Analysts opt for small Gulf telcos despite profits at majors

• Home markets most profitable
• Stocks are a safe haven
• PIF may sell STC stake

The Gulf’s major former telecom monopolies reported steady first-quarter profit growth and have proved a safe haven for equity investors during market volatility this year.

However, it is their smaller domestic rivals that analysts prefer.

Saudi Telecom Co (STC), the UAE’s e& (formerly and more commonly known as Etisalat), Qatar’s Ooredoo and Kuwait’s Zain are all part-owned by their countries’ respective governments.

The companies have all expanded abroad to varying degrees following the introduction of domestic competition – yet their home markets remain the most profitable part of their operations.

Etisalat’s first-quarter net profit of AED5.35 billion ($1.46 billion) was up 130 percent year on year as it made a gain of AED5.1 billion on its sale of a minority stake in data centre operator Khazna to Abu Dhabi government conglomerate G42.

STC’s first-quarter profit rose 19 percent to SAR3.65 billion ($973 million) as its cost of revenue fell. Ooredoo’s reported quarterly profit growth of 5 percent despite revenue falling slightly as impairments declined.

Zain’s first-quarter profit rose by two-thirds to KWD48.5 million ($158 million), although that increase is more a reflection of a dire prior-year period than a sudden earnings windfall.

“Q1 was business as usual for the major Gulf telcos,” says Omar Maher, a telecoms analyst at EFG Hermes in Cairo.

Telecom stocks were among the Gulf’s best performers in April and May as US president Donald Trump’s erratic tariff policies roiled equity markets worldwide.

STC’s stock was up 7.5 percent this year to June 9, while Abu Dhabi-listed Etisalat (+6.4 percent), Ooredoo (+7.8 percent) and Zain (+1.5 percent) also made gains.

“Telco stocks are a safe haven, providing regular, predictable dividends and modest earnings growth – it’s a defensive sector during periods of uncertainty,” says Nishit Lakhotia, head of research at Bahrain’s Sico Bank.

Abu Dhabi’s stock benchmark is up about 4 percent this year, Qatar’s measure has gained 2 percent and Saudi Arabia’s index has slid nearly 9 percent.

Among the four telecom operators, only Zain has underperformed relative to its main stock index, which has benefitted from a bank-led rally.

Sico’s Lakhotia picks the UAE’s other telecom operator, du, Saudi Arabia’s No.2 carrier Mobily – an Etisalat affiliate – and Zain as his three top Gulf telco stock picks.

Mobily and du operate only in their home markets, while Zain’s performance is improving – especially in Sudan – and it has a specific, guaranteed dividend policy for the next three years and trades at an attractive yield, Lakhotia explains.

“Du is a good proxy for the booming UAE economy,” he says.

Single-country Gulf operators such as du and Mobily provide investors with greater earnings certainty and have resisted the allure of making headline-grabbing but value-destructive acquisitions abroad. 

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Du’s shares have nearly doubled in price in the past two years, yet it still offers a dividend yield of 5.8 percent, according to financial website Simply Wall St.

That compares with Etisalat’s dividend yield of 4.7 percent. Zain’s dividend yield is 8.1 percent and STC’s is 9.8 percent. Ooredoo, whose stock has risen by one-fourth over the past year, has a dividend yield of 5.3 percent.

“We previously picked du and Ooredoo, but both have rallied significantly so there’s not much further upside in either stock for now,” says Maher. 

“STC is trading at attractive valuations, but there’s no catalyst to move its share price higher. Uncertainty over whether the Public Investment Fund will sell a further stake is a major overhang on STC’s stock.”

The Public Investment Fund, Saudi Arabia’s sovereign wealth fund, owns 62 percent of STC and investors are speculating that it may sell some of its holdings to help fund the kingdom’s vast infrastructure projects.