Bahrain Telecommunication -Equity Report -11-06-2012

Higher network costs and lower domestic revenue dents profitability
Batelco’s 1Q12 net profit (attr. to equity holders of the company) declined by 7.6% toBHD16.1mn. The net profit was affected by increase in network operating expenses which increased to 37.7% of sales revenue in 1Q12 from 33.6% of sales revenue in 1Q11.

Stiff competition erodes domestic revenue
The company continues to see a decline in its domestic revenue due to intensification of competition. Revenue from Bahrain operations declined by 5.4%YoY to BHD48.1mn in 1Q12. The launch of Viva Bahrain in March 2010, which is a subsidiary of Saudi Telecom Company, has had a major impact on the sector landscape. The new entrant has managed to capture 27.3% of the subscriber base as at the end of 2011. Although we expect market share erosion for Batelco to slowdown significantly going forward, the competition is likely to remain stiff.

Valuation update- High dividend yield intact
We have upgraded our fair value by 5.0% to BHD0.525. The increase in fair value despite the downward revision in estimates is due to the lower risk premium taken for Batelco. The uncertainty of operations in India had casted a shadow on the company and ultimately its share price performance as the stock price declined by 23.1% in 2011. The uncertainty was also reflected in the low trading multiples for
the company. With the sale of stake in Stel to its Indian partner, the risk attached to the company has gone down.

The stock at its current market price of BHD0.474 offers a potential upside of 10.7%. Thus we have downgraded our recommendation from STRONG BUY to BUY as the recent rally in the stock price has absorbed most of the upside potential.