By Sarah Townsend
Investment bank Arqaam Capital says du will follow Etisalat in opening up shares to foreign buyers
Du has been touted as the next Middle East and North Africa (MENA) telecoms firm expected to loosen restrictions on foreign ownership, after Etisalat opened up shares to foreign buyers in September.
Dubai-based investment bank Arqaam Capital said in a strategy note on Sunday that it sees Emirates Integrated Telecommunications Company (Du) as “the next candidate in the MENA telecom space for an increase in its foreign ownership limit (FOL)”.
Etisalat increased its limit last year to allow as much as 20 percent of the company to be owned by foreign investors, sending shares surging 6.3 percent to AED13.50 on the news.
Currently, foreign ownership is restricted to non-UAE individuals only, which excludes overseas institutions from holding shares.
Du’s shares closed 3.85 per cent higher yesterday at AED5.40, its highest level since July.
Arqaam said it expects that the further increase in liquidity of Du shares if it lifted foreign ownership restrictions, would be sufficient for it to quality for the MSCI Emerging Markets Index after 12 months.
Tibor Bokor, head of telecoms, media and technology (TMT) research at Arqaam Capital, said: “We see Du as the next candidate for an increase in its foreign ownership limit after Etisalat.
“In Du’s case, however, we would expect MSCI inclusion to come no sooner than a year after the foreign ownership limit (FOL) change due to its relatively lower liquidity as we estimate its annualised Traded Value Ratio (ATVR) in 2015 to have been only circa 9 percent, below the required 15 percent.
“Liquidity would need to increase by 67 percent to an Average Daily Trading Volume of circa $1 million versus the current $0.6 million.
“Arqaam expects the ADTV to increase to at least $2-3 million per day based on the liquidity of similar sized stocks that allow foreign ownership.”
Du’s inclusion in the MSCI Emerging Markets Index would result in the company representing 0.04 per cent of the index at current valuations, boosting the UAE's overall weighting in the index to about 0.89 per cent from its current level of 0.85 per cent, Arqaam said.
Once it is included, it could pave the way for further easing of ownership restrictions for du.
“In the future, we would not be surprised if a secondary public offering is made and the foreign ownership limit increases even further [than 20 per cent], but we would expect this to happen at more attractive valuations following MSCI inclusion,” Bokor said.
The largest shareholders in Du at present are the Emirates Investment Authority, which holds around 40 percent, and Mubadala, which holds about 20 percent.
Arqaam said it expects Du’s fixed line market share to grow further in 2016 “as the company will be able to offer pay TV services on Etisalat's network and data services for corporate clients”.
Du CEO Osman Sultan said: "Any decision to lift restrictions on foreign institutions owning du shares is one to be made by our board, and at this stage our board has not made any such decision. We remain open to the possibility of a change in foreign ownership restrictions.”