Du shares hit after big increase in royalty fees

Du has been asked to raise its royalty fee to the Federal Government, reflecting the firm's growing presence in the telecom market.

Du will hand over 15 per cent of its net profit for last year, as it did for 2010. But du has also been told to pay the Government 5 per cent of last year's revenue. Pawan Singh / The National

The telecommunications company du may have to pay an estimated Dh443 million (US$120.6m) in extra fees to the federal Government after changes to the royalty scheme.

The company will hand over 15 per cent of its net profit for last year, as it did for 2010. But du has also been told to pay the Government 5 per cent of last year's revenue.

Shares in the telecoms company fell the most in six weeks after the announcement on the Dubai Financial Market yesterday. The stock closed 2.3 per cent lower at Dh3 after rising in earlier trading.

"From our point of view, it's not so good, as we were assuming the company would pay the same as last year," said Zaineb El Beheiry, an analyst at NAEEM Holding, adding it was uncertain whether the 5 per cent charge was a one-off or would be imposed every year.

Historically, Etisalat, du's rival, has paid half of its profit as royalties to the Government, a fee that the operator wants reviewed. Mohammed Omran, the chairman of Etisalat, has said he would like to see its royalty charges lowered.

Du paid its first royalty fee last year - four years after its launch in 2007. The company's bigger contribution this year comes as it carves out a bigger market share from Etisalat.

"Generally speaking, a royalty is like a dividend. When things are going well, the company is less in need of cash. It's a reasonable thing to do," said Farouk Soussa, the chief economist in the Middle East at Citi.

Du is due to report next month its results for last year's fourth quarter. Those figures will be used to determine exactly how much it has to pay the Government.

The operator is expected to record another year of double-digit growth.

Profit soared 50 per cent year on year from Dh236m up to Dh489m in the third quarter. Analysts also expect du to post revenue of Dh8.8 billion this year.

A rise in the firm's mobile data revenue and an increase in the number of post-paid customers have helped to boost the bottom line this year. "Despite the royalty fee we still expect du to report strong results," said Ms El Beheiry. "We expect du to pick up revenue from fixed lines and other services."

Du had set aside about half its net profit for last year in preparation for royalty payments. Cash left over is likely to be used to help reduce debt. Du last year had an additional Dh600m to pay back debt after the Government levied a lower-than-expected royalty charge.

Du is 39.5 per cent owned by Emirates Investment Authority, the sovereign fund that is also a major shareholder in Etisalat, 19.75 per cent by Mubadala Development, a strategic investment company owned by the Abu Dhabi Government, and 19.5 per cent by Dubai Holding, with the remaining stake held by public shareholders.

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