Etihad Etisalat Co. (Mobily)

Transcription

1 1 Financial statement revised, Weak top line, Debt and Zain issue unresolved, we reiterate our Underweight recommendation. 2Q-2015 result continues the Mobily saga: Mobily announced its 2Q-2015 result. According to the announcement, the company posted a loss of SAR 900.9mn, as compared to a net income of SAR 92.5mn in 2Q The company in 2Q-2015 accounted for provision of SAR 800mn against the Zain s account receivables of SAR 2.1bn; the additional SAR 800mn provision has taken the whole provision to SAR 1.9bn. Adjusting for the one-off provision, the company normalized loss stood at SAR 100.9mn, depicting a jump of 120% QoQ. Table 01: 2Q Result Details Revenue from services 3,568 Growth QoQ (%) -2.1% Growth YoY (%) 0.0% Cost of services (1,619) Gross profit 1,949 Selling and marketing expenses (427) General & administrative expenses (1445) Depreciation and amortization (894) Operating Profits (EBIT) (817) Finance cost (58) Other, net 70 Net Income before Zakat (805) Provision for Zakat (96) Net income to equity shareholders (901) Growth QoQ (%) -43% Growth YoY (%) NM* Source: Company Financials Statement on Tadawul *Not Meaningful Our estimates & Valuation: For 2015 we expect Mobily to post loss of SAR 1.18bn, depicting a fall of 25%YoY. Revenues in the same time period is expected to stand at SAR 14.5bn ( 3.5% YoY). Mobily is facing a number of issues like shrinking market share, falling ARPU, intensive competition, legal arbitration, and negotiations with debt holders. We update 12-month price target to SAR 27.8; we reiterate our Underweight recommendation. Depreciation revision: The company was delaying its recognition of the depreciation expense, as it was recording depreciation from the day the asset was becoming operational. According to CMA the company should have recognized depreciation expense on the asset from the day it has been capitalized, rather than when it is actually put into service. Along with that the company was also delaying the capitalization. Since the asset was being capitalized once the internal confirmation was complete. The company in principal should have considered the asset capitalized once it was ready for operations. T0:Construction of Asset starts T 0 Decrease Interval b/w T1 to T2 T 1 T1:Construction Completed. Ready for Opreations CMA wants Mobily to start recongnizing Depreciation expense from time T2 T2:Internal Confirmation Completed. Asset ready for Capitalization T3:Asset becomes Operational. Company starts recognizing Depreciation expense In our view the timing of the depreciation recognition, does not impact the total depreciation expense. However, the mismatch in timing results in overstating and understating of the company s depreciation expense. A period where depreciation should have been recognized and it is not recognized, will result in higher net income, however eventually depreciation expense in the coming quarters will increase; smoothing out the impact of late recognition of depreciation. T 2 T 3 Recommendation Underweight Previous Target Price (SAR) 32.1 Current Price* (SAR) New Target Price (SAR) 27.8 Upside / (Downside) -11.2% Key Sector Data Key Financials SARmn (unless specified) FY14 FY15E FY16E Revenues 13,995 14,483 14,988 Growth % -23% 3% 3% Net Income -1,576-1, Growth % NM* -25% -99% EPS (2.05) (1.53) (0.02) Source: Company reports, Aljazira Capital, *Not Meaningful Key Ratios *prices as of 03 nd of August 2015 SARmn (unless specified) Market Cap(bn) 24,008.6 YTD% -29.7% 52 week (High) week (Low) Share Outstanding (Million Shares) 770 Source: Company reports, Aljazira Capital SARmn (unless specified) FY14 FY15E FY16E Gross Margin 49.3% 54.1% 54.2% EBITDA Margin 16.1% 19.7% 27.2% Net Margin -11.3% -8.2% -0.1% P/E NM* P/B EV/EBITDA (x) ROE -7.6% -0.1% 0.5% ROA -2.8% 0.0% 0.2% Dividend Yield 8.5% 0.0% 0.0% DPS Source: Company reports, Aljazira Capital, *Not Meaningful Mobily Revenue and Net income Billion SAR (5) Revenue Net income (Loss) Source: Company Financials Senior Analyst Talha Nazr t.nazar@aljaziracapital.com.sa

2 Mobily should have been recognizing depreciation expense from the time the asset was capitalized along with that the CMA wants Mobily to decrease the delay in revenue recognition arising due to time taken for internal confirmations. The change in the depreciation policy has resulted in the revision of depreciation expense, which is highlighted in table 02. Change in accounting policy for FTTH/FTTX revenue recognition: In light of the CMA report findings, the company has decided, that these two type of contracts (FTTH and Brand reseller), will be treated under IFRS 15, which was suppose to be implemented from 1st Jan The board has decided to implement this accounting treatment from 31st Dec Under the new standard the company will recognize revenues, once the service has been provided, instead of recognizing revenues once the payment is received. In such a case where cash is received, however service is not provided, deferred revenues will be booked. Mobily had recognized revenues from contracts, once it received cash or was sure of receiving cash by considering them as Accounts Receivable, without providing the necessary service in lieu of the payment received. Under the new standard, the company had to de-recognized its earlier recognized revenues, since services against these revenues were not provided. In order to comply with IFRS 15, the company has restated its revenues for 2013 and 2014,refer to table 02 for further details. Table 02: Revised income Statement Revised Income Statement In Mn SAR: unless otherwise stated Initial result 1st revision 1st revision/ Initial result 2nd Revision 2nd revision/1st revision 2nd revision/ Initial result Revenue 25,191 19,180-24% 18,103-6% -28% Cost of Services (12,243) (6,987) -43% (6,896) -1% -44% Gross Profit 12,948 12,193-6% 11,207-8% -13% Selling & marketing (1,535) (1,533) 0% (1,533) 0% 0% General & administrative (2,223) (2,209) -1% (2,209) 0% -1% EBITDA 9,190 8,450-8% 7,465-12% -19% Depreciation and amortization (2,502) (2,502) 0% (2,760) 10% 10% Operating Profit 6,688 5,949-11% 4,705-21% -30% Financing costs (191) (191) 0% (191) 0% 0% Other Revenues % 257 0% 0% Net Income before Zakat 6,755 6,015-11% 4,771-21% -29% Zakat (78) (78) 0% (79) 1% 1% Net Income 6,677 5,937-11% 4,692-21% -30% Revised Income Statement In Mn SAR: unless otherwise stated Initial Revised Revenue 15,749 13,995-11% Cost of Services (7,107) (7,096) 0% Gross Profit 8,642 6,899-20% Selling & marketing (1,843) (1,843) 0% General & administrative (3,822) (2,810) -26% EBITDA 2,977 2,246-25% Depreciation and amortization (3,491) (3,533) 1% Impairment of goodwill and other provision (63) (63) 0% Operating Profit (578) (1,350) 134% Financing costs (269) (269) 0% Other Revenues % Net Income before Zakat (764) (1,535) 101% Zakat (150) (41) -73% Net Income (914) (1,576) 72% 1Q Revised Income Statement In Mn SAR: unless otherwise stated Initial Revised Revenue 3,613 3,643 1% Cost of Services (1,744) (1,743) 0% Gross Profit 1,870 1,901 2% Selling & marketing (368) (368) 0% General & administrative (594) (601) 1% EBITDA % Depreciation and amortization (1,012) (882) -13% Operating Profit (104) % Financing costs (68) (68) 0% Other Revenues % Net Income before Zakat (157) (3) -98% Zakat (42) (42) 0% Net Income (199) (45) -78% Source: Company Financials on Tadawul 2

3 In our view the 2013 revised revenues and cost of services, which were revised by 28% and 44% respectively, were impacted by the de-recognition of the hand set revenues. Earlier, the company was recognizing hand set sales in the revenues portion whereas, cost of hand set were being recorded in the cost of services. However under the auditors recommendation and CMA direction, the company restated its income statement by recording the net revenues(sales revenue of device-cost of device) in the top-line. Along with that the company also de-recognized, earlier recorded revenues from FTTH and FTTX contracts. Drop in revenues: According to the revised income statement the company has been witnessing a decline in its revenues by 23.2% and 22.7% in 2013 and 2014 respectively. Similarly in 1H-2015 revenue from services showed a decline of 2.8% YoY. This in our view is can be attributed the following reasons: 1. The potential decrease in market share; 2. falling ARPUs 1 ; 3. decrease in quota of Hajj and Umrah Pilgrims; 4. Intensive competition; and 5. an absence of FTTH lease revenues, at least in the near future. In our view the major cause of concern is the shrinking market share, since fall in ARPUs is more or less an industry wide phenomena the decrease in revenue is a primarily a function of the falling customer base, which we believe was due to the cancelation of the unregistered SIM Cards 2, and the intense competition in the market given the 170% mobile penetration level. In light of the revised financial statement and the current financial performance we revise our sensitivity analysis of the company, based on the available information Following are our major assumption for the analysis As we have discussed earlier Mobily is facing number of issues on the revenue front, the lack of clarity in regard to the market share make it difficult to judge the revenue potential of the company. For that matter we have considered multiple revenue assumption ranging from SAR 2.5bn per quarter ( SAR 10bn annual) to SAR 6bn per quarter (SAR 24bn annual) On the expenses front we have considered the following assumption; 1. Annual Depreciation expense of SAR 3.6bn, against our earlier assumption of SAR 4.0bn 2. Bad debt provisioning; 3. Around SAR 3.9bn in annual SG&A expenses; and 4. A potential increase in finance cost, due to short term liquidity squeeze. Given the lack of disclosure on the revenue front and the reasonable clarity on the expenses, we believe the best way to predict the earnings of the company is through sensitivity analysis of revenue. We have conducted a sensitivity analysis on Mobilys income statement based on the different quarterly revenues. Based on the quarterly revenue, we have annualized the revenue assumptions. Major Assumption on the expense front are; 1. Gross profit margins will range from 50% to 56%, depending on the scenario; 2. Selling and marketing expense of SAR 1.5bn annually; 3. General and administrative expense of SAR 2.4bn annually; 4. Annual depreciation expense of SAR 3.6bn, against our earlier assumption of SAR 4.0bn; 5. Finance cost of SAR 250mn annually, against earlier assumption of SAR 240mn annually; Revised Potential 2015 annual result scenario Values in bn SAR Bear 3 Bear 2 Bear 1 Base Bull 1 Bull 2 Bull 3 Underlying Quarterly Revenues Annual Annual Revenue(A) Gross Profit GP Margins 50% 52% 53% 55% 56% 56% 56% Selling & Marketing (A) General & Administrative (A) EBITDA(A) Depreciation and Amortization (A) EBIT (A) (2.50) (1.26) (0.08) Finance Cost (A) Earnings(loss) Before Zakat (A) (2.75) (1.51) (0.33) A-annual 1 Average Revenue per Unit 2 Subscriber Identity Module 3

4 Despite of a few changes in our assumption, our current sensitivity provides us with the similar earlier conclusion, that the company s breakeven point is somewhere between quarterly revenues of SAR 3.5bn to SAR 4.0bn.Mobily in 2014, on average posted revenues of SAR 3.5bn (SAR 13.99bn divided by 4 quarters). The gross margin stood at 49%, above our assumption of 53% for Bear1. Along with that SG & A cost stood at SAR 4.6bn (against our assumption of 3.9). Due to these reason the company posted a higher than expected loss before Zakat of SAR 1.6. In 1Q-2015, the company posted revenues of SAR 3.6bn, the gross margin stood at 52%, and rest of the constituent where roughly in line with our assumptions, due to which the company posted a loss before Zakat of SAR 3.0mn. For 2Q-2015, revenues stood at SAR 3.57bn,gross margins stood at 54.6%. Adjusting for the one off provision of SAR 800mn, the company posted loss before Zakat of 105mn.We believe, for Mobily to be profitable, quarterly revenues should have a base of SAR 4.0bn/quarter. However even at SAR 4.0bn, profitability is expected to be underwhelming. Debt issue still unresolved: The company in light of its financial troubles broke a number of covenants on its long term loans, which has resulted in re statement of long term loans from long term liabilities to short term liabilities. Long term loan in 2014 stood at SAR 17.0bn, which were being treated as current liabilities. The company has been in negotiation with it debt holders to reset it covenants and re negotiate new terms for the loan, however no result has been reached so far. In 2Q-2015 the loan is still being treated as a current liability. It should also be noted that according to the company cash flow statement for 2Q-2015, it has paid SAR 1.4bn in its loan re-payment. We continue to treat the loan as a long term loan, until a clear indication by the company is not presented. 4

5 RESEARCH DIVISION AGM - Head of Research Abdullah Alawi a.alawi@aljaziracapital.com.sa Analyst Jassim Al-Jubran j.aljabran@aljaziracapital.com.sa Senior Analyst Talha Nazar t.nazar@aljaziracapital.com.sa Analyst Sultan Al Kadi s.alkadi@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General manager - brokerage services and sales Ala a Al-Yousef a.yousef@aljaziracapital.com.sa AGM-Head of Sales And Investment Centers Central Region Sultan Ibrahim AL-Mutawa s.almutawa@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa lalmutawa@aljaziracapital.com.sa AGM-Head of Qassim & Eastern Province Abdullah Al-Rahit aalrahit@aljaziracapital.com.sa AGM- Head of Western and Southern Region Investment Centers & ADC Brokerage Abdullah Q. Al-Misbani a.almisbahi@aljaziracapital.com.sa AGM - Head of Institutional Brokerage Samer Al- Joauni s.aljoauni@aljaziracapital.com.sa RESEARCH DIVISION AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. RATING TERMINOLOGY 1. Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated Overweight will typically provide an upside potential of over 10% from the current price levels over next twelve months. 2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated Underweight would typically decline by over 10% from the current price levels over next twelve months. 3. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated Neutral is expected to stagnate within +/- 10% range from the current price levels over next twelve months. 4. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company. 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