Etihad Etisalat (Mobily) Initiating Coverage
STRONG BUY April 25th, 2007
Current Price (AED) 51.75 Target Price (AED) 78.00 Investment Highlights 1-year Total Return 51%
Company Data • We are initiating coverage on Etihad Etisalat (Mobily) with a Strong Buy recommendation and a one year target price of SAR 78. We believe that the market has incorrectly priced the growth Country KSA potential of Mobily and therefore believe that the stock is significantly undervalued. We arrive Sector Telecom at our target price of SAR 78 based on a peer analysis of price-to-earnings-to-growth (PEG) Exchange TASI ratios. Shares Outstanding (mn) 500 Market Cap (mn) SAR 25,875 • Mobily is trading at 15.4x’s trailing and 14x’s 2007 EV/EBITDA, and 28x’s trailing and 25x’s Net Debt (mn) SAR 9,414 2007 forecasted earnings. Enterprise Value (mn) AED 35,289 • Mobily entered the Saudi mobile market in 2005 as the second provider of mobile services in the Kingdom. The company’s success to date has been exceptional, capturing over 30% of the
Stock Data mobile market while posting positive net income in 2006.
52 Week High SAR 101.25 • We expect Mobily’s success to continue in the near future. Mobile penetration in the Kingdom 52 Week Low SAR 38.00 currently stands at 81% which is considerably lower than other GCC countries providing a Yield N/A growing market for operators. This will allow Mobily to continue to grow revenues and profit- Beta vs. ADSMI 1.18 ability in spite of increasing levels of competition (entrance of Mobile Telecommunications Co Bloomberg EEC AB (MTC) into the Saudi mobile market). We forecast revenue and profitability to slow in 2009 and onwards as mobile penetration in the Kingdom approaches saturation and new competition gains a foothold in the market place. • Mobily has applied to the Saudi Capital Market Authority to issue an additional 166 million shares through a secondary offering. We have included this dilution event in our forecast and Performance—Past Twelve Months while we anticipate this to be a successful offering we have concerns about how the capital will be used. 110 7 100 • The most notable risks in our one year target price include: continued deterioration in overall 6 90 equity market sentiment in Saudi; Mobily capturing significantly less market share and experi- 80 5 70 4 encing a larger decline in ARPU than our forecast as a result of increasing competition. 60
Price 3 50 Volume (mn) Volume 40 2 30 1 20 Financial Highlights 10 0 Apr-06 Jun-06 Aug-06 Oct-06 Jan-07 Mar-07 Year End as of December 31st (SAR mn) 2006A LTM 2007E 2008E 2009E 2010E 2011E
Revenue 6,183 6,933 8,332 10,827 12,138 12,772 13,291 Revenue Growth 268.0% NA 34.7% 29.9% 12.1% 5.2% 4.1%
EBITDA 2,125 2,286 2,508 4,082 4,962 5,411 5,640 EBITDA Margin 34.4% 33.0% 30.1% 37.7% 40.9% 42.4% 42.4% EBITDA Growth N/A NA 18.1% 62.8% 21.5% 9.0% 4.2%
Net Income 700 913 1,371 2,983 3,930 4,440 4,763 Net Income Margin 11.3% 13.2% 16.5% 27.5% 32.4% 34.8% 35.8% Net Income Growth N/A NA 95.7% 117.6% 31.8% 13.0% 7.3%
EPS 1.40 1.83 2.06 4.47 5.90 6.66 7.14 Darren K Smith, CFA EPS Growth N/A NA 46.8% 117.6% 31.8% 13.0% 7.3% Vice President [email protected] Dividend Per Share - - - - 1.80 1.80 1.80 Payout Ratio 0.0% 0.0% 0.0% 0.0% 30.5% 27.0% 25.2% Munira Mukadam Business Analyst Net Debt 8,892 9,414 149 - - - - [email protected] Book Value 4,533 4,784 14,570 17,553 20,283 23,524 27,086 Book Value Per Share 9.1 9.6 21.9 26.3 30.4 35.3 40.6 Justin Tantalo Business Analyst Va lua tion [email protected] EV/Revenue 5.7 5.1 4.2 3.3 2.9 2.8 2.7
EV/EBITDA 16.6 15.4 14.1 8.6 7.1 6.5 6.3 Contact Us P/E 36.9 28.3 25.2 11.6 8.8 7.8 7.2
Dividend Yield 0.0% 0.0% 0.0% 0.0% 3.5% 3.5% 3.5% Gulf Capital Group Dubai International Financial Centre PB 5.7 5.4 2.4 2.0 1.7 1.5 1.3 Dubai, United Arab Emirates ROE 15.5% 19.1% 9.4% 17.0% 19.4% 18.9% 17.6% Tel: +971 4 363 5730 Fax: +971 4 363 5739 NOTES: EPS data is based on outstanding shares as per calendar year end. Forecasted per share data as sumes that Mobily is successful in their planned issuance of 166 million s hares Gulf Capital Group does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decisions.
TABLE OF CONTENTS
FORECAST AND FINANCIAL OVERVIEW...... 1 Revenues ...... 1 Fixed Line Expansion – A Failed Attempt ...... 6 EBITDA ...... 6 Net Income ...... 7 Capital Spending ...... 9 Show me the Money ...... 9 THE ROAD AHEAD ...... 11 Two’s Company, Three’s a Crowd ...... 11 An Expensive Deal ...... 11 VALUATION ...... 13 PEG Ratio Analysis ...... 13 Relative Value – Market Share vs. Market Cap ...... 15 Traditional Multiples Analysis ...... 16 Free Cash Flow Calculation ...... 16 Weighted Average Cost of Capital ...... 17 Discounted Cash Flow Analysis ...... 18 Sensitivity Analysis – Discounted Cash Flow ...... 18 FINANCIALS ...... 21 APPENDIX A: COMPANY OVERVIEW ...... 22 Board of Directors ...... 22 The story to date ...... 23 Network Coverage ...... 23 Current Operations ...... 24 End of the monopoly ...... 24 Moving Forward ...... 25 Financial Highlights ...... 26 Recent Financings ...... 26 APPENDIX B: MENA MOBILE TELECOMMUNICATIONS OVERVIEW ...... 28 Liberalization in the MENA region ...... 28 MENA Mobile Operators ...... 29 A Changing Landscape ...... 30 MENA Mobile Penetration ...... 31 Subscriber Growth Remains Strong ...... 31 Price Decline With Increased Competition ...... 33 April 25th, 2007
FORECAST AND FINANCIAL OVERVIEW
Mobily hit the Saudi mobile market hard in 2005 as the second telecom operator providing mobile services. The market’s anticipation to the end of Saudi Telecom Company’s (STC’s) monopoly proved to be an exceptional catalyst for Mobily’s operations propelling the company to 30% market share in less than two years. Our forecasts for 2007 and 2008 reflect continued growth in revenue and robust business for Mobily. Although we expect to see continuous growth in revenues, EBITDA and net income over our five year forecast period, we believe growth will level off once the third telecom operator establishes themselves in the Saudi market in 2008 and 2009.
Exhibit 0.1: Mobily Key Performance Indicators – 2006 to 2011
Key Indicators Year End as of December 31st (SAR mn) 2006A 2007E 2008E 2009E 2010E 2011E We expect EBITDA Revenues 6,183 8,332 10,827 12,138 12,772 13,291 to reach SAR 5.6 EBITDA 2,125 2,508 4,082 4,962 5,411 5,640 billion by 2011 EBITDA Margin 34% 30% 38% 41% 42% 42% Net Income 700 1,371 2,983 3,930 4,440 4,763 Net Income Margin 11% 16% 28% 32% 35% 36% Source: Company Reports, GCG Analysis
Revenues
We expect Mobily’s top line to continue to grow, but at a declining rate. Mobily’s tremendous success in its first two years of operations has been a result of two primary factors:
1) Anticipation of the end of STC’s monopoly – We believe that the impact of competition in the Saudi mobile market cannot be understated. With subscribers in the Kingdom having been limited to one operator historically, the opportunity for choice has helped propel Mobily’s revenue to unanticipated levels early in the entity’s life as subscribers have moved from STC to Mobily The impact that Mobile Number Portability (MNP) has had on the subscriber migration (from STC to Mobily) is significant. Without the introduction of MNP Mobily’s subscriber base would be materially lower today. 2) Growing mobile penetration - Mobily entered the Saudi mobile market when mobile penetration was approximately 40%. Since the company’s inception, penetration in the Kingdom has doubled and it now exceeds 80%. This has enabled Mobily to capture a significant portion of new subscribers in the market.
While penetration is expected to continue to increase, the initial excitement associated with “choice” in the mobile market has passed; particularly when one considers the entrance of a third operator (MTC of Kuwait) into the market. This will have a significant impact on Mobily’s top line growth prospects.
We expect the third mobile services provider to have a greater impact on STC subscriber growth than Mobily. This is primarily due to the fact that STC a has much a larger subscriber base and hence has more to lose than Mobily. STC has previously been accused of lower service quality, making competitive services more
Etihad Etisalat – Mobily 1 April 25th, 2007
attractive. Exhibit 0.2 shows our forecasts for subscribers in the Kingdom. We anticipate that in 2008 STC will be faced with a declining subscriber base, while Mobily subscribers will continue to grow (albeit at a much slower rate than the first two years).
Exhibit 0.2: Saudi Arabia Mobile Subscribers – 2006 to 2011 The third telecom license provider will have a grater 35,000 impact on STC 30,000 market share than 25,000 Mobily 20,000
(000s) 15,000
10,000
5,000
0 2006A 2007E 2008E 2009E 2010E 2011E
STC Mobily MTC Source: Company Reports, GCG Analysis
Saudi’s Communications and Information Technology Commission (CITC) received the largest bid from Kuwait’s Mobile Telecommunications Company (MTC) as the third mobile services provider. This will be Mobily’s biggest threat, as MTC has an excellent track record and has been successful in other cross border expansions. As shown in exhibit 0.3, our revenue forecasts for Mobily slow after 2008 while exceeding SAR 13 billion in 2011.
Exhibit 0.3: Mobily Top Line Estimates – 2006 to 2011 (Millions) 13.29 Top Line for Mobily 12.77 12.14 will continue to 10.83 exhibit strong growth in the next 8.33
two years 6.18
2006A 2007E 2008E 2009E 2010E 2011E
Source: Company Reports, GCG Analysis
Advantage
Mobily should expect continued revenue growth in the next couple of years based on several factors including an increasing subscriber base, increasing mobile penetration rate, and a relatively stable ARPU.
Etihad Etisalat – Mobily 2 April 25th, 2007
Increasing Subscriber Base
When Mobily entered the Saudi market, mobile penetration was at 40%. Mobily not only managed to attract millions of new subscribers, but was also able to take a significant share of STC’s subscribers. The main factors that allowed them to do so were:
1. Cheaper Rates – While STC’s rates are cheaper within its own network, when comparing the trans-network charges Mobily is clearly the better option. On average Mobily’s charges for prepaid plans (for calls and sms/mms) are slightly cheaper than STC’s. Mobily has a fixed rate for national calls and data services, but segregates prices based on peak and off-peak hours. With a large share of the population subscribing to the newer carriers, STC stands to lose out in this price war.
Exhibit 0.4: Price Comparison – Mobily vs. STC
STC Mobily Mobily’s trans- Same Different network rates are Price (SAR) Network Network Anees Wafeer cheaper than STC’s Pre-paid Plan - SIM Card 100 100 75 75 - Initial Credit - - 75 75 Call Charges - Peak Hours 0.65 0.85 0.83 - - Off-Peak Hours 0.65 0.85 0.73 - - Favourite Number (choice of one Ntl. No.) - - 0.63 - - 1st and 2nd minute - - - 0.79 - 3rd minute onwards - - - 0.69 SMS Charges - National (Same Network) 0.25 0.35 0.25 0.25 - International 0.45 0.45 0.50 0.50
Source: Company Reports, GCG Analysis
2. Mobile Number Portability – In June 2006 Saudi welcomed the regulation allowing Mobile Number Portability, a facility allowing customers to switch between carriers while maintaining the same number. It allowed Mobily to attract STC customers who may have hesitated in switching carriers at the cost of losing their original number(s).
3. 3G and 3.5G Services – Mobily initiated the launch of 3G services in 2005 and in June 2006 they introduced their new and advanced 3.5G services for the first time in Saudi Arabia. Their 3.5G network provided customers access to mobile television, video calling, audio/video on demand, high speed internet and multiplayer gaming. As a larger percentage of the youth is now exposed to the cellular technology at a very early age, services such as mobile television and multiplayer gaming were an immediate hit. At the same time, video calling and high speed internet have become a crucial factor for the business community that travels on an on-going basis. As Mobily entered the market for both 3G and 3.5G services before STC, they have been able to attract over 800,000 active subscribers to this high end service offering. This makes Mobily the largest 3G mobile operator in the Middle East.
Etihad Etisalat – Mobily 3 April 25th, 2007
Penetration on the rise
Saudi’s penetration has been growing exponentially over the past few years and currently stands at 81%. It has the largest subscriber base in the Middle East potentially enabling all three service providers to operate profitably. As new carriers enter the market, customers are provided with a choice of services. We expect penetration to surpass 100% by next year and reach 112% by 2011.
Exhibit 0.5: Saudi Mobile P enetration – 2005 to 2011 112% 108% 110% Saudi Mobile 102% Penetration should 93% reach 112% by 2011 81%
61%
2005A 2006A 2007E 2008E 2009E 2010E 2011E
Source: Company Reports, IMF, ITU, GCG Analysis
Saudi is characterized by a large and relatively wealthy population, presenting the opportunity for Mobily to sweep up more subscribers based on a superior product offering. Over the years, STC has been criticized about the low quality of their services. Mobily has been successful at capturing market share because of their ability to provide better services at competitive rates. MTC, is expected to do the same. We thus anticipate that the majority of the new mobile users will be inclined to use either Mobily or MTC’s services.
MTC is expected to begin operations by early 2008. As of March 2007, Mobily had 31% of the market share. We expect this to increase to 34% by the end of the year. If MTC begins operations in early 2008, we believe Mobily’s ability to capture additional subscribers will be materially affected. Nevertheless, we anticipate that Mobily will capture 38% of the total market share by 2011.
Exhibit 0.6: Mobily Subscribers and Market Share – 2006 to 2011
By 2011 Mobily is 12,000 40% 38% expected to capture 10,000 38% of the market 36% 34% 8,000 32% 6,000 30%
(000s) 28% 4,000 26% 24% 2,000 22% 0 20% 2006A 2007E 2008E 2009E 2010E 2011E
Subscribers Market Share Source: Company Reports, IMF, ITU, GCG Analysis
Etihad Etisalat – Mobily 4 April 25th, 2007
ARPU affect
While we anticipate ARPUs in the Kingdom to fall as a whole, the impact on Mobily will be less severe than that of STC. This is due to the fact that Mobily is starting with a much smaller ARPU to begin with as a result of their competitive pricing strategy coming into the market. Two additional factors impacting ARPU are:
1. Competition – Increased competition will have an impact on prices. Current operators can expect downward pressure on prices, as a third carrier settles in. Since Mobily’s ARPU is currently significantly lower than STC’s, we expect the negative impact to be greater on the latter. As Saudi Arabia is not the cheapest mobile provider in the region there is room to reduce overall tariff rates. As Mobily already provides slightly cheaper rates on average its ARPU should not be materially affected.
Exhibit 0.8: Saudi Tariff Comparison - 2006
Mobily’s prepaid SAR 0.78 SAR 0.75 charges are lower than STC’s
SAR 0.30 SAR 0.31 SAR 0.25 SAR 0.18
STC Mobily Etisalat (UAE) Prepaid Minute Prepaid SMS
Source: Company Reports, GCG Analysis
2. High End Users - Mobily has managed to remain competitive by providing value added services at better prices. Mobily’s ARPU currently is lower than STC’s as the latter has a bigger high value customer base. Mobily has already managed to attract a significant number of customers to their 3G and 3.5G services. If they continue doing so, they will be able to increase their high value customer base which in turn will help them maintain their ARPU, in spite of competition.
While competition will put downward pressure on the company’s ARPU, the companies current pricing structure and their ability to attract high end users will help stabilize ARPU. We believe ARPU will consequently reduce marginally over the years and expect ARPU to reach SAR 99 by 2011.
Etihad Etisalat – Mobily 5 April 25th, 2007
Exhibit 0.8: Mobily ARPU - 2006 to 2011
101 100 Mobily’s ARPU by 100 99 99 2011 will range around SAR 99
86
2006A 2007E 2008E 2009E 2010E 2011E
Source: Company Reports, GCG Analysis
Fixed Line Expansion – A Failed Attempt
Mobily recently bid for Saudi’s second fixed line operator license - unsuccessfully. The three telecom providers that had been short listed by the CITC, namely Verizon Communications from the US, PCCW from Hong Kong (Al Mutakamilah) and Bahrain Telecommunications from Bahrain (Al Atheed Consortium), have all received approval to operate the country’s new fixed line network. The PCCW and Batelco consortia also made 52 bids each for spectrums in 13 regions. Verizon, on the other hand, will operate an optical fixed line service alone. The CITC is yet to announce the exact value of the bids, but have confirmed that the amount is much lower than the bid for the country’s third mobile license. The approved operators are expected to help increase broadband penetration in the country to 10% of households by 2010, as compared to the current 1%. All three new operators will have to undergo an IPO, offering at least 25% of their capital to the public and 10% to the government. Operations are expected to start within a year from securing the license.
EBITDA
As Mobily is in its growth stage we expect EBITDA to grow at a rate similar to that of revenues. In 2006 EBITDA margin was about 34%, much lower than its domestic competitor STC (EBITDA of 62%) as a result of Mobily’s growth profile. By 2011 we expect EBITDA to increase to SAR 5.6 billion with an EBITDA margin of 42%. While STC has the second largest EBITDA margin of GCG’s regional telecom universe, we do not anticipate Mobily to achieve this level of success (nor do we anticipate that STC will maintain its current margin). Our EBITDA forecasts are based on the following variables:
1) We do not feel that STC is a fair benchmark to forecast Mobily’s EBITDA margin as their margin still reflects the benefits derived from operating in a monopolistic environment. We anticipate STC’s EBITDA margin to fall closer to the regional average as competition continues to eat away at STC’s business. STC’s EBTIDA margin fell from 69% in 2005 to 62% in 2006. For Mobily to continue to gain market share it must provide competitive pricing in a market with three operators.
Etihad Etisalat – Mobily 6 April 25th, 2007
Exhibit 0.9: Regional Carriers EBITDA Margin - 2006 Etisalat has an Etihad Etisalat (Mobily) 33% EBITDA Margin of 77%, the highest in Etisalat 77% the region, followed by STC at 62% Saudi Telecom Co. 62%
Qatar Telecom 59%
Bahrain Telecom Co. 49%
Mobile Telecommunications Co. 47%
Average Orascom Telecom Holding 43% EBITDA Margin: 53% National Mobile Telecommunication Co. 30%
Source: Company Reports, GCG Analysis
2) As shown in Exhbit 0.9 the regional average EBITDA margin is approximately 53%. We are anticipating that Mobily’s long-term EBITDA margin will approach that of the regional average.
We are forecasting a 42% EBITDA margin by 2011 as shown in exhibit 1.0.
Exhibit 1.0: Mobily EBITDA and EBITDA Margin - 2006 to 2011
6,000 45% EBITDA Margin 40% 5,000 will continue to 35% grow till it stabilizes 4,000 30% around 42% 25% 3,000 20%
(SAR (SAR 000s) 2,000 15% 10% 1,000 5% 0 0% 2006A 2007E 2008E 2009E 2010E 2011E
EBITDA EBITDA Margin
Source: Company Reports, GCG Analysis
Net Income
We foresee net income maintaining positive growth until the end of our forecast period in 2011. Mobily is in its growth stage and should see net income growing over the next 3-5 years. While the average net income margin from our regional peers is approximately 30% we are forecasting a higher net income margin for the following reasons:
Etihad Etisalat – Mobily 7 April 25th, 2007
1) Mobily will continue to focus on growing and maintaining market share in its domestic market. The majority of regional peers have entered into expansive and expensive cross border transactions. A lot of the funding for these projects has come through debt which results in significant interest expense having a material impact on net income.
2) Peers undergoing expansion often engage in joint ventures or partnerships whereby there is a minority stake (sometimes significant) which results in a material adjustment to net income and the overall margin.
Mobily’s Net Exhibit 1.1: Regional Carriers Net Income Margin (2006) Income Margin is Etihad Etisalat (Mobily) 11% currently one of the lowest in the region Bahrain Telecom Co. 39% at 11% as of 2006 Saudi Telecom Co. 38%
Qatar Telecom 37%
Etisalat 36%
Mobile Telecommunications Co. 27%
National Mobile Telecommunication Co. 23% Average Net Income Orascom Telecom Holding 18% Margin: 31%
Source: Company Reports, GCG Analysis
Until Mobily announces plans for international expansion or a significant capital expansion we will continue to forecast a net income margin which is higher than its regional peers. We expect net income margins to reach 36% by 2011, as displayed in exhibit 1.2.
Exhibit 1.2: Mobily Net Income and Net Income Margin - 2006 to 2011
6,000 40% Mobily Net Income Margin is expected 5,000 to reach 36% by 30% 4,000 2011 3,000 20%
(SAR 000s) 2,000 10% 1,000
0 0% 2006A 2007E 2008E 2009E 2010E 2011E
Net Income Net Income Margin
Source: Company Reports, GCG Analysis
Etihad Etisalat – Mobily 8 April 25th, 2007
Capital Spending
As all new operators, Mobily has undergone a significant capital spending program to build out its mobile network. In May 2006, Mobily aimed to install more than 2,500 base stations to cover 90% of the populated territories of the Kingdom by end of June 2006. Mobily’s major contractors included Alcatel, Motorola, Ericsson and Huwawie.
Mobily’s next major expansion project is to create a fiber optic network, under the name Saudi National Fiber Network, with 12,600 kilometers of fiber optics around the Kingdom to enhance and support their advanced services. The project ownership is shared between Mobily and two other partners, namely Bayanat and Integrated Communications. The total cost of the project is estimated to be around SAR 1 billion, of which Mobily’s share is about one-third. The project is being constructed and deployed in seven phases, three of which have been completed including the central, western and eastern regions. Mobily expects the network to be constructed and deployed in phases over the next two years.
As time goes by, and its network building approaches completion we expect investment in fixed assets to decline. For 2007 we estimate additional expenditures of about SAR 1.455 billion. From 2008 onwards we estimate capex to average 10% of the total sales revenues.
Exhibit 1.3: Mobily Capital Expenditures - 2006 to 2011 (Billions)
Capital 1.42 1.45 1.33 expenditures 1.28 1.21 average 10% of 1.08 total revenue over our forecast period
2006A 2007E 2008E 2009E 2010E 2011E
Source: Company Reports, GCG Analysis
Show me the Money
Mobily recently signed the biggest deal in Islamic finance ever: a debt agreement worth SAR 10.78 billion, to be paid off over the next 6 years. The company has also submitted a request to Saudi’s Capital Market Authority (CMA) to float an additional 20% of the company’s capital, by issuing approximately 166 million shares. At current market prices this will bring in proceeds worth over SAR 8 billion. Our model includes this dilution event and as of the second quarter of 2007, we forecast Mobily to have over SAR 10 billion in cash while having SAR 10 billion in debt.
Etihad Etisalat – Mobily 9 April 25th, 2007
The tremendous amount of cash inflow raises questions as the company has provided no indication of how the monies will be used. The two main prospects are:
1. Settle existing debt - Is the company going to pay down its current debt? It makes very little sense to us to have SAR 10 billion in idle cash while holding SAR 10 billion in debt. 2. International expansion - Is Mobily planning to follow the regional trend and expand operations beyond their domestic market?
While management has provided no indication over any major expansion or major capital expenditure, something must be done with this expected influx of cash.
Etihad Etisalat – Mobily 10 April 25th, 2007
THE ROAD AHEAD
Two’s Company, Three’s a Crowd
If it was not for Etisalat’s outstanding bid for the license as the second telecom operator, it would have been MTC counting the monies at this point in the Saudi Arabian telecom expansion. In 2004 Etisalat outbid MTC by a substantial margin to win the license, and Mobily came into being. In mid 2006, Etisalat outbid MTC once again to win the Egyptian mobile license; by almost EGP 2.5 billion. It is clear that MTC has been looking to expand its operations in the region and will prove to be fierce competition for the existing carriers. Higher valued added services such as mobile internet, mobile television and mobile gaming are gaining popularity among the youth. With almost half the population being under the age of 19 Mobily has the opportunity to continue to attract new subscribers with their 3.5G services and keep the competition at bay.
An Expensive Deal
The $6.1 billion bid put forth by Kuwait’s MTC came as a shock to many, as it is the most expensive bid for a telecom license in the region thus far. MTC outdid Etisalat’s bid of $3.25 for Etihad Etisalat in 2004 for the second telecom operator license, which was the most expensive bid in the region at that time. MTC had lost out to Etisalat in its bid for the Saudi license in 2004 and more recently lost to Etisalat’s $2.9 billion acquisition in Egypt (Nile Telecom: Etisalat Misr ). MTC has been on a spending spree for the past few years with acquisition in Sudan and Nigeria. Saudi Arabia became the “21 st ” on the list of countries that have MTC operations.
Exhibit 2.0 displays some of the recent mobile transactions in the MENA region. MTC’s deal looks far more expensive when compared to other recently issued licenses. While Etisalat paid a Price/Population of $148 for the second license, MTC paid $258 Price/Population. This represents a premium of nearly 75% to Etisalat’s purchase while mobile penetration has risen from 40% to 80%.
Exhibit 2.0: Recent Mobile Transactions – MENA Region
At acquisition MTC paid a Country Operator Name Date License Price Pop Price/Pop Penet. GDP/Capita at time Price/Population of US$ (mn) Millions US$ of transaction US$ $258 for the third Saudi Etihad Etisalat 2004 2nd 3,250 22.02 148 39% 9,758 Saudi MTC 2007 3rd 6,110 23.69 258 81% 14,715 license in the Saudi Egypt Etisalat Misr 2006 3rd 2,909 70.72 41 21% 1,270 telecom market
Note: Population and GDP/Capite are IMF figures as of year end numbers prior to transaction date Saudi and Egypt Population and GDP/Capita figures as of end of 2006 are IMF estimates
Source: Company Reports, IMF, Zawya, GCG Analysis
While the Saudi and Egypt transactions were purchases of a new operator license, the recent transaction in Kuwait; Qatar Telecom’s purchase of 51% stake in Wataniya, is also worth mentioning. Qtel’s purchase price of $3.72 billion represented a 50% premium to its listed equity value at the time of the transaction. This price implied an EV/EBITDA purchase multiple of 13.5x’s. While this is
Etihad Etisalat – Mobily 11 April 25th, 2007
certainly a steep price, it is important to note that they have acquired a stake in a company with ongoing operations. Qtel’s high price thus includes the premium for control in a well established carrier with an existing subscriber base and a reputable track record.
MTC, on the other hand, justified their aggressive bidding by directing attention to the vast potential of the mobile market in the Kingdom. The demographic and economic potential bode well for the market participants. Approximately 50% of the population in Saudi Arabia is under the age of 19; and, GDP per capita has been growing at approximately 6% for the last three years. At the end of 2006 there were over 19 million subscribers between Mobily and STC. This translates into a penetration rate of just over 81% - relatively moderate considering penetration in the rest of the GCC.
Exhibit 2.1 displays the ownership structure of the MTC lead consortium planned after its IPO in 2008.
Exhibit 2.1: MTC Consortium Ownership Structure – Post IPO
MTC is expected to General issue 40% of their Organization Public, 40% capital in an IPO for Social before they begin Insurance, 5% operations in 2008 Public Pension, 5%
Saudi Investors, 25% MTC, 25%
Source: Company Reports, Zawya, GCG Analysis
Etihad Etisalat – Mobily 12 April 25th, 2007
VALUATION
We are initiating coverage on Mobily with a Strong Buy recommendation based on our belief that Mobily is trading at a significant discount considering its exceptional growth profile. The basis of our target price is an analysis of regional peers and their growth related to earnings multiples. We derive a target price of SAR 78 based on our price to earnings to growth (PEG) ratio analysis implying a total return of 51%. Our valuation assumes that Mobily is successful with its planned floatation of 166 million shares.
PEG Ratio Analysis
Mobily enters its third year of operations this May and as such it is still in the growth stage of its business/product cycle. The company is expected to generate significant growth in the upcoming quarters and years. Both the top and bottom lines are yet to reach a point where growth is more reflective of industry norms.
We have conducted a PEG (Price to Earnings to Growth) ratio analysis for our regional peer universe. We first calculated net income growth during 2006 for each of the comparable regional carriers. Using these growth figures in conjunction with their trailing PE ratios we arrive at a PEG Ratio for each of the carriers as detailed in exhibit 3.0. The average PEG from our regional peers is 1.26, with STC having the highest PEG (3.22), representing overvaluation, and Wataniya having the lowest PEG (0.14) representing undervaluation.
Exhibit 3.0: Mobily Valuation – PEG Ratio
Saudi Telecom Co. 3.22 Saudi Telecom has the highest PEG Bahrain Telecom Co. 2.40 ratio of 3.22 from our MENA region Orascom Telecom Holding 2.10 universe
Etisalat 0.48 Average PEG Ratio MENA – 1.26 Qatar Telecom 0.28
Mobile Telecom Co. 0.18
Wataniya 0.14
Source: Company Reports, GCG Analysis
To arrive at a value for Mobily shares based on our PEG comparables we have worked our way backwards. Based on our trailing twelve month earnings for Mobily and our implied net income CAGR over our forecast period we arrive at a price of SAR 78.
There are a number of key assumptions that must be discussed to further understand our valuation based on PEG ratios.
1) Expected Growth – Due to a lack of published equity research in the region, we do not have an adequate basis to provide forward estimates on regional
Etihad Etisalat – Mobily 13 April 25th, 2007
peers. For this reason, we have used the latest annual growth figures in EPS as we believe this is the best representation of future growth. We understand that this is not ideal, however, there simply is not adequate research coverage to derive a reasonable forward earnings estimate. 2) While we have used historic growth rates for our peers in developing our regional PEG ratio, we have used our four year net income CAGR as per our Mobily forecast model. We did not use our historic growth rate for Mobily as this would have provided a significant upward bias to our valuation due to Mobily’s current growth profile. 3) Mobily will be undergoing a secondary public offering in the coming months worth approximately 20% of the company’s current outstanding shares. The market has been anticipating this event for sometime and has priced this into the stock accordingly. We have therefore used 500 million shares outstanding prior to, and 666 million anticipated outstanding shares post floatation in our valuation analysis.
Again, we think it is important to highlight to readers that we are using historic growth rates for our regional peers and forecasted growth rates for Mobily as readers may not agree with our methodology or logic.
We arrived at an equity value for Mobily by multiplying the MENA PEG Ratio (1.26), times our forecasted growth rate for Mobily (59%), times our historic earnings per share (SAR 1.05) adjusted for the coming equity dilution. Our original EPS was SAR 1.40 based on 500 million shares outstanding. This generates our target price of SAR 78.
If one assumes that the market is properly valuing telecom assets based on growth rates then Mobily is significantly undervalued. We can make a strong argument that our PEG ratio analysis is highly understating our valuation because we are using our projected four year earnings growth vs. a growth rate from a shorter time frame (i.e. the next three years). We mention this because Mobily’s growth prospects are strongest in the near future.
For a better perspective, we have applied our PEG analysis to two different growth rates in our calculations. We first used Mobily’s expected 4-year net income CAGR of 59% and arrived at an equity value of SAR 78 (our target price). For comparative purposes we have taken our forecasted 3-year net income CAGR of 78% and arrived at a value of SAR 103 value.
Exhibit 3.1 shows how we arrived at our equity value according to our PEG Ratio analysis.
Etihad Etisalat – Mobily 14 April 25th, 2007
Exhibit 3.1: Mobily Valuation – PEG Ratio Analysis Our PEG Ratio analysis results in Average MENA PEG an equity value of Ratio: 1.26 SAR 78, when using Mobily’s 4-year CAGR of 59%
Average MENA PEG Price Ratio: 1.26 SAR 103 Mobily Growth: 78% Price SAR 78 Mobily Growth: 59%
Mobily EPS: 1.05 Mobily EPS: 1.05
Source: Company Reports, GCG Analysis
Note: Trailing EPS of 1.05 has been adjusted to reflect the impact of the planned share floatation
Additionally, if we assume that Mobily achieves our EPS forecast of 2.06 in 2007, and our price target of SAR 78, the stock will be trading at 38x’s trailing earnings. By applying our forecasted net income CAGR for the remaining four years of our forecast period (2008 to 2011) of 37% we arrive at a PEG ratio of 1.03 – still below the regions current PEG of 1.26. Once again, implying an undervalued stock price for Mobily.
Relative Value – Market Share vs. Market Cap
We have conducted a relative value analysis of STC vs. Mobily based on market capitalization and telecom market share as defined by telecom revenues. Our analysis uses current market capitalization and the companies’ share of revenues within the telecom market currently, and for 2007 and 2008 of our forecast period.
In theory, if two companies share the same fundamentals (margins, growth, capital structure, operating leverage etc) they should have the same ratio of market cap to market share. While we recognize that there are material differences between Mobily’s business and STC’s business we think our rudimentary analysis is worth considering.
As seen in exhibit 3.2, we plotted the percentage share of the Saudi telecom market capitalization for each of the carriers on the Y-axis and the respective shares of telecom revenues on the X-axis. The blue marker represents the position of the two carriers based on total revenues for 2006 and current market capitalization. Currently, STC has 80% of the total Saudi telecom market capitalization while having 85% of the total telecom revenue generated in 2006. Again, assuming the fundamentals for the businesses are the same, this would imply that STC is undervalued (the company should have 85% of the market capitalization based on revenue distribution between the two carriers).
Etihad Etisalat – Mobily 15 April 25th, 2007
Exhibit 3.2: Analysis of Valuation – STC vs Mobily
Share of Telecom Revenue 100% 25% 20% 15% Based on our 2008 revenue forecasts, currently STC is 80% 2 1 20% Market CapitalizationMarket
overvalued and Telecom of Share
Mobily is STC Overvalued undervalued
Shareof Telecom Mobily Overvalued MarketCapitalization
75% 80% 85% 100% Share of Telecom Revenue
Market Share based on 2006A Total Revenues 1 Market Share based on 2007F Total Revenues 2 Market Share based on 2008F Total Revenues Efficient Frontier Source: GCG Analysis
Mobily is the growth story
There is a large number of distinguishing characteristics between Mobily and STC. For this analysis, we have considered growth: Mobily being the growth story and STC being a more mature, stagnant business. The red markers indicates market share by revenue for our 2007 and 2008 forecasts as this incorporates the growth profiles for the companies over the next two years. Looking at 2008, Mobily will have approximately 25% of the combined market share. Based on the company’s current market cap (only 20% of the total) this would imply undervaluation for Mobily.
Traditional Multiples Analysis
While we generally prefer a comparable multiples method for determining value, a traditional multiples approach is not reasonable due to the Mobily’s extreme growth profile (hence our PEG analysis). Multiples based purely on historic financials will not capture the true value of Mobily. Mobily is currently trading at 15.4x’s trailing EV/EBITDA multiple and 28.3x’s trailing earnings (unadjusted for the coming dilution event). As Mobily’s EBITDA and net income grow and the business becomes a more mature operating entity, we anticipate Mobily to trade in line with its regional peers.
Free Cash Flow Calculation
While we are basing our target price on our PEG analysis we have conducted a Discounted Cash Flow (DCF) analysis as well. By 2011 we anticipate Mobily to be generating free cash flows of SAR 4.77 billion and EBITDA of SAR 5.6 billion.
Etihad Etisalat – Mobily 16 April 25th, 2007
Exhibit 3.3: Mobily Free Cash Flow – 2006 to 2011
Year End as of December 31st We expect Mobily’s 2006A 2007F 2008F 2009F 2010F 2011F SAR (millions) Free Cash Flow to EBITDA 2,125 2,508 4,082 4,962 5,411 5,640 reach SAR 5.6 Plus (less) net Interest (455) (105) 87 254 404 578 billion by 2011 Zakat 0 (28) (92) (122) (137) (147) Changes in Working Capital (311) (848) (165) (29) (70) 24 Capex (1,422) (1,450) (1,083) (1,214) (1,277) (1,329) Free Cash Flow (63) 77 2,829 3,852 4,330 4,766 Source: GCG Analysis
Weighted Average Cost of Capital
We have discounted our free cash flows using our calculated WACC of 11.05%, which is based on the assumptions as outlined in exhibit 3.4.
Exhibit 3.4: Mobily Weighted Average Cost of Capital Components
Weighted Average Cost of Capital Cost of Debt 5.44% We have used a Risk Free Rate - Ten Year US Treasury 4.66% WACC of 11.05% in Company Beta 1.18 our DCF Analysis Equity Market Premium 7.0% Cost of Equity 12.9% WACC 11.05%
Source: Bloomberg, GCG Analysis Our debt and equity weightings are based on a target capital structure and not the company’s current capital structure. Due to the immature nature of the business, the company has significant debt on its balance sheet to fund capital expenditures. The current capital structure is approximately 34% equity and 66% debt. With out the anticipation or any material capital investments in the near future and with the secondary offering that will raise approximately SAR 8 billion at current prices, we anticipate debt to be reduced materially. We are using a target capital structure of 25% debt and 75% equity. Our model actually forecasts net debt to be zero by 2008.
Exhibit 3.5: Capital Structure Comparison – Current vs. Future Our target capital structure is 25% Debt and 75%
34% Equity
75%
66%
25%
Current Capital Structure Target Capital Structure
Debt Equity
Source: Company Reports, GCG Analysis
Etihad Etisalat – Mobily 17 April 25th, 2007
We have used a 7% equity market risk premium, which we feel is appropriate for the MENA region. We arrive at our equity risk premium by taking a 5% equity risk premium for developed markets and applying a 2% emerging markets premium. We have taken a beta of 1.18 relative to the Tadawul All Shares Index.
Discounted Cash Flow Analysis
For valuation purposes we prefer to use a terminal multiple (EV/EBITDA) in 2011 vs. a perpetual growth rate. For Mobily’s valuation we have applied a 8.2x’s multiple representing an average of the regional carriers EV/EBITDA (2006 results). Based on our forecasted cash flow, WACC, and Terminal Value we arrive at a value of SAR 57.63
Exhibit 3.6: Mobily Valuation – Discounted Cash Flow Analysis (millions)
2007E 2008E 2009E 2010E 2011E Our DCF Analysis 2011 EBITDA 5,640 EV/EBITDA Multiple 8.20 provides us with an 2011 Terminal Value 46,247 equity value of SAR Discount Rate 0.900 0.811 0.730 0.658 0.592 57.63 for Mobily Total Cash Flows 77 2,829 3,852 4,330 51,013 Discounted Cash Flow 69 2,294 2,813 2,847 30,206 Sum of Discounted Cash Flows 38,229 Less Net Debt 9,414 Equity Value 28,816 Outsanding Shares 500 Equity Per Share 57.63
Source: GCG Analysis
Sensitivity Analysis – Discounted Cash Flow
We have conducted a sensitivity analysis to show the affect of several key assumptions in our DCF analysis.
Case 1: Market Share and ARPU Effect - DCF
Essential in our DCF analysis are the assumptions around mobile market share and ARPU, especially considering the entrance of a third carrier coming into the market within the next four quarters.
The two variables used in this scenario are the expected market share that Mobily captures by 2011 and Mobily’s expected ARPU in 2011. Exhibit 3.7 shows the effect on the current price of our estimate of fair value for various combinations of the two variables. Our base case is highlighted and it assumes 38% market share for Mobily and an ARPU of SAR 99 by 2011.
Etihad Etisalat – Mobily 18 April 25th, 2007
Exhibit 3.7: Scenario Analysis – MTC Market Share and Mobily ARPU
Market Share If Mobily captures ARPU (SAR) 28% 33% 38% 43% 48% 28% of the market 89 30 40 50 60 70 share by 2011, our 94 33 43 54 64 75 DCF equity value 99 36 47 58 68 80 drops to SAR 30 104 39 50 62 73 85 109 42 54 66 77 90
Source: GCG Analysis
Case 2: WACC and Terminal Multiple Effects - DCF
Our terminal multiple assumption has a significant impact on our valuation. Using our base WACC number of 11.05% there is an SAR 33 range in our estimate of fair value.
Exhibit 3.8: Scenario Analysis – WACC and Terminal Multiple
Terminal Value Multiple WACC 6.2 7.2 8.2 9.2 10.2 A change in 12.1% 42 48 54 61 67 Mobily’s Terminal 11.6% 43 49 56 63 69 Value Multiple and 11.1% 44 51 58 64 71 WACC produces an 10.6% 46 52 59 66 73 SAR 33 range in 10.1% 47 54 61 68 75 our DCF Valuation
Source: GCG Analysis
Etihad Etisalat – Mobily 19 April 25th, 2007 % % 9% 9% 15% 36.0% Margin 11.33% N/A N/A Growth Net Income Net N/A 187 Value Growth* PEG ROE 35.87 Margin 34.36% N/A 5.48 Growth Valuation Millions $US of 567 15.96 Value 1,501 Growth 267.98% Revenue EBITDA N/A Value 1,649 Div YieldSubscribers / EV EBITDA / EV / Revenue EV P/E the company the rices. 6,026 2,633
Net Debt 12,124 623 29.6% 6.9% 721 305 17.4% 8.8% 59.5% 48.9% 454 241 12.9% 37.4 14.4% 38.7% 4,438 58.8% 1,983 59.3% 44.7% 736 82.1% 16.6% 1,482 4,436 40.2% 20.9% 446 3,413 34.7% 20.5% 30.1% 76.9% 1,596 339 27.9% 45.1% 22.9 9,013 7.4% 5,583 4.3% 61.9% 3,414 14.5% 37.
4,188 68.1% 1,973 59.8% 47.1% 1,126 49.6% 26. 35 3,449 45396441 1,513 13,3001145 92045 2.03% 600 9.16% 9,267 1,069 4.20% 5,535 5.96% 0.93% 12,224 4.01% 2,395 3.50% 6,863 4,230 2,008 9.37 4,967 5.71 3,866 8.75 4.42 8.33 9.38 3.53 9.61 6.27 5.21 13.26 4.49 4.19 9.10 3.71 74% 14.34 4.82 10.83 20.44 3% 18.45 0.18 51% 12.93 5% 10% 3.22 129% 22% 0.28 27% 2.40 2.10 37% 0.14 33% 0.48 24% 36% 30% 27% 931 3,140 $ millions US$ 000's 6,703 33.08 41.44 4,601 4.26% 5,222 8.20 4.34 14.20 43% 1.26 30% m m Operators ARPU Subscribers 13,623 887 5,186 33% 2,061 29% 53% 1,129 35% 31% Market Cap US$ 13.41 ar CAGRs ar Price 2.88 9.96 4,565 538 Income Growth Income Local and hence do not reflect total subscriber base for total reflect do not hence and ED 16.70 4.55 20,636 161 SAR 50.25 SAR re as of year end 2006. Market prices are current are p prices Market 2006. end of as year re Revenue, EBITDA, and Net Income growth are three ye three are growth Income Net EBITDA, and Revenue, 1-year Net on based calculation PEG in used *Growth only, figures domestic numbers represent Subscriber Exhibit 3.9 : Key Comparables – MENA Region Teleco Average Qatar Telecom (QTEL) Telecom (BATELCO)Bahrain Co. OrascomTelecom (Mobinil) Holding 78.00 EGP 0.82 BHD QAR 237.30 13.67 2.18 65.09 15,0 2,610 6,509 (95) (211) National Mobile Telecommunication (Wataniya) Co. Mobile National KWD Emirates Telecommunications (Etisalat) Corporation A Saudi TelecomSaudi (STC) Co. 58.25 SAR 15.54 31,078 (776) Select MENA Telecom Operators Telecom MENA Select Company Telecommunications (MTC)Mobile Co. KWD 3.42 (Mobily) Etisalat Etihad 11.83 14, Company Telecommunications (MTC) Mobile Co. (Mobily) Etisalat Etihad Note: a items sheet balance and statement income All TelecomSaudi (STC) Co. Qatar Telecom (QTEL) Telecom (BATELCO) Bahrain Co. OrascomTelecom (Mobinil) Holding Telecommunication (Wataniya) Co. Mobile National Emirates Telecommunications (Etisalat) Corporation Average
Etihad Etisalat – Mobily 20 April 25th, 2007
FINANCIALS
Year End as of December 31st Income Statement (SAR mn) 2006A 2007E 2008E 2009E 2010E 2011E Revenues 6,183 8,332 10,827 12,138 12,772 13,291 COGS 2,661 3,647 4,158 4,363 4,470 4,652 SGA Expense 1,397 2,177 2,587 2,814 2,891 2,999 EBITDA 2,125 2,508 4,082 4,962 5,411 5,640 Depreciation and Amortization 845 1,004 1,095 1,164 1,237 1,308 Provisions 124 0 0 0 0 0 EBIT 1,156 1,504 2,988 3,798 4,174 4,332 Financing Costs 455 105 -87 -254 -404 -578 Zakat 0 28 92 122 137 147 Net Income 7,004 1,371 2,983 3,930 4,440 4,763
EPS 1.40 2.06 4.47 5.90 6.66 7.14
Year End as of December 31st Balance Sheet (SAR mn) 2006A 2007E 2008E 2009E 2010E 2011E Assets Cash and Cash Equivalents 548 10,435 11,468 12,323 13,656 15,425 Account Receivables 739 1,265 1,550 1,706 1,776 1,848 Inventories 38 52 57 61 62 65 Other current assets 717 877 1,075 1,183 1,232 1,282 Total Current Assets 2,041 12,629 14,150 15,274 16,726 18,620 Property, Plant and Equipment 3,848 4,807 5,308 5,871 6,425 6,960 License and Acquisition Fees 11,800 11,287 10,773 10,260 9,746 9,233 Total Non Current Assets 15,648 16,093 16,081 16,131 16,171 16,192 Total Assets 17,689 28,723 30,231 31,405 32,897 34,812
Liabilities Short term loans 7,840 0 0 0 0 0 Creditors 1,516 1,165 1,288 1,380 1,398 1,455 Due to related parties 179 179 179 179 179 179 Other current liabilities 320 320 320 320 320 320 Accrued expenses 1,687 1,890 2,090 2,239 2,269 2,361 Total Current Liabilities 11,543 3,555 3,877 4,118 4,167 4,316 Long term loans 0 8,984 7,188 5,391 3,594 1,797 Provision for Employees' End of Service Benefits 13 13 13 13 13 13 Founding Shareholders' Loan 1,600 1,600 1,600 1,600 1,600 1,600 Total Non Current Liabilities 1,613 10,597 8,801 7,004 5,207 3,410
Shareholders' Equity Paid up Capital 5000 13,667 13,667 13,667 13,667 13,667 Retained Earnings -467 904 3,886 6,617 9,857 13,420 Total Shareholders' Equity 4,533 14,570 17,553 20,283 23,524 27,086
Total Liabilities + Shareholders' Equity 17,689 28,723 30,231 31,405 32,897 34,812
Note: Equity calculation includes expected float of 20% of capital in 2007
Etihad Etisalat – Mobily 21 April 25th, 2007
APPENDIX A: COMPANY OVERVIEW
Mobily, the official brand name for Etihad Etisalat, is the second mobile service provider in the Kingdom of Saudi Arabia. Mobily was granted a 25-year license in August of 2004 and launched its services in the Kingdom on May 25 th , 2005 in accordance with a 2004 Royal Decree. In October 2004 the company floated 20% of its capital in a successful IPO which was oversubscribed 51 times. The company is expected to float an additional 20% in 2007. The current ownership of the company is two-fold: Saudi ownership, comprising public investors holding a 20% stake, while private investors own 45% of the company. The remaining 35% is held by UAE based Emirates Telecommunications Corporation (Etisalat).
Etisalat entered into a management agreement with Mobily on August 14 th , 2004. According to this contract Etisalat pays an annual management fee of $10 million (AED 36.7 million) for services provided under the agreement. These services include executive and senior management services, implementation of the network roll-out programme, management of the capital investment programme, provision of customer operations, execution of Saudization, establishment of national distribution channels, and licensing of the intellectual property rights. The term of the agreement is for seven years and can be renewed automatically for successive periods of five years, unless Etisalat gives a 12 month notice of termination or Mobily provides a six month notice of termination prior to the expiry of the applicable period.
Exhibit 4.0 shows the split of the major shareholders of the company.
Exhibit 4.0: Mobily Ownership Structure
Etisalat owns 35% Public, 20% of Mobily’s current Abdulaziz Al Saghyir Etisalat, 35% capital structure Commercial Investment Company, 5%
Rana Investment Company, 6%
Binzagr Company, 6% General Al Jomaih Holding Organization for Company, 6% Riyadh Cables Social Insurance, Group, 8% 15%
Source: Company Reports
Board of Directors
Mobily’s board of directors is comprised of 10 members, headed by the Chairman, Abdulaziz bin Saleh Al Saghyir.
Etihad Etisalat – Mobily 22 April 25th, 2007
Exhibit 4.1: Mobily Board of Directors
Position Name Chairman Abdulaziz bin Saleh Alsaghyir CEO and MD Khaled Omar Al Kaf Director H.E. Mohammed Hassan Omran Al Shamsi Director Salem Ali Abdullah Al Sharhan Director Essa Mohammed Al Haddad Director Ibrahim bin Mohammed Al Saif Director Saied bin Mohammad Obeid Binzagr Director Abdulaziz bin Hamad Al Jomaih Director Dr. Fahad bin Abdulla Al Mubarak Director Dr. Mazen Ibrahim Hassounah
TheSource: story Zawya to date
Network Coverage
Mobily’s network covers over 65 cities including the most populous regions surrounding Riyadh, Mecca, Jeddah and Medina. While parts of the northern region of the country, including over 22,000 km of major highways, are also covered by Mobily’s network, most of the southern regions remain unexplored by both carriers. Exhibit 4.2 displays Mobily’s network coverage in Saudi Arabia.
Exhibit 4.2: Mobily Network Covera ge – Saudi Arabia
Mobily’s network covers over 22,000 km of major highways and some of the most populous cities in the Kingdom
Source: Telestial
Etihad Etisalat – Mobily 23 April 25th, 2007
Current Operations
During 2006, Mobily introduced more than 15 value added services to its existing packages. The companies range of services includes SMS, MMS, mobile internet, stock news, GPRS, credit transfer, voice mail, location based service, international MMS, and many more. In June 2006 Mobily introduced advanced services available through its 3G and 3.5G networks, such as mobile TV and multiplayer gaming services. In September 2006 Mobily launched the Blackberry wireless platform in the Kingdom, targeting the mobile workforce. Blackberry services are proving to be a major attraction for high end users. While services such as video/audio on demand and multiplayer gaming are popular among the youth, mobile internet and video conferencing has attracted the business community.
Mobily has 3,610 points of sale including Mobily’s mega centers, fully branded, co- branded, and non branded stores. Mobily’s distributors and dealers handle the last three types of stores. Mobily was also the first in the region to open female dedicated sales outlets, with female staff. Additional services such as Mobily auto-payment machines and direct services with banks enabling subscribers to recharge via banking facilities are gaining popularity fast.
Mobily launches Value Added Services
In September 2006 Mobily introduced the Blackberry wireless platform to the Kingdom. The launching, delivery, supporting and selling of the Blackberry solution to the customers was assisted by Emitac Mobile Solutions, LLC, a Dubai based solutions and service provider.
Mobily offers BlackBerry Enterprise Server ™ and the BlackBerry 8700g ™ handset to its corporate customers. The handset operates in conjunction with BlackBerry Enterprise Server to enable secure, push-based wireless access to email and other corporate data. Mobily customers are able to use the handset both on Mobily’s network in Saudi as well as networks in 47 other countries via more than 87 global roaming partnership agreements. The handset enables fast access of several applications including web browsing, attachment viewing, high resolution graphic delivery, and conference calling.
It is also noteworthy that Mobily was the first mobile operator to launch value added services such as MMS, Location Based Services, International Roaming (for Prepaid SIM cards), GPRS and GPRS EDGE roaming with the speed of 200 kbps and other services including “Kelmeni”, enabling disconnected mobile numbers to send free SMSs.
End of the monopoly
After years of operating under a monopolistic regime, the Kingdom introduced competition to the mobile market. Mobily launched its operations on May 25 th , 2005 as the second mobile services provider in the Kingdom of Saudi Arabia and has gained over 30% of the market share in less than two years of operations. In its first year of operations Mobily had a subscriber base of 3.8 million and at the end of 2006 this figure had crossed the 6 million mark. Since launching its 3.5G services on June 27, 2006, the company has attracted 800,000 active 3G and 3.5G subscribers.
Etihad Etisalat – Mobily 24 April 25th, 2007
Exhibit 4.3 depicts the current market share of the nearly twenty million mobile telephone subscribers in the Kingdom.
Exhibit 4.3: Saudi Mobile Market Share (2006) Mobily has gained Etihad 31% of the market Etisalat, share since it 31% started operations in 2005
Saudi Telecom Company, 69%
Source: Company Reports
In a continuation of the liberalization wave, the CITC has recently awarded the county’s third mobile telecom license to a consortium lead by Kuwaiti-based Mobile Telecommunication Company (MTC). The group continued the regional trend of aggressive bidding strategies and paid a whopping $6.1 billion for the 25 year license. The figure dwarfs the $3.25 billion paid by Etihad Etisalat just 36 months prior and represents, by far, the highest priced license in the MENA region to date.
Moving Forward
The Saudi mobile market has seen the penetration rate more than double in the recent past. As the population continues to embrace mobile connectivity as the primary source of telecommunications, penetration levels in the country rose to 81% as of the end of 2006. Harboring the largest population in the Middle East, Saudi Arabia presents plenty of opportunity for profitable expansion of existing carriers as well as new entrants.
Exhibit 4.4: Saudi Arabian Mobile Penetration Rates – 1998 to 2006
81% Saudi mobile penetration has surged from 38% in 54% 2004 to 81% in 2006
38% 31% 22% 11% 6% 3% 4%
1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Company Reports, IMF, ITU, GCG Analysis
Etihad Etisalat – Mobily 25 April 25th, 2007
Saudi Arabia’s penetration rate is relatively low compared to countries with similar GDP per capita. The select countries highlighted in exhibit 4.5 below show the room for growth in the Kingdom. The other five members of the GCC (Oman, Kuwait, Qatar, Bahrain, and the UAE) all have penetration rates that exceed that of Saudi Arabia’s.
Exhibit 4.5: GDP Per Capita vs. Mobile Penetration Rates (USD, 2006 )
Saudi Arabia has 150.0% Luxembourg the lowest 140.0% penetration rate 130.0% Israel when compared to Italy 120.0% Bahrain carriers in the UAE Sweden UK Hong Kong UAE Ireland Middle Eastern 110.0% Norway
region Portugal Kuwait Qatar 100.0%
90.0% Oman 80.0% Saudi Arabia 70.0% $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000
Source: Company Reports Note: Data as of December 2006
The highlighted countries (circled in exhibit 4.5), namely Oman, Bahrain, and Israel, share many of the same traits with Saudi Arabia yet show distinctly higher mobile penetration rates. We acknowledge that a part of discrepancy is due to the income/wealth inequality in Saudi Arabia, however, we still expect Saudi mobile penetration to rise with its continued economic expansion.
Financial Highlights
In its first two years of operations Mobily has shown signs of tremendous growth. In 2005 Mobily posted negative earnings of SAR 1.04 billion. Revenues stood at SAR 1.68 billion, and the company had significant selling, general and administrative expenses, high capital expenditures thus bringing down overall profitability and cash flow. In 2006 however, the company posted positive earnings of SAR 700 million. Revenues jumped to 6.18 billion (a 367% rise) and in spite of high selling expenses the company’s earnings ended in the positive.
Recent Financings
The operator recently signed a $2.875 billion (SAR 10.78 bn) Islamic financing agreement with a consortium of five banks: Samba, Banque Saudi Fransi with Calyon, Saudi Hollandi Bank with ABN Amro, National Commercial Bank and National Bank of Abu Dhabi. The loan is termed as the “largest ever syndicated Islamic loan”.
Etihad Etisalat – Mobily 26 April 25th, 2007
Proceeds from the loan will be used to pay off the short-term debt, and to finance operations and infrastructure expansion. The short term bridging loan was taken up two years ago for one year and was then extended for an additional year.
Mobily has also been able to get the lowest rate of Islamic financing (Morabaha) ever granted to a telecom operator in the MENA region. This comes on the support of its major stakeholder, Etisalat, and the company’s overall success.
Etihad Etisalat – Mobily 27 April 25th, 2007
APPENDIX B: MENA MOBILE TELECOMMUNICATIONS OVERVIEW
The ability to be continuously connected has appealed to many segments of the MENA region: business community, students, and blue collar workers have embraced mobile telecommunications and all the benefits derived from its use. As a result of this broad acceptance, the MENA mobile market can be characterized by one word: growth . Subscribers, revenues, capital spending and earnings have increased significantly over the past three years. Exhibit 5.0 highlights the compound annual growth rate of earnings for the major publicly traded carriers in the region. Most have shown double digit growth in profit over the past three years.
Exhibit 5.0: Net Income – Three Year CAGR (2006)
82% Orascom and MTC lead the pack with strong growth in net
income 50% 45%
28%
15% 14% 13%
Orascom MTC Wataniya Etisalat STC Batelco Qtel
Source: Company Reports, GCG Analysis
While the MENA mobile market can be characterized by the word growth , the Gulf Cooperation Council (GCC) countries, and its carriers, are distinctly different than the rest of the MENA region. The GCC is characterized by high ARPUs and penetration rates that, in many instances, exceed 100%. While the remainder of the MENA region is generally characterized by low ARPUs and low penetration.
The material difference between these two geographic segments has resulted in a number of the GCC carriers aggressively pursuing opportunities beyond their domestic markets. Etisalat, along with other regional giants such as MTC, Batelco, QTel, and Wataniya, have all undergone cross border expansion.
Liberalization in the MENA region
A catalyst towards cross border expansion has been the liberalization of the telecommunications industry. Due to the relatively low capital expenditure required to build a mobile network (compared to fixed line), the mobile marketplace is well suited to foster competition and the MENA region has welcomed liberalization. This cost differential has provided the support for a continued monopoly in fixed line market and competition in the mobile market.
Etihad Etisalat – Mobily 28 April 25th, 2007
Exhibit 5.1 depicts the consequences of the network cost differential; while fixed line competition in the region has begun, the majority of countries in the region have one fixed line provider and more than one wireless provider.
Exhibit 5.1: MENA Telecommunications Providers (2006)
All the action is in the Fixed Mobile Operators Operators mobile telecommunication Algeria 2 3 sector Bahrain 1 2 Egypt 1 2 Iraq 1 3 Jordan 1 4 Kuwait 1 2 Saudi Arabia 1 2 While liberalization has Lebanon 1 2 been the catalyst for Libya 1 2 increased mobile Morocco 1 2 competition, fixed line Oman 1 2 competition is minimal Palestine 1 1 Qatar 1 1 Syria 1 2 Tunisia 1 2 UAE 1 2 Yemen 1 3
Source: GCG Analysis
The MENA telecommunications industry has been embracing market liberalization over the past decade. Since 2000, the number of mobile carriers has doubled to 38, ending many of the long standing monopolies in the region. The region is beginning to experience the benefits that competition has on service and pricing.
Competition has lowered prices and greatly increased mobile penetration across the region. New mobile licenses being offered by governments have generated exceptional interest by entities looking to continue their historic growth via mobile operations.
MENA Mobile Operators
In the last decade the mobile telecom industry in the MENA region has experienced significant changes; the industry is no longer monopolized by fixed line carriers.
There are currently 38 operators providing mobile services in the region’s 17 countries. Exhibit 5.2 is a comprehensive list detailing who is providing mobile services in each MENA country as of early 2007.
Etihad Etisalat – Mobily 29 April 25th, 2007
Exhibit 5.2: MENA Mobile Carriers (2007)
There are currently 38 Jordan Jordan MTS ‘95 Syria mobile providers in Tunisia Mobilecom ‘99 Lebanon SyriaTel ‘00 the region Morocco SNT ‘96 Xpress ‘04 SpaceTel ‘00 Iraq Orascom ‘02 Fel Dete ‘04 AsiaCell ‘99 Maroc Telecom ‘84 Umniah ‘03 MTC ‘04 Medi Telecom ‘99 MTC ‘03 Orascom ‘03 Kuwait Palestine MTC ‘83 Paltel ‘99 Wataniya ‘97
Bahrain Algeria Batelco ‘81 Orascom ‘01 Libya MTC Vodafone ‘03 Mobilis ‘03 Al Madar ‘97 Qatar Wataniya ‘03 Egypt Libyana ‘03 Qtel ‘87 Mobinil ‘98
Vodafone ‘98 Saudi Arabia UAE Saudi Telecom ‘98 Etisalat ‘76 Mobily ‘04 Du ‘07 Oman OmanTel ‘04 Nawras ‘04 Yemen SpaceTel ‘00 Source: Zawya, GCG Analysis Yemen Co. FMT ‘01 Yemen Mobile ‘04
A Changing Landscape
The list of service providers has changed significantly over the past few years. Many of the regulatory regimes have opened up; in some cases, pushed to do so by their bid to gain entry to the WTO. As a result, we have seen an abundance of new service providers enter the market.
Exhibit 5.3 tracks the number of mobile telecom providers operating in the region in the recent past.
Exhibit 5.3 : Number of MENA Mobile Carriers – 2000 to 2006
From 2002 to 2006 37 38 the number of mobile 36 carriers in the region increased by over 60% 29
21 22 19
2000 2001 2002 2003 2004 2005 2006
Source: Zawya, GCG Analysis
Etihad Etisalat – Mobily 30 April 25th, 2007
The most significant of the changes in the landscape took place during 2003 and 2004; in that period alone the number of carriers in the region rose by nearly 35%. At the end of 2006, the mobile telecom sector in the MENA region was supplied by a total of 38 providers.
MENA Mobile Penetration
Mobile penetration in the MENA region varies substantially. In few other regions of the world would you find such distinct variation. The lowest of the range is in Yemen, where around 10% of the population has a mobile phone. In the other extreme there is Bahrain, where estimates of mobile penetration have topped 120% - technically more than one mobile phone per person. In fact, the variations in penetration rates mirror the high variations in GDP per capita in the region – brought about by, amongst others, different natural resource endowments.
Exhibit 5.4: GDP Per Capita vs. Penetration Rate - 2006 Unsurprisingly, the
$60,000 wealthier countries Qatar have higher mobile
$50,000 penetration rates
$40,000 UAE Kuwait sample best fit line $30,000 Bahrain $20,000 Saudi Arabia Oman Libya Lebanon $10,000 Algeria Egypt Morocco Tunisia Jordan Yemen $-
0% 20% 40% 60% 80% 100% 120% 140%
Source: IMF, Company Reports, GCG Analysis Note: The GDP value on the dotted line when penetration rate equals 100 is roughly $25,000
Exhibit 5.4 shows the richer countries in the region have higher penetration rates. Countries with a GDP per capita of over $10,000 tend to have significant mobile penetration rates – 75% plus. Furthermore we notice that the richest countries have penetration rates exceeding 100%. Roughly, holding all other characteristics constant, a country in the MENA region will reach 100% penetration when their GDP per capita has reached $25,000.
Subscriber Growth Remains Strong
Since 1998 the region has experienced a compound annual growth rate in mobile subscribers of just under 60%. Exhibit 5.5 displays the subscriber figures in the region as of 2006, excluding Iraq.
Etihad Etisalat – Mobily 31 April 25th, 2007
Exhibit 5.5 : MENA Mobile Sub scribers, ex Iraq – 1998 to 2006 (Millions)
Growth in subscribers has been exponential in 104.6 the last few years 78.9
49.5 34.2 24.7 16.5 9.1 2.6 4.2
1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: ITU, MENA Carriers, GCG Analysis Note: Iraq was excluded due to problematic data
Growth has accelerated in the past few years in conjunction with robust economic activity in the region. In eight years the region has gone from a little more than 2.5 million subscribers to just under 105 million. It is evident that consumers in the region are adopting mobile telephones as an increasingly important medium of voice telecommunication.
The top 10 mobile providers in the region provide services for more than 65% of mobile subscribers. Unsurprisingly, the carriers with the largest amount of subscribers generally come from the most populous countries in the region such as Egypt, Algeria, and Morocco.
Exhibit 5.6 displays the carriers with the largest subscriber base.
Exhibit 5.6: Largest Subscriber Base (Millions) - 2006
13.3 North African carriers dominate when categorized by number 10.0 of subscribers 9.0 8.1 7.1 7.0 6.0 5.3 4.2
STC Orascom Maroc Orascom Vodafone Mobilis Mobily Etisalat Medi Algeria Algeria Egypt Egypt Telecom Source: Carrier’s Reports, GCG Analysis Note: As of December 2006
Saudi Telecom Company is the largest provider by subscriber base at 13.3 million. Two of the Orascom operations in North Africa (Egypt and Algeria) are amongst the largest subscriber bases in the region. In fact, North Africa has six of the top nine service providers by subscribers.
Etihad Etisalat – Mobily 32 April 25th, 2007
The growth in subscribers has resulted from a few major developments. Popularity and convenience of mobile telecommunication, combined with its recent affordability has made mobile the telecommunication medium of choice.
Price Decline With Increased Competition
The affordability of mobile connectivity as a source for subscriber growth should not be underestimated. It has been increasingly an influential factor for two reasons:
1. Lowering the price has made mobile telephony a viable option for a larger portion of the population.
2. Lowering the price has enticed substitution from fixed line telecommunication. For some, mobile connectivity is their sole form of communication.
Exhibit 5.7 displays the average price for a 3 minute call from a mobile phone.
Exhibit 5.7: Price of 3 Min. Local Mobile Phone Call –MENA Average ($US)
Despite a blip along the $0.60 Price increases way, regional tariffs $0.50 in Morocco have been declining and Lebanon since 1999 $0.40
$0.30
$0.20
$0.10
$- 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: ITU, GCG Analysis
From 1998 to 2006 the average price in the region has decreased by just under 40%. This resulted largely from increased competition and an attempt to increase penetration by capturing customers who may not value the service as highly, and thus are not willing to pay high prices.
Exhibit 5.8 shows the relatively quick liberalization progress that has occurred in the MENA region.
Etihad Etisalat – Mobily 33 April 25th, 2007
Exhibit 5.8: Evolution of the Competitive Environment – 1998 to 2006
100% In 1998 over 80% of 90% the countries were 80% served by monopolies 70% Four Carri ers 60% Three Carriers 50% Duopoly 40% Monopoly 30% 20% 10% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Zawya, GCG Analysis
As recent as 1998 almost 85% of the countries in the region were served by monopolistic providers; in 2006 it was less than 15%. Additionally, since 2003 some countries have opened up their mobile telecom sector to three or more providers. Currently Jordan is the only country in the region with four providers.
Etihad Etisalat – Mobily 34
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