl specially from Gulf countries ( particaly about kuwait ) are asking omanies to buy shares on their behalf so they can transfer them to them self after the restriction period .. and am not talking about some one who dont have the enought liquidity to do so am talkign about BIG SHOTS who would like to invest millions to gain millions .. some would even pay for the omanies for using his name to buy the shares .. how much does that cost here in oman but they usually pay around 50 in the begigng and around 100 before the closure to single person to buy shares under his/her name .

thanks for the analysis :)

aqualung said...

you talk about the fixed line business not co tributing to growth - is there a risk that it can contract earnings? where does Omantel record international call earnings? those (TAR's) have colapsed in the rest of the world, will that happen later on in Oman? Also Omantels ARPU's at >50 dollars are among the highest i have seen - that could collapse in 3-4 years to 30$....so may be it is trading at some 40 times future PE. finally you say that Qtel has paid the govt 100mUSD... have they? or have they just promised to invest that in Oman - big difference - because one is a productive investmet and the other is not.

Arabian Princess said...

Very intresting analysis muscati ..

regarding internet subscribes, is ADSL & ISDN included in that number?

muscati said...

aqualung- I am not a telecom expert, nor do I have access to any research on this field. All I have is the prospectus which I read very quickly once and wrote my comments. I think all international calls in Oman are presently routed through Omantel, even the second mobile phone company, Nawras, routes their calls through Omantel. I think this is a very important area of concern. And Omantel must be very concerned about this, or else why have they blocked Skype?

The ARPU. Oman has very low purchasing power. I am sure if Omanis are spending an average of $50 a month on mobile calls then it must be much higher in the UAE and other GCC countries.

Qtel was involved in a bidding war with a Kuwaiti telecom (not sure if it was MTC or Wataniya) and they did indeed pay an upfront cash license of over $100 million.

Arby - the number includes every single internet account in oman regardless whether it's dial-up, ISDN or ADSL. But the number of ADSL users will be low because the figure is for year end 2004 and ADSL wasn't launched officially until December 2004.

Devilish said...

Excellent analysis. I’ve heard that 60k applicants already subscribed to Omantel IPO ! am not sure if its an exaggerated figure or actual.

muscati said...

Devilish - I doubt that 60K applications have been already received, although that number could be true. They estimate that the total applications would be anywhere between 100 and 200K. So if it's 60K in the first week then the total number will definitely be well over 250K in the end since most people wait till the last week before they apply. But when I went to give in my application yesterday the branch I went to said I was the first application they received since the IPO began on Saturday.

I heard that although 500K application forms were printed they are being distributed in stages. Every branch of every bank is sent about 500 to 1000 applications a day (depending on branch size). They don't want people to come in and just grab 100 application forms each. They're making it difficult so that people only take the exact number that they need.

Kazablanka said...

ok I know this is off the subject but is OceanDream ok?? did she have the baby yet?? I can see that she hasnt posted an entry in a while.. I hope shes alright... is she nervous?? Tell her am praying for her.

see this is why u guys need a shoutbox so i dont ruin your posts with unrelated stuff..

muscati said...

The mega initial public offering (IPO) of the state-owned Omantel has mobilsed nearly RO11 million in just one week.

The IPO, which opened for subscription on June 11, 2005, so far has received 9,786 applications.
(from today's Times of Oman)

11 million divided by 9.786K, that comes out to RO. 1124 per application which is like 880 shares per application. I assume people are dividing their subscriptions into lots of around 1000 rials each and putting it in different names.

Devilish said...

am surprised that only 11 million was mobilized in the first week !

muscati said...

The mega initial public offering (ipo) of the Oman Telecommunications Company (Omantel) has been evoking good response ever since it opened for subscription on June 11. The company has raised RO 32.9 million in the first two weeks from 29,999 investors, said an official at the Capital Market Authority (CMA). (Oman Observer today)

That's an average of 889 shares per application. The trend's continuing.

So that's 10,000 applications in the first week and 20,000 in the second week. Think it'll go to 40,000 in the third week and 80,000 in the last week?

muscati said...

Last week the president of the capital markets authority issued a circular to all collecting banks telling them not to accept applications from anybody bringing papers relating to non-family members. The circular even states that you can only give applications on behalf of your parents, spouse or kids.

With all respect to His Excellency, does the president of the CMA have any authority over banks in the first place to tell them who to accept forms from?

muscati said...

Sources told Times Business that the IPO, which is the largest in the history of Omani capital market, has mobilised RO61,561,072, in less than 20 working days, that is, from June 11 to June 30, 2005. Though the issue is open from June 11 to July 10, now only six working days are left for investors to subscribe to the issue. The IPO, which opened for subscription on June 11, 2005, has received more than 56,230 applications for 48,094,588 shares till June 30. [Times of Oman today]

It's following the previous trend. 11 million rials the first week, 22 million the second week and now and now close to 30 million the third week.

You think it might double to 60 million this week? If that's the case then they'll still be short by Saturday and will need to make 70 million on Sat and Sun just to complete the subscription. However, in previous IPO's as much as 80% of applications came on the last 2 days. Today I was at a bank making a deposit and the guy infront of me had 50 Omantel IPO applications for between 500 and 600 shares each.

muscati said...

ارتفعت أعداد المكتتبين في أسهم الشركة العمانية للاتصالات (عمانتل) مع نهاية يوم امس الاول الى 72.645 طلبا بلغت قيمتها الاجمالية 85.09 مليون ريال عماني حسبما ذكر مصدر مسؤول بالهيئة العامة لسوق المال ونفى المصدر ان يكون هناك تمديد لفترة الطرح الى ما بعد التاريخ المحدد سابقا وهو 10 يوليو الجاري

For all the doubters who thought it will not get fully subscribed: that's about 24 million rials in two days.

muscati said...

Heard last night there was a single application for 37 million rials on either Wed or Thur. Heard also there might be a couple more this size on Saturday and Sunday. Now estimates are for a final subscription of RO. 300 million. However it is expected that the allocation of 3000 shares per application will remain. In fact someone says it's going to be 3000 shares minimum plus 10%.

muscati said...

RO. 700+ million, of which around 450 million came in the very last day!

167,000 applications.

620 million rials of individual applications and only 80 million rials from pension funds. Unbelievably, the pension funds undersubscribed.

Allocation still unknown. The government wants all small investors to get their full amount up to 3000 shares, but they still haven't figured out how.. and they don't want to piss of the big fish who applied for up to 37 million shares (some in multiple applicationa of 37 million each!).

Devilish said...

""(some in multiple applicationa of 37 million each!)""

ummmmmm alot of Msakeen/poor ppl in the counrty it seems !

muscati said...

The Arabic daily Oman newspaper yesterday quoted a source from the CMA saying that there's a possibility that the allocation could be announced before the end of the current week and the listing might come earlier than originally scheduled.

Also, the CMA will extend trading hours in the securities market and the share will be allowed to float for 5 days instead of the usual 3 days.

People are now back to gossiping about the possibility that the share might go to 4 or even 5 rials.

muscati said...

How come whenever we hear about a bank screwing up in an IPO collection it's always OIB? They did it with Dhofar Power and now they're at it again with Omantel. Earlier in the week the CMA said they might list Omantel's shares early. But then by Wednesday it turned out that OIB was late in giving in their collections. From yesterday's Oman newspaper:

انتهاء مهلة تسليم بيانات المكتتبين ف أسهم (عمانتل)


أعلن مصدر مسؤول بشركة مسقط للايداع والتحويل ان الشركة انتهت من استلام بيانات المكتتبين في الشركة العمانية للاتصالات «عمانتل« حيث كان يوم امس آخر موعد لاستلام البيانات من البنوك وذلك حسب نشرة الاصدار.
وأضاف المصدر في تصريح لـ«عمان«: إن البنوك قد قامت بتسليم كشوف لبيانات ابتداء من مطلع هذا الاسبوع حيث قامت كافة بنوك الاكتتاب بتسليم بيانات المكتتبين ما عدا بنك عمان الدولي الذي سلم بياناته الأولوية صباح يوم أمس ولكن مع وجود بعض النواقص حيث طلبت الشركة من البنك القيام باستعمال هذه النواقص تمهيدا لاجراء عملية تخصيص الأسهم ومن ثم ادراجها في سوق مسقط للأوراق المالية.
و

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Inayatullah said...

Dear Sir

I have good Skills of these Dept: BSS, Transmission and RF ,Also I have no issue of salary depand on my job perfomance give me, any whr globly i will relocate just give me one chance,

I would appreciate an opportunity to talk with you about potential career opportunities with your company. With my specialized background in Telecommunication, I am certain that I can make a strong contribution to your organization.

I hope you will call or write soon to suggest a time for personal interview. I believe my talents and experience is a great match for your needs and I'd like a chance to demonstrate that. And am willing to relocate any where in the country or Globally. Thank you for your consideration.
I have no any issue ..........



Sincerely,
Inayatullah Bhutto.

+92 345 3881993