Telecommunications companies (telcos) in the Gulf Cooperation Council (GCC) region are seeking new opportunities to expand and diversify their revenue sources, according to a report.
A new S&P Global Ratings report revealed that the mature telecom markets in the GCC, where mobile penetration rates range from 130 percent to 210 percent, offer limited potential for organic growth for these telcos.
Read more: Saudi telecommunications companies record profits of $1.5 billion
Rated telcos in the GCC region are driven by a desire for higher growth rates, wider business diversification, and lower capital intensity. However, S&P Global Ratings does not anticipate that the increasing revenue contribution from non-telecom operations will have an immediate impact on the ratings of GCC telcos in the next two to three years. It is expected that rated GCC telcos will maintain low leverage during this period. Nonetheless, over the long term, the rating agency will assess the potential impact of changing business mix, competitive threats, and the ability of GCC telcos to balance growth and leverage.
Telecom markets in the GCC region have reached maturity, resulting in limited revenue growth prospects of approximately 1 percent to 3 percent annually for rated GCC telcos. This is in stark contrast to the expected double-digit revenue growth of technology companies (techcos).
Diversification strategy: Enhancing cash flow potential
The diversification strategy pursued by GCC telcos could enhance their cash flow generation potential due to the lower asset intensity of tech businesses. However, it may also affect their profitability, as techcos generally have lower margins compared to telcos. S&P Global Ratings predicts that the consolidated EBITDA margins of telcos could decline by 100 to 300 basis points over the next three years due to the lower margins of techcos.
The digitalization and economic development agendas of GCC governments will support digital businesses and contribute to the consolidated revenues of GCC telcos. S&P estimates that non-telecom operations currently account for approximately 15 percent to 16 percent of the combined revenues of rated GCC telcos. Among more advanced telcos such as stc and e&, digital businesses generate higher revenues compared to Ooredoo and Beyon.
While core telecom services will continue to generate the majority of revenues and remain the primary profit drivers in the short term, digital businesses are expected to grow at a significantly faster pace. According to S&P’s latest forecast, investment grade-rated global software and services companies are projected to expand by 8 percent to 10 percent over the period of 2024-2025, whereas investment grade-rated global telcos are expected to grow by 1.5 percent to 3.0 percent.
Strong emphasis on digitalization by GCC governments
Considering the strong emphasis on digitalization by GCC governments, S&P expects that GCC telcos will experience higher growth rates compared to other regions. The development of a digital economy will stimulate sectors such as e-commerce, fintech, streaming, and gaming. According to the agency, this digitalization drive will result in increased private and public spending on information and communication technology (ICT), benefiting rated GCC telcos due to their market leadership and close relationships with various governments.
As an example, S&P Global Ratings highlighted that stc’s ICT subsidiary, Solutions, derived approximately 44 percent of its revenues from government-related customers in 2023. It achieved robust revenue growth of 20 percent-25 percent between 2022 and 2023, partly attributed to mergers and acquisitions (M&As).
Digital revenues’ relative contribution will increase
S&P estimates that non-telecom operations of rated GCC telcos could contribute 18 percent-25 percent to their total combined revenues in the next three years. According to S&P’s sensitivity analysis, telecom revenues are expected to grow at a low single-digit rate, while non-telecom revenues will experience organic growth of 10 percent-20 percent annually.
M&As have the potential to further accelerate revenue growth from tech-related services, on top of organic growth. According to the paper, there will likely be a significant disparity between more advanced telcos, with digital revenues exceeding 30 percent, and less advanced telcos, with digital revenues ranging from 8 percent to 14 percent. Currently, the focus of adjacent tech businesses is primarily on domestic markets of GCC telcos. However, their expansion into other markets, potentially through M&As, will expedite growth.
EBITDA margins lower
Furthermore, S&P said e&’s recent announcement to generate 40 percent of its revenues from techco businesses by 2030 is attainable through a combination of organic growth and external expansion. Over the next three years, S&P forecasts a contraction of 100 to 300 basis points in GCC telcos’ EBITDA margins due to the dilutive effect resulting from lower-margin non-telecom services.
The magnitude of this effect will vary depending on the proportion of digital revenues. Based on S&P’s forecast for investment grade-rated global software and services techcos, EBITDA margins are projected to be around 33 percent-34 percent between 2024 and 2025. This represents a decline of approximately 500 to 600 basis points compared to S&P’s expectation of 38 percent-39 percent for EBITDA margins of global investment grade-rated telcos.
GCC telcos currently operate at even higher S&P Global Ratings-adjusted margins, which are anticipated to be around 42 percent-43 percent between 2024 and 2025. S&P expects e&’s EBITDA margin, which stood at 43.7 percent in 2023, to increase by 300 to 400 basis points in 2024 due to changes in the royalties’ regime in the UAE, and an additional 200 basis points due to accounting changes following Vodafone becoming an associate.
For more news on telecom, click here.
