<strong>Saudi</strong> TelecomTelecom –Industrial04 December 2011STC’s balance sheet isexpanding as a result ofinvestment overseasSTC’s financial ratios aremostly healthyWhile capex declined in 2011,we expect it to increase in thenext couple of years as STCwill look for more inorganicexpansionBalance Sheet (SARmn) 12/09A 12/10A 12/11E 12/12E 12/13ECash and Cash Equivalents 7,710 5,904 8,769 8,263 7,102Current Receivables 11,461 8,847 9,727 13,500 13,576Inventories 710 732 858 920 926Other current assets 2,782 3,183 3,930 3,930 3,930Total Current Assets 22,663 18,666 23,285 26,614 25,534Fixed Assets 52,737 55,135 56,070 63,592 70,245Investments 2,533 2,540 2,644 2,644 2,644Goodwill - - - - -Other Intangible Assets 29,222 31,806 29,218 28,181 27,143Total Other Assets 2,433 2,561 2,349 2,349 2,349Total Non-current Assets 86,924 92,043 90,282 96,766 102,381Total Assets 109,587 110,709 113,566 123,380 127,915Short Term Debt 8,579 8,452 6,666 6,666 6,666Trade Payables 20,762 18,190 20,171 25,793 25,927Dividends Payable - - - - -Other Current Liabilities (0) 0 0 0 (0)Total Current Liabilities 29,341 26,642 26,837 32,459 32,593Long-Term Debt 22,711 21,736 24,497 24,497 24,497Other LT Payables 3,859 5,868 4,933 4,933 4,933Provisions 2,844 2,995 3,030 3,030 3,030Total Non-current Liabilities 29,414 30,599 32,460 32,460 32,460Minority interests 8,798 8,469 7,168 7,494 7,876Paid-up share capital 20,000 20,000 20,000 20,000 20,000Total Reserves 22,035 24,998 27,102 30,968 34,986Total Shareholders' Equity 42,035 44,998 47,102 50,968 54,986Total Equity 50,833 53,468 54,270 58,462 62,862Total Liabilities & Shareholders' Equity 109,587 110,709 113,566 123,380 127,915Ratios 12/09A 12/10A 12/11E 12/12E 12/13ENet Debt (SARmn) 23,580 24,284 22,394 22,900 24,061Net Debt/EBITDA (x) 1.14 1.24 1.09 1.06 1.04Net Debt to Equity 46.4% 45.4% 41.3% 39.2% 38.3%EBITDA Interest Cover (x) 20.1 13.1 13.3 12.7 12.8BVPS (SAR) 21.02 22.50 23.55 25.48 27.49Cashflow Statement (SARmn) 12/09A 12/10A 12/11E 12/12E 12/13ENet Income before Tax & Minority Interest 12,130 10,983 8,741 8,988 9,924Depreciation & Amortisation 7,799 8,645 8,845 9,483 10,026Decrease in Working Capital (3,671) 175 (828) 1,787 53Other Operating Cashflow (302) (1,024) (251) (796) (924)Cashflow from Operations 15,956 18,780 16,507 19,461 19,079Capital Expenditure (15,637) (14,677) (8,436) (15,967) (15,641)New Investments - (75) (30) - -Others 2,094 1,706 393 - -Cashflow from investing activities (13,542) (13,046) (8,073) (15,967) (15,641)Net Operating Cashflow 2,413 5,734 8,434 3,495 3,439Dividends paid to ordinary shareholders (5,943) (6,109) (4,441) (4,000) (4,600)Proceeds from issue of shares - - - - -Effects of Exchange Rates on Cash - - - - -Other Financing Cashflow 3,874 (329) (1,244) - -Cashflow from financing activities (2,764) (7,540) (4,710) (4,000) (4,600)Total cash generated (351) (1,806) 3,724 (505) (1,161)Cash at beginning of period 8,061 7,710 5,904 8,769 8,263Implied cash at end of year 7,710 5,904 9,629 8,263 7,102Ratios 12/09A 12/10A 12/11E 12/12E 12/13ECapex/Sales 30.8% 28.3% 15.3% 27.2% 25.3%Source: Company data, Al Rajhi CapitalDisclosures Please refer to the important disclosures at the back of this report. 14
Etihad Etisalat CompanyTelecom –IndustrialEEC AB: <strong>Saudi</strong> Arabia04 December 2011US$9.33bn 55.3% US$8.72mnMarket cap Free float Avg. daily volumeTarget price 70.00 39.3% over currentConsensus price 72.51 44.3% over currentCurrent price 50.25 as at 03/12/2011Underweight Neutral OverweightOverweightKey themesWe expect mobile to continue to outperform fixedlinetelecom in <strong>Saudi</strong> Arabia over the next few years.<strong>Mobily</strong> has taken a clear lead in 3.5G mobile data,which is the fastest-growing segment of the market.While <strong>Mobily</strong>’s strong focus on mobile is a clearpositive, it is also making selective investments infixed-line service.ImplicationsOur preferred stock in the <strong>Saudi</strong> telecom sector is<strong>Mobily</strong>, which we rate as Overweight. <strong>Mobily</strong> isperforming well operationally and offers stronggrown in the near term at a reasonable valuation.PerformanceRSI10Vol thEarningsPeriod End (SAR) 12/10A 12/11E 12/12E 12/13ERevenue (mn) 16,013 19,474 22,226 24,827Revenue Growth 22.6% 21.6% 14.1% 11.7%EBITDA (mn) 6,165 7,276 8,084 8,814EBITDA Growth 27.5% 18.0% 11.1% 9.0%EPS 6.02 7.01 7.74 8.45EPS Growth 39.7% 16.6% 10.3% 9.2%Source: Company data, Al Rajhi CapitalValuation4.54.03.53.02.52.01.51.00.50.056514641703010 8642Price Close MAV10 MAV50 Relative to SASEIDX (RHS)11/10 03/11 05/11 08/11 11/11Source: BloombergEV/Sales (x)01/08 01/09 01/10 01/11Source: Company data, Al Rajhi Capital10310198969391888683<strong>Mobily</strong>Growth <strong>still</strong> intactResearch DepartmentMazhar Khan, Equity Research Analyst966 12119248, khanm@alrajhi-capital.com<strong>Mobily</strong>’s Q3 results were respectable but below our estimates. Revenue growthof 16% y-o-y was decent, while net profit grew by a meagre 8%. Intensepromotions coupled with handset sales continue to squeeze gross margin whichcontracted in Q3 by 460bps from same quarter last year. We believe revenueand net profit growth will moderate from now on as the market is reaching amaturity stage. That said, we expect <strong>Mobily</strong> to increase promotional activitiesgoing forward along with bundling packages to stimulate handset sales. Thus,we <strong>still</strong> believe that <strong>Mobily</strong> has at least another two years of double digitgrowth. On the back of Q3 results, we have modestly cut our overall forecastsand set a new target price of SAR70, implying 39% upside. We retain ourOverweight rating.Revenue growth on remain double digit: Revenue grew by 16% year-on-yearin Q3 after climbing by 29% and 25% in Q1 and Q2 respectively. We think themain reason for the slowdown was weak handset sales in Q3. We believe revenuegrowth should remain strong (17% y-o-y) in Q4 on the back of 1) the launch ofiphone 4s which is likely to boost handset sales, and 2) Hajj season whichwitnessed more visitors compared to last year. That said, Q4 last year wasextremely strong and thus making it difficult for <strong>Mobily</strong> to achieve a robustgrowth similar to that seen in Q1 and Q2.Gross margin <strong>still</strong> healthy but under pressure: <strong>Mobily</strong>’s gross margin hasbeen falling as the company has concentrated more on growth. Though <strong>still</strong>healthy at 53.3%, gross margin contracted in Q3 by 460bps, continuing thepattern that started in Q2 2011 due to fierce competition and handset sales. Weexpect similar contraction in Q4, which will translate into weak bottom linegrowth. Nevertheless, we believe that the adverse impact of growing handsetsales on margins has been already felt in 2011. Therefore, we think gross marginwill fall gradually over the next two years as the company will concentrate onmaintaining its double digit growth, but the fall should not be as steep as evidentin 2011.Balance sheet remains strong: Net debt was SAR6.4bn at the end of Q3,down from SAR6.9bn at the end of Q2. Higher EBITDA and lower debt pushedthe net debt/EBITDA ratio further down to 0.9x at the end of Q3, versus 1.1x oneyear ago. This makes <strong>Mobily</strong>’s balance sheet stronger than its peer STC (netdebt/EBITDA is 1.1x). With very healthy finances, <strong>Mobily</strong> can continue to investfor growth. With ROE and ROCE strongly placed at 29.1% and 21.2% for 2011,we believe the company might declare stock dividends in the near future.Higher dividend payout will favour the stock: <strong>Mobily</strong> paid a dividend ofSR1.25 for the first half of 2011. It is worth noting that <strong>Mobily</strong> board hasapproved a dividend payout ratio of not less than 40% of its net profits in 2011.Hence, we estimate H2 dividend to be higher (SAR1.75 per share), indicating fullyear dividend of SAR3.0 implying an attractive dividend yield of 6%.Conclusion: We believe <strong>Mobily</strong> has at least two years of double digit growthconsidering the launch of NGN network coupled with its focus on domesticmarket. Though margins have slipped, robust revenue growth will continue todrive profitability. Accordingly, we have cut our earnings forecasts toincorporate falling margins in our model. Our new target price is now SAR70.0(old target: SAR72.9). <strong>Mobily</strong> trades at a 2012 PE of 6.5x and EV/EBITDA of5.0x.Disclosures Please refer to the important disclosures at the back of this report.Powered by Enhanced Datasystems’ EFA Platform 15
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