Telecom Lead Middle East: The Saudi telecom sector has strong growth potential with profit growth largely driven by value-added services (namely broadband), costs efficiencies, and international operations for STC.
We believe that the corporate segment in general and the ICT segment in particular (e.g. data security, cloud computing) is a source of continued growth for the sector with it a key target for Mobily.
In its new report, NCB Capital remained Overweight on STC, with a PT of SR51.8 (upside of 30 percent), and Mobily with a PT of SR81.9 (upside of 20 percent) and Neutral on Zain KSA, with a PT of SR11.3 (downside of 5 percent). Focus on the broadband market for all three players remains key, with expansion in network capabilities being sought as a point of differentiation. Valuations remain attractive with the sector trading at 8.0x 2013E P/E. Though the upside on STC is greater, Mobily remains our preferred stock, given its strong fundamentals, excellent execution record and good dividend visibility.
NCB Capital forecast that total revenues for the three stocks under coverage to increase by 8 percent YoY to SR46 billion in 2H12, driven by a higher broadband subscriber base and growth in Saudi Arabia’s corporate segment. Seasonal factors (Ramadan and Haj=j) take place in 2H12 and should aid sequential growth in the sector. Intense competition in the international call business notwithstanding, margins should be supported by the high-margin Data segment and OpEx efficiencies.
On the other hand, increased sales coming from handset items and the corporate segment may pressure margins for Mobily. Margin growth, coupled with higher revenues, is likely to result in EBITDA rising by 9 percent YoY to SR16 billion in 2H12, and net income increasing 26 percent YoY to SR7.4 billion.
For Zain, on the one hand its financial outlook has improved post its balance sheet restructuring due to lower interest payments. However, it remains significantly behind STC and Mobily in terms of market share and available products, and the top-line performance has been muted in the past several quarters, holding back the pace of its recovery.
STC has benefited from improved local operations and higher than expected Other Income, while Mobily has benefitted from margin expansion (in line with expectations), led by improved operational efficiencies. For Zain, NCB Capital reduced its PT by 30 percent, due to subdued revenue growth, leading to margin growth being held back. This is despite factoring in the balance sheet restructuring.
The sector’s main concern is price-led competition, with voice ARPUs under significant pressure. NCB Capital said the price-led competition is now also moving into the data segment with operators increasingly launching new offers and different packages to gain subscribers. The commencement of operations from Mobile Virtual Network Operators would be another source of pressure for existing operators.
Farouk Miah, head of Equity Research at NCB Capital
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