Worst is over for Etisalat shares but don’t expect a rebound

Zuma Press/Alamy via Reuters

• Stock price has dived since 2022
• ‘Everything negative is priced in’
• Concerns remain over expansion

Shares in UAE blue-chip e& – more commonly known as Etisalat – have fallen by more than half from a 2022 peak as investors fret over difficulties related to some of the telecom operator’s foreign investments. Yet analysts believe these issues are now priced in and so the worst should be over for the stock.

Etisalat is the UAE’s former telecom monopoly. The company generates 58 percent of its revenue from its domestic consumer telecom business, although it operates in 32 countries including Egypt, Pakistan and Morocco.

Etisalat has sought to diversify further, both geographically and in its activities, borrowing heavily to buy a 14.6 percent stake in British telecom major Vodafone for an estimated $5.9 billion and spending $400 million on a majority stake in ride-hailer Careem’s so-called super-app.

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Etisalat also acquired stakes in other companies such as streaming service Starzplay Arabia and lending platform Beehive.

“Local investors value dividends a lot more than a company doing M&A deals,” says Rohit Modi, a vice president and analyst at Citi in London.

Etisalat’s share price performance underlines this view, with its stock down 56 percent from an April 2022 high of nearly AED38 ($10.35). It ended Wednesday at AED16.76, although it has rallied from May’s four-year low of about AED15.

Etisalat did not respond to requests for comment.

Part of the decline reflects difficulties at subsidiary Maroc Telecom, which must pay AED2.3 billion ($626 million) to Casablanca’s Wana Corporate after losing a court appeal. This penalty is slightly less than Maroc Telecom’s 2023 annual net profit of MAD6.2 billion ($632 million).

Etisalat is also nursing a paper loss of about $2 billion on Vodafone following a sustained decline in the London-listed company’s stock.

“The worst seems to be over in terms of pressure on Etisalat’s share price – everything negative is already priced in from here,” says Nishit Lakhotia, head of research at Bahrain’s Sico Bank.

Yet Etisalat’s stock may struggle to mount a significant rebound, with earnings growth in low single digits and its dividend yield relatively unremarkable compared with norms for Gulf blue-chips.

• Telcos turning to tech to propel growth
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Citi has a neutral rating on Etisalat and a target price of AED17.40 per share. Modi says the rating was largely a result of the competitive and commercial pressure on Maroc Telecom and concerns that Etisalat may buy stakes in other telecom operators abroad.

“Etisalat expanding its geographical footprint further doesn’t make any financial sense,” Modi says.

“In Egypt, inflation remains high and if the regulator doesn’t allow Etisalat to raise prices further its earnings will only grow in line with inflation.

“Etisalat Egypt has very high investment requirements to expand its network in what is an underpenetrated market.

“Investing in emerging markets carries significant foreign currency risk while investing in telecom operators in developed markets offers slim growth prospects.”

Muscat’s Ubhar Capital is more bullish on Etisalat, giving it a buy rating and a target price of AED23.1.

“There had been uncertainty over Etisalat but now its outlook is clearer which drives our investment case for the stock,” says Neetika Gupta, Ubhar Capital’s head of research.

Etisalat reported a 25 percent year-on-year rise in second-quarter net profit to AED3.17 billion, although this increase was largely the result of beneficial changes to the taxes the company pays as operating expenses grew more than revenue.

Quarterly revenue from its domestic telecom business rose 5 percent year on year to AED8.2 billion, while revenue at its international division grew 1 percent over the same period to AED5 billion. The latter includes Maroc Telecom and its Egypt unit, which reported quarterly revenue declines of 1 and 8 percent respectively.