Gulf Cooperation Council (GCC) telcos have completed several bolt-on acquisitions and financial investments over the past two years. Their high profitability and robust cash flow generation have enabled Emirates Telecommunications Group Company PJSC (e&) and Saudi Telecom Co. to expand into stable European markets, a new report from S&P Global highlighted.
With mature domestic markets and mobile penetration exceeding 100 percent, GCC telcos now face revenue growth converging to single-digit figures, a stark contrast to the double-digit growth seen historically. This situation compels these companies to pursue geographic and technological expansion.
Credit metrics to remain strong
Despite elevated capital expenditures (capex) and active M&A, leverage levels are expected to stay low. For e&, headroom is limited due to recent transactions; however, recovery to below 1.5x is anticipated by 2026.
GCC telcos are making substantial investments in non-telco ventures, which may include data centers, cybersecurity, cloud services, the Internet of Things, AI, licensed digital banks, or e-wallets.
Read more: UAE’s trade in telecommunication services surges by 4.3 percent to $2.8 billion in 2024
Governments to spur growth
Given the strong digitalization initiatives from GCC governments, telcos in the region could experience growth rates surpassing those in other areas. The digital economy’s development will stimulate e-commerce, fintech, streaming, and gaming. Additionally, data localization laws and increased cloud adoption are driving demand for data centers in the region.
EBITDA margins could decrease by 100 to 300 basis points (bps) over the next three years. The extent of this impact will depend on the relative share of revenues.
Key risks around the baseline
Margin compression due to non-telco business remains a concern. EBITDA margins may shrink by 100 to 300 basis points (bps) over the next three years, contingent on revenue shares.
Foreign currency fluctuations could affect revenue growth. GCC telcos’ international portfolios are exposed to countries with significant country risk and currency volatility (such as Egypt, Pakistan, and many sub-Saharan African nations), which may offset some local currency growth prospects. However, increasing investments in Europe, where country risk is low and euro fluctuations are relatively stable, should provide a currency hedge against other markets.
Moreover, credit factors may evolve in the long term. “We do not anticipate that the growing revenue contribution from non-telecom operations will impact the ratings of the rated GCC telcos over the next two to three years. Nevertheless, in the longer term, there could be potential rating implications due to the changing business mix, competitive threats, and the challenge of balancing growth and leverage,” S&P further noted.
