Saudi Telecoms Sector: Mobily still ahead

Etihad Etisalat CompanyTelecom –IndustrialEEC AB: Saudi 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 Saudi Arabia over the next few years.Mobily has taken a clear lead in 3.5G mobile data,which is the fastest-growing segment of the market.While Mobily’s strong focus on mobile is a clearpositive, it is also making selective investments infixed-line service.ImplicationsOur preferred stock in the Saudi telecom sector isMobily, which we rate as Overweight. Mobily 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 Capital10310198969391888683MobilyGrowth still intactResearch DepartmentMazhar Khan, Equity Research Analyst966 12119248, khanm@alrajhi-capital.comMobily’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 Mobily to increase promotional activitiesgoing forward along with bundling packages to stimulate handset sales. Thus,we still believe that Mobily 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 Mobily to achieve a robustgrowth similar to that seen in Q1 and Q2.Gross margin still healthy but under pressure: Mobily’s gross margin hasbeen falling as the company has concentrated more on growth. Though stillhealthy 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 Mobily’s balance sheet stronger than its peer STC (netdebt/EBITDA is 1.1x). With very healthy finances, Mobily 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: Mobily paid a dividend ofSR1.25 for the first half of 2011. It is worth noting that Mobily 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 Mobily 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). Mobily 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