10 th November 2008
Initial Coverage Saudi Telecoms Sector
• A pro-competition regulator, together with population growth and attractive demographics should be the key drivers for the Saudi telecoms sector, resulting STC in a CAGR of 7.1% for Saudi telecom revenues. We project revenue from the Rating: Outperform mobile, internet and fixed segments growing to SAR 65.4bn by 2013, up from SAR 45.3bn in 2007.
Mobily • A young population of digital natives (28% under the age of 10, 50% under 25) Rating: Outperform should ensure a strong demand for telecom services, especially mobile and broadband internet. This demand should be met by the increasing number of competitors in the sector. With 3 mobile and 4 fixed license operators the Saudi telecoms sector is set to become one of the most competitive in the region.
• In the case of STC we expect international operations to become an increasingly important driver for the company’s profitability and the stock’s performance, especially given the level of competition in its domestic market. We project revenue from overseas operations growing from 20% (SAR 9.5bn) of total revenues in 2008 to 31% (SAR 16.6bn) by 2013, a CAGR of 12%.
• With a 2009 EV/EBITDA of 6.4 we feel the current valuation does not fully reflect STC’s growth potential or the quality of its earnings. We initiate coverage of STC with an Outperform rating, and a DCF-derived target price of SAR 89.07, giving a 47.2% upside to the current price.
• We initiate coverage of Mobily with an Outperform rating, and DCF-derived target price of SAR 49.62, reflecting 78.50% upside to the current price. With an EV/EBITDA multiple of 4.7 our 2009 estimate, we feel the current valuation does not fully reflect the strong growth in the mobile and broadband segments that should benefit Mobily.
Equity Data STC Mobily
Current Price (SAR) 60.50 27.80 140 Target Price (SAR) 89.07 49.62 130 Upside/downside 47.2% 78.5% 120 12 Month Performance -15.1% -53.4% 110 100 12 Month High (SAR) 87.75 59.61 90 12 Month Low (SAR) 54.25 23.68 80 Market Cap. (SAR bn) 121.00 13.90 70 Div Yield 6.6% 0.0% 60 08 08 07 07 08 08 08 08 07 07 08 08 08 08 08 ------Enterprise Value (SAR bn) 146.5 22.1 ------Jan Jan Jan Feb Feb Apr Apr Dec Dec Nov Nov Mar Mar May May RIC 7010.SE 7020.SE MSCI Saudi STC Mobily Bloomberg STC AB EEC AB Irfan Ellam Estimates STC Mobily +971 4 360 11 53 2007A 2008E 2009E 2007A 2008E 2009E [email protected] Revenues (SAR mn) 34,458 46,791 48,601 8,440 10,640 11,923 EBITDA (SAR mn) 16,716 21,290 22,843 2,947 3,671 4,233 EBITDA Margin 48.5% 45.5% 47.0% 34.9% 34.5% 35.5% Net Income (SAR mn) 12,022 13,077 13,313 1,380 1,801 2,345 Net Income Margin 34.9% 27.9% 27.4% 16.3% 16.9% 19.7% EPS (SAR) 6.01 6.54 6.66 2.76 2.57 3.35 Net Debt/Equity 16.6% 56.9% 47.6% 139.0% 81.2% 48.6% Office 302, Emaar Square 4 Interest Cover - 23.2 11.8 3.4 4.3 6.0 Div/Share (SAR) 5.00 4.00 5.00 - 0.50 1.00 Sheikh Zayed Road Div Yield 8.3% 6.6% 8.3% 0.0% 1.8% 3.6% P. O. Box 119930 Estimates STC Mobily Dubai, United Arab Emirates Valuation Multiples 2007A 2008E 2009E 2007A 2008E 2009E PE 10.1 9.3 9.1 10.1 10.8 8.3 T +971 4 360 11 11 EV/EBITDA 7.6 6.9 6.4 7.5 5.8 4.7 F +971 4 360 11 22 P/BV 3.4 2.7 2.3 1.0 1.3 1.4 BV/Share 17.9 22.4 26.4 27.9 21.1 20.3 Saudi Telecoms Sector | 10 th November 2008
Table of Contents
Saudi Telecoms Sector: The Heat of Competition ...... 3 Saudi Industry Projections ...... 5 Regulatory Environment ...... 11 Investment Thesis ...... 14
STC – Feeling the Heat ...... 16 Company Overview ...... 16 STC Saudi ...... 17 STC International ...... 19 Other Subsidiaries and Associates ...... 24 Strategy ...... 24 Investment Positives ...... 25 Investment Risks ...... 26 Financial Review and Projections ...... 27 Summary Financials ...... 27
Mobily – Growth Bullseye, Mobile and Broadband ...... 29 Company Overview ...... 29 Strategy ...... 31 Investment Positives ...... 32 Investment Risks ...... 32 Financial Review and Projections ...... 33 Summary Financials ...... 34
2 Saudi Telecoms Sector |10 th November 2008
Saudi Telecoms Sector: The Heat of Competition
Overview
The Saudi telecommunications market, the largest in the GCC, continues its growth trajectory, despite ever increasing competition. It is characterized by a per capita GDP of US$ 15,731 for 2007, high mobile penetration (116%, YE2007), rapidly growing internet penetration (26%, YE2007) and steady fixed-line penetration (16.8%, YE2007). At the end of 2007 telecom services revenues for STC and Mobily totaled SAR43.3bn, up 9% YOY.
Telecom Liberalization: Pro-Competition Regulator, Favorable Demographics and WTO are key drivers
Saudi Arabia joined the WTO in November 2005 and so became bound by the WTO Agreement on Basic Telecommunications, committing it to provide full market access for its telecommunications services, allowing an increasing level of foreign participation from 2005 to 2008 (specific to different services, ie 60% for fixed and mobile and 70% for others).
The Communications and Information Technology Commission (CITC), the Saudi telecoms sector regulator, was created in 2001. Since then competition has been greatly enhanced in the country, with CITC having issued a total of 296 licenses by YE2007, illustrating its pro-competition stance.
This has resulted in Etisalat of the UAE (through Etihad Etisalat) and Zain of Kuwait (through Zain KSA) entering the mobile market, and 3 fixed licenses being awarded to 3 consortia led by companies from the USA, Hong Kong and Bahrain.
Figure 1: Saudi Licenses Issued - Year End 2007
Service 2002 2003 2004 2005 2006 2007
Fixed Line Telephony Service 1 1 1 1 1 1 2G Mobile Service 1 1 2 2 2 2 3G Mobile Service 0 0 1 2 2 2 VSAT 1 5 5 5 7 13 GMPCS Service 1 2 2 2 3 3 Internet Service 18 18 23 27 47 64 Data Communications 1 1 3 3 3 3 Internet over Airplane Services 0 0 1 1 1 1 Mobile Services over Aircraft 0 0 0 0 1 2 Automated Vehicle Locator 0 0 6 19 24 33 Bulk SMS Service 0 0 6 38 92 122 Audio Text Service 0 0 0 21 26 24 Call Center Service 0 0 0 4 7 11 Electronic Wallet Services 0 0 0 2 2 5 Mobile Service Recharging Card Services 0 0 0 1 4 4 Network Control & Management 0 0 0 2 3 4 Automatic Calling 0 0 0 0 0 1 ICT Equipment Hosting 0 0 0 0 0 1
Total 21 26 50 130 225 296 Source: CITC
With such a large number of companies operating in the sector, we could see some consolidation between companies.
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Saudi Telecoms Sector |10 th November 2008
STC Monopoly Broken
Etihad Etisalat was awarded Saudi Arabia’s second GSM license in August 2004 for SAR 12.2bn (US$ 3.2bn), and a 3G license for SAR 753mn (US$ 200mn), thereby ending STC’s mobile telecom monopoly in the KSA.
Competition in the mobile segment was further increased with the launch of a tender for a third license. The tender process for the third mobile license attracted a great deal of interest, with 9 applications being received, with strong interest from emerging market operators, and 7 of the applicants qualifying, namely:
• MTC and Partners Consortium (Zain Kuwait) • Samawart Consortium • Oger Telecom Consortium (Oger Telecom Dubai) • Kingdom Turkcell Consortium (Turkcell Turkey) • Tawasul Consortium • MTN Saudi Arabia Consortium (MTN South Africa) • Consortium Abdullah Abdul Aziz Al Rajhi Reliance Consortium (Reliance India)
The winning consortium, MTC and Partners, was awarded the third license for SAR 22.9bn in March 2007.
The STC fixed line monopoly was ended in February 2008 with the issue of 3 fixed licenses, following a tender process, which generated interest from numerous international operators. This led to 10 regional and international consortia bidding for the license, namely:
• Optical Communications Company (Verizon) • Khaled Ahmed Al Jafaly Co and WorldCall Telecom Limited • Telecommunication Holding Co Saudi (Qtel-Atcp Clearwire Telecom) • Al Mutakamilah Consortium (PCCW) • Electronet Consortium (Autelia) • Etihad Etisalat (Mobily) • Atheeb Telecom Consortium (Batelco) • Makkah Telecom Consortium (China Telecom Co) • Al Shola Consortium (MTNL India) • Bayanat Consortium (Korea Telecom)
The winning consortia were Optical Communications (led by Verizon of the USA), Mutakamilah (led by PCCW of Hong Kong) and Atheeb (led by Batelco of Bahrain).
With 3 mobile and 4 fixed operators we expect the Saudi telecoms market to be one of the most competitive in the region.
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Saudi Telecoms Sector |10 th November 2008
Saudi Industry Projections
Population and Demographics
The Saudi population stood at 24.4mn at the end of 2007, with a 5 year CAGR of 2.5%. We project the population to grow further to 28.23mn by 2013 at a CAGR of 2.4%.
Whilst the increasing population is a growth driver, it is the demographics of the population that should have the greatest impact on the telecoms sector, with over 50% of the population under the age of 25. These are the ‘digital natives’ who have grown up with digital technology such as computers, the Internet, mobile phones, cameras and MP3s. As the digital natives enter further education, the workforce and become economically self sufficient, they will increasingly use telecoms devices and services (voice, data, internet). Additionally, over 28% of the population is estimated to be under the age of 10 and currently does not use telecom services, thus providing strong potential demand for the future.
Figure 2: Saudi Population Demographics
0 to 4 14.5% 5 to 9 14.1% 10 to 14 11.7% 15 to 19 9.5% 20 to 24 8.2% 25 to 29 8.6% 30 to 34 8.7% 35 to 39 7.3% 40 to 44 5.3% 45 to 49 3.6% 50 to 54 2.5% 55 to 59 1.8% 60 to 64 1.3% 65 to 69 1.0% 70 to 74 0.9% 75 to 79 0.5% 80 to 84 0.3% 85 and older 0.3%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
Source: STC
Saudi also has a relatively high expat population of 6.3mn (27% of the population), which is growing at a CAGR of 2.7%, creating a demand for higher margin international calls.
Figure 3: Saudi Population Composition
100% 11% 14% 6% 90% 17% 17% 20% 29% 12% 18% 14% 38% 80% 39% 25% 51% 45% 70% 52% 60% 50% 40% 30% 20% 10% 0% 0 to 4 to 0 9 to 5 10 to 14 to 10 19 to 15 24 to 20 29 to 25 34 to 30 39 to 35 44 to 40 49 to 45 54 to 50 59 to 55 64 to 60 69 to 65 74 to 70 75older and
Saudi Expat
Source: STC, Al Mal Capital Research
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Saudi Telecoms Sector |10 th November 2008
GDP has grown strongly from SAR 707bn in 2002 to an estimated SAR 1,386bn in 2007, driven by higher oil prices, which has allowed the government to reduce its debt levels and increase investment in mega projects. Over US$ 350bn such projects have been announced, of which US$ 72bn have already been awarded. Most of these projects are public private partnerships with 70% of the investment originating in the private sector. This growth has resulted in an increase in GDP per capita to US$ 15,371 from US$ 8,729 in 2002. Telecoms spend in Saudi is estimated to be 3.1% of GDP in 2007.
With a combination of GDP growth, population growth and favourable demographics, we forecast Saudi revenues from fixed, mobile and internet services to grow from SAR 43.29bn in 2007 to SAR 65.55bn by 2013, a CAGR of 7.1%.
Mobile – No Cosy Duopoly
With fixed to mobile substitution, the mobile market over took the fixed market, in revenue terms in 2002, a trend which has continued, resulting in the mobile market contributing 78% of telecom revenues by the end of 2007.
Figure 4: Mobile vs Fixed Revenue
100% 90% 80% 8.0 70% 12.9 17.7 20.9 60% 25.0 30.0 34.0 50% 40% 30% 11.8 % of Total ofTotal %Revenue 20% 10.6 9.5 9.6 10% 9.0 9.8 9.3 0% 2001 2002 2003 2004 2005 2006 2007
Fixed Revenue Mobile Revenue
Source: CITC, Al Mal Capital Research
The Saudi mobile market has benefited greatly from the introduction of competition, with mobile penetration increasing from 40% in 2004, (when there was no competition), to 116% by year end 2007. Total mobile revenues grew from SAR 20.9bn to SAR 34bn during the same period. Unlike some other markets the entry of a second player has definitely not resulted in a cosy duopoly, with ARPUs falling from SAR 189 in 2004 to SAR 100 by year end 2007, a reduction of 47.3% and the growth for subscribers running at 5 year CAGR of 40% to YE 2007. We calculate ARPUs based on total revenue for the year and year end subscriber numbers.
We project this growth to continue, with revenue growing to SAR 36.28bn in 2008 and to SAR 43.85bn by 2013, a CAGR of 3.9%. We expect penetration levels to continue to grow, albeit at a lower rate, given the explosive growth over the last few years and a penetration rate of over 100%. The existing operators, STC and Mobily, have decreased tariffs in 2007, in a bid to capture additional market share before the launch of operations by Zain KSA. We forecast penetration to grow to 130% in 2008 and to stabilise by 2013 at 146%, a CAGR of 4.8%.
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Figure 5: Saudi Mobile Market
45 160% 40 140% 35 120% 30 Penetration 100% 25 80% 41.2 20 37.4 39.1 40.3 32.7 35.3 60% 15 28.4 Subscribers(mn) 10 19.7 40% 5 20% 0 0% 2006A 2007A 2008E 2009E 2010E 2011E 2012E 2013E Total Subs, mn Penetration, %
Source: CITC, Al Mal Capital Research
With the entry of Zain KSA, launching services in August 2008, the market should see increasing competition, putting further downward pressure on ARPUs. We project monthly ARPU declining 7% in 2008 to SAR 93 and bottoming in 2010 at SAR 87. Thereafter we expect ARPU to stabilise and then increase to SAR 89 by 2013 as the operators begin to benefit from mobile broadband and the sale of other valued added services, offsetting declining voice revenues.
Figure 6: Saudi Mobile Market Data
2006 2007 2008 2009 2010 2011 2012 2013
Saudi Population, mn 24.02 24.48 25.12 25.75 26.37 26.97 27.59 28.23 Growth Rate, % 2.4% 1.9% 2.6% 2.5% 2.4% 2.3% 2.3% 2.3%
Total Subs, mn 19.70 28.40 32.66 35.27 37.44 39.11 40.28 41.21 Penetration, % 82.0% 116.0% 130.0% 137.0% 142.0% 145.0% 146.0% 146.0% Growth, % 21.5% 34.0% 14.0% 7.0% 5.0% 3.0% 1.0% 0.0% Total Mobile Net Adds, mn 5.50 8.70 4.26 2.62 2.16 1.67 1.18 0.93
KSA Total Mobile Revenue, SAR mn 30,000 34,000 36,286 38,057 39,296 40,851 42,327 43,854 Revenue Growth,% 20.0% 13.3% 6.7% 4.9% 3.3% 4.0% 3.6% 3.6%
KSA ARPU/month, SAR 127 100 93 90 87 87 88 89 ARPU change,% -14% -21% -7% -3% -3% 0% 1% 1%
Source: IMF, CITC, Al Mal Capital Research
Internet – Growth Hotspot
Internet services were first made available in Saudi Arabia in 1997 yet have been slow to take off. This can be partly attributed to the correlation between fixed line penetration and internet penetration rates – Saudi has relatively low fixed line penetration. The introduction of competition in the fixed segment, with 3 new entrants, and Saudi demographics, does, however, favour a rapid increase in internet users.
Broadband
Broadband should be one of the sweet spots for revenue growth for the telecom operators in Saudi.
Broadband was initially delivered through ISDN at its launch in 2001and is now predominately delivered through DSL. Yet total broadband penetration remains very low at 2.5%, equivalent to only 0.62mn subscribers at YE2007. This has been in part due to low population density, which has meant over 50% of ADSL applications are 7
Saudi Telecoms Sector |10 th November 2008
rejected, as the potential subscriber is more than 5km from an STC exchange. However, over the last 2 years subscriber growth has accelerated with 241% and 186% growth in 2006 and 2007 respectively, albeit from a low base.
Figure 7: Saudi Internet Market
4.5 4.0 3.5 0.7 0.7 3.0 0.8 0.9 2.5 1.1 2.0 3.3 1.5 1.1 3.0 Subscribers (mn) 1.2 2.7 1.0 2.3 1.2 1.6 0.5 1.0 0.6 0.0 0.2 2006 2007 2008 2009 2010 2011 2012 2013
Broadband Dial-up
Source: CITC, STC, Mobily, Al Mal Capital Research
The number of broadband applications rejected illustrates a pent-up demand for these services and implies additional demand for at least another 0.62mn subscribers in the near term. Going forward broadband penetration should continue its rapid growth due to: i) the 3 new fixed operators starting to offer their services, increasing the availability and decreasing the cost of a broadband connection ii) an increasing awareness of the internet, more Arabic language sites and services such as online banking and other e-commerce applications iii) use of different delivery technologies, which do not suffer the same constraints at DSL iv) increase in PC penetration, driven by government initiatives v) broadband services being offered by the operators holding data communications licenses, ie Bayanat Al Oula, Integrated Telecommunications Company ( which launched broadband services in June 2008) and STC.
As of Q2 2008 Saudi had 0.86mn DSL subscribers, up from 0.62mn broadband subscribers as at YE2007. We project broadband penetration increasing from 0.62mn subscribers (2.5% penetration) in 2007 to 1.01mn (4.0% penetration) in 2008 and to 3.28mn (11.63% penetration) by 2013, a CAGR of 26.6%.
Mobile Internet
The pent-up demand for broadband internet could be met from both the new fixed service providers as well as the 3.5/3G networks of the mobile operators, for whom it should help arrest the decline in mobile ARPUs. Given the supply constraints currently faced in fixed broadband, mobile broadband may prove to be a viable (but costly) alternative, until the new fixed operators launch their services. The trend of cheaper web enabled smart phones should also encourage mobile internet uptake. We estimate data revenue comprise 6% of mobile revenues and project this to grow to 15% by 2013.
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Figure 8: Saudi Internet Market
2008 2009 2010 2011 2012 2013 KSA Internet Market (Fixed) Total Subscribers, 000s 2,153 2,748 3,201 3,546 3,732 3,981 Penetration, % 9% 11% 12% 13% 14% 14% Growth, % 19% 28% 16% 11% 5% 7% Net Adds, mn 349 595 453 345 186 248 KSA Total Fixed Dial-up & Broadband Revenue, SAR mn 3,527 4,942 5,787 6,411 6,748 7,000
KSA Fixed Broadband Market Total Subs, 000s 1,009 1,615 2,261 2,713 2,984 3,283 Broad Brand Penetration 4.02% 6.27% 8.57% 10.06% 10.82% 11.63% Growth, % 62% 60% 40% 20% 10% 10% Total Broadband Net Adds, 000s 386 606 646 452 271 298
KSA Total Broadband Revenue, SAR mn 2,497 3,923 4,984 5,736 6,176 6,498 Revenue Growth, % 57.1% 27.0% 15.1% 7.7% 5.2%
Broadband ARPU/month, SAR 206 202 184 176 172 165 ARPU Change, % -2% -9% -4% -2% -4%
KSA Dial-up Market Total Subs (000s) 1,144 1,133 940 833 748 698 Penetration, % 4.6% 4.4% 3.6% 3.1% 2.7% 2.5% Growth, % -3.1% -1.0% -17.0% -11.4% -10.2% -6.7% Net Adds, 000s -37 -11 -193 -107 -85 -50
KSA Total Dial-up Internet Revenue, SAR mn 1,029 1,019 803 675 572 502 Revenue Growth, % -1.0% -21.2% -16.0% -15.2% -12.2%
Dial-up ARPU/month, SAR 75 75 71 67 64 60 ARPU Change, % 0% -5% -5% -6% -6%
Source: Mobily, Al Mal Capital Research
Fixed-Line
Fixed line penetration has remained fairly flat over the last 5 years (4.1mn lines, 16.75% penetration YE 2007) as a result of:
i) fixed mobile substitution and ii) historically low internet penetration, both dialup and broadband iii) large household size of 5.6 iv) lack of competition
Figure 9: Saudi Fixed Line Market
9 30% 8 25% 7 6 20% Penetration Penetration 5 15% 4 3 10% Subscribers, Subscribers, mn. 2 4 4.1 4.332 4.698 5.338 6.000 6.828 7.691 5% 1 0 0% 2006A 2007A 2008E 2009E 2010E 2011E 2012E 2013E
Total Lines, mn Penetration, %
Source: CITC, Al Mal Capital Research
The three newly licensed fixed line operators each intend to sell 25% of their shares by IPO and offer 5% each to the State Pension Fund and the General Organisation for Social Insurance.
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Saudi Telecoms Sector |10 th November 2008
Atheeb, a joint venture with Bahrain Batelco, plans to have paid up capital of SAR 1bn, and intends to raise SAR 500mn from its IPO. Batelco will retain a 15% stake in the company, while the other founder shareholders, Atheeb Group, Traco and Nahla will retain the balance. Atheeb plans to invest US$ 1bn in the first five years of operations and has awarded infrastructure contracts worth US$ 333mn.It intends to roll out broadband, voice and data services using WiMAX technology. The company initially intends to focus on the highly populated cities of Riyadh, Jeddah, Mecca, Madina, Dammam and Al Khobar.
Optical Communication plans to have paid up capital of US$ 300mn, and intend to serve the business and residential sectors, with services commencing in Q1 2009, using optical services. The company intends to offer its services in 21 cities in the first 7 years of operations.
Mutakamilah, operating as Saudi Integrated Telecom Company, plans to have paid up capital of SAR 300mn. The company intends to target business and residential customers, offering broadband with speeds up to 100mbps, as well as video on demand, IPTV through both wireline and wireless technology.
We expect fixed line penetration to increase driven by the award of 3 new fixed licenses, resulting in competition in this segment for the first time, hand in hand with an increasing demand for broadband. We project fixed lines to increase to 4.33mn in 2008 and further to 7.69mn by 2013, at a CAGR of 12.2%. The growth and competition should result in lower ARPLs, with ARPL of SAR 179 in 2008 (down from SAR 189 in 2007) falling to SAR157 by 2013. Total revenue from fixed line services should continue to grow, from SAR 9.29bn in 2007 to SAR 9.31bn in 2008 and to SAR 14.47bn by 2013.
Figure 10: KSA Fixed Line Market
2006 2007 2008 2009 2010 2011 2012 2013
Total Lines, mn 4.00 4.10 4.33 4.70 5.34 6.00 6.83 7.69 Penetration, % 16.6% 16.7% 17.2% 18.2% 20.2% 22.2% 24.7% 27.2% Growth, % 0.5% 0.1% 0.5% 1.0% 2.0% 2.0% 2.5% 2.5% Total Fixed Line Net Adds, mn 0.200 0.100 0.232 0.366 0.640 0.662 0.828 0.863
KSA Fixed Line Revenue, SAR mn 9,763 9,293 9,308 9,814 10,791 11,731 13,038 14,512 Growth, % 8% -5% 0% 5% 10% 9% 11% 11%
KSA ARPL, SAR/monthly 203 189 179 174 168 163 159 157 ARPL, % Change 3% -7% -5% -3% -3% -3% -2% -1%
Source: CITC, Al Mal Capital Research
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Saudi Telecoms Sector |10 th November 2008
Regulatory Environment
The Telecommunications Act, passed in June 2001, provides the legislative foundation for developing and regulating the telecommunications sector in the KSA. The Communications and Information Technology Commission (‘CITC’) Ordinance, which became effective in June 2001, created the CITC as a standalone legal entity with financial and administrative independence. The Telecommunications Bylaw issued in July 2002 provides for the regulation of the telecommunications sector by CITC. The aims of CITC are:
i) Establishing the required legal and regulatory frameworks to allow the liberalization of the ICT sector ii) Promoting effective and fair competition, in order to enable the provision of universally available, high quality and affordable communications and information technology services, whilst safeguarding the public and user interest throughout Saudi Arabia.
CITC is funded through various fees for licenses, spectrum usage and commercial provisioning for services.
Key Regulatory Policies
Universal Access and Universal Service This is to be funded through a Universal Service Fund, established in 2007, with the following aims:
i) Universal access to voice services within 3 years of establishing the fund ii) Universal service for voice by 2010 iii) Universal access to internet service by 2010 iv) Universal service for internet by 2012
Interconnection Given the strength of the former incumbent STC, and in order to ensure it did not abuse its dominant market position, a Reference Interconnection Offer (‘RIO’) was drafted by STC. This was approved by the CITC in 2005, to allow newly licensed service providers to connect to STC’s network. Since its approval both Mobily and Zain have signed inter-operator interconnect agreements with STC, allowing them access to STC’s network on equitable terms. The STC RIO is reviewed and amended on an annual basis, in light of market developments, with the aim of moving to interconnections fees to a long run incremental cost basis by 2010.
Number Portability Mobile Number Portability: The CITC created a National Number Portability Database in 2005 to facilitate the porting of numbers and guarantee that MNP can accommodate future service providers. The database is connected to all service providers, allowing subscribers to port their numbers at no charge. Mobile number portability was implemented in 2006 between STC and Mobily.
Fixed Line Number Portability: The CITC is preparing number portability guidelines for fixed line services, which should remove a major barrier for subscribers to transfer their service from one provider to another, thereby encouraging competition.
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Saudi Telecoms Sector |10 th November 2008
Active Subscriber Definition The CITC issued a decision in 2007 to adopt a standard definition of ‘Active Mobile Subscriber’ based on a 90 day activity rule, which the network operators will have to apply from Q1 2008 when reporting subscriber numbers to the CITC.
WiMax Wimax can be offered by the fixed line operators as well as the data communications operators, which brings the total number of competitors to 7, which should help increase the take up of broadband internet services.
VoIP VoIP, as in many other GCC countries, is banned in Saudi. There are currently no plans to introduce VoIP and VoIP based services in the near future in Saudi.
Long Run Incremental Costing The CITC believes that wholesale prices have to be cost based and decided to implement LRIC as the method to determine wholesale service costs. CITC has drawn up LRIC Guidelines which are awaiting approval from the CITC Board and should be implemented in 2008.
Home Computer Initiative (HCI) This initiative, launched in 2005, in conjunction with selected retailers and banks, aims to enable 1 million Saudi families to obtain a PC, through an easy process and affordable installment plan. This should help to boost internet penetration in the country.
STC under the spotlight
As the former incumbent, STC is firmly in the CITC spotlight in the following areas:
Accounting Separation The main goal of accounting separation is to ensure that STC does not abuse its market dominance by engaging in any form of anti-competitive behavior, such as predatory pricing or cross subsidization between various business lines. Wholesale prices charged by STC to competitors should be the same as STC would charge its own business units. STC is required to provide the CITC with detailed audited, unqualified accounts for each its 3 business unit (fixed, mobile and data).
Tariff Regulation The CITC regulates the service tariffs of STC as the current dominant service provider and issued an interim tariff approvals procedure to regulate service provider tariffs. A final procedure will be prepared and implemented on approval of the LRIC methodology and guidelines.
Reference Offer for Data Access This is similar to the RIO for interconnection. The RODA includes offers for providing bit stream access services and line sharing services and their associated tariffs. STC had to provide the CITC with a Reference Offer for Data Access to ensure equitable terms. STC’s RODA was approved by CITC in 2007.
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Regulatory Aims & Challenges
Overall key regulatory policies are in place, and, with Zain KSA launching services, there is very strong competition in the mobile segment. With the issue of 3 new fixed licenses, there will be competition in the fixed segment as well, which should drive up fixed line penetration, but predominantly as a means of accessing the internet via broadband, rather than for voice. The areas where additional regulation is required is regarding MVNOs.
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Investment Thesis
STC
We are initiating coverage on STC with an Outperform rating with a DCF derived target price of SAR 89.07, implying 47.2% upside from the current price. In recent years, the company has invested heavily in foreign operators, some of which are already contributing to revenues and net profits. We expect other operations will begin to mature over the coming years and also start contributing to revenues and net profits. This growth in overseas markets should more than mitigate the impact of losing its monopoly status. Therefore, we expect the company to continue to generate significant free cash flow at home to further expand its investments internationally.
Our target price is derived from the discounted cash flow to equity method. We use a cost of equity (Ke) discount rate of 10.7%, based on the Qatar sovereign 30-year rate of 6.85% as our risk-free rate, and an equity risk premium of 5.5% for STC and 6% Mobily (adjusted for the beta of each equity). We use a higher equity risk premium for Mobily due to lack of geographical diversification, the fact that it is not the former incumbent and the entrance of a third mobile operator, Zain KSA. Combined these factors gives it a higher risk profile compared to that of STC. Given Mobily’s relationship with the UAE operator Etisalat we do not expect Mobily to diversify outside Saudi. Additionally, we used a terminal growth rate of 4% for both companies.
We have based comparable valuations on other regional operators with large operations internationally and strong cash generating businesses in their home markets. In the region, five operators fit this model: STC, Etisalat, Orascom Telecom, Zain and Qtel. Wataniya is effectively controlled by Qtel.
Figure 11: Valuation Summary P/E EV/EBITDA EV/EBIT Current 2008E 2009E 2007A 2008E 2009E 2007A 2008E 2009E STC 10.1 9.3 9.1 7.6 6.9 6.4 10.1 9.4 8.9 Etisalat 13.3 9.9 10.5 6.5 5.2 4.9 7.5 5.9 5.8 Zain 11.3 13.6 12.3 9.2 8.2 7.0 14.5 12.7 11.1 Qtel 9.5 8.2 6.4 - 6.7 5.4 18.7 11.2 10.4
Operators Wataniya 10.1 9.7 8.9 8.1 6.7 6.1 15.6 11.6 10.5 International Orascom Telecom 13.4 9.0 7.4 6.6 6.7 5.9 11.0 9.8 8.9 MTN 18.8 14.0 10.5 - 6.7 5.7 10.7 9.4 8.0 Average 12.4 10.5 9.3 7.6 6.7 5.9 12.6 10.0 9.1
Mobily 11.1 11.9 9.1 7.5 5.8 4.7 12.3 9.8 7.6 du - - 45.1 - 64.4 14.5 - - 33.1 Omantel 9.7 8.8 8.5 7.1 7.3 6.9 9.6 10.2 9.4 Telecom Egypt 10.7 9.6 7.7 5.0 6.0 5.5 13.6 13.5 11.3 Mobinil 5.8 6.5 6.1 6.8 6.0 5.4 10.4 9.7 9.3 Domestic Operators Maroc Telecom 18.5 17.0 15.6 10.1 9.8 9.2 13.2 12.6 11.9 PTCL - 7.7 7.7 5.1 4.1 3.9 9.3 8.3 7.8 Average 11.1 10.2 14.3 6.9 14.8 7.2 11.4 10.7 12.9 Source: Bloomberg, Al Mal Capital Research
STC trades at 6.4x for 2009 EV/EBITDA, whilst its peer group average is 5.8. Zain trades on a higher multiple of 7.0x. Orascom Telecom appears cheaper on an EV/EBITDA basis, however its share price has underperformed it peers, (-59% YTD v -29% for its peer group) as investors appear view the company’s move into Canada in a negative light. We justify STC’s higher multiple relative to its remaining 14
Saudi Telecoms Sector |10 th November 2008
peers based on the quality of STC’s earning. Future growth for the company will come predominantly from overseas markets and the two most important contributors to revenue will be Turk Telecom in Turkey and Maxis in Malaysia. Both Turk Telecom and Maxis are market leaders in their respective markets, positions we believe they will maintain going forward.
Given the sensitivity of DCF models to both the terminal growth rate and the cost of equity, we have carried out a sensitivity analysis on changes to these variables for both STC and Mobily.
Figure 12: STC Sensitivity Analysis
Cost of Equity 10.0% 10.5% 10.7% 11.0% 11.5%
3.5% 94.35 86.57 83.76 79.84 73.96 4.0% 101.13 92.25 89.07 84.65 78.08 4.5% 109.15 98.88 95.24 90.21 82.79 Terminal Growth Terminal
Source: Al Mal Capital Research Mobily
We initiate coverage on Mobily with a Market OutPerform rating and target price of SAR 49.62, representing 78.50% upside to the current price. As with STC, our target price is derived from a DCF to equity holders using a cost of equity (Ke) of 12.25%.
Mobily stands to benefit from two key drivers over the forecasted period: population demographics and low broadband penetration. The company’s operations have grown considerably over a very short period of time; operationally, both financial performance and subscriber growth have been very robust.
On an EV/EBITDA basis, Mobily trades at a discount to its peers. Mobily trades on a 2009E EV/EBITDA of 4.7x, compared to 14.5x, 6.9x, 5.5x, 5.4x and 9.2x for du, Omantel, and Maroc Telecom respectively. PTCL on a 4.1x 2008EV/EBITDA appears cheaper but this is as a result of a collapse in its share price, which is down 75% YTD. The share price collapse is due to political instability in Pakistan and strong competition, both factors which will remain for the foreseeable future.
Figure 13: Mobily Sensitivity Analysis
Cost of Equity 12% 12% 12.25% 13% 14%
3.5% 52.56 48.94 48.94 42.87 40.30 4.0% 55.47 51.45 49.62 44.77 41.98 4.5% 58.79 54.29 54.29 46.91 43.84 Terminal Growth Terminal
Source: Al Mal Capital Research
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STC – Feeling the Heat
Company Overview
Saudi Telecom Company (‘STC’) was established in 1998, as a Saudi Joint Stock Company, with the remit to be the sole provider of telecoms services in Saudi. STC remains the only integrated telecoms operator in Saudi and offers mobile, landline, internet services, data transmission, leased lines and public telephones. The former incumbent is also the region’s largest telecoms provider. When initially established the telecommunications company was fully owned by the Government of the Kingdom of Saudi Arabia. In 2002 the government sold 30% of its shares via an IPO.
With its domestic market opening up to competition and with a healthy balance sheet, STC has started to diversify overseas with direct and indirect operations in Kuwait, Malaysia, Indonesia, India, South Africa and Turkey.
Figure 14: STC – Countries of Operation, Q3 2008
Turk ey
Kuwai t
Saudi Arabia I ndi a
Malays ia Indonesia
Key
Subsidiaries
Associates
South Africa
Source: STC, Al Mal Capital Research Ownership
STC is majority owned (70%) by the Government of Saudi Arabia. The 20% free float is publicly traded on the Saudi Arabia Exchange and can only be held by Saudi Arabian nationals and residents. The other 10% was split equally between General Organization for Social Insurance and the Public Pension Fund, both of whom have subsequently increased their combined stakes to 12.4% in total. The Saudi Government currently has no plans to reduce its stake in STC.
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Saudi Telecoms Sector |10 th November 2008
Figure 15: Saudi Telecom Company – Shareholder Structure
17.6% Public Investment Fund Saudi Arabia
6.5% Public Pension Fund
5.9% General Organisation for Social Insurance 70.0% Free Float
Source: STC, Al Mal Capital Research
STC Saudi
Operations
STC operates through 4 key business units in Saudi and is one of the largest employers in the country with over 21,000 employees as at YE 2007.
Figure 16: STC Domestic Organisational Structure
Saudi Telecom Company
Personal Home Enterprise Wholesale
So urce: STC, Al Mal Capital Research
The business units provide a wide range of services under several different brands:
1. Al Hatif – includes card phones, landline services, prepaid card services, public telephones and business services 2. Al Jawal – offers a range of mobile services, including Family Al Jawal, Sawa, business services, messaging services, data services and roaming services 3. Saudi Net – an internet service provider, the largest in Saudi 4. STC Online – for electronic bills payment services 5. Saudi Data - a provider of data solutions
Its mobile network covers 98% of the Saudi population. STC is currently investing in Next Generation Network, through which it aims to offer triple play services, which it plans to launch in 2009.
Mobile
With the introduction of competition in mobile in 2005, both the number of subscribers and revenues have grown over the last 3 years, with STC’s revenue from the mobile segment increasing from SAR 23.51bn in 2005 to SAR 25.16bn in 2007. STC’s mobile subscribers are projected to peak in 2010 at 19.5mn, thereafter declining in line with market share to reach 19mn by 2013. We believe, however, that STC’s domestic mobile revenues have already peaked in 2007 due to the increasing level of competition. 17
Saudi Telecoms Sector |10 th November 2008
We project domestic mobile revenue for STC declining to SAR 24.71bn in 2008 and further to SAR 21.52bn by 2013. STC had 17.8mn mobile subscribers as of 30 June 2008. Figure 17: STC Mobile Market Share
2006 2007 2008 2009 2010 2011 2012 2013
STC Mobile Subscribers, mn 13.20 16.76 18.29 19.05 19.47 19.16 19.34 18.96 STC Mobile Market Share 67% 59% 56% 54% 52% 49% 48% 46% STC Growth, % 11% 27% 9% 4% 2% -2% 1% -2% STC Net Adds,mn 127% 356% 153% 76% 42% -30% 17% -38%
STC ARPU, SAR/monthly 143 125 113 106 100 97 95 95 STC ARPU, % change -13% -12% -10% -6% -6% -3% -2% 0%
STC Mobile Revenue, (SAR, mn) 22,631 25,165 24,717 24,201 23,251 22,201 21,953 21,522 Growth, % -4% 11% -2% -2% -4% -5% -1% -2% Source: STC, Al Mal Capital Research
Fixed-Line
In contrast to the rapid growth in the mobile market over the last 3 years, the fixed line market has remained flat with penetration rates hovering around 16%, equivalent to 4mn lines at the end of 2007. We believe that this about to change, with growth being driven by increased competition and pent up demand for broadband. As the sole provider of fixed line services in Saudi, STC’s market share can only go down; we project a decline from 100% in 2007 to 98% in 2008 and to 70% by 2013. Whilst market share is projected to decline, STC revenues from fixed line are projected to increase from SAR 9.14bn in 2008 to SAR 10.37bn by 2013, at a modest CAGR of 2.5%. STC had 4.2mn fixed subscribers as of October 2008.
Figure 18: STC Fixed Market Share
2006 2007 2008 2009 2010 2011 2012 2013
STC Fixed Lines, mn 4 4.1 4.25 4.37 4.70 4.92 5.33 5.38 STC Fixed Line Market Share, % 100% 100% 98% 93% 88% 82% 78% 70% STC Fixed Line Growth, % 5.3% 2.5% 3.6% 2.9% 7.5% 4.7% 8.2% 1.1% STC Net Adds, mn 0.200 0.100 0.146 0.124 0.328 0.223 0.406 0.058
STC ARPL, SAR/monthly 203 189 179 174 169 164 160 160 STC ARPL Change, % 3% -7% -5% -3% -3% -3% -2% 0%
STC Fixed Line Revenues, SAR mn 9,763 9,293 9,142 9,126 9,517 9,669 10,257 10,368 Growth, % 8% -5% -2% 0% 4% 2% 6% 1%
Source: STC, Al Mal Capital Research
Internet - Broadband and Dial-up
As the former incumbent we expect STC to benefit from the strong demand for broadband internet, with STC’s broadband subscribers increasing from 0.99mn in 2008 to 2.29mn by 2013, resulting in broadband revenues increasing from SAR 2.47bn in 2008 to SAR 4.55bn by 2013. With increasing competition in broadband, we project declines in Broadband ARPU for STC from SAR 206 in 2008 to SAR 165 by 2013, together with falling broadband market share from 98% in 2008 to 70% by 2013, in line with fixed line market share.
Broadband subscribers are projected to overtake dial-up subscribers in 2009. We project the number of dial-up subscribers to peak in 2008 at 1.14mn, thereafter 18
Saudi Telecoms Sector |10 th November 2008
declining to 0.69mn by 2013. Revenues from dial-up internet are projected to decline from SAR 1.03bn in 2008 to 0.50bn by 2013
Figure 19: STC Internet Market Share
2008 2009 2010 2011 2012 2013
STC Broadband & Dial-up STC Internet Subscribers 2,133 2,635 2,929 3,058 3,076 2,996 STC Internet Revenue, SAR mn 3,477 4,668 5,189 5,378 5,389 5,051 Growth, % 24% 11% 4% 1% -3%
STC Broadband STC Broadband Subscribers, 000s 989 1,502 1,989 2,225 2,328 2,298 STC Broadband Market Share 98% 93% 88% 82% 78% 70% STC Broadband Growth, % 59% 52% 32% 12% 5% -1% STC Broadband Net Adds, 000s 366 513 488 235 103 (30)
STC ARPU Broadband, SAR 206 202 184 176 172 165 STC ARPU Broadband Change, % -2% -9% -4% -2% -4%
STC Broadband Revenues, SAR mn 2,447 3,648 4,386 4,704 4,817 4,548 Growth, % 49% 20% 7% 2% -6%
STC Dial-up STC Dial-up Subscribers, 000s 1,144 1,133 940 833 748 698 STC Dial up Market Share, % 100% 100% 100% 100% 100% 100% STC Dial-up Growth, % -1% -17% -11% -10% -7% STC Dial-up Net Adds, 000s -1% -17% -11% -10% -7%
STC Dial-up ARPU, SAR 75 75 71 67 64 60 Growth, % 0% -5% -5% -6% -6%
STC Dial-up Revenues, SAR mn 1,029 1,019 803 675 572 502 Growth, % -1% -21% -16% -15% -12% Source: STC, Al Mal Capital Research
STC International
STC International Operations
With low leverage and increasing competition in its domestic market, STC started its overseas diversification program in 2007, acquiring stakes in Maxis and NTS Indonesia, followed by its investment in Oger Telecom in January 2008. With these investments STC acquired stakes in 5 overseas mobile networks and 2 fixed networks. As a major Saudi company, STC receives the assistance of the Saudi Government, when required, to support its international expansion programme.
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Figure 20: STC’s International Organisation Structure
STC
25 % 26 % 35%
Binariang Vivaa Oger Telecom
100 % 95 % 75% 54% Cyberia – KSA, Cell C – South Turk Telekom Maxis Lebanon, 51% Jordan Africa – Turkey
44% 100% 74% 50% 81%
NTS – Maxis - Aircel - India Virgin Mobile – Avea – Turkey Indonesia Malaysia South Africa
Source: STC, Al Mal Capital Research
Binariang, Malaysia
• Figure 21: Malaysia STC first expanded into the international market in September 2007 by acquiring 25% of Malaysian investment holding company Biniariang, and 51% Malaysia - 2007 of PT Natrindo Telepon Selular in Indonesia, for SAR 11.4bn (US$3.1bn). Population (mn) 26.8 • Binariang is a special purpose vehicle, owning 100% of Maxis, a Malaysian Nominal GDP (US$ bn) 186.5 holding company, formed by Utaha Tegas (45%) and Bumiputera Trustee GDP per capita (US$) 6,948 (30%) companies. Mobile Subs ('000) 23,347.0 Penetration 87.9% Maxis, Malaysia Fixed-line Subs ('000) 4,350.0 Penetration 16.4% • Internet Subs ('000) 4,930.9 Maxis Communications Berhad (Maxis), formally known as Binariang was Penetration 18.6% established in 1993, when it was awarded licenses for GSM900 mobile Broadband Subs ('000) 1,368.9 operations, a domestic fixed network and an international gateway. Penetration 5.2% • The company launched its IPO in 2002 and was listed on Bursa Malaysia in Source: IMF, ITU July 2002. As a result of the transaction with STC, the company delisted its shares in 2007. • In addition to the mobile operations in Malaysia, Maxis also has stakes in 2 other mobile operators: 44% of NTS in Indonesia and 74% of Aircel in India. • Maxis is the largest telecoms operator in Malaysia; the Malaysian mobile telecoms market is dominated by three companies: Maxis, Telekom Malaysia (Celcom) and DiGi with market shares of 42%, 31% and 27% respectively. • Maxis had 9.7mn subscriber by YE2007, a 21% increase from the previous year.
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Aircel, India
• In the one of the fastest growing and most competitive mobile markets in the Figure 22 : India world, with 7 national operators, Aircel is the 5 th largest GSM mobile operator
in India, with a market share of 4%, serving over 9.4mn subscribers. India - 2007 • Population (mn) 1,124.0 The leading mobile provider in India, Bharti, has a 24% market share. Nominal GDP (US$ bn) 1,098.9 Reliance Communications follows with an 18% market share, followed closely GDP per capita (US$) 978 by Hutch Essar (Vodafone) with a 17% market share. Mobile Subs ('000) 233,620.0 • Penetration 20.0% Maxis Communication has majority stake of Aircel with 74% stake with the Fixed-line Subs ('000) 39,250.0 remaining 26% owned by Apollo Hospital Enterprise Ltd. Penetration 3.4% • In 1999, Aircel initiated operations in Tamil Nadu. Expanding gradually from Internet Subs ('000) 13,490.0 Penetration 1.2% city to city, Aircel has gained rapid momentum and holds the title of fastest Broadband Subs ('000) 3,130.0 growing telecom company in India. Penetration 0.3% • Source: IMF, ITU Aircel has a strong presence in the Southern and Eastern regions of India, operating in 10 out of the 23 telecoms circles, and is the number one operator in 4 of the circles in which it operates. • Aircel also holds licenses for the 14 remaining regions and is aiming to launch services in an additional 3 circles in Q4 2008, with a target of offering services in 17 of the 23 circles by Q2 2009.
PT Natrindo Telepon Seluler NTS , Indonesia
• Figur e 23 : Indonesia NTS is 51% owned by STC directly and 44% by Maxis, with the remaining 5% held by Indonesian shareholders. STC’s effective stake of 62% in the Indonesia - 2007 Population (mn) 224.9 subsidiary was acquired in 2007. Nominal GDP (US$ bn) 432.9 • NTS is now a licensed third generation mobile network operator. NTS has GDP per capita (US$) 1,925 held the license for 3 years but did not have the funds to build out the Mobile Subs ('000) 81,834.6 network and launch operations, until its takeover by STC. Penetration 35.3% • Fixed-line Subs ('000) 17,827.9 With a population of over 224mn and mobile penetration of under 40%, Penetration 7.7% Indonesia is a very attractive market for mobile telecom operators. However Internet Subs ('000) 2,543.6 Indonesia comprises of 17,508 islands of which c.6,000 are inhabited, which Penetration 1.1% poses challenges for network deployment. This challenge is mitigated with Source: IMF, ITU over 92% population being concentrated on 5 of the largest islands, namely Java, Sumatra, Kalimantan, New Guinea and Sulawesi. • Commercial launch of its national GSM services, under the Axis brand, was announced in June 2008 and as of October 2008, the company had 1.6mn subscribers. • The Indonesian telecommunications market has 5 mobile operators and 6 CDMA- based fixed-wireless operators. • The Indonesian mobile telecom market is dominated by three GSM operators who currently control 85% of the market. The leading operator, Telkomsal (Singtel), has 46% market share. Indosat has a market share of 24% and Excelcomindo (Telekom Malaysia and Etisalat) has 15%. • NTS aims to have 15% market share within 15 years of launch.
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Kuwait Telecommunications Co, Kuwait
Figure 24 : Kuwait • In November 2007 STC acquired a 26% stake in Kuwait’s third mobile telecommunications operator for SAR 3.37bn. STC has management control Kuwait - 2007 and will receive annual management fees. Population (mn) 3.0 • The mobile telecom market in Kuwait is currently a duopoly between Zain Nominal GDP (US$ bn) 110.4 GDP per capita (US$) 36,911 and Wataniya. Zain commands the larger market share, with 57% and Mobile Subs ('000) 2,770.0 Wataniya the remaining 43%. Penetration 105.5% • The population of Kuwait is growing at 3.5% per annum and 66% of the Fixed-line Subs ('000) 517.0 population are expatriates. The population has an average age of 27. A Penetration 17.0% Internet Subs ('000) 283.2 majority of the population is concentrated in the east of the country on 2% of Penetration 10.5% the land mass, implying easy population coverage. Broadband Subs ('000) 100.0 • Saudi benefits from approximately 1mn roaming visitors from Kuwait every Penetration 3.0% Source: IMF, ITU year. • Current regulation is favourable for new entrants (asymmetric interconnection tariffs, national roaming, site sharing and MNP) • KTC launched its IPO in August 2008 aiming to float 50% of the company (250mn shares) and raise KWD 26.25mn. The IPO closed 3 times oversubscribed. The balance of 24% of the company is held by the Kuwaiti government. • It is expected to launch operations by the end of 2008, under the brand name of Viva and aims to capture 10% (300,000 subscribers) market share in its first year of operations.
Oger Telecom, UAE
• In April 2008 STC finalized the acquisition of 35% of Oger Telecom for SAR 9.6bn (US$ 2.56bn). • Oger Telecom is a Dubai based holding company, investing in emerging markets telecoms. It has a majority 54.5% stake in Turkey’s leading fixed-line and broadband operator, Turk Telekom, as well as 75% stake in Cell C, the third South African mobile operator. • Another addition to their investment portfolio is a 95% stake in Cyberia. Cyberia is an internet service provider operating in Lebanon, Jordan and Saudia Arabia.
Turk Telekom, Turkey
Figure 25: Turkey • Turk Telekom was privatized in 2005, when Oger Telecom purchased a 55% controlling stake in the former incumbent. The company is listed on the Turkey - 2007 Population (mn) 70.6 Istanbul Stock Exchange with a 15% free float, with the remaining 30% held Nominal GDP (US$ bn) 673.6 by the Turkish government. GDP per capita (US$) 9,542 • Turk Telekom is the leading broadband internet (4.1mn subscriber YE2007) Mobile Subs ('000) 62,161.0 Penetration 83.0% and fixed line provider (18.1mn lines YE 2007) in Turkey. Fixed-line Subs ('000) 18,412.8 • Turk Telekom also holds 81% of Turkish GSM mobile operator Avea. Avea is Penetration 25.9% Turkey’s third mobile operator by subscriber market share, with 9.7mn Internet Subs ('000) 4,684.9 Penetration 6.3% subscribers as at YE2007. Broadband Subs ('000) 5,900.0 • Turkcell commands 58% of the market share, followed by Vodafone (Telsim) Penetration 8.0% Source: IMF, ITU with 26% market share and Avea with 16%.
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Cell C, South Africa
Figure 26 : South Africa • Cell C (Pty) is the third mobile operator in South Africa and began operations in 2001. Its network currently covering 95% of the South African population. South Africa - 2007 • Cell C is 100% owned 3C Telecommunications (Pty) Ltd which in turn is 25% Population (mn) 47.9 Nominal GDP (US$ bn) 282.6 owned by a black empowerment organization, Cell SAF. The majority stake in GDP per capita (US$) 5,906 the company of 75% is held by Oger Telecom South Africa. Mobile Subs ('000) 42,300.0 • There are three cellular network providers, namely, Vodacom, MTN and Cell Penetration 87.1% Fixed-line Subs ('000) 4,642.0 C, with market shares of 56%, 33% and 11% respectively. Penetration 9.6% • As at YE 2007 Cell C had 4.5mn subscribers. Internet Subs ('000) 4,279.2 • In 2006, Virgin Mobile South Africa, a MVNO launched as the fourth Penetration 9.0% Broadband Subs ('000) 335.1 operator in South Africa, targeting high spending mobile subscribers. Virgin Penetration 0.7% Mobile is an equal joint venture between Cell C and Virgin Group. Source: IMF, ITU
Figure 27: STC International – Summary Projection
SAR, mn 2008 2009 2010 2011 2012 2013 Maxis (Malaysia) Market Share 42% 42% 42% 42% 42% 42% Revenues 7,927 8,218 8,530 8,861 9,211 9,579 STC % Share 25% 25% 25% 25% 25% 25% Proportionate Share 1,982 2,055 2,132 2,215 2,303 2,395 NTS (Indonesia) Market Share 3% 4% 5% 6% 7% 8% Revenues 854 1,291 1,787 2,335 2,887 3,510 STC % Share 62% 62% 62% 62% 62% 62% Proportionate Share 530 800 1,108 1,448 1,790 2,176 Aircell (India) Market Share 4% 5% 6% 7% 7% 8% Revenues 1,884 2,838 4,041 5,430 6,985 8,838 STC % Share 18.5% 18.5% 18.5% 18.5% 18.5% 18.5% Proportionate Share 349 525 748 1,005 1,292 1,635 Turk Telecom (Turkey) Market Share Revenues 31,625 34,788 38,266 42,093 46,302 50,932 STC % Share 19% 19% 19% 19% 19% 19% Proportionate Share 6,072 6,679 7,347 8,082 8,890 9,779 Cell C (South Africa) Market Share 6% 6% 6% 6% 6% 6% Revenues 1,978 2,042 2,126 2,210 2,317 2,405 STC % Share 26.25% 26.25% 26.25% 26.25% 26.25% 26.25% Proportionate Share 519 536 558 580 608 631 Third Mobile Company (Kuwait) Market Share 4% 9% 12% 13% 15% 16% Revenues 17 42 64 78 94 101 STC % Share 26% 26% 26% 26% 26% 26% Proportionate Share 4 11 17 20 24 26 Total Proportionate Revenes 9,456 10,606 11,910 13,350 14,908 16,643 Source: Al Mal Capital Research
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Saudi Telecoms Sector |10 th November 2008
Other Subsidiaries and Associates
Arabian Internet and Communications Services Company (Awalnet)
AwalNet, a limited liability company, 100% owned by STC, was formed in 2002. The company offers internet services, operation of communications projects and the transmission and processing of information
Tejari Saudi Arabia
Tejari Saudi Arabia, a limited liability company, was established in 2006 and is 50% owned by STC. The company was formed with the purpose of establishing, operating and managing electronic markets and platforms, and also offering all e-commerce dealing related services.
The Arab Satellite Communications Organization
Arabsat, in which STC has a 36.66% stake, was established in April 1976 by the Arab League. The services provided to the member states, the public and private sectors include television broadcasting, regional telephony, regional radio broadcasting and leasing of capacity on an annual or monthly basis.
Arab Submarine Cables Company Ltd
The company, 44% owned by STC, was established in 2002 to construct, lease, manage and operates a submarine cable connecting the Kingdom of Saudi Arabia and the Republic of Sudan.
Strategy
Remain Market Leader in Domestic Market
STC needs to be able to maintain its leading position in Saudi in order to protect its domestic cash cow, which provides the cash flow to acquire overseas licenses, build out infrastructure and operations. It is this cash flow that has allowed STC to maintain a strong balance sheet with a sizeable cash balance and will, in the future, allow STC to increase the amount of leverage on its balance sheet as it acquires additional overseas operations.
We believe STC will be able to maintain its leading position in Saudi in the short term, especially as it is the only operator who will be able to offer triple play services. However, in the medium term, with 3 mobile operators and 4 fixed line operators, this will prove to be increasingly challenging. STC will face very strong competition in each of the segments it operates in, resulting in declining revenue from domestic operations from 2009, despite maintaining its market lead in each of the segments in which it operates.
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Saudi Telecoms Sector |10 th November 2008
Ensure Growth of Existing International Operations
STC needs to expand its existing overseas operations, in order to grow revenues. With direct control of NTS in Indonesia, STC is in the driving seat in terms of determining the performance of this subsidiary. The company’s investment in Kuwait is another operation where STC will have control, from an operational perspective. With its other investments, STC will be relying on the managements of Oger Telecom and Binaring to deliver growth as it does not have a majority stake nor management control.
Acquire Additional Overseas Licenses and/or Companies
We believe STC will continue to seek opportunities to acquire additional overseas licenses and acquire/investment in overseas companies, in order to offset declining domestic revenues and take advantage of its strong balance sheet. The company intends to target acquisitions in the Middle East, Africa and Asia, especially in countries with large Muslim populations, so it can capture roaming revenue from pilgrims on its own overseas networks, and pay lower roaming charges to other operators. STC has already announced its intention to bid for the third mobile license in Oman and is exploring opportunities in Bahrain, Egypt, Lebanon and Vietnam.
Investment Positives
Increasing Revenue from Overseas Operations
With its overseas investments, an increasing portion of STC’s revenue will come from overseas. We project 20% (SAR 9.46bn) of total revenues coming from overseas in 2008, growing to 31% (SAR 16.64bn) by 2013.
The Oger Telecom investment should contribute a majority of overseas revenue in 2008, contributing SAR 6.59bn, equivalent to 69% of overseas revenue and 14% of total revenue. Whilst Oger Telecom should continue to contribute a majority of overseas revenue in our forecast period, by 2013 we forecast Binariang will be contributing 37% of overseas revenue and 12% (SAR 6.2bn) of total revenue versus SAR 10.41bn from Oger Telecom, as a result of the higher growth rates and lower penetrations in the countries in which Maxis operates.
Turk Telecom should be the key overseas contributor to revenue, contributing SAR 6.07bn in 2008, growing to SAR 9.78bn by 2013. Maxis in Malaysia should be the second most important contributor in revenue, contributing SAR 1.98bn in 2008, growing to SAR 2.40bn by 2013. NTS in Indonesia should contribute SAR 530mn in 2008 growing to SAR2.18bn by 2013. Aircell in India should contribute SAR 349mn in 2008 growing to SAR1.64bn by 2008. The South African operation of Cell C should contribute SAR 519mn in 2008 growing to SAR 631mn by 2013. The Kuwaiti mobile operation should contribute the smallest portion of SAR 4mn in 2008 growing to SAR 26mn by 2013.
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Saudi Telecoms Sector |10 th November 2008
Strong Balance Sheet
STC has a debt/equity ratio of 17% and 2007 interest cover of 29 times. Assuming a conservative debt level of 3 times EBITDA and a 2007 EBITDA of SAR 16.71bn, this implies a maximum debt of SAR 50.15bn versus actual debt of SAR 22.65bn.
Based on 2008 forecasts, we estimate EBITDA of SAR 21.29bn, implying maximum debt of SAR 63.87bn.
The ability to increase gearing together with its existing cash balance (SAR 7.53bn as at Q2 2008) gives ample opportunity for STC to carry out further acquisitions and investments abroad, as well as meeting ongoing capex requirements.
STC is rated A+ long term by Standard and Poors and rated A1 long term local and foreign currency issuer by Moody’s Investor Services.
Triple Play – Incumbents Privilege
As the former incumbent operator in Saudi, STC has made substantial investments over the years in its network, resulting brand name and customer base which should stand it in good stead as the market becomes increasingly more competitive. As the incumbent operator, STC is the only operator who will be able to offer triple play services.
Broadband Opportunities
With low broadband penetration of just 2.5% as at 2007 YE, this segment of the market has very high potential for growth, both in terms of traditional fixed line offering and also through 3/3.5G mobile broadband. As the incumbent operator, with infrastructure in place in both fixed and mobile segments, STC should be well placed to take advantage of this growth.
Investment Risks
Domestic Market Revenue Share to become ex-growth
With a pro-competion regulator, the Saudi telecoms market is set to become one of the most competitive in the region, in all segments of the market. Whilst the overall market will continue to grow from SAR 43bn in 2007 to SAR 65.37bn by 2013, STC share of revenue and market share will continue to come under pressure. We project STC’s revenue market share to decrease from 80% (SAR 34.46bn) in 2007 to 57% (SAR 36.94bn) by 2013. However this decline in domestic revenue is more than offset by revenue contribution from overseas investments, resulting in overall revenues growing from SAR 34.46bn in 2007 to SAR 53.58bn by 2013.
Mobile Number Portability
The introduction of mobile number portability is potentially one of the greater threats to both STC and Mobily. MNP was implemented in 2006 between STC and Mobily, and at the insistence of CITC, is a transparent process from the subscriber point of 26
Saudi Telecoms Sector |10 th November 2008
view. Without full MNP ie including the prefix, mobile telephone numbers are inherently “sticky”, as subscribers may be deterred from changing their service provider, because of the inconvenience of having to inform all their existing contacts of a new telephone number and the potential cost of having to change business cards and other stationary.
We would view MNP to be a greater threat to STC, as its customers have higher ARPUs, by virtue of STC being the former monopoly provider. It is these higher spending customers that we would expect Zain KSA to target aggressively.
Third Operator
Zain KSA, as the third mobile operator, will have to complete aggressively in order to gain market share. With mobile penetration rates already in excess of 100%, this could potentially lead to a damaging price war, which would lower STC’s margins and profitability. However the high price paid by Zain KSA for its licenses should ensure that whilst there maybe downward pressure on ARPUs, an all out price war should not breakout, if Zain is to earn a decent return in its investment.
Overpaying for Licenses/Acquisitions
Increasing levels of competition for overseas assets and licenses, given the expansion plans of other GCC and emerging markets telcos, may lead to bidding wars and the potential risk that STC could overpay for assets. Financial Review and Projections
• We project revenue growing by 36% to SAR 46.79bn in 2008 as overseas subsidiaries start contributing to overall revenues. Throughout our forecast period, we see revenue increasing from SAR 34.46bn in 2007 to SAR 53.58bn in 2012. The revenue mix changes during the period, with overseas revenue contributing 31% of overall revenue by 2012.
• EBITDA margins are projected to decrease in 2008 to 45.5%. Thereafter we expect EBITDA margins to improve to 48.5% in 2011 as overseas operations start to contribute to revenues. Thereafter we expect EBITDA margins to decline to 47.5% in 2013 as domestic competition starts to impact margins.
• We forecast net earnings to grow by a CAGR of 3% between 2007 and 2013. Reported EPS is expected to grow by 9% in 2008 to SAR 6.54 and by 2013 we project EPS growth to be 2%, equivalent to SAR 7.16.
• We project capex and investments to decrease from SAR 16.92bn in 2007 to SAR 11.7bn in 2008 and then again in 2009 to SAR 8.75bn before falling to SAR 5.36bn in 2013.
Summary Financials 27
Saudi Telecoms Sector |10 th November 2008
Figure 28: STC (AED Millions) 2007A 2008E 2009E 2010E 2011E 2012E 2013E Income Statement Revenues 34,458 46,791 48,601 49,867 50,598 52,507 53,584 SG&A (21,840) (31,230) (32,067) (33,017) (33,363) (35,289) (36,209) EBITDA 16,716 21,290 22,843 23,687 24,540 24,941 25,452 EBITDA Margin 48.5% 45.5% 47.0% 47.5% 48.5% 47.5% 47.5% Depreciation & Amortisation (4,098) (5,729) (6,308) (6,836) (7,305) (7,722) (8,077) EBIT 12,618 15,561 16,535 16,851 17,235 17,218 17,375 Operating Margin 36.6% 33.3% 34.0% 33.8% 34.1% 32.8% 32.4% Net Interest (Expense) 333 (296) (970) (996) (917) (777) (628) Other Income (Expense) (505) (1,018) (1,036) (1,049) (1,056) (1,075) (1,086) Pretax Income 12,446 14,247 14,528 14,806 15,262 15,367 15,661 Zakat & Taxes (427) (1,170) (1,215) (1,247) (1,265) (1,313) (1,340) Minority Interest 2 ------Net Income 12,022 13,077 13,313 13,559 13,997 14,054 14,322 Shares Outstanding (mn) 2,000 2,000 2,000 2,000 2,000 2,000 2,000 Earnings Per Share 6.01 6.54 6.66 6.78 7.00 7.03 7.16 Balance Sheet Cash & Equivalents 7,618 9,358 10,692 10,971 11,132 11,552 11,788 Acct. Receivables 4,973 7,955 8,262 8,477 8,602 8,926 9,109 Inventories 368 936 972 997 1,012 1,050 1,072 Prepayments & Other Assets 1,019 2,340 2,430 2,493 2,530 2,625 2,679 Total Current Assets 13,977 20,588 22,357 22,939 23,275 24,153 24,649 PP&E 34,369 46,338 51,022 55,295 59,088 62,462 65,332 Intangibles Assets 13,856 31,584 34,777 37,689 40,275 42,575 44,531 Investments 2,407 2,553 2,811 3,046 3,255 3,441 3,599 Other Non-current Assets 4,202 6,057 6,670 7,228 7,724 8,165 8,540 Total Long Term Assets 54,834 86,532 95,280 103,259 110,342 116,643 122,002 Total Assets 68,811 107,120 117,636 126,198 133,617 140,796 146,650 Accounts Payable 3,082 5,615 5,832 5,984 6,072 6,301 6,430 Dividends Payable 57 80 83 85 86 89 91 Other Payables 6,160 4,945 5,731 6,405 6,833 6,803 7,236 Accrued Expenses 5,587 6,551 6,804 6,981 7,084 7,351 7,502 Deferred Revenue 1,773 2,106 2,187 2,244 2,277 2,363 2,411 Current Portion of LT Liabilities 560 3,743 3,888 3,989 4,048 4,201 4,287 Total Current Liabilities 17,220 23,039 24,525 25,688 26,400 27,107 27,957 LT Liabilities 13,019 31,064 31,892 30,004 26,771 23,207 17,863 Employee End of Service Benefits 1,932 2,359 2,422 2,279 2,372 2,350 2,035 Deferred Revenue 437 1,180 1,211 1,519 1,355 881 678 Other Long Term Payables 311 4,719 4,844 4,178 3,389 2,938 2,261 Total Long Term Liabilities 15,700 39,321 40,370 37,979 33,887 29,376 22,837 Total Liabilities 32,919 62,361 64,895 63,668 60,286 56,483 50,794 Shareholders' Equity 35,876 44,735 52,714 62,501 73,300 84,281 96,048 Minority Interest 16 25 27 29 31 32 34 Total Liabilities & Shareholders' Equity 68,811 107,120 117,636 126,198 133,617 140,796 146,650 Cash Flow EBIT 12,618 15,561 16,535 16,851 17,235 17,218 17,375 Depreciation & Amortisation 4,098 5,729 6,308 6,836 7,305 7,722 8,077 EBITDA 16,716 21,290 22,843 23,687 24,540 24,941 25,452 Change in Working Capital 7,081 (791) (282) 581 375 (171) 355 Other Income 43 (468) (486) (499) (506) (525) (536) Taxes & Zakat (427) (1,170) (1,215) (1,247) (1,265) (1,313) (1,340) Capex (16,919) (31,698) (8,748) (7,979) (7,084) (6,301) (5,358) Net Financial Expense 333 (1,045) (1,826) (1,874) (1,807) (1,701) (1,571) Increase (Decrease) in Financing 3,087 23,622 1,048 (2,391) (4,092) (4,511) (6,765) Free Cash Flow 9,915 9,740 11,334 10,279 10,161 10,420 10,237 Dividends (10,000) (8,000) (10,000) (10,000) (10,000) (10,000) (10,000) Change in Cash Position 4,709 1,740 1,334 279 161 420 237
Source: Company Data & Al Mal Capital Research
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Saudi Telecoms Sector |10 th November 2008
Mobily – Growth Bullseye, Mobile and Broadband
Company Overview
Mobily, Saudi Arabia
Etihad Etisalat Company (trading under the Mobily brand) was formed by a consortium of investors, led by UAE operator Etisalat, to bid for the second mobile license in Saudi. Etihad Etisalat was awarded Saudi Arabia’s second GSM license in August 2004 for SAR 12.2bn (US$ 3.2bn) and a 3G license for SAR 753mn (US$ 200mn), thereby ending STC’s mobile telecom monopoly in the KSA. Etisalat reportedly outbid the second highest bidder, MTN Group, by 11%. Etisalat is paid an annual management fee of US$ 10mn (SAR 37.5mn) for 7 years, subject to renewal.
Mobile operations were launched in May 2005 under the brand name Mobily and acquired 1mn customers in the first 90 days of operations. Mobily became EBITDA positive within 2 years of operation. In 2007, revenues grew by 44% to SAR 8.44bn (US$ 2.25bn, AED 8.26bn), while profits nearly doubled to SAR 1.38bn (US$ 368mn, AED 1.35bn). By year-end 2007, Mobily claimed 11.1mn subscribers, of which more than 100,000 were subscribing to its mobile broadband package. Mobily reported a 41% market share at the end of Q1 2008, whilst STC reported 59%.
Ownership
Under the terms of the license, the new mobile provider would be 45% owned by Saudi institutional investors, 20% publicly traded on the Tadawul Exchange (and open only to GCC nationals), and 35% owned by designated operator Etisalat. In October 2004, Etihad Etisalat listed 20% of its shares on the Tadawul in an IPO oversubscribed by 51 times.
As part of Mobily’s original licensing terms and in accordance with regulations set forth by the Saudi Stock Market Authority, the company was required to increase its public float to 40% by its third year as a publicly traded company. In April 2008, founding shareholders including the Saudi Public Pension Authority, General Organization for Social Insurance (GOSI), and Etisalat consequently reduced their respective stakes by 20%. Etisalat alone sold 43.75 million shares at SAR 55 (USD 14.67) per share, which generated a cash return of AED 2.33 billion (USD 634.4 million) and reduced its stake in Mobily from 35% to 26.25%. As a result Etisalat generated a profit of AED 1.8bn, which was reported in Q2 2008.
Following the completion of the 20% stake sale, Mobily intends to raise its capital by 40% to SAR 7 billion (USD 1.87 billion) by issuing 200 million new shares at par value of SAR10 each. From the secondary offering 60% will be allocated to the founding shareholders. In the event the rights issue is not fully subscribed, existing shareholders will be able to bid for the remaining shares, with the shares going to the highest bidders. If this is the case we would expect Etisalat to use this opportunity to increase its stake in Mobily.
We expect a sizeable portion of the secondary offering’s proceeds to be reinvested in Mobily's network infrastructure.
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Figure 29: Mobily Shareholder Structure
Free Float 33.75% 40% Etisalat
Other Founding Shareholders 26.25%
Source: Mobily
Operations
Mobily’s network currently covers 96% of KSA’s population and comprises of c.5,000 base stations of which c.1000 are 3.5G capable. The company distributes its products and services through 5,400 points of sale in more than 77 cities and towns, and aims to further grow its distribution network in the coming years.
In March 2008, Mobily purchased a 33% stake in Saudi-based data communications infrastructure company Bayanat Al Oula (‘Bayanat’) for SAR1.5bn (US$ 400mn).
Mobile
We project that Mobily will continue to add mobile subscribers during our forecast period, with mobile subscribers increasing from 11.1mn in 2007 to 14.4mn by 2013. With Zain KSA entering the market, we expect Mobily’s market share to peak in 2008 at 40% and then decline to 35% by 2013.
Figure 30: Mobily Mobile Market Share
2006 2007 2008 2009 2010 2011 2012 2013
Mobily Subscribers, mn 6.40 11.10 13.06 13.76 13.85 14.08 14.10 14.42 Mobily Mobile Market Share 33% 41% 40% 39% 37% 36% 35% 35% Mobily Growth, % 178% 73% 18% 5% 1% 2% 0% 2% Mobily Net Adds, mn 4.10 4.70 1.96 0.69 0.10 0.23 0.02 0.32
Mobily ARPU, SAR/monthly 76 63 68 72 75 78 80 82 Mobily ARPU, % change 26% -17% 7% 6% 4% 4% 3% 2%
Mobily Revenues, (SAR, mn) 5,841 8,440 10,628 11,864 12,425 13,133 13,547 14,136 Growth, % 251% 45% 26% 12% 5% 6% 3% 4%
Source: Mobily, Al Mal Capital Research
Internet & Broadband
Mobily has offered wireless broadband via its 3.5G data service since June 2006, and the 3.5G enabled portion of the network currently reaches 50% of KSA’s population.
Under its licensing terms, Bayanat Al Oula is allowed to offer internet services. It is however prohibited from offering voice services. This is a positive move, in our 30
Saudi Telecoms Sector |10 th November 2008
opinion, toward increasing exposure to the nascent Saudi fixed-line broadband market to complement its own mobile broadband service offering.
In September 2008 Bayanat launched broadband@home, a prepaid WiMAX service targeted at domestic users, in 4 major cities: Riyadh, Jeddah, Dammam and Khobar and intends to expand its services to a further 14 cities in 2009.
In August 2008, subject to the CMA approval, Mobily acquired a 96% stake in Zajil International Telecommunications Co. (‘Zajil’) at a cost of SAR 80 mn. Zajil, formerly known as GulfNET, is the largest independent ISP operator in Saudi Arabia, with a mainly corporate client base. CMA approval was received in November 2008.
Figure 31: Mobily Broadband Market Share
2008 2009 2010 2011 2012 2013
Mobily Broadband Subs, 000s 5 24 68 136 179 263 Mobily Broadband Market Share, % 0.5% 1.5% 3.0% 5.0% 6.0% 8.0% Mobily Broadband Growth, % 480% 280% 200% 132% 147% Mobily Broadband Net Adds, 000s 19 44 68 43 84
Mobily ARPU Broadband, SAR 206 202 184 176 172 165 Mobily ARPU Broadband, Change -2% -9% -4% -2% -4%
Mobily Broadband Revenue, SAR 000s 12,486 58,844 149,508 286,812 370,536 519,825 Growth, % 371% 154% 92% 29% 40% Source: Mobily, Al Mal Capital Research
Strategy
Defend Mobile Market Share
As the second mobile operator Mobily’s strategy has been growth focused, growing the mobile market in Saudi and gaining market share from the incumbent. Prior to the launch of Zain KSA’s network both Mobily and STC tried to capture as many new subscribers as possible. With the launch of Zain KSA, the priorities within this strategy should change. Firstly, Mobily needs to defend its mobile market share and retain subscribers, and secondly, growing it subscribers in the low end, prepaid growth market. This, we expect, will result in further segmentation of the market.
Continue Expansion into High Growth Broadband
Broadband is the segment that offers the highest prospects for growth, by virtue of the low penetration rates. Mobily is well positioned to exploit this growth, through mobile broadband and through Bayanat, in the fixed segment. By using WiMAX for fixed deployment, Mobily will avoid the pitfalls that have plagued STC in its broadband deployment. These are due to STC’s choice of DSL as its fixed broadband technology, namely proximity of its potential broadband customers to telephone exchanges. Mobily aims to target corporate customers using WiMAX technology, and domestic users through mobile HSDPA.
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Value Chain
We believe Mobily will capture more elements of the value chain. This is shown by its acquisition of Zajil in the ISP space, specifically targeting the corporate segment. Through its acquisition of Bayanat, Mobily will be able to grow revenues and decrease operating expense, hence increasing margins by carrying and terminating more of its traffic on its own network. We expect Mobily to increasingly target SME/SOHO customers and corporates.
Through Mobily’s affiliation with Etisalat, an increasing amount of its international traffic will pass the E –Cable terrestrial and submarine cable running from the UAE, through Saudi and Egypt to France via Italy. This will allow Mobily to benefit from capturing national and carrying international traffic. Investment Positives
Exposure to High Growth Broadband
The broadband sector in Saudi should be one of the segments offering the highest growth potential in Saudi, given the low penetration rates of fixed broadband of 2.5% for YE 2007. Mobily has access to both the mobile and fixed broadband markets through its mobile network and its subsidiary Bayanat respectively.
International Parent
As Mobily’s parent, Etisalat operates in 18 countries, Mobily would become the network of choice for those Etisalat customers visiting Saudi, allowing Mobily to capture roaming revenues.
Capex is another area where Mobily should benefit from having Etisalat as a parent. Mobily could capture economies of scale through larger orders, thus obtaining better pricing and terms than if it were to act on its own.
Investment Risks
No Direct Fixed Line Exposure
Etisalat bid for a fixed line license, but was unsuccessful and so does not have direct fixed line exposure. However, Mobily is able to access the fixed broadband market, the portion of the fixed segment with potential for high growth, through its acquisition of Bayanat, a data communications operator. In addition, as fixed voice traffic has low growth, due to fixed mobile substitution, this should not be a major weakness.
Mobile Number Portability
The introduction of mobile number portability is potentially one of the greater threats to both STC and Mobily. MNP was implemented in 2006 between STC and Mobily, and at the insistence of CITC, is a transparent process from the subscriber point of view. Without full MNP ie including the prefix, mobile telephone numbers are inherently “sticky”, as subscribers may be deterred from changing their service provider, because of the inconvenience of having to inform all their existing contacts of 32
Saudi Telecoms Sector |10 th November 2008
a new telephone number and the potential cost of having to change business cards and other stationery.
We would view MNP to be a less of a threat to Mobily than STC, as STC’s customers have higher ARPUs than Mobily and it is these higher spending customers that we would expect Zain KSA to target aggressively.
Financial Review and Projections
• We project revenue growing by 26% to SAR 10.64bn as the company increases mobile market share and revenue from fixed broadband. Throughout our forecast period, we see revenue increasing from SAR 8.44bn in 2007 to SAR 14.65bn in 2013.
• EBITDA margins are projected to decrease marginally in 2008 to 34.5%. Thereafter we expect EBITDA margins to improve to 40% in 2013 as Mobily continues to benefit from economies of scale and increased revenue from broadband.
• We forecast net earnings to grow by a CAGR of 15.9% between 2008 and 2013. Reported EPS is expected to grow by 31% in 2008 to SAR 2.57 and by 2013 we project EPS growth to be 19%, equivalent to SAR 5.37.
• We project capex to increase from SAR 1.88bn in 2007 and peak at SAR 3.4bn in 2008 and before falling to SAR 1.47bn in 2013.
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Saudi Telecoms Sector |10 th November 2008
Summary Financials
Figure 32 : Mobily (AED Millions) 2007A 2008E 2009E 2010E 2011E 2012E 2013E Income Statement Revenues 8,440 10,640 11,923 12,574 13,420 13,917 14,655 COGS (3,792) (4,682) (5,127) (5,470) (5,771) (5,915) (6,009) SG&A (1,701) (2,288) (2,564) (2,641) (2,751) (2,783) (2,785) EBITDA 2,947 3,671 4,233 4,464 4,898 5,219 5,862 EBITDA Margin 34.91% 34.50% 35.50% 35.50% 36.50% 37.50% 40.00% Depreciation & Amortisation (1,031) (1,359) (1,440) (1,569) (1,690) (1,798) (1,893) EBIT 1,916 2,312 2,793 2,895 3,208 3,421 3,969 EBIT Margin 22.70% 21.73% 23.43% 23.02% 23.90% 24.58% 27.09% Net Interest Expense (555) (518) (451) (367) (311) (249) (186) Other Income (Expense) 43 53 60 63 67 70 73 Pretax Income 1,404 1,847 2,402 2,590 2,964 3,242 3,857 Zakat & Taxes (24) (46) (60) (65) (74) (81) (96) Net Income 1,380 1,801 2,342 2,525 2,890 3,161 3,760 Shares Outstanding (mn) 500 700 700 700 700 700 700 Earnings Per Share 2.76 2.57 3.35 3.61 4.13 4.52 5.37 Balance Sheet Cash & Equivalents 703 426 417 440 403 418 440 Acct. Receivables 1,460 2,128 2,385 2,515 2,684 2,783 2,931 Inventories 69 106 119 126 134 139 147 Due from Related Party 71 11 12 13 13 14 15 Prepayments and Other Assets 810 958 1,073 1,132 1,208 1,253 1,319 Total Current Assets 3,113 3,628 4,006 4,225 4,442 4,607 4,851 Total Long Term Assets 16,767 20,172 22,318 24,330 26,209 27,879 29,344 Total Assets 19,881 23,800 26,324 28,555 30,651 32,486 34,195 ST Debt ------Payables & Other ST Liabilities 624 745 835 880 939 974 1,026 Current Portion of Long Term Loan 1,011 1,277 1,431 1,509 1,610 1,670 1,759 Creditors 3,076 3,830 4,292 4,527 4,831 5,010 5,276 Due to Related party 111 106 119 126 134 139 147 Accrued Expenses 1,207 2,341 2,623 2,766 2,952 3,062 3,224 Total Current Liabilities 6,029 8,299 9,300 9,808 10,468 10,856 11,431 Employees' End of Service Benefits 26.3 37.2 41.7 42.2 43.2 42.9 41.0 Founding Shareholders Loan ------Long Term Liabilities 7,912 6,514 4,986 3,938 2,815 1,726 277 Total Liabilities 13,968 14,835 14,302 13,759 13,292 12,587 11,709 Shareholders' Equity 5,913 8,966 12,022 14,796 17,359 19,899 22,486 Total Liabilities & Equity 19,881 23,800 26,324 28,555 30,651 32,486 34,195 Cash Flow EBIT 1,916 2,312 2,793 2,895 3,208 3,421 3,969 Depreciation & Amortisation 1,031 1,359 1,440 1,569 1,690 1,798 1,893 EBITDA 2,947 3,671 4,233 4,464 4,898 5,219 5,862 Change in Working Capital (6,586) 1,755 623 289 443 223 331 Other Income 43 53 60 63 67 70 73 Capex (1,878) (3,405) (2,146) (2,012) (1,879) (1,670) (1,466) Taxes, Zakat (24) (46) (60) (65) (74) (81) (96) Net Financial Expense (555) (552) (484) (403) (343) (282) (221) Increase (Decrease) in Financing (119) (1,403) (1,533) (1,051) (1,127) (1,093) (1,453) Free Cash Flow (6,173) 72 692 1,285 1,986 2,385 3,030 Dividends - (350) (700) (1,263) (2,023) (2,370) (3,008) Change in Cash Position 155,675 (277,593) (8,289) 22,782 (37,493) 14,917 22,141 Source: Company Data & Al Mal Capital Research
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Saudi Telecoms Sector | 10 th November 2008
Al Mal Securities Group Al Mal Capital Research
Managing Director Managing Director Tamim Refai +971 4 360 11 30 Robert McKinnon +971 4 360 11 17
Institutional Sales & Trading Research Analysts Reza Kiani +971 4 3 60 11 13 Irfan Ellam +971 4 360 11 53
Khamis Shinnawi +971 4 360 11 10 Bobby Sarkar +971 4 360 11 68
Tareq Hamdan +971 4 360 11 06 Deepak Tolani, CFA +971 4 360 11 52
Hommam Magalseh +971 4 360 11 07 Katherine Lynn +971 4 360 11 66
Hassan El Salah +9714 360 11 09 Prerna Sharma +971 4 360 11 56
All Desks Number +971 4 360 11 00 Mala Pancholia +971 4 360 11 54
Disclaimer: This report is not an offer to buy or sell nor a solicitation to buy or sell any of the securities mentioned with in. The information and recommendations contained in this report were prepared using information available to the public and source s Al Mal Capital believes to be reliable. Al Mal Capital PSC does not guarantee the accuracy of the information contained within this report and accepts no responsibility or liability fo r losses or damages incurred as a result of investment decisions taken based on information provided or referred to in this report. Any analysis of historical facts and data is for information purposes only and past performance of any company or security is no guarantee or indication of future results. Al Mal Capital PSC, or its “related group companies” (which may include any of its branches, affiliates and subsidiaries) or any director(s) or employee(s) of the said companies, individually or collectively , may from time to time take positions or effect transactions related t o companies mentioned in this report. Al Mal Capital PSC and its related group companies may have performed or seek to perform investment banking or any other financial or advisory services for the companies mentioned in this report.