Qtel Update 082006 Global

8/8/2019 Qtel Update 082006 Global

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Reuters Code:

QTEL.QA

Listing:

Doha Securities Market, Abu Dhabi, Bahrain & London Stock Exchanges

Current Price (As on August 10th, 2006):

QR242.4

August, 2006

BUY

Qatar TelecomConnecting home turf at rapid pace

Qatar Telecom 1

Global Research - Qatar

Q

atar

mar M. El-Quqa, CFAxecutive Vice President

[email protected] No:(965) 2400551 Ext.104

hailesh Dash, CFAead of [email protected] No:(965) 2400551 Ext.196

handresh Bhattnior Financial [email protected] No:(965) 2400551 Ext.270

mit Tripathynior Financial Analyst

[email protected] No:(965) 2400551 Ext.269

Mihir J. Marfatianancial [email protected] No:(965) 2400551 Ext.421

Investment Update

Investment Summary

During FY2004 and FY2005, Qatar Telecom (Qtel) performed more or less in line with

our estimates made earlier in the initial research in October 2004, with variations (actual

v/s projection) of -4.7% in total sales, -6.8% in EBITDA and 0.7% in net profit for

FY2004 and FY2005 witnessed variations of -3.8% in total sales, -8.6% in EBITDA and

-7.4% in net profit.

The consolidated revenue of Qtel stood at QR2,982.4mn at the end of FY2005, which was

an increase of 27.1% from that reported at the end of FY2004. Its EBITDA margin declined

to 59.4% in FY2005 from 65% in FY2004, which was mainly due to the consolidation

effect for Nawras Telecom, which had negative EBITDA. With a y-o y growth of 16.1% in

FY2005, Qtels consolidated EBITDA was at QR1,771.6mn as compared to QR1,525.3mn

in FY2004.

In FY2005 the companys net profit margin (on consolidated basis) declined to 39.9% from

63.1%, which was mainly due to the royalty payments for Qatari and Omani operations and

also due to loss registered under Nawras Telecom. The companys consolidated net profit

stood at QR1,190.4mn at the end of FY2005 as compared to QR1,479.4mn in FY2004.

Over the last few years GSM penetration rate has been rising rather steeply in Qatar,

which went up from 51% in 2003 to 85% in 2005.

Over 2002-2005 Qtels GSM subscriber base grew at a CAGR of 39%, during 2005 it

added 225,811 new customers with total subscriber base reached to 716,763. At the end

of June 2006, the GSM subscriber base increased further by 94,265 to reach 811,028.

Over the last few years, Qtel has been enjoying the highest blended ARPU (Average

Revenue Per User) in the region, though it has been declining over the years. Its monthly

blended ARPU declined to QR213 (US$58.5) in 2005 from QR236 (US$64.8) in 2004.

Qtels fixed line subscriber base grew at a CAGR of 5.2% over 2002-2005 and ended the

year 2005 with a subscriber base of 205,386, adding 14,510 new customers during the year.


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Global Research - Qatar Global Investment House

2 Qatar Telecom

In March 2005, Nawras Telecom, which is a consortium led by Qtel, Tele Denmark

Communications (TDC) of Denmark and private Omani partners, launched its GSM

services in the Sultanate of Oman.

The market response to Nawras has been extremely well and in just one year of its launch

it achieved a market share of 22% with customer base of 320,282. At the end of June

2006, its market share increased further to 25% with subscriber base of 394,080.

During 1H 2006, Qtels consolidated revenue increased by 50.3% on a y-o-y basis to reach

QR2,033.5mn and its net profit registered a y-o-y growth of 48% to reach QR858.2mn.

The key risks to our recommendation are a) widening scope of regulations by regulatory

authority in Qatar which could impact growth adversely b) liberalization of telecom

sector and scope of liberalization, and c) introduction of new competition in the form of

a second mobile operator in Qatar.

We maintain our earlier Buy recommendation and revalue the companys stock at an

intrinsic value of QR284 based on the Discounted Cash Flow Method and Peer Group

Valuation Method. The stock currently trades at a discount of 17.2% as compared to the

intrinsic value.

Table 1: Investment Indicators

Price (QR)

(as on August 10, 2006)

Shares in issue Market Cap

(QR bn)

52-week High/Low

(QR)

242.40 100 mn 24.2 260.7/195.5

Year EBITDA

(QR 000)

Net Profit

(QR 000)

EPS

(QR)

BVPS

(QR)

ROAE

(%)

P/E* P/BV*

2007 F 2,969,406 2,258,324 22.6 57.3 37.5 10.7 4.2

2006 E 2,619,342 1,745,819 17.5 46.0 36.6 13.9 5.3

2005 A 1,771,634 1,190,447 11.9 38.6 29.6 18.5 5.7

2004 A 1,525,325 1,479,432 14.8 33.0 45.1 13.5 6.0

* Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on

market price in the Doha Securities Market as on August 10,2006.

Source: Qtel andGlobalResearch estimates

Exhibit 1: Share Price Performance Chart

Source: DSM & GlobalResearch

1200

1000

800

600

400

200

0

400

350

300

250

200

150

100

50

0

Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06

Global Qatari General Index Service Sector Index Qtel

Index

QatarTelecomSharePrice

(QR)


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3Qatar Telecom

Telecom Sector in Qatar

Qatar telecom market is characterized as monopoly in nature since Qtel is the only player

providing whole range of telecommunication services in the country. Therefore, Qtel isoperating in an environment which is free of competition. However, we believe that since

Qatar is committed towards the WTO, it will open up its telecom sector partially with the

opening up of the GSM segment. Therefore, going forward we believe that Qatar will have

a duopolistic market structure for GSM operations from 2007 onwards with the advent of a

second GSM operator. Since the Qatari market is catered to only by Qtel, any further mention

of the market pertains to Qtels market share only.

GSM Segment

Qatars GSM market is characterized by exponentially high growth rate in penetration levels

and high ARPU (Average Revenue Per User) levels due to the high level of per capita GDP.

Penetration Rate

Over the last few years GSM penetration rate has been rising rather steeply in Qatar, which

went up from 51% in 2003 to 85% in 2005. We believe that during next year Qatar will

open its telecom sector partially by allowing a second mobile operator. Therefore, going

forward we believe that Qatars GSM segment will have a duopoly market structure from

2007 onwards with the advent of a second GSM operator. Till then Qtel will keenly focus

on market penetration to have a larger market share as it has already geared itself to face

competition especially in the GSM segment.

Exhibit 2: Market Penetration & Growth in Subscribers

Source: Company Annual Report & GlobalResearch

As a result of the various initiatives taken by Qtel, till the end of Q1-2006 the penetration rate

has gone up to about 90%. Going forward we believe that as a part of Qtels aggressive focus

on promotional campaigns and value added services there will be a faster growth in GSM

penetration level, which is what the Q1-2006 figures are indicating. During the year 2006

under the monopoly market environment, we expect the penetration levels in Qatar to reach

105%. With the likely opening up of the sector in 2007, we expect the penetration level to

reach around 115% and for the years 2008 and 2009 it is estimated at 120%.

Growth in Subscribers

Over 2002-2005, Qtels subscriber base grew at a CAGR of 39%. During 2005, it added

225,811 new customers taking the total subscriber base to reach 716,763. Over a period of

1,500,000

1,200,000

900,000

600,000

300,000

-

150%

100%

50%

0%2003 2004 2005 2006F 2007F 2008F 2009F

Subscribers Penetration

120%120%115%105%

85%

66%

51%

Going forward we

believe that Qatars

GSM segment will have

a duopolistic market

structure.


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4 Qatar Telecom

time launching of new and innovative customer packages with heavy promotional campaigns

resulted in significant growth of customers under prepaid category. Qtels prepaid customer

base has seen strong growth in 2005, a 58% increase over the last year which brought the tally

of prepaid customers to 560,123. Qtels postpaid subscriber base grew at the rate of 15% in2005 to reach 156,640. With this the customer segmentation between prepaid and postpaid

changed to 78:22 in 2005 from 72:28 in 2004. In 1H-2006, the GSM subscriber base increased

further by 94,265 to reach 811,028. Going forward, we believe that the customer segmentation

will skew more towards the prepaid segment and the Asian Games at the end of this year in

Qatar will increase tourist traffic and further boost the prepaid segment. Beyond 2007, with the

advent of competition, there will be a dramatic rise in the prepaid segment of GSM market.

During the current year and also in 2007 we believe that Qtel will aggressively try to increase

its GSM subscriber base. Going forward, with the likely opening up of the sector in 2007,

Qtels market share is projected to fall to 95% and 90% in 2007 and 2008 respectively.

Trend in ARPU

Monopoly market condition has resulted in rather high blended ARPU in Qatar. Over the last

few years, Qtel has been enjoying the highest blended ARPU in the region, though it has been

declining over the years. Its monthly blended ARPU declined to QR213 (US$58.5) in 2005 from

QR236 (US$64.8) in 2004. Going forward we expect that declining trend in ARPU is likely to

continue as Qtel will focus on capturing the market before the onset of market liberalization.

Upgrading Technological Platform

In 2005, Qtel had the trial run for the launch of 3G (Third Generation) in 2006. 3G represents

the most advanced mobile services, which enhances the mobile experience of customers

through applications such as video calls, video messaging and video mailbox including live

and recorded streaming, breaking news, sports events and video-based alerts. 3G mobile

services to be offered soon by Qtel, will cover more than 85 per cent of Doha and major

cities of Qatar by the end of this year. The company also plans to offer e-mail facilities to

subscribers while on the move.

Expanding Product Range

In 2005, Qtel launched TETRA (Terrestrial Trunked Radio) mobile radio network. It enables

communication within close groups without the necessity of using GSM services. TETRA offers

reliable voice and data digital communications within Talk groups. Talk Groups allow

TETRA users to talk one-to-one or over 1,000 people at the same time. It helps organize and

streamline communications which are integral to the organizational, operational and logistical

aspects of any major event. The service was launched specifically to meet the needs of the

3rd West Asian Games held in Doha in December 2005. The company will have commercial

launch of this service later this year. The company finds it appealing for the Oil & Gas sector.

Qtel also launched state-of-the-art Remote Locations services (Wireless Local Loop) that

uses Broadband Point-to-Multipoint Radio technology to provide nationwide telephone and

Internet services to customers who reside outside Qtels wired network. Qtels customers

living outside Doha with no wired network coverage like remote residential areas, farms,

chalets and even companies site offices can now avail fixed line and internet services on

one connection. Remote Locations services will allow customers to use the connection

simultaneously for both normal fixed lines and Broadband services. This technology ensures

Declining trend in

ARPU is likely to

continue


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5Qatar Telecom

that Qtels network spreads across the entire nation, even to the most remote regions in

Qatar. With Remote Locations services, customers have access to fixed telephony and

internet services that offer superior quality and reliability similar to Qtels wired network. It

also provides all telephony value-added services including Caller ID, Call Forwarding andCall Barring. The Broadband Internet services offered through Remote Locations services is

similar to barQ (brand name of Qtels internet service), the high speed Internet access that is

up to 10 times faster than existing Internet dial-up connections. It has the ability to provide

Internet speeds of 512Kb/s and 1 Mb/s.

Fixed Line

The fixed line segment remained dormant over the last few years as it has been growing at a slow

pace in Qatar. The penetration rate has been rising marginally and hovered in the range of 25%.

Over 2002-2005 subscriber base under this segment grew at a CAGR of 7.9% and ended the year

2005 with a subscriber base of 205,386, adding 14,510 new customers during the year. However,

this growth rate is more or less in line with the growth rate in the GCC region as a whole.

Qatar is witnessing rapid expansion in its economic activities. Several new projects are

coming up in different sectors, which will lead to expansion of various business sectors.

The increase in economic activities will increase the need for fixed line telephony. Fixed

line ARPL (Average Revenue Per Line) declined from QR280 in 2004 to QR273 in 2005.

Going forward we believe that there will be further pressure on fixed line ARPL, however,

we continue to believe that volume will grow substantially driven mainly by the growth in

lease lines and also due to dial-up internet connections.

Internet

In the last two years internet penetration level in Qatar had grown at a faster pace as compared

to earlier years. The penetration level, though stands in single digit, had gone up to 6.8% in

2005 from just 2.8% at the end of 2002. The internet subscriber base grew at a CAGR of 40%

during the period 2002-2005. The y-o-y growth in subscriber numbers was robust in 2005

at 45% as compared to the previous years growth rate of 30%. At the end of 2005 internet

subscribers were at 53,033 as compared to 36,588 at the end of 2004.

Qtel provides internet services based on ADSL (Asymmetric Digital Subscriber Line)

technology to provide unlimited 24-hour internet connection with high-speed downloading.

Unlike dial-up internet access, ADSL remains operational without blocking a subscribers

telephone line. In this segment Qtel now offers 2 Mega Bytes ADSL access, branded barQ

for business and residential users.

During 1H-2006, the company witnessed significant y-o-y growth of 35.3% and 15.1% y-t-d

growth in internet subscriber base which increased to 61,062, indicating a growing internet

culture. Going forward, we believe that there will be a substantial expansion in the internet

subscriber base in the country.

Cable Vision

In this segment, over the last few years, Qtel has been continuously losing its subscriber base

and during 2005 it witnessed 11% decline in subscriber numbers to 14,806. This is despite

the promotional offers the company makes at regular intervals. In this segment the primary

challenge the company faces is the stiff competition from the satellite providers.

Over 2002-05, fixed

line penetration rate

had grown at a CAGR

of 7.9%

Internet subscriber

base grew by 65.8%

during 2002-2005


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6 Qatar Telecom

In the wireline segment, during the current year, Qtel will offer a variety of bouquets on its

yet-to-be-launched Triple Play access that combines cable TV and video, high-speed Internet

and telephony, through a single connection. Triple Play will allow high quality audio and

video reception to cable TV subscribers since its signals are transmitted on fiber-optic cableand hence, not dependent upon atmospheric disturbances such as humidity levels or affected

by tall buildings near subscribers premises. It will also eradicate the problem of Qtels cable

TV signals being hacked or accessed illegally by technical alteration of the decoders of its

older Microwave Multipoint Distribution System (MMDS).

Outlook

Going forward, Qatar will open its GSM segment while the fixed line segment will remain

with Qtel. In GSM segment, apart from enhancing technological platform with 3G services,

Qtel is also focusing on service quality and value added product offerings. All these will

help Qtel to have competitive advantage with the opening of the GSM segment. With regard

to ARPU trend, especially with the advent of competition, it is difficult for any playerto maintain the ARPU levels as operators will focus on increasing the customer base by

sacrificing on ARPU levels, therefore, ARPU will have a much sharper fall. Going forward,

competition will further shift the customers profile in favor of the prepaid segment, however,

Qtel being an incumbent player will have a substantial share of the postpaid segment. In case

of fixed line segment, we maintain that expansion in economic activities will definitely boost

the penetration level in the country. We also expect substantial growth in internet penetration

levels, as discussed earlier, which will also contribute to the growth of wireline segment.

Nawras Telecom - Oman

The year 2005 witnessed Nawras Telecom (Omani Qatari Telecommunications Company),which is a consortium led by Qtel, Tele Denmark Communications (TDC) of Denmark and

private Omani partners, launch its GSM services in the Sultanate of Oman in March 2005.

The market response to Nawras has been extremely well and in just one year of its launch it

achieved a market share of 22% with customer base of 320,282. At the end of 2005 penetration

rate in Oman was estimated at around 54%. In 1H-2006, the total GSM subscriber base of

the sector was at 1,564,100 as compared to 1,333,225 at the end of the year 2005. Nawras

increased its customer base to 394,080 in 1H-2006 which represents a market share of 25%.

During the current year, Nawras has announced the launch of Data Roaming (also called

GPRS roaming) with Wataniya-Kuwait. With this launch Nawras is now the only mobile

operator in Oman which provides Data Roaming in all GCC countries. Nawras was first to

introduce Data Roaming, which is a wireless data service that connects to the internet, WAP

and e-mails through mobile phone while traveling. Nawras has been successful in bringing

new and innovative roaming services to the mobile customers of Oman.

During December 2005, Nawras piloted 3G services in its network in Oman. As part of winning

the licence for the 2nd mobile operator in Oman in 2004, Nawras was also awarded a 3G license,

and already operates an EDGE network. Following the trial run in December 2005, Nawras has

expanded its 3G network to cover selected areas in main cities of Muscat, Salalah, Sur, Nizwa and

Sohar. Nawras is currently trialing 3G with selected number of customers in the Muscat area. With

this, customers are able to make and receive video calls and browse the internet at high speed.

Later on, Nawras will gradually roll out services to more customers. The introduction of 3G will

further strengthen Nawras position as the clear leader in the local mobile broadband market.

With early focus on

value added services

Qtel will definitely score

over its competitor

As of June 2006

Nawras market share

of Omani GSM segment

was 25%.


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7Qatar Telecom

Financial Performance

Revenue Composition

In FY2005, Qtel reported a y-o-y growth of 27.1% in its consolidated revenue which increasedto QR2,982.4mn from QR2,346.1mn achieved in FY2004. With the beginning of its Omani

operations (under Nawras Telecom) the company has started getting revenue contribution

from this subsidiary. The revenue from this operations accounted for 4.6% of Qtels total

revenue for FY2005. With regard to Qtels domestic operations, wireless segment accounted

for 64.5% (FY2004 59.3%) of Qtels total domestic revenue, wireline segment accounted for

33.3% (FY2004 37.4%) and special business contributed 2.2% (FY2004 3.2%).

Exhibit 3: Revenue Compositions

Source: Qatar Telecom andGlobalResearch

Wireless Segment - Qatar

Qtels GSM business witnessed a jump of 31.8% in its revenues which increased to

QR1,834.9mn in FY2005 from QR1,392.2mn in FY2004. In the GSM segment, prepaid

service registered a whopping growth of 49.8% and netted a revenue of QR978.5mn while

postpaid service recorded a revenue growth of 16.5% to QR833.5mn. The major growth

drivers for this excellent performance in GSM business are high ARPU levels (highest in the

GCC region) and a steep 46% growth in total subscriber base. The other revenue witnessed a

marginal decline of 2.8% to stood at QR22.9mn.

Wireline Segment

Fixed line, internet and other services (consisting of equipment sales and rental incomes of

wireline segment) are the three business components under wireline segment. In FY2005,

Qtels wireline revenue grew by 7.8% to reach QR946.7mn. The fixed line business, the

major revenue contributor to wireline segment, witnessed a growth of 5% while internet

business witnessed a significant revenue increase of 26.7%. Its subscriber base under internet

segment grew to 53,033 from 36,588 in FY2004, a significant growth of 44.9%.

Special Business

The companys revenue from this segment declined significantly by 17.1% to reach QR62.9mn

in FY2005. Qtels cable TV operations (QCV) and other services consists of payphones, call

centre services, and directory related services. Over the last few years the companys QCV

business is losing its subscribers to satellite providers.

Composition of Consolidated Revenue Revenue Composition of Domestic Operations

5%

61%

32%

2%

Wireless-Oman Wireless-Qatar

Wireline-Qatar Special Business-Qatar

65%

33%

2%

Wireless Wireline Special Business

Qtel witnesseda y-o-y growth of

27.1% in its

consolidated

revenue for 2005


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8 Qatar Telecom

Revenue, Margins & Profitability

In FY2005, Qtels business in Qatar saw revenue rise of 21.2% over the previous year from

QR2,346.1mn to QR2,844.6mn. This revenue growth continues to be driven predominantly

through Wireless and Data services. The business also saw a strong EBITDA growth toQR1,900mn, an increase of 21.1% over the previous year. Its profit before royalty for Qatar

operations rose to QR 1,705.6mn representing a 13.2% growth over FY2004. Royalty

payment to the Government of Qatar had a dampening effect on the companys net profit

from Qatar operations for FY2005 which declined to QR1,308.8mn from QR1,507.1mn in

FY2004.

Qtels total revenue grew at a CAGR of 21.3% during the period 2003-2005. Total revenues

of the company stood at QR2,982.4mn at the end of FY2005, which displayed a growth

of 27.1% over that reported at the end of FY2004. The companys EBITDA registered a

CAGR of 16% during 2003-2005. Its EBITDA margin declined to 59.4% in FY2005 from

65% in FY2004, which was mainly due to the consolidation effect for Nawras operations.With a y-o-y growth of 16.1% in FY2005, its EBITDA was at QR1,771.6mn as compared to

QR1,525.3mn in FY2004.

In FY2005 the companys net profit margin declined to 39.9% from 63.1%, which was

mainly due to the royalty payments for Qatari and Omani operations and also due to loss

registered under Nawras Telecom, as in any other large scale projects in the initial years there

will not be any addition to the bottomline. The companys consolidated net profit stood at

QR1,190.4mn at the end of FY2005 as compared to QR1,479.4mn in FY2004.

Table 2: Revenue, Margins & Profitability

(in QR 000) 2003 2004 2005Revenue 2,026,149 2,346,104 2,982,400

EBITDA 1,316,638 1,525,325 1,771,634

EBITDA Margin 65.0% 65.0% 59.4%

Net Profit 1,148,822 1,479,432 1,190,447

Net Profit Margin 56.7% 63.1% 39.9%

Source: Qatar Telecom andGlobalResearch

Capex

In Qatar the company is focusing on improving its technological platform for all the

segments whereas for its Oman operations, Qtel is making heavy investments in building

GSM network, with the primary objective of increasing capacity, enhancing coverage andimproving network quality. The companys total capital expenditure rose by 81.5% during

FY2005 to QR1,012.6mn. In FY2004 and FY2005, Qtels capex/sales ratio was at 23.8% and

34% respectively.

Royalty Payment

Being a monopoly player in the Qatari telecommunication market, Qtel is liable to pay

royalty to the State of Qatar for the exclusive right to provide telecommunication services in

the state of Qatar. Thus, Qtel will have to make royalty payments to the Government of Qatar

which started from 2005 onwards. The royalty fees will be 25% of net profit. However, with

the likely liberalization of the sector in 2007, Qtel will no more remain a monopoly player.

Profit growth

impacted by

royalty payments


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9Qatar Telecom

Therefore, we expect that the royalty payment as a percentage of net profit will be lowered

from 2007 onwards. Hence, in our projections we have assumed a 25% royalty payment for

the year 2006 which would reduce by half (12.5%) with the partial opening up of the sector

from 2007 onwards.

In accordance with the terms of licence granted to Nawras Telecom to operate wireless

telecommunication services in the Sultanate of Oman, royalty is payable to the Government

of Oman effective from March 2005. The company will have to pay royalty fees based on its

annual gross revenues.

Projected Financials

Qtels Projected Revenues & Profitability

We forecast a CAGR of 5% in Qtels (on standalone basis) revenues and 9% in profitability

for the periods 2006-2009. The companys EBITDA margin is expected to remain in high

terrain of around 68.7% in FY2006 and going forward we expect that it will come under

pressure with the advent of competition in Qatar. The future profitability will get affected due

to the levying of royalty on net profit to the tune of 25% of the net profit. Going forward, we

have assumed that with partial liberalization in 2007, the Government of Qatar will lower the

royalty payment and therefore a rate of 12.5% is assumed from the year 2007 onwards.

Exhibit 4: Trend in Qtels Revenues, Profitability & FCF (on standalone basis)

Source: GlobalResearch

Nawras Telecoms Projected Revenues & Profitability

As Nawras is in initial years of its operations, it has high capex plan, the major portion of

this outlay is expected to be spent on setting up of the infrastructure to support and expand

the reach of its GSM service in Oman. As per the terms of the licence agreement for Oman,

Nawras is liable to pay royalty to the Government of Oman which is based on its annual

gross revenues at the end of each fiscal year, till the licence tenure which is 15 years. We

believe that Nawrass operations will be EBITDA positive from the current year i.e. FY2006.

However, free cash flow is likely to remain negative for the year 2006 because operations will

not be able to cover the spending on capex and working capital requirements. We forecast

that Nawras will start contributing to Qtels bottomline only from the year 2007 onwards.

There will be a substantial growth in revenues and net profits from FY2007 onwards; and

free cash flows will also remain in the positive territory for Nawras.

5,000

4,000

3,000

2,000

1,000

-

2006F 2007F 2008F 2009F

Revenue Net Profit FCF

QRM

n

We estimate that

Nawras will be

EBITDA positive

from FY2006

onwards


10/20


10 Qatar Telecom

Exhibit 5: Trend in Revenues, Profitability & FCF of Nawras Telecom


Future Trend in Consolidated Revenues & Profitability

Going forward we forecast a CAGR of 7% in consolidated revenues and 12% in net profit

for the period FY2006-FY2009. As per our projections, Nawrass contributions to the

consolidated revenues of Qtel would be to the extent of 11% in FY2006, which would further

increase to 13% in FY2007, 14% in FY2008 and 16% in FY2009. The royalty payment to

the state of Qatar has a dampening effect on the companys net profit and also on cash flow

from FY2005 onwards.

Exhibit 6: Projected Revenues, Net Profit & FCF (on a consolidated basis)


1,000

800

600

400

200

-

(200)

(400) 2006F 2007F 2008F 2009F


QRMn

6,000

5,000

4,000

3,000

2,000

1,000

-

2006F 2007F 2008F 2009F

QRMn



11/20


11Qatar Telecom

Financial Performance in 1H-2006

During 1H 2006, Qtels consolidated revenue increased by 50.3% y-o-y to reach

QR2,033.5mn. It derived over 90% of its revenues from Qatar operations and the rest

was contributed by Oman operations. With regard to its revenues from Qatar operationswireless segment accounted for about 65.9% of the total revenues from Qatar, wireline

segment accounted for 32.7% and the balance was contributed by special business.

Qtels wireless services continued to perform well with revenue increasing by 44.6% to

QR1,211.6mn. The GSM subscriber base grew by 13% over December 2005 to 811,028

with prepaid subscribers at 639,554 and postpaid subscribers at 171,474.

Under Nawras GSM subscriber base grew by 62% over December 2005 to 394,080, with

this it acquired 25% market share of Omani GSM segment. During 1H-2006, its revenue

was at QR194.5mn.

Wireline services also performed well with a 31.5% growth in revenue to QR601.1mn.

This was driven by subscriber growth in internet segment and marginal growth in fixed

line segment.

During the first half of 2006, Qtels consolidated EBITDA margin improved to 61.9% as

compared to 59.1% in 1H 2005. Its EBITDA grew by 57.3% to QR1,258.8mn.

Qtels other income, which consists of interest income and gain on sale of investments,

increased by a robust 90.5% on y-o-y basis to QR70mn.

Qtels consolidated net profit registered a y-o-y growth of 48% to reach at QR858.2mn.

Table 3: Interim Results for the first half of 2006

Amount in Qatari Riyal 000 1H 2005 1H 2006 % Growth

Revenues 1,353,227 2,033,482 50.3%

Total Cost of Sales (193,668) (303,941)

Selling, General & Operating Expenses (359,441) (470,803)

EBITDA 800,118 1,258,738 57.3%

EBITDA Margin 59.1% 61.9%

Depreciation and amortization (119,843) (198,613)

Finance Cost - (5,740)

Other Income 36,779 70,049Royalties (194,693) (298,490)

Minority interests 57,492 32,299

Net Profit 579,853 858,243 48.0%

Net Profit Margin 42.8% 42.2%Source: Qatar Telecom andGlobalResearch

Outlook

The companys successful introduction of new products and value added services, coupled

with a series of new customer promotions and continuous commitment to improve services

will help it to have an edge and enable it to compete better with the advent of competition

in the GSM segment. During the coming years the company expects to witness significant


12/20


12 Qatar Telecom

growth from wireless, data and internet services As it has plan to roll out new services this

year such as 3G, Triple Play and a host of other value added services; and will continue with

network infrastructure expansion, particularly before the 15th Asian Games in December

2006.

With regard to Nawras Telecom, the company expects to achieve positive EBITDA in 2006

and also expects to achieve first profit at net level in 2007. Regarding its expansion plans, it

will continue to look at expansion opportunities in the region. As part of this it was one of

the participants for Egypts third mobile licence. It has expressed interest in a potential third

mobile licence in Saudi Arabia and is also eyeing the Arab and Islamic world for acquisitions

for both Greenfield and existing operations.


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13Qatar Telecom

Valuation and Recommendation

Our valuation rating for the stock is supported by combination of DCF Method and Peer

Group Valuation Method.

a) DCF Valuations Under this method we have arrived at a fair value of QR290 for the

stock which currently trades at 19.6% discount to the fair value.

Key points to be noted for DCF valuations are:

i. Risk free rate: We have assumed the risk free rate of 5.95% for Qatar and 6.7% for Oman.

To arrive at risk free rate we have taken the discount rate of Kuwait, which is at 6.25%.

As Kuwait has a lower country risk rating than Qatar, we have subtracted the difference

of country risk premiums between Qatar (0.9%) and Kuwait (1.2%) to the discount rate

of 6.25%. Thus, we arrived at a risk free rate of 5.95% for Qatar. In case of Oman we

have added the difference of country risk premiums between Oman (1.65%) and Kuwait(1.2%) to the discount rate of 6.25%, which gave us the risk free rate of 6.7% for Oman.

The difference in country risk premiums have been taken from the study done by Prof.

Damodaran and available on his web site www.pages.stern.nyu.edu.com.

ii. Market Risk Premium: We have assumed a market risk premium of 5.5% for Qatar and

for Oman operations we have revised the risk premium from the earlier 7.25% to 6.25%.

Earlier we had assumed the higher risk premium for Oman operations considering the

start-up nature of the operations.

iii. A beta of 1 is taken for both the companies, Qtel as well as Nawras. The actual beta for

Qtel is low, but to more appropriately reflect the market risk we have taken it as 1.

iv. The cost of capital for Qatar and Oman have been estimated to be at 11.5% and 7.9%

respectively. With regard to Nawras operations, on a conservative basis, we have taken

projected debt of FY2006, as during this year the funding mix of Nawras will change

because of borrowings which are likely to take place. With this the total capital commitment

would consist of 71% debt financing and 29% of equity financing. Therefore, Weighted

Average Cost of Capital (WACC) will be skewed more towards cost of debt financing,

which we have assumed at around 5.85%. The reason for the lower cost of capital for

Oman emanates from the higher debt component which forms 71% of the total capital.

v. We have assumed a terminal Enterprise Value / EBITDA (EV/E) multiple of 9.5x for Qteland 7.5x for Nawras Telecom.

vi. We have assumed a 4-year forecast period (2006-2009) for both the countries, Qatar and

Oman.


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14 Qatar Telecom

A summary sheet of the DCF valuation is shown below.

Table 4: DCF Calculations

Qatar (Amount in Qatari Riyal 000) Dec-06 Dec-07 Dec-08 Dec-09FCFF 1,791,307 1,836,295 1,852,194 1,875,653

Discounted Cash Flow 1,712,238 1,589,007 1,437,676 1,306,312

NPV of FCFF 6,045,233

NPV of Terminal Value 19,099,391

Total Enterprise Value 25,144,625

Less: Debt -

Add: Investments + cash equivalents 3,052,722

Total Equity Value (a) 28,197,347

Oman (Amount in Qatari Riyal 000) Dec-06 Dec-07 Dec-08 Dec-09FCFF (285,159) 89,021 166,194 241,366

Discounted Cash Flow (276,262) 80,424 139,111 187,225

NPV of FCFF 130,498

NPVof Terminal Value 2,104,941

Total Enterprise Value 2,235,439

Less: Debt 800,874

Total Equity Value (b) 1,434,565


Table 5: DCF Summary Sheet

Country Operations Equity Value

(in QR 000)

Qatar (100%) 28,197,347

Oman (effective stake of Qtel will be 55.3%) 793,314

Total Equity Value 28,990,661

Number of shares outstanding (in 000) 100,000

Per share value (QR) 290.0


b) Valuations based on multiples For peer group comparison, we have used the valuation

of listed telecom companies from the region, based on their 1H-2006 earnings. We believethat the comparative valuation would more appropriately reflected through the earnings

multiple i.e. P/E. The weighted average P/E multiple based on market capitalization for

the listed regional telecom companies derived from their 1H-2006 annualised earnings

and closing prices as on August 10, 2006 was estimated at 14.9x. Therefore, on the basis

of that Qtels stock valuation comes to QR260.1 based on its forecasted earnings for

FY2006. As the earnings multiples vary with time and are dependent on several factors

such as market sentiment and other qualitative factors, we have provided 20% weightage

to the valuation based on earnings multiple and 80% to the DCF value calculation.


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15Qatar Telecom

Table 6: Weighted Price

Valuation Approach

Fair Value/Share

(QR)

Weightage

Weighted Price

(QR)

DCF Method 290.0 80% 232.0

Peer Group Valuation Method 260.1 20% 52.0

Estimated Fair Value/Share 284.0

Prem./(Disc.) to Market Value 17.2%


Therefore, combination of both the methods suggests a price of QR284 per share. The

stock currently trades at around QR242.4, which implies that the value arrived by using

above methods is 17.2% higher than the current market price. We believe that the earnings

momentum from Qatar operations and further expansion in Oman operations would providere-rating triggers to the stock over the medium term. Hence, we maintain our earlier BUY

recommendation on the stock with a medium term perspective.


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16 Qatar Telecom

CONSOLIDATED BALANCE SHEET

Qatar Telecom

Amount in Qatari Riyal000 2003 (A) 2004 (A) 2005 (A) 2006 (E) 2007 (E) 2008 (E) 2009 (E)

Assets:

Cash & cash equivalents 1,362,676 1,370,869 1,730,359 1,700,293 2,657,973 3,083,201 3,532,187

Accounst recivable and prepayments 500,929 616,944 710,656 782,423 830,365 876,306 924,342

Inventories 33,345 23,291 23,869 24,585 25,568 26,847 28,189

Provision for doubtful debt (151,309) (161,686) (168,923) (198,434) (225,337) (255,665) (283,909)

Total Current Assets 1,745,641 1,849,418 2,295,961 2,308,867 3,288,569 3,730,689 4,200,809

Investment securities 473,607 962,305 1,198,683 1,491,862 1,790,234 2,148,281 2,577,938

Property, plant & equipment 2,758,247 3,316,198 4,328,762 5,695,712 6,763,181 7,786,659 8,834,467

less: accumulated depreciation (1,485,320) (1,550,046) (1,837,535) (2,213,332) (2,664,152) (3,179,475) (3,760,628)

net property, plant & equipment 1,272,927 1,766,152 2,491,227 3,482,381 4,099,029 4,607,184 5,073,839

License Cost (Gross) - 382,728 400,756 400,756 400,756 400,756 400,756

Amortisation - - (20,238) (46,955) (73,672) (100,389) (127,106)

Net Book Value - 382,728 380,518 353,801 327,084 300,367 273,650

Other Assets - 92,449 94,917 118,646 124,579 133,299 142,630

Total Assets 3,492,175 5,053,052 6,461,306 7,755,557 9,629,495 10,919,820 12,268,865

Liabilities:

Accounts payable & Accruals 444,751 1,046,580 923,458 1,163,376 1,290,908 1,369,567 1,448,867

Amounts due to other international carriers 87,476 92,485 66,461 71,778 78,238 86,062 94,668

Current Account with the State of Qatar 2,549 1,535 397,069 436,776 480,453 528,499 581,349

Total Current Liabilities 534,776 1,140,600 1,386,988 1,671,930 1,849,599 1,984,127 2,124,884

Other Non-Current Liabilities 103,857 87,341 128,758 139,059 151,574 166,731 183,404

Long Term Loan from Banks - - 573,413 800,874 800,874 711,888 632,789

Minorities Interest - 122,530 25,555 (38,716) (31,595) (4,549) 70,766

Shareholderss Funds:

Share capital 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000Legal reserve 431,613 582,320 713,199 887,781 1,000,000 1,000,000 1,000,000

Proposed dividend 400,000 400,000 485,000 581,691 1,129,162 1,241,652 1,303,969

Retained earnings 909,520 1,562,692 1,767,560 2,332,105 3,349,048 4,439,137 5,572,220

Fair value reserve 112,409 157,419 380,683 380,683 380,683 380,683 380,683

Translation reserve - 150 150 150 150 150 150

Equity Attributable to Parent Shareholders 2,853,542 3,702,581 4,346,592 5,182,411 6,859,043 8,061,623 9,257,022

Total Liabilities 3,492,175 5,053,052 6,461,306 7,755,557 9,629,495 10,919,820 12,268,865


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17Qatar Telecom

CONSOLIDATED OPERATING STATEMENT

Qatar Telecom

Amount in QatariRiyal 000 2003(A) 2004(A) 2005(A) 2006(E) 2007(E) 2008(E) 2009(E)

Revenues 2,026,149 2,346,104 2,982,400 4,233,518 4,649,535 4,873,417 5,131,927

Total Cost of Sales (212,824) (230,679) (330,809) (590,148) (690,566) (731,794) (802,946)

Gross Profit 1,813,325 2,115,425 2,651,591 3,643,370 3,958,969 4,141,623 4,328,982

% to sales 89% 90% 89% 86% 85% 85% 84%

EBITDA 1,316,638 1,525,325 1,771,634 2,619,342 2,969,406 3,073,079 3,248,518

EBITDA Margin 65.0% 65.0% 59.4% 61.9% 63.9% 63.1% 63.3%

Financial Charges - - (4,497) (46,851) (44,448) (40,222) (37,018)

Depreciation (179,009) (186,488) (317,737) (375,797) (450,820) (515,323) (581,153)

Amortisations - - - (26,717) (26,717) (26,717) (26,717)

Provision for doubtful debts - (6,185) (27,669) (29,511) (26,903) (30,328) (28,244)

Provision for impairment of investments (36,415) - - - - - -

Other Income (Investments) 47,608 124,507 76,709 134,268 179,023 236,311 283,573

Earnings Before Taxes 1,148,822 1,457,159 1,498,440 2,274,734 2,599,540 2,696,801 2,858,959

Royalty Payment to Govt. - - (404,968) (593,186) (334,096) (338,013) (346,592)

Minority Interest - 22,273 96,975 64,271 (7,121) (27,046) (75,316)

Net Profit 1,148,822 1,479,432 1,190,447 1,745,819 2,258,324 2,331,742 2,437,052

Net Profit Margin 56.7% 63.1% 39.9% 41.2% 48.6% 47.8% 47.5%

P&L Appropriation Account:

Op Balance of Retained Earnings 605,580 909,520 1,562,692 1,767,560 2,332,105 3,349,048 4,439,137

Net Profit for the year 1,148,822 1,479,432 1,190,447 1,745,819 2,258,324 2,331,742 2,437,052

Trfr to Legal Reserve (114,882) (150,707) (130,879) (174,582) (112,219) - -

Interim Dividend (330,000) (365,000) (365,000) (425,000) - - -

Proposed Directors Remuneration - (4,700) (4,700) - - - -

Revaluation of investment property - 94,147 - - - - -

Proposed Dividend (400,000) (400,000) (485,000) (581,691) (1,129,162) (1,241,652) (1,303,969)

Retained Earnings Carried Forward 909,520 1,562,692 1,767,560 2,332,105 3,349,048 4,439,137 5,572,220


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18 Qatar Telecom

CASH FLOW STATEMENT

Qatar Telecom

Amount in Qatari Riyal 000 2003 (A) 2004 (A) 2005 (A) 2006 (E) 2007 (E) 2008 (E) 2009 (E)

Operating

Operating Activities 1,329,834 1,518,297 1,334,424 2,026,156 2,635,310 2,735,066 2,901,926

Profit Before Tax 1,148,822 1,457,159 1,498,440 2,274,734 2,599,540 2,696,801 2,858,959

Depreciation & Amortisation 179,009 186,488 317,737 402,514 477,537 542,040 607,870

Investment and interest income (43,301) (124,507) (76,709) (134,268) (179,023) (236,311) (283,573)

Gain on sale of investments (4,307) - - - - - -

Provision for doubtful receivables 12,994 - - 29,511 26,903 30,328 28,244

Provision for impairment of investments 36,415 - - - - - -

Financial Charges - - - 46,851 44,448 40,222 37,018

Loss/ (gain) on disposal of property, plant &

equipment202 (843) (369) - - - -

Royalty Payments - - (404,968) (593,186) (334,096) (338,013) (346,592)

Deferred taxes - - 293 - - - -

Working Capital (430,195) 493,724 191,113 222,759 141,260 102,466 108,051

Decrease / (increase) in inventories 16,628 10,054 (579) (716) (983) (1,278) (1,342)

Decrease / (increase) in accounts receivable (65,023) (105,638) (95,816) (107,198) (47,942) (45,941) (48,036)

(Decrease) / increase in payables to other

international carriers (net)(1,772) 40,748 6,460 7,824 8,606

(Decrease) / increase in accounts payable (28,171) 590,322 (108,026) 250,218 140,047 93,816 95,973

Movement in current account with the State of

Qatar(351,857) (1,014) 395,534 39,707 43,678 48,045 52,850

Total Operating 899,639 2,012,021 1,525,537 2,248,916 2,776,570 2,837,532 3,009,977

Investing Activities

Purchase of property, plant & equipment (374,997) (589,805) (1,022,809) (1,366,950) (1,067,469) (1,023,478) (1,047,808)

Increase in other assets - (92,449) (2,468) (23,729) (5,932) (8,720) (9,331)

Net increase in investments (122,188) (488,632) (284,885) (293,179) (298,372) (358,047) (429,656)

Proceeds from sale of property, plant &

equipment1,113 5,082 604 - - - -

Proceeds from sale of investments 8,541 125,408 283,886 - - - -

Investment and interest income 43,301 44,193 64,594 134,268 179,023 236,311 283,573

Purchase of Intangible Assets - (382,728) (18,028) - - - -

Total Investing (444,230) (1,378,931) (979,106) (1,549,591) (1,192,750) (1,153,934) (1,203,222)

Financing

Increase/(decrease) in long term debt - - 582,759 227,461 - (88,986) (79,099)

Financial Charges - - - (46,851) (44,448) (40,222) (37,018)

Dividends paid (710,000) (765,000) (765,000) (910,000) (581,691) (1,129,162) (1,241,652)

Directors remuneration - (4,700) (4,700) - - - -

Minority Interest - 144,803 - - - - -

Total Financing (710,000) (624,897) (186,941) (729,390) (626,140) (1,258,369) (1,357,769)

Net Change in Cash (254,591) 8,193 359,490 (30,066) 957,680 425,228 448,986

Net Cash at beginning 1,617,267 1,362,676 1,370,869 1,730,359 1,700,293 2,657,973 3,083,201

Net Cash at end 1,362,676 1,370,869 1,730,359 1,700,293 2,657,973 3,083,201 3,532,187


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19Qatar Telecom

RATIOS

Qatar Telecom

2003 (A) 2004 (A) 2005 (A) 2006 (E) 2007 (E) 2008 (E) 2009 (E)

LIQUIDITY RATIOS

- Current Ratio 3.26 1.62 1.66 1.38 1.78 1.88 1.98

- Quick Ratio 3.20 1.60 1.64 1.37 1.76 1.87 1.96

- Cash Flow from Operations ratio 1.68 1.76 1.10 1.35 1.50 1.43 1.42

PROFITABILITY ANALYSIS

- Gross Profit Margin 89.5% 90.2% 88.9% 86.1% 85.1% 85.0% 84.4%

- EBITDA to Revenues 65.0% 65.0% 59.4% 61.9% 63.9% 63.1% 63.3%

- Net Profit Margin 56.7% 63.1% 39.9% 41.2% 48.6% 47.8% 47.5%

- Return on Average Assets 33.5% 34.6% 20.7% 24.6% 26.0% 22.7% 21.0%

- Return on Average Equity 44.3% 45.1% 29.6% 36.6% 37.5% 31.3% 28.1%

- Return on Common Capital 114.9% 147.9% 119.0% 174.6% 225.8% 233.2% 243.7%

ACTIVITY RATIOS

- Debtors Turnover Ratio 4 4 4 5 6 6 6

- Creditors Turnover Ratio 0.5 0.2 0.4 0.5 0.5 0.5 0.6

LEVERAGE RATIOS

- Current Liability / Equity 0.19 0.31 0.32 0.32 0.27 0.25 0.23

- Current Liability / Assets 0.15 0.23 0.21 0.22 0.19 0.18 0.17

- Debt / Equity - - 0.13 0.15 0.12 0.09 0.07

RATIOS USED FOR VALUATION

- EPS (QR) 11.49 14.79 11.90 17.46 22.58 23.32 24.37

- Book Value Per Share (QR) 24.54 33.03 38.62 46.01 57.30 68.20 79.53

- Market Price Year End (QR) 158.40 199.80 220.40 242.40 242.40 242.40 242.40

- P/E 13.8 13.5 18.5 13.9 10.7 10.4 9.9

- P/BV 6.5 6.0 5.7 5.3 4.2 3.6 3.0


20/20

The following is a comprehensive list of disclosures which may or may not apply to all our researches.Only the relevant disclosures which apply to this particular research has been mentioned in the tablebelow under the heading of disclosure.

1. Global Investment House did not receive and will not receive any compensation from the company

or anyone else for the preparation of this report.

2. The company being researched holds more than 5% stake in Global Investment House.

3. Global Investment House makes a market in securities issued by this company.

4. Global Investment House acts as a corporate broker or sponsor to this company.

5. The author of or an individual who assisted in the preparation of this report (or a member of his/her

household) has a direct ownership position in securities issued by this company.

6. An employee of Global Investment House serves on the board of directors of this company.7. Within the past year , Global Investment House has managed or co-managed a public offering for

this company, for which it received fees.

8. Global Investment House has received compensation from this company for the provision of

investment banking or financial advisory services within the past year.

9. Global Investment House expects to receive or intends to seek compensation for investment banking

services from this company in the next three month.

10. Please see special footnote below for other relevant disclosures.

This material was produced by Global Investment House KSCC (Global),a firm regulated by the CentralBank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offerto buy any securities. Global may, from time to time,to the extent permitted by law, participate or invest inother financing transactions with the issuers of the securities (securities), perform services for or solicitbusiness from such issuer, and/or have a position or effect transactions in the securities or options thereof.Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effecttransactions in the securities before this material is published to recipients.Information and opinions contained herein have been compiled or arrived by Global from sources believedto be reliable, but Global has not independently verified the contents of this document. Accordingly, norepresentation or warranty, express or implied, is made as to and no reliance should be placed on thefairness, accuracy, completeness or correctness of the information and opinions contained in this document.Global accepts no liability for any loss arising from the use of this document or its contents or otherwisearising in connection therewith. This document is not to be relied upon or used in substitution for the exerciseof independent judgement. Global shall have no responsibility or liability whatsoever in respect of anyinaccuracy in or ommission from this or any other document prepared by Global for, or sent by Global toany person and any such person shall be responsible for conducting his own investigation and analysis of theinformation contained or referred to in this document and of evaluating the merits and risks involved in thesecurities forming the subject matter of this or other such document.Opinions and estimates constitute our judgment and are subject to change without prior notice.Pastperformance is not indicative of future results. This document does not constitute an offer or invitation tosubscribe for or purchase any securities, and neither this document nor anything contained herein shall formthe basis of any contract or commitment whatsoever. It is being furnished to you solely for your informationand may not be reproduced or redistributed to any other person.Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where itsdistribution may be restricted by law. Persons who receive this report should make themselves aware of andadhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations.

Disclosure Checklist

Qatar Telecom

Company Recommendation Ticker Price Disclosure

BUY QTEL.QA QR242.4 1, 10

Global Research: Equity Ratings Definitions

Global rating Definition

Buy

HoldReduce

Sell

Fair value of the stock is 10% from the current market price

Fair value of the stock is between +10% and -10% from the current market priceFair value of the stock is between -10% and -20% from the current market price

Fair value of the stock is -20% from the current market price

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