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.
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.