The maturity of telecom markets in the GCC region with mobile penetration rates of 130%-210% is limiting rated GCC telcos' revenue growth to about 1%-3% annually, hindering organic growth prospects for telcos, according to S&P Global Ratings. Higher growth rates, broader business diversification, and lower capital intensity fuel the tech appetite of rated telecommunications companies (telcos) in the (GCC) region, the analysis noted.
Nonetheless, the agency foresees a double-digit increase in revenues for tech companies (techcos) as they explore novel avenues to expand their operations and diversify revenue streams. This trend underscores the evolution of UAE telecom operators—Etisalat (e&), and du—as prominent players in the tech sector.
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Pioneering Digitalization and Economic Development
The report highlighted that the digitalization and economic development agendas of GCC governments will bolster digital businesses and enhance the consolidated revenues of GCC telcos. S&P noted that non-telecom operations currently account for approximately 15%-16% of combined revenues for rated GCC telcos. Notably, advanced telcos like stc and Etisalat (e&) tend to generate higher revenues from digital businesses.
S&P anticipates that core telecom services will continue to contribute to profits in the short term, but it predicts that digital businesses will experience much faster growth. According to S&P's latest forecast, investment-grade global software and services companies are projected to grow by 8%-10% between 2024 and 2025. In comparison, investment-grade global telcos are expected to grow by 1.5%-3.0% during the same period.
The GCC governments' strong digitalization push will impact GCC telcos' growth rates in the digital economy, with increases in e-commerce, fintech, streaming, and gaming.
S&P estimates that rated GCC telcos' non-telecom operations could contribute 18%-25% to total combined revenues over the next three years. S&P’s sensitivity analysis assumes low single-digit growth for telecom revenues and an organic growth of 10%-20% per year in non-telecom revenues.
M&As could compound on the organic growth, resulting in much faster revenue accretion from tech related services.
Techco Projections
S&P noted that the recent announcement by the evolving global tech company, e&, to generate 40% of its revenues through tech-related businesses by 2030 is attainable through a blend of organic growth and external expansion.
“We forecast GCC telcos' EBITDA margins could shrink by 100 bps to 300 bps over the next three years. This is because of the dilutive effect that results from lower-margin, non-telecom services. We expect e&'s EBITDA margin, which stood at 43.7% in 2023, to increase by 300 bps-400 bps in 2024, thanks to the change in the royalties’ regime in the UAE,” noted the S&P report.
The report further outlined that e&’s EBITDA margin will increase “by another 200 bps because of the change in accounting after Vodafone becomes an associate.”
