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du and Etisalat forced to cough up large royalty
In the past, the royalty percentage fluctuated depending on how well the Telcos were doing, so is this a good sign?
December 10, 2012 1:34 by Reuters
The United Arab Emirates government set royalty, or tax, rates on the Gulf Arab state’s two telecom operators on Monday, which will raise the amount paid into federal coffers.
The Ministry of Finance said Emirates Telecommunications Corp, known as Etisalat, will pay a royalty of 15 percent on its revenues and 35 percent on profits between 2012 and 2015. In 2016, Abu Dhabi-based Etisalat, which is majority-owned by the government, is required to pay a royalty of 15 percent on revenues and 30 percent on profits.
Meanwhile, du, the No. 2 operator that broke Etisalat’s monopoly in 2007, will be required to pay a 17.5 percent royalty on profits in 2012 and 5 percent on revenues.
Du’s profit royalty will incrementally rise to 30 percent by 2015 while the fee it pays to the government on its revenue will increase to 15 percent by 2016.
“There was speculation du’s royalties would increase to match those of Etisalat, which is not the case and therefore a positive for du’s stock,” says Amer Khan, fund manager, Shuaa Asset Management.
“The regulator has put the uncertainty to rest by clarifying the gradual increase in fees till 2016.”
“Du has been very conservative in provisioning for royalties and now they wouldn’t have to pay it all. The entire remaining amount will go straight to the bottom line, which is also a positive for dividends.”
Etisalat, the Gulf’s No. 2 operator, has paid 50 percent of its profit in royalties to the federal government but a profit slump has seen the total amount it pays decline in recent years.
It paid 5.8 billion dirhams ($1.58 billion) in royalties in 2011, down from 7.6 billion dirhams in 2010 and 8.8 billion dirhams in 2009.
The Abu Dhabi-based firm operates in about 15 countries and the government said on Monday that the “royalty applies only on local revenues and profit.” However, the operator must pay the difference between any taxes it pays abroad and the UAE’s royalty rate. Approximately 90 percent of Etisalat’s profit came from the UAE last year.
Du was instructed to pay a royalty of 15 percent on its 2011 net profit, plus a further 5 percent of revenue to the government on its 2011 profit.
Shares in both telecom operators were halted pending the announcement.