Dubai: Emirates Integrated Telecommunications Company (Du) is seen as the next candidate for an increase in its foreign ownership limit in the Middle East and North Africa (Mena) telecom space after etisalat increased its limit to 20 per cent in September 2015, according to investment bank Arqaam Capital.
Arqaam said in a strategy note on Sunday that it expects the increase in liquidity of du shares as a result of lifting foreign ownership restrictions would be enough for it to qualify for the MSCI Emerging Markets Index after 12 months if it were to lift the foreign ownership for institutional investors.
“We would expect du’s MSCI inclusion to come no sooner than a year after the foreign ownership limit change due to its relatively lower liquidity as we estimate its annualised Traded Value Ratio (ATVR) in 2015 to have been only about 9 per cent, below the required 15 per cent,” said Tibor Bokor, head of Technology, Media and Telecommunications research at Arqaam Capital.
He, however, said that liquidity would need to increase by 67 per cent to an average daily trading volume (ADTV) of about $1 million (Dh3.67 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.
“In addition, MSCI criteria requires four consecutive three-month ATVRs greater than 15 per cent, implying that Du would need to wait another year to be able to meet this requirement,” Bokor said. “In the future, we would not be surprised if a secondary public offering is made and the foreign ownership limit increases even further, but we would expect this to happen at more attractive valuations following MSCI inclusion.”
Open to possibility of change
Osman Sultan, CEO of Du, said that 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,” Sultan told Gulf News in an email.
Arqaam said that 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.
“Actually it is a natural fallout of market forces to revise foreign ownership limit. Given the slightly gloomy outlook of markets for 2016, one would not be surprised if du decides to increase foreign ownership limit, in turn freeing some cash,” said Sukhdev Singh, vice-president at market research and analysis services provider AMRB.
This is a “good change” for the telecom market as such, if at all it happens, he said, and added that these are early signs for the UAE telecom market to open up slowly to “more direct competition” in the long term.
Du’s shares closed 3.85 per cent higher at Dh5.40 on Sunday on Dubai bourse. Arqaam currently has a “buy” rating with a target price of Dh6.4.