2009 Saudi Telecom Company Tadawul Code 7010 PE (x) 9.7 Sector Telecom Close Price (SAR) 51.0 PBV (x) 2.7 Index PE 13.4 52 week high (SAR) 71.3 Div Yield (%) 7.4% Index PBV 1.8 52 week low (SAR) 33.7 Outstanding Shares (million) 2,000.0 Index Div Yield 3.9% YTD 2009 3.9% Market Cap (SAR million) 102,000.0 Sector PE 12.2 30 Day Avg Vol ('000) 5,801.8 % of TASI 9.7% Sector PBV 2.2 Beta 0.8 % of sector 70.0% Sector Div Yield 5.5% Financials (SAR '000) 2007 2008 2009E 2010E 2011E 2012E Revenues 34,457,807 47,469,368 49,368,143 50,849,187 52,374,663 54,469,649 EBITDA 16,544,500 18,449,868 19,129,699 20,994,796 22,007,345 22,726,293 Net Profit 12,021,733 11,037,846 11,274,566 12,733,383 13,349,276 13,726,933 Total Assets 68,811,246 99,762,135 100,986,513 104,038,296 106,539,013 114,325,180 Total Liabilities 32,919,364 57,200,258 55,716,384 54,311,483 52,139,953 55,121,693 Shareholders' Equity 35,876,253 37,637,978 40,346,230 44,802,914 49,475,161 54,279,587 EPS (SAR) 6.0 5.5 5.6 6.4 6.7 6.9 BVPS (SAR) 17.9 18.8 20.2 22.4 24.7 27.1 Ratio Analysis Profitability Ratios (%) Net Profit Margin 34.9% 23.3% 22.8% 25.0% 25.5% 25.2% EBIDTA Margin 46.9% 41.4% 39.7% 40.3% 40.0% 39.7% Return on Avg. Equity 34.3% 28.1% 25.7% 26.8% 25.6% 24.2% Return on Avg. Assets 20.9% 13.1% 11.2% 12.4% 12.7% 12.4% Growth (%) Revenues 6.4% 37.8% 4.0% 3.0% 3.0% 4.0% Net Income -6.1% -8.2% 2.1% 12.9% 4.8% 2.8% Shareholders’ Equity 5.0% 4.9% 7.2% 11.0% 10.4% 9.7% Total Assets 49.2% 45.0% 1.2% 3.0% 2.4% 7.3% Liquidity/Turnover/Leverage Ratios Current Ratio (x) 0.8 0.8 0.8 0.8 0.9 1.1 Total Asset Turnover (x) 0.5 0.5 0.5 0.5 0.5 0.5 Cash Conversion Cycle 9.4 3.7 2.9 5.5 5.7 6.8 (days) Total Debt/Total Equity 0.4 0.8 0.7 0.6 0.5 0.5 Valuation Ratios PE (x) 13.9 8.9 9.0 8.0 7.6 7.4 PBV (x) 4.7 2.6 2.5 2.3 2.1 1.9 PEG (x) -13.8 -6.0 4.2 0.6 1.6 2.6 Dividend Yield (%) 16.8 13.1 7.2 8.1 8.5 8.7 Earnings Yield (%) 7.2 11.2 11.1 12.5 13.1 13.5 EV/Revenues (x) 5.0 2.6 2.6 2.4 2.3 2.2 (Source: STC, Tadawul, FALCOM Research; Note: Stock Market Data and Prices are as of 6th July 2009) Price - Volume Chart 14100 80 12100 Volume STC 70 10100 8100 60 6100 50 Price (SR) Volume ('000) 4100 40 2100 100 30 Jul-08 Oct-08 Jan-09 Jun-09 Feb-09 Apr-09 Mar-09 Aug-08 Sep-08 Nov-08 Dec-08 May-09 (Source: Tadawul, FALCOM Research) FALCOM RESEARCH Saudi Telecom Company 1 FALCOM Research Saudi Telecom Company 1 Contents Executive Summary 3 Company Profile 5 Operations 11 Marketing Mix 22 Strategy 24 Competitive Advantages 26 SWOT Analysis 28 Financial Analysis 29 Future Outlook 35 Valuation 38 Company Financials 42 Glossary 46 Rating Rationale 47 Disclosures 48 FALCOM RESEARCH Saudi Telecom Company 2 2 Saudi Telecom Company FALCOM Research Established in 1998 as a joint-stock holding company, STC is the only fully integrated telecommunications service provider in the kingdom and the largest telecom operator in the MENA region. Over the last two years, cash-rich STC has emerged as a telecommunication holding company with operations in ten different countries, including Saudi Arabia. The international operations of STC contributed for 21% of total revenues in 2008 and the contribution increased to 27% by the end of first quarter of 2009. STC’s role has been instrumental in establishing and developing the telecom industry in the kingdom and it has re- SUMMARY invented and re-aligned itself with the changing landscape of the industry. STC was awarded as the Best Wholesaler in the Middle East in 2008 by Telecoms World, for operating the most sophisticated, fastest- growing network with quality and sustainability across the region. In order to position itself as a global telecom operator and further manage and expand its operations locally and internationally, STC recently undertook an organizational restructuring plan creating separate management committees for its domestic and international operations. In spite of intense competition in the local GSM market with the entry of EXECUTIVE two new players, STC remains the market leader with around 53% market share in terms of number of subscribers and 82% market share in terms of revenues (as on 31st December 2008). The company has maintained a blended ARPU of around SR 115-120 which is considerably higher than its competitors. STC’s network covers around 98% of the populated areas and highways within the kingdom and at the end of 2008, STC had 19 million mobile subscribers, 4.1 million fixed-line subscribers and over 1 million broadband subscribers. In order to tap the increasing penetration level in GSM market, STC plans to continue offering value-added services to its customers and sustain its high ARPU levels. STC’s share of the total addressable GSM subscriber base in 2008, including all its subsidiaries was 28.6 million, of which 66% were local subscribers. STC's share of total addressable market in GSM for 2007 and 2008 Subscribers 2007 2008 % in 2007 % in 2008 (000’s) Saudi Arabia 17,300 19,000 68.5% 66.4% Malaysia 2,451 2,848 9.7% 10.0% India 2,377 3,208 9.4% 11.2% Indonesia 116 140 0.5% 0.5% Turkey 1,730 1,816 6.8% 6.4% Kuwait 0 76 0.0% 0.3% South Africa 1,288 1,513 5.1% 5.3% Bahrain 0 0 0.0% 0.0% Total 25,262 28,602 100.0% 100.0% (Source: STC, ITU, CITC, FALCOM Research, Telecom Regulatory Authorities of respective countries) STC’s monopoly in the wireline segment has also ended recently, when CITC issued licenses to three new operators, STC plans to remain competitive by offering more value-added services to its fixed-line subscribers and leverage its strong position to develop its internet FALCOM RESEARCH Saudi Telecom Company 3 FALCOM Research Saudi Telecom Company 3 business by providing bundled services to its customers. STC’s DSL subscribers touched the benchmark figure of 1 million in 2008. On the technology front, STC is working on the deployment of NGN (Next Generation Network) which will help it utilize economies of scale further and reduce the capital expenditure going forward. Continuing with the FORWARD strategy adopted in 2007, STC plans to foster its organic and inorganic growth by enhancing its customer-centric business model, operational efficiency and international growth. With acquisitions in the under penetrated markets of India and Indonesia and the growing domestic demand for broadband, STC’s future potential for growth looks robust. Financially, 2008 was not a very profitable year for STC, is spite of 38% increase in revenues, its net income declined by 7%, mainly due to the loss of market share in the domestic market, decline in consumer expenditure, start-up costs in Kuwait and currency losses related to international operations. However, in Q1 2009, in spite of 1.3% q-o-q decline in revenues, STC reported 113% increase in net profits, mainly due to decline in access charges and administrative and marketing expenses. According to our forecasts, STC’s net profit margin and EBITDA margin are expected to be 23% and 40% respectively in 2009, and 25% and 40% by 2012. The contribution from international segment is expected to increase in coming years. Company’s return on average equity and average assets is expected to be steady around 25% and 12% respectively in the coming four years. Historically, STC’s stock has outperformed the TASI and Telecommunications sector index and has shown relatively lower volatility over the last one year (in terms of coefficient of variance). The company has consistently paid quarterly dividends to its shareholders and is expected to do so in the coming years. STC’s stock is currently trading at lower P/E multiples but higher PBV and dividend yields as compared to that of the TASI or the telecom sector. FALCOM Research is releasing the updated report with amendments in valuation that has resulted in a fair value of SR 64.7 which is at 26.9% premium to its price of SR 51.0 on 6th July 2009. FALCOM Research maintains “Strong Buy” recommendation on the stock. The fair value of the stock is based on FCFE, DDM and comparable valuation methods. For our valuation we have assumed the perpetual growth rate of FCFE and dividend to be 2%. Valuation Ratios 2007 2008 2009E 2010E PE (x) 13.9 8.9 9.0 8.0 PBV (x) 4.7 2.6 2.5 2.3 PEG (x) -13.8 -6.0 4.2 0.6 Dividend Yield (%) 16.8 13.1 7.2 8.1 Earnings Yield (%) 7.2 11.2 11.1 12.5 EV/Revenues (x) 5.0 2.6 2.6 2.4 (Source: FALCOM Research) FALCOM RESEARCH Saudi Telecom Company 4 4 Saudi Telecom Company FALCOM Research Background Saudi Telecom Company (STC) was established as an independent joint- stock company in 1998, when the government separated the telecommunication services from the Post, Telegraph and Telephone Ministry.