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Fitch Affirms Etisalat at 'A+'; Outlook Stable

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Fitch Ratings has affirmed UAE based state owned Etisalat's Long term foreign currency Issuer Default Rating (IDR) at 'A ' with a Stable Outlook. Its senior unsecured debt is also affirmed at 'A '.

Etisalat's IDR is underpinned by its strong linkage with the UAE government from which its rating is notched down on a top-down basis. This is driven by assessment of strong legal, operational and strategy ties between the two, in accordance with Fitch's Parent and Subsidiary Linkage criteria.

­Etisalat's ratings are also supported by the strong cash flow generation profile of the company's domestic business. It has a leading position in the UAE, a two-player market where it has a revenue market share of around 70% and generates an EBITDA margin of around 55%.

Sovereign Linkage

The small notching differential between the UAE sovereign and Etisalat ratings reflects our view of a limited risk of the links between the two weakening in the future. In Fitch's opinion government support is integral to the company's international expansion plans. The UAE government currently owns 60.03% of Etisalat and, according to federal law, the government's stake cannot fall below 60%.

Strong Domestic Position

Etisalat has a strong position in its domestic market where it generates the majority of the group's EBITDA (61% in LTM 1Q15) and cashflow (80% of EBITDA less capex).

Domestic revenue growth in 2014 of 9% was driven mainly by the fixed line business. There was a strong take-up of eLife double and triple-play bundles and fibre-to-the home connections in the consumer segment, as well as data services in the enterprise segment. The regulatory environment is changing which might see Etisalat facing more competition in fixed services in 2H15. Du, the company's main competitor, is preparing to launch services using bitstream access via Etisalat's network on a wholesale basis.

Mobile services, where Etisalat has around a 55% subscriber market share, are more competitive. Both Etisalat and du were assigned 800MHz spectrum earlier this year, which should allow both companies to continue to benefit from strong growth in mobile data.

Limited International Growth

Growth of revenue from Etisalat's international businesses in 2014 was limited, partly due to negative FX trends. Etisalat controls 53% of the Maroc Telecom Group (MT, acquired in May 2014), which is fully consolidated in Etisalat's group results. The sale of some of Etisalat's existing African operations to MT created a group of operations in west Africa which should deliver scale benefits over the medium-term. The enlarged MT group accounts for around 21% of Etisalat's revenue (LTM 1Q15) and generates reasonable cashflow.

The company's operation in Pakistan (9% of group revenue in LTM 1Q15), through a 23% economic interest in Pakistan Telecommunication Company Limited, is facing strong competition. In Egypt (9% of group revenue in LTM 1Q15), Etisalat's 66%-owned Etisalat Misr S.A.E. has helped improve profitability with a 5% revenue growth in local currency in 2014, although the regulatory environment remains uncertain.

Leverage to Increase

Net debt-to-EBITDA increased to 0.2x at end-2014 from -0.5x (net cash) at end-2013 after the completion of the debt-funded acquisition of MT. Fitch does not expect Etisalat's net debt-to-EBITDA to exceed 1.5x over the medium-to-long-term. This is commensurate with management's conservative financial policy and remains well within Fitch's guidelines for the current ratings.

The domestic operation remains strongly cash-generative but Etisalat's free cash flow (FCF) margin has been diluted by the acquisition of MT. We expect group FCF generation to improve over the medium-term as current investment programmes are completed.

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