Digital Migration And Mounting 5G Costs Will Erode Margins

Key Takeaways

• Over-the-top platforms, competition, and commoditized data services are undermining traditional revenue streams, causing persistent margin erosion and declines in growth.
  
• Heavy ongoing 5G investment and volatile regulatory costs are straining cash flow and profitability, with uncertain returns from new ventures like wholesale and data centers.
  
• Strategic expansion into digital, IoT, and 5G services alongside regulatory benefits and operational efficiencies is enhancing revenue potential and supporting long-term financial strength.

Catalysts

Develops, operates, and maintains mobile and fixed telecommunications services in the Sultanate of Oman.

• Erosion of traditional revenue streams from accelerating digital adoption, combined with rising penetration of over-the-top communication platforms such as WhatsApp and Zoom, is likely to continue pressuring both voice and SMS revenues, resulting in ongoing top line declines that may not be offset by incremental ICT or IoT revenues.
  
• Sustained heavy capital expenditure to fund 5G expansion and maintain competitive parity is expected to keep free cash flow under strain, especially if new investments in wholesale and data centers do not deliver sufficient returns, compressing both earnings and net margins over the medium term.
  
• Intensifying competition in both mobile and fixed line segments, foreseen from the entry of Awasr as a mobile virtual network operator and the potential regulatory approval for Vodafone's expansion in fixed broadband, threatens to accelerate ARPU contraction and subscriber churn, further undermining revenue growth.
  
• The commoditization trend in data services, with customers increasingly price-sensitive and the value-add from 5G or bundled offers proving harder to monetize, is likely to suppress pricing power, driving persistent margin erosion even in the enterprise and B2B segments.
  
• Heightened regulatory scrutiny and ongoing changes in royalty and fee structures, while providing some short-term relief, add volatility to cost bases and increase the risk of unexpected compliance expenses, limiting sustainable profitability and potentially leading to further downward adjustments in net income.

Omani Qatari Telecommunications Company SAOG Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Omani Qatari Telecommunications Company SAOG compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Omani Qatari Telecommunications Company SAOG's revenue will decrease by 0.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.2% today to 5.5% in 3 years time.
• The bearish analysts expect earnings to reach OMR 13.9 million (and earnings per share of OMR 0.02) by about August 2028, up from OMR 10.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, up from 15.8x today. This future PE is greater than the current PE for the OM Wireless Telecom industry at 15.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.23%, as per the Simply Wall St company report.

Omani Qatari Telecommunications Company SAOG Future Earnings Per Share Growth

Risks

• The company is experiencing growth in its ICT and IoT business segments, including being the first to introduce managed WiFi and Google Workplace solutions in Oman, which positions Omani Qatari Telecommunications Company SAOG to benefit from long-term demand for digital transformation and enterprise connectivity, supporting stronger revenue growth.
  
• Significant investments in 5G infrastructure-now covering 80% of the population-and data centers aimed at attracting international sea cable consortiums and hyperscaler customers, create opportunities for premium service offerings and higher-margin B2B and wholesale revenues, which can drive earnings expansion over time.
  
• The company reported maintaining operational efficiency through cost controls and network optimization, with improvements in operating expenses and signs of improved free cash flow and a strong balance sheet, supporting net margin stability and future investment capacity.
  
• Regulatory developments, particularly the reduction and unification of royalty fees for both mobile and fixed services down to 10%, are expected to have a positive effect on net profit, providing increased flexibility for dividends or reinvestment and strengthening future earnings.
  
• Ongoing increases in customer base in segments such as prepaid, M2M, and migration to advanced technologies like FTTH and 5G broadband, suggest that secular trends of rising data consumption and digital ecosystem expansion in Oman may help offset competitive pressures and underpin topline growth.

Valuation

• The assumed bearish price target for Omani Qatari Telecommunications Company SAOG is OMR0.22, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Omani Qatari Telecommunications Company SAOG's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of OMR0.38, and the most bearish reporting a price target of just OMR0.22.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be OMR251.6 million, earnings will come to OMR13.9 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 21.2%.
• Given the current share price of OMR0.25, the bearish analyst price target of OMR0.22 is 13.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.