Why MAROC TELECOM share price has to rise
- The company always regains market shares from competitors after losing them for a while;
- Operating Telecom margin may be falling at the moment, but would probably be improved during next years, thanks to an appreciation of African affiliates margin combined with a higher contribution of Data revenue on local market;
- Moroccan State won't take the risk to push the main telecom operator into cutting its investment budget, therefore the draft telecoms amendment bill won't be adopted in its present form;
- MAROC TELECOM would provide a D/Y higher than local 10-yr bonds during next years;
Like a phœnix …
Despite the turnover depreciation of the historical telecom operator since 3 years, with a consensus of analysts rather cautious about the evolution of consolidated sales in 2014 (2%), and 2015 (+1 %) , and 2016 (0%), factors argue for a recovery in the long term.
A quick glance at MAROC TELECOM (OTC:MAOTF) achievements in recent years, would lead to detect two important strengths of the company:
- Strong capacity to counteract the innovative offerings of competitors by launching attractive and similar commercial offerings (eg the transition to second billing after the launch of this offer by the third operator);
- An ability to recover lost market share after the launch of an offer by a competitor.
The last point can be illustrated by the evolution of the market share in Fixed lines & Internet segments. Indeed, after the launch of BAYN by the third operator, in hope of capturing the market of fixed telephony service, MAROC TELECOM gradually regained market share in last two years, through incorporating fixed lines with the sale of DSL offers. The graphs below depict the evolution of market shares in the segment of residential fixed lines:
(click to enlarge)Click to enlarge
Similarly, MAROC TELECOM succeeded to gain 7.3 percentage points of market share in 3G Internet segment between 2010 and 2013. This speaks volumes about the commercial efficiency of the company. The graphs below depict the market shares' evolution in the segment of Internet 3G:
Same as for fixed lines & Internet, MAROC TELECOM is currently trying to defend its market share against its aggressive competitor INWI on wireless segment, by pursuing lower prices, while ensuring an increase in the level of consumption of its customers, through "passes". Thus, Minutes-Of-Use (NASDAQ:MOU) shows a double-digit growth for 3 years.
Reasons for an improving operating margin …
In terms of operating margin, it is true that the tendency is rather disappointing for 4 years, except that the latter is still stabilized in 2013 to 38%. This level is still very far from the historic 2008 level (47%).
Our belief in an improvement margin level is based on the fact that the profitability of African subsidiaries is strongly affected by the weight of amortization (19.6% Vs 16.5% in Morocco). The analysis of depreciation's weight on sales suggests that the operating margin of subsidiaries should continue to improve by mere relief of these expenses, after the end of significant investments that took place after the acquisition of these companies.
In addition, operating expenses reduce increasingly Moroccan income of MAROC TELECOM as a result of investments made during the last 4 years to develop the local mobile infrastructure. Thus, the completion of major projects after the upcoming launch of LTE (called 4G) in 2015, mean that these expenses should have their weight ease, which should be reflected automatically on the result of the operator. Indeed, simply by reducing the weight of depreciation costs of African subsidiaries on sales to 16.5% (against 19.5% currently) and Moroccan depreciation expenses to 12% of local turnover, consolidated income before tax is expected to increase of nearly 1 billion MAD, assuming that consolidated revenue remains at the same level as in 2013.
A new bill that could change everything …
A new Amendment Bill 121-12, revising and supplementing the Post and Telecommunications Act (Law No. 24-96), was presented to the Government Council for approval. In add, the new regulation gives more power to the telecoms watchdog (ANRT), and if passed, the ANRT will be allowed to impose penalties on operators of up to 2% of their turnover before tax, in cases of infringement. The bill also addresses consumer protection, infrastructure sharing and the integration of fibre-optic infrastructure in buildings.
Among the items brought by this law, sharing of the infrastructure is the most sensitive point to the Telecom Company. In fact, by detaining the widest network coverage, MAROC TELECOM is still advancing this commercial argument to maintain its dominance on Moroccan telecommunications market. Trough this law, other operators would benefit from investments undertaken previously by MAROC TELECOM, if the rental cost of the infrastructure is competitive. However, this would deter MAROC TELECOM to conduct large investment projects if rivals are the ones that benefit the most.
In the event of a slowdown of the company investments, all projects for the development of the tertiary sector will suffer as a consequence. Thus, state project "Maroc Numeric" and other emerging industrial projects will have their culmination brought into doubt. For these reasons, we believe that the Moroccan state would eventually revisit this law, so as not to prejudice the company.
A new arbitrage opportunity for local yield seekers investors…
If MAROC TELECOM (OTC:MAOTF) interested investors on the Moroccan stock market, this is due to two main characteristics of the share: its liquidity and its yield. However, these two qualities were strongly impacted by the decline in volumes on the Moroccan stock market and the deterioration of the recent company results.
This fact strongly encouraged local investment vehicles (legally compelled to invest primarily in Morocco) to withdraw from the stock market to move towards the Fixed-Income market, which offered more performance. Indeed, because of the growing financing needs of the Moroccan treasure (higher wages and subsidies after the Arab Spring), the State didn't ceased to raise money on local financial market, bringing the risk-free rate on the rise.
However, this situation is beginning to come to an end after the restructuring of the Compensation Fund and the gradual reduction of the public deficit. As a result, we notice a significant drop in the yield on 10-year treasury bonds since 2014.
This shift should push rates down, which should result in a less attractiveness of Fixed income market for local investors, directing them to the stock market. A lower risk-free-rate would technically improve the risk premium of Moroccan stocks.
This shift towards equity market should benefit to high-yield stocks, currently undervalued. On the basis of April 25th, 2014 share price, MAROC TELECOM offers to its shareholders a dividend yield of 5.9%. This rate will increase in future years due to the non-recurrence of the impact of tax audit of last year (1.5 billion MAD), which should naturally lead to an improvement of dividends payable 2014 as the company distributes all of its earnings each year. Thus, in case of the return of the earning to the same levels of 2008-2010, MAROC TELECOM may even offer a yield higher than 10% annually!
Source : MAROC TELECOM, Casablanca Stock Exchange
In this context, MAROC TELECOM (OTC:MAOTF) is a share with a high potential for next years, after an improvement of results, especially after the launch of the LTE (4G Internet), on which we must invest since now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.