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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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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
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10 Qatar Telecom
Exhibit 5: Trend in Revenues, Profitability & FCF of Nawras Telecom
Source: GlobalResearch
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)
Source: GlobalResearch
1,000
800
600
400
200
-
(200)
(400) 2006F 2007F 2008F 2009F
Revenue Net Profit FCF
QRMn
6,000
5,000
4,000
3,000
2,000
1,000
-
2006F 2007F 2008F 2009F
QRMn
Revenue Net Profit FCF
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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
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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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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
Source: GlobalResearch
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
Source: GlobalResearch
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%
Source: GlobalResearch
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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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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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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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
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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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