Etihad Etisalat (Mobily) (7020.SE)

Transcription

1 (7020.SE) Broadband opportunity materializing! Equity Research General Update April 6th, 2009 Current Price: SAR Country: Saudi Arabia Fair value Target: SAR Sector: Telecom Services Recommendation: BUY Exchange: Saudi Stock Exchange (Tadawul) Sector Coverage Team Simon Simonian, CFA Jessica Estefane We continue to favor Mobily as a pure play on Saudi Arabia s telecom market, a more stable and resilient economy in the region. We believe that Mobily s management is focused on the KSA opportunity, and will not pursue international expansion in the near future. Mobily is no longer reliant on a single line of business, having established the foundation to transition from a pure play mobile operator to an integrated telecom services provider. In less than two years, Mobily has captured more than 20% share of the kingdom s broadband subscribers with 300,000 users in We estimate that data revenue contributed to approximately 10% of total revenue in Broadband services will represent the next leg of growth for the company. We forecast KSA s broadband subscribers to more than triple from 1.4mn in 2008 surpassing the 4mn mark in Following the entry of Zain, Saudi Arabia s mobile sector has become more competitive. So far, Mobily with its strategically calculated promotions has managed to lure new mobile subscribers as well as maintain its existing ones without sacrificing margins. We believe KSA s mobile market has room to grow towards a 145% active penetration rate by 2010 from 124% in We maintain our BUY recommendation and revise our fair value target to SAR based on the average of two valuation methods: DCF and peer multiples. Our target price suggests a total return upside of 21.5% to the stock's most recent closing price, factoring in expected dividend of SAR 1.00 per share for Our updated DCF derived fair value is SAR Our target price is at a discount to our DCF valuation, and implies a P/E of 12.3x on 2009E earnings. The applied P/E is at a premium to the average multiples in the MENA / emerging markets telecom universe. We believe Mobily warrants a higher multiple because of its track record as a growth company since the IPO. Our target P/E is backed by our forecast of 14.2% compound annual growth in earnings for the next three years. Year Net Profit (SAR mn) EPS (SAR) EBITDA reported (SAR mn) BV (SAR mn) EV/EBITDA adj. (X) Dec-11E 3, ,158 15, Dec-10E 2, ,890 13, Dec-09E 2, ,450 11, Dec-08 2, ,794 9, Week range (SAR) Number of shares ('000) 700,000 Free Float (%) 48% Market cap (SAR mn) 25,340 Market cap (USD mn) 6,756 Div Yld. 2009E (%) 2.8% Mobily stock performance vs. SC KSA Index P/E (X) P/BV (X) Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 Mobily (SAR) adjusted for corporate actions SC KSA index rebased

2 Contents INVESTMENT THESIS...3 SAUDI MOBILE MARKET UPDATE...4 INTENSIVE PROMOTIONS SINCE AUGUST MARKET SHARE UPDATE... 4 ROBUST GROWTH FOR KSA MOBILE SECTOR IN IPHONE 3G: ANOTHER MARKETING INITIATIVE... 6 BROADBAND OPPORTUNITY MATERIALIZING!...7 KSA BROADBAND MARKET UPDATE... 7 THE CASE FOR THE BROADBAND OPPORTUNITY IN SAUDI ARABIA... 8 MORE COMPETITION EXPECTED IN BROADBAND... 9 FINANCIAL ANALYSIS AND FORECAST...11 CAN MOBILY MARGINS EXPAND IN AN INCREASINGLY COMPETITIVE ENVIRONMENT? CAPEX UPDATE FREE CASH FLOW DIVIDENDS RIGHTS ISSUE STRENGTHENS BALANCE SHEET VALUATION: TARGET FAIR VALUE REVISED TO SAR UPDATE ON POTENTIAL CATALYSTS / DEVELOPMENTS APPENDIX...17 MOBILY: OWNERSHIP STRUCTURE UPDATE FINANCIALS...18 April 6th,

3 Investment thesis Mobily has proven to be one of the most successful greenfield telecom operations in the MENA region. In less than three years, the company has become a solid number two player in Saudi Arabia s mobile market, commanding approximately 28% revenue share in Mobily is branching out from a pure play mobile operator to an integrated telecom services provider in the kingdom. Broadband services will represent the next leg of growth, as broadband penetration, at 5.3% of the population in 2008, remains low. Mobily launched the wireless broadband service (HSPA) in Q2 07, and in less than two years captured more than 20% market share of the broadband segment with 300,000 subscribers at 2008-end. Competition has become more intense with the entry of Zain, the third mobile operator. So far, Mobily with its strategically calculated promotions has managed to lure new mobile subscribers as well as maintain its existing ones without sacrificing margins. Net profit forecast: largely unchanged from a year ago We increased our revenue forecasts for 2009 and 2010 by 10% and 14% respectively factoring in higher broadband data contribution. Overall, our net profit forecasts for 2009 and 2010 remain largely unchanged. To reflect more intensive promotions, beyond our initial expectations, by the three players to gain or maintain market share, we revised lower our long term EBITDA margin assumptions. This combined with fine-tuning in items below the EBITDA line, notably accounting for higher depreciation and amortization expenses, leads us to revise downward our net profit estimates for 2009 and 2010 by 1% and 3%. Valuation new target price of SAR We revised our target price to SAR from previously SAR (SAR pre-rights issue). Our new target price is based on a 70%-30% weight for DCF and peer valuation, respectively. Our new DCF-derived fair value of SAR reflects principally a higher discount rate applied to our DCF. We revised our WACC to 10.8% from previously 9.4%. Our revised target price implies a P/E of 12.3x on 2009E earnings, which represents a premium to the average P/E multiples in the MENA / emerging markets telecom universe. We believe Mobily warrants a higher multiple because of 1) its established track record as a growth company since the IPO in 2004, 2) strong management execution, and 3) our target P/E is backed by our forecast of 14.2% compound annual growth in earnings for the next three years. April 6th,

4 Saudi mobile market update Intensive promotions since August 2008 The Saudi mobile market has proved to be anything but a benign competitive environment since the entry of Zain. From the beginning in August 08, Zain launched with an aggressive campaign, One month on us, one month on you, offering the first 500,000 subscribers the equivalent of 50% lifetime discount combined with the benefits of the One Network concept. Mobily reacted soon afterwards with a September promotion offering subscribers 60% discount after the third minute for on-net local calls and all international calls. In October, Mobily launched Tejwali service as a response to Zain s One Network, offering free incoming calls in 56 countries, including UAE (mandatory roaming with Etisalat required to receive free incoming calls), Egypt (again mandatory roaming with Etisalat Misr), Bahrain, Jordan, Switzerland, and France all key destinations for Saudis. Tejwali also includes Sudan, which is part of Zain s One Network. Earlier, in August, STC had announced an alliance with 30 global telecom operators to offer discounts on international roaming. Both Mobily and STC retaliated so that the One Network no longer becomes a differentiator for the new entrant. At the beginning of November, STC introduced a one-month promotion offering free calls after the fifth minute for on-net local call and all international calls. In response to STC s offer, Mobily replaced, in mid-november, the 60% discount promotion after the third minute with a new one by offering 50% discount starting the first second for on-net local calls and all international calls. This promotion was for three weeks, and ended at the start of the Hajj season. In summary, following Zain s aggressive commercial launch, Mobily and STC reacted quickly with generous promotions to send a message to the new entrant. By the same token, both STC and Mobily signalled their intention to contain Zain s market share progression. We believe more promotions are in store for 2009, leading to ARPU pressure. However, as discussed in our March 30th 2008 report on Mobily ( Revisiting the contender...still a growth story ), the minutes of use (MoU) are relatively low in the kingdom compared to neighbouring GCC countries. Hence, we expect a positive elasticity effect to somewhat offset the decline in rates per minute with an increase in minutes of use. Market share update Given the lack of disclosure, it has been difficult to track on a quarterly basis subscriber market share evolution for the Saudi mobile sector. Saudi Telecom reported 19mn active mobile subscribers at the end of STC switched to active mobile subscriber reporting as of last year. Mobily indicated that closing mobile subscriptions increased to 14.8mn in December 08, from 11.1mn a year ago. Zain Saudi Arabia reported 2.0mn subscribers at the end of 08. Based on our estimates, Mobily captured 35% share of Saudi active mobile subscribers at the end of April 6th,

5 Active subscriber share of Saudi mobile market (Dec. 2008E) Zain 6% Mobily 35% STC 59% Source: SHUAA Capital estimates 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Although revenue breakdown per segment is not available, we are able to gauge revenue market share for STC and Mobily from reported revenues. We estimate that STC captured approximately 71% revenue share of the Saudi mobile market. Mobily continued to gain revenue share of the mobile market, reaching close to 28%, up from 26% revenue share in 2007 albeit at a slower pace than previous years. Revenue share of Saudi mobile market 93% 7% Source: SHUAA Capital estimates 79% 21% 1% 74% 71% 26% 28% Mobily STC Zain KSA Robust growth for KSA mobile sector in 2008 It s worth mentioning that Saudi mobile segment s growth picked up, according to our estimates, to 16% in 2008 from 15% in Saudi Arabia mobile sector vs. Mobily: annual revenue growth E % Annual revenue growth E KSA mobile sector 62% 37% 18% 20% 20% 15% 16% Mobily 251% 45% 28% Source: Company reports, SHUAA Capital estimates April 6th,

6 Have we reached maturity? We expect Saudi Arabia s mobile sector revenue growth to decelerate in 2009, while still achieving low double digit growth. We estimate that Saudi mobile penetration has reached approximately 124% in 2008 based on active subscribers. Note that human penetration is lower due to multiple SIM card ownership. We believe the market has room to grow towards a 145% active mobile penetration rate by iphone 3G: Another marketing initiative Mobily launched the iphone 3G in the kingdom in February 09. We believe this has two positive implications for the company: 1. Sustains its image as an innovative company constantly bringing new products to market. As a reminder, Mobily was first to launch the Blackberry service (Sep. 06) and HSPA 3.5G mobile broadband (Jun. 07) in the kingdom. 2. iphone 3G should allow Mobily to attract new high ARPU customers from the competition. April 6th,

7 Broadband opportunity materializing! KSA broadband market update Broadband Internet started to gain traction in Saudi Arabia only as of Since then, growth has been tremendous, with broadband penetration rising from 1% of the population in 2006 to 3% in 2007, and 5.3% in Total broadband subscribers (fixed+mobile) in the kingdom reached 1.4mn at the end of Saudi Arabia: Broadband subscriber mix and penetration 1,600,000 1,400,000 1,200,000 1,000, , , , , E 2008E Fixed broadband subscribers Mobile broadband subscribers (LHS) Broadband penetration % of population (RHS) Source: CITC, Company reports, SHUAA Capital estimates (LHS) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% In the residential segment, according to our estimates, broadband penetration doubled from 10% in 2007 to 20% of households in % 20% Saudi Arabia: Broadband penetration of households 20% 15% 10% 10% 5% 4% 0% E Broadband penetration of households Source: CITC, SHUAA Capital estimates HSPA subscribers blow through the roof! 2008 was the year of the boom of mobile broadband in the kingdom. Mobily s progress in the broadband segment last year was ahead of our expectations. In our model, we were forecasting mobile broadband subscribers (HSPA) to double from 100,000 in 2007 to 200,000 in Mobily reported that HSPA subscribers reached 300,000 at the end of From solid number two in mobile to number two in broadband Less than two years after entering the broadband segment, in May 2007, Mobily has captured more than 20% share of total broadband subscribers (fixed+mobile) in the kingdom. From a pure play mobile operator, Mobily is on track to become a solid number two player in the broadband data segment in Saudi Arabia. On the other hand, Saudi Telecom remains the dominant player. After tripling its DSL subscribers in 2007 from 200,000 to 600,000, STC added another 400,000 subscribers in 2008, matching the net additions of the previous year. STC ended 2008 with one million DSL subscribers. April 6th,

8 A comprehensive broadband strategy Up till now, Mobily s success in broadband data segment has been through the Mobily Connect HSPA mobile broadband offering. With the acquisition of Bayanat Al-Oula and Zajil International Telecom in 2008, the company is developing a more comprehensive broadband product offering: Fixed WiMAX: following the acquisition of Bayanat Al-Oula, Mobily integrated to its distribution network WiMAX broadband, a fixed high-speed Internet service for the home or at work. It is positioned as a complimentary offering to Mobily Connect which provides the advantage of the mobility feature. The residential WiMAX product is marketed as broadband@home offering a speed of up to 2Mbps for a monthly fee of SAR 200 (USD53.3). FTTP: Mobily is selectively deploying fiber-to-the-premise (FTTP), extending the national fiber backbone in metropolitan areas. We believe Mobily will target the business sector with FTTP. The case for the broadband opportunity in Saudi Arabia Penetration remains relatively low. As indicated earlier, broadband penetration has reached c. 5% of population in 2008 a level still well below that of OECD countries. Residential high-speed Internet penetration remains relatively low at 20% of households in As such, we anticipate continued strong growth in the broadband segment over the next few years. We expect the number of broadband subscribers to more than triple from 1.4mn in 2008 exceeding the 4mn mark in A young population. Saudi Arabia has a very favourable demographic profile. 51% of the population is less than 25 years old, and approximately one-third is less than 15 years old. The country has 5mn students, and has relatively limited entertainment venues (e.g.: no movie theatres). All this bodes well for broadband adoption. High potential for corporate sector Internet service. In 2007, the Communication and Information Technology Commission (CITC) mandated Nielson to conduct a survey of the Saudi PC and Internet market. According to the study, PC penetration was 76% and broadband penetration at 36% among private corporations in the kingdom. It is worth mentioning that 66% of small businesses were using computers in Broadband penetration was the lowest among small businesses at 22%, with a large number relying on a dial-up service to connect to the internet. We note that even among corporations using broadband, the 256 kb/sec and 512 kb/sec speed connections were the most popular at that time. Saudi private sector: PC and Broadband penetration (2007) 120% 100% 94% 97% 80% 60% 76% 66% 56% 74% 40% 20% 36% 22% 0% All companies Small business Medium business (50 < employees) (51-300) PC penetration % Broadband penetration % Source: CITC, Nielson survey, SHUAA Capital Large enterprise (>300) April 6th,

9 PC affordability improving. What a difference a year can make? Historically, a relatively low PC penetration in Saudi Arabia, at 21% of the population in 2007, has been considered a barrier for long term broadband adoption. With the rise of the low priced netbooks since last year, whose sales are gaining traction in the kingdom, the barriers for PC ownership are falling. Netbooks retail price in Saudi Arabia is starting from SAR 1,300 (USD 346). More competition expected in broadband Mobily launched in Dec. 08 a promotion targeted to students by bundling in a package a Connect USB modem, a SIM card, an ASUS Eee laptop, and a data subscription plan. The promotion coincided with the back to school season in Saudi Arabia. Different packages are available: 1GB, 5GB, and unlimited data plan, combined with a one month, 6-month, or 12-month contract. For instance, the bundle (USB modem+sim card+asus netbook) including a one month unlimited mobile data subscription is offered at SAR 1,985 (USD 529). Mobily: mobile broadband subscription bundle with netbook Source: Mobily STC reacts We believe DSL remains the priority in STC s broadband strategy. Its marketing efforts have been focused on promoting the DSL service. However, the incumbent recently reacted to Mobily s mobile broadband success. On Feb. 17, STC announced a jointpromotion with Jarir Bookstore, offering a free one-month mobile data subscription and a SIM card with the purchase of a laptop. In March, STC also lowered the monthly fee for the unlimited mobile broadband subscription from SAR 450 to SAR 350 matching Mobily s monthly rate. STC: DSL packages pricing Afaq DSL Shamil (Access+Internet Service) Monthly Connection Speed Fee (SAR) March 08 Monthly Fee (USD) March 08 Monthly Fee (SAR) March 09 Monthly Fee (USD) March 09 % Change YoY up to 256 Kbps % up to 512 Kbps % up to 1 Mbps % up to 2 Mbps % up to 4 Mbps % up to 8 Mbps n/a n/a up to 10 Mbps n/a n/a DSL Max (8 to 20 Mbps) n/a n/a Installation fee Source: STC During the same month, STC also slashed the monthly fee for the DSL service, in our opinion, in order to 1) price the service more competitively with Mobily s Broadband@ Home WiMAX service as well with the Connect mobile broadband service, and 2) preempt the commercial launch of the new entrant Atheeb Telecom. Having surpassed the one million subscriber mark, STC is clearly leveraging on its economies of scale. April 6th,

10 STC: Evolution of monthly subscription fee for 1 Mbps DSL package Sep. 07 Oct. 07 Dec. 07 Feb. 08 Mar. 08 Jun. 08 Sep. 08 Dec. 08 Feb. 09 Mar. 09 STC: Afaq DSL Shamil, 1 Mbps (Monthly Fee in USD) Source: Company reports New entrants in broadband: time to market is key! On another note, in February 08, three new fixed licenses were awarded to Atheeb Telecom, Integrated Telecom, and Optical Communications. In March 08, Zain Saudi Arabia completed an oversubscribed IPO. The three new fixed licensed companies were expected to follow suit with their respective IPOs prior to the end of 2008, with some of them announcing their plan to commercially launch operations in Q4 08. Given market conditions, the IPO process was delayed as well as the commercial launch. Atheeb Telecom took the lead by completing a SAR 300mn IPO in February 09 the first IPO on Tadawul since August 2008 and intends to commercially launch its operations in H1 09 with WiMAX under the GO brand. According to the decree, the new fixed license holders must list their shares prior to commencing operations. In December 08, an executive of Optical Communications indicated to the media that the commercial launch has been postponed until We believe time to market is key and the more the commercial launch is delayed, the less attractive will be the window of opportunity to the new entrants. Saudi Telecom is aggressively upgrading its network to extend the coverage of DSL services as well as fibre to the premise (FTTP) in major cities. As discussed earlier, Mobily is also expanding in the broadband sector via 1) HSPA-based wireless broadband, 2) fixed-wimax, and 3) FTTP in select areas. Execution risk When the company launched Mobily Connect wireless broadband service in mid-2007, it attracted a lot of interest not only due to the mobility feature of the product, but also because of pent-up demand and a lack of alternative, as STC s DSL service was not available in all areas of the kingdom. The overwhelming success of Connect in the first year put pressure on the available bandwidth. Initial subscribers were willing to tolerate a throughput significantly lower than the theoretical 7.2 Mbps in addition to periods of service downtime. However, with STC aggressively pursuing the upgrade of its fixed infrastructure, and the entry of a third player (Atheeb Telecom GO ), the consumer will increasingly have alternatives in the near future. Execution becomes critical for Mobily: hence its ambitious Capex program in The company recently launched HSUPA (High Speed Uplink Packet Access) in major cities enhancing the speed of data upload to up to 2 Mbps. Mobily has been investing to ensure that its HSPA network can meet subscriber demand. As a reminder, Mobily launched in 2007 the Middle East s first all you can eat unlimited data broadband package. Broadband usage grew by 500% to 20 terabytes (20,000 gigabyte) daily at the end of 2008 from 4 terabytes in 2007 an indicator of Saudi s thirst for internet connectivity. This has made Mobily s 3G network one of the busiest not only in the region, but in the world. April 6th,

11 Financial analysis and forecast Following the release of Mobily s FY 2008 results, we are revisiting our forecasts. Since Q2 08, the company has consistently beaten our and consensus estimates every quarter. Mobily achieved a net profit of SAR 2,092mn in 2008, up 52% YoY, and 17% higher to our original forecast of 1,788mn in March 08. Mobily: Summary P&L Y/E Dec A 2009E 2010E Revenue 1,662 5,841 8,440 10,795 12,372 13,444 % growth 251% 45% 28% 15% 9% EBITDA reported (113) 2,001 2,947 3,794 4,450 4,890 % margin -6.8% 34.3% 34.9% 35.1% 36.0% 36.4% % growth 47% 29% 17% 10% Adjusted EBITDA (pre-tax) (67) 2,445 3,895 5,001 5,827 6,379 % margin -4.0% 41.9% 46.1% 46.3% 47.1% 47.5% % growth 59% 28% 17% 9% Net Income (1,167) 700 1,380 2,092 2,438 2,801 % margin 12.0% 16.3% 19.4% 19.7% 20.8% % growth 97% 52% 17% 15% Source: Company reports, SHUAA Capital estimates Overall, our net profit forecasts for 2009 and 2010 remain largely unchanged. We finetuned our estimates for 2009, 2010 and beyond to reflect: Higher broadband data contribution. We increased our revenue forecasts for 2009 and 2010 by 10% and 14% respectively. Increased competition in the mobile sector was expected with the entry of Zain. However to reflect more intensive promotions by the three players to gain or maintain market share beyond our initial expectations, we revised lower our long term EBITDA margin assumptions. This combined with fine-tuning in items below the EBITDA line, notably accounting for higher depreciation and amortization expenses, leads us to revise downward our net profit estimates for 2009 and 2010 by 1% and 3%. April 6th,

12 Mobily: forecast update SAR mn 2009E 2010E 2011E New estimates: Revenue 12,372 13,444 14,076 EBITDA reported 4,450 4,890 5,158 Net Income 2,438 2,801 3,111 Old estimates: Revenue 11,219 11,829 12,341 EBITDA reported 4,203 4,483 4,714 Net Income 2,457 2,879 3,238 % Change (New vs. Old) Revenue 10% 14% 14% EBITDA reported 6% 9% 9% Net Income -0.8% -2.7% -3.9% Source: SHUAA Capital estimates SHUAA Capital estimates versus consensus Since the company reported outstanding Q4 08 and FY 2008 results, analyst forecasts have been revised upwards. This being said, at this time, our net income projections for 2009 and 2010 are respectively 4% and 5% above consensus. Mobily: SHUAA estimates vs. consensus Revenue EBITDA Net Income 2009E 2010E 2009E 2010E 2009E 2010E Consensus 12,003 12,862 4,312 4,750 2,349 2,662 SHUAA Capital 12,372 13,444 4,450 4,890 2,438 2,801 % difference 3% 5% 3% 3% 4% 5% Source: Reuters, Bloomberg, Zawya, SHUAA Capital estimates Can Mobily margins expand in an increasingly competitive environment? As discussed above, we revised lower our long term EBITDA margin assumptions for Mobily to take into account more intensive promotions by all telecom players. Our revised model calls for an EBITDA margin of 36.6% in 2011, up from 35.1% realized in We prefer to be conservative at this time. Previously, we were factoring margin expansion to 38.2% in In summary, we expect the company to improve its EBITDA margin in the next few years, however, at a slower pace. In particular, we see room for margin enhancement in 2009 and thereafter for the following reasons: 1) savings from international gateway, 2) completion of national fiber backbone, 3) growing contribution of higher margin data segment, 4) enhanced network capacity utilization from wholesale agreement with Zain and Atheeb Telecom. April 6th,

13 Factors that will have positive / negative impact on margins in Savings from International Gateway - Positive impact of completion of National Fiber Backbone in H Increasing contribution of (higher margin) broadband data to revenue mix - Improved network capacity utilization from exclusive national roaming agreement with Zain E EBITDA margin - -Increased promotions to protect market share -Declining ARPU Source: SHUAA Capital Capex update Time to market is important, and the company has been investing heavily to seize the opportunity particularly in the broadband data area. Currently, Mobily s 2G GSM network covers 96% of the kingdom s population, and its 3.5G network approximately 70%. This explains the whopping Capex of SAR 3,061mn in 2008 or 28% of sales, up from SAR 2,148mn in In 2009 and 2010, we expect the operator to: 1) complete the upgrade/expansion of its mobile network; 2) expand and enhance HSPA coverage; 3) complete the construction of the national fiber backbone a.k.a. the Saudi National Fiber Network (SNFN) by Q2 09; 4) invest in WiMAX network; 5) selectively roll-out fiber-to-the-premise (FTTP) technology in metro areas; 6) invest in the E-Cable project, the international submarine/terrestrial cable (UAE-KSA-Egypt-France) in partnership with Etisalat UAE and Etisalat Misr Egypt. Mobily: Capex forecast E SAR million 2007A 2008A 2009E 2010E 2011E Capex 2,148 3,061 2,700 2,500 2,150 Capex as a % of sales 25.5% 28.4% 21.8% 18.6% 15.3% Source: Company reports, SHUAA Capital estimates April 6th,

14 Free cash flow Despite heavy capex investments, we expect a marked improvement in FCF generation as of We forecast Mobily s free cash flow to jump from SAR 485mn in 2008 to SAR 1,500mn this year. Based on our FCF forecast for 2009 and 2010, Mobily shares are currently trading at a FCF yield of respectively 5.9% and 8.4%. SAR million 2007A 2008A 2009E 2010E 2011E FCF (21) 485 1,500 2,136 2,845 FCF / share (0.03) FCF yield % (at today's price) neg. 1.9% 5.9% 8.4% 11.2% Dividend ,050 1,400 Dividend / share Dividend yield % (at today's price) 1.0% 2.1% 2.8% 4.1% 5.5% Net debt 8,220 7,476 6,501 5,065 3,270 Net debt / EBITDA reported 2.8x 2.0x 1.5x 1.0x 0.6x Net debt / adjusted EBITDA (pre-tax) 2.1x 1.5x 1.1x 0.8x 0.5x Source: Company reports, SHUAA Capital estimates Dividends Mobily instituted a dividend as of For 2008, the dividend more than doubled from SAR 0.36 / share (adjusted for rights issue) to 0.75 per share. We assumed a gradual increase in payout. We forecast the dividend to double to SAR 1.50 / share for We expect Mobily to transition from a growth story to high dividend yield stock in the next few years. Rights issue strengthens balance sheet As at Dec. 31, 2008, Mobily had a total debt of SAR 9.8bn and cash of 2.3bn. Mobily strengthened its balance sheet with a SAR 2.0bn rights issue completed in November The company s long-term debt was SAR 7.9bn at the end of 2008 (including a current portion of 1.3bn). The debt is repayable in semi-annual instalments. The maturity is December 2012, with a final balloon payment of 33% of the loan at maturity. Mobily financed this debt in 2007 at an attractive rate. Management is guiding for a cost of debt of 5.5%. We note that based on our calculations, cost of debt was less than 5% in Mobily also had short term loans of SAR1.86bn on its balance sheet at the end of This debt incorporates a 12-month loan of SAR 1.5bn obtained in mid-april 2008 to finance the acquisition of Bayanat Al-Oula, and is extendable for a period of 6-month, i.e. until October The company announced its intention to refinance this debt. In summary, with the cash on hand and expected cash flow from operation this year, debt refinancing is not at risk. The balance sheet is in good shape post the rights issue. Net debt to pre-tax EBITDA 2008 is 1.5x. For an apple to apple comparison with international peers, we are calculating net debt to EBITDA ratio by adjusting Mobily s reported EBITDA before government royalty, which is the equivalent to income taxes. Note that our adjusted pre-tax EBITDA excludes only government revenue share, but not the license fees. We forecast Mobily s net debt to (pre-tax) EBITDA ratio to decline from 1.5x in 2008 to 1.1x and 0.8x at the end of 2009 and 2010, respectively. April 6th,

15 Valuation: Target fair value revised to SAR We reiterate our BUY recommendation with a revised target price of SAR from previously SAR (SAR pre-rights issue). Our revised target fair value suggests a 18.8% upside from the current share price. Taking into account SAR 1.00 per share dividend estimate for 2009, expected total return is 21.5% from the current price. Our new target price is based on a 70%-30% weight for DCF and peer valuation, respectively. The table below summarizes our new target price: Valuation method SAR / share Weight SAR / share DCF % 33.0 Relative valuation (P/E & EV/EBITDA) % 9.9 Weighted average target price 43.0 Source: SHUAA Capital Our new DCF-derived fair value reflects principally a higher discount rate applied to our DCF. We revised our WACC to 10.8% from previously 9.4%. We also revised slightly downward our net profit/cash flow forecasts (discussed earlier). Finally, we revised upward our Capex forecasts. Current assumptions Previous assumptions Risk free rate 6.0% 4.3% Equity risk premium 5.0% 5.0% Cost of equity 11.6% 10.3% WACC 10.84% 9.4% Terminal growth 2.5% 2.5% What multiples does our new target fair value imply? We cross check the implied multiples on our new target fair value of SAR Our revised target price implies a P/E of 12.3x on our 2009 EPS estimate, and an EV / EBITDA multiple of 6.4x on our 2009 (pre-tax) EBITDA forecast. We believe that these multiples are reasonable despite that they represent a slight premium to peer valuation metrics, as regional / emerging markets mobile players are currently trading at 8x to 11x 2009E EPS and 4x to 6x 2009E EBITDA. However we believe that this premium is justified given the future growth expectations - our model calls for a compound annual earnings growth of 14.2% for the next three years ( E). April 6th,

16 Update on potential catalysts / developments Mobily: A strategic asset for Etisalat Mobily is a strategic operation for Etisalat. While no specific timetable has been disclosed, Etisalat has indicated in the past that it would be interested to increase its stake in Mobily. However, under current Saudi regulation, a minimum 40% free float must remain intact. Etisalat can increase its share by acquiring approximately 8% on the free market, nevertheless it can only achieve a controlling stake of 51% if other founding shareholders of Mobily are sellers. Potential royalty cut most likely deferred Given the current economic situation combined with the steep decline in oil prices, we believe that the Saudi government will defer any decision related to revising the royalty rate charged to telecom operators. Hence, a previously anticipated cut in government revenue share from 15% to 10% for mobile services, following the entry of the third operator, has been postponed to 2010 or later. Dismissing the prospect for a full fledged 4th mobile license Contrary to recent media reports, we don t expect a fourth full fledged mobile license in Saudi Arabia. With active mobile penetration already high, estimated at 124% in 2008, and heading north of 140%, we don t believe the Communications and Information Technology Commission (CITC), Saudi Arabia s telecom regulator, will award a fourth license to a facilities-based operator. The only possibility, in our view, is the issuance of a MVNO (Mobile Virtual Network Operator) license. However, we believe the CITC, before considering awarding such license, will take its time to watch the evolving dynamics of the new three players market. As a reminder, Zain SA only recently paid USD 6.1bn for the third license. April 6th,

17 Appendix Mobily: Ownership structure update Following the SAR 2.0bn rights issue, completed in November 2008, Etisalat s stake in Mobily increased slightly from 26.25% to %. Mobily s free float is currently estimated at 48%, up from 40% as of April 2008, and from 20% prior to that. Mobily: Ownership structure post rights issue Etisalat 27.5% Free Float 48.0% General Organization for Social Insurance 11.2% Source: Tadawul, Shuaa Capital Saudi Investors 13.3% April 6th,

18 Financials Consolidated Balance Sheet (SAR millions) Year to December E 2010E 2011E 2012E Assets Property and equipment, net 2,757 3,848 5,479 8,117 9,760 11,131 12,112 12,924 License acquisition fees 12,314 11,800 11,287 10,923 10,397 9,875 9,353 8,830 Goodwill ,530 1,530 1,530 1,530 1,530 Investment Total Non-Current Assets 15,071 15,648 16,767 20,570 21,687 22,535 22,995 23,284 Inventories Accounts receivable, net ,460 3,098 3,687 4,126 4,457 4,581 Other current assets / Prepaid exp ,063 1,063 1,063 1,063 1,063 Cash and bank balances ,264 2,278 2,704 2, Short-term investments , Due from a related party Total Current Assets 1,167 2,041 3,113 6,621 7,175 8,039 7,868 6,376 Total Assets 16,238 17,689 19,881 27,192 28,861 30,574 30,863 29,660 Capital and reserves Total Equity 3,833 4,533 5,913 9,754 11,668 13,768 15,830 17,896 Liabilities LT loan 0 0 7,912 6,642 7,769 5,472 1,878 1,878 Provisions for employees' end of service benefits Founding shareholder's loan 1,600 1, Total Non-Current Liabilities 1,603 1,613 7,939 6,688 7,836 5,562 1,992 2,017 Accounts payable 909 2,526 3,142 4,365 5,111 5,711 6,211 6,511 Short term borrowing 7,348 7, , Due to related parties Current portion of long-term loan 0 0 1,011 1,286 1,011 2,297 3,594 0 Other current Liabilities + Accrued expenses ,765 3,157 3,157 3,157 3,157 3,157 Total Current Liabilities 10,802 11,543 6,029 10,749 9,357 11,244 13,041 9,747 Total Liabilities 12,405 13,156 13,968 17,437 17,194 16,806 15,033 11,764 Total Equity and Liabilities 16,238 17,689 19,881 27,192 28,861 30,574 30,863 29,660 April 6th,

19 Consolidated Income Statement (SAR millions) Year to December E 2010E 2011E 2012E Total service revenue 1,662 5,841 8,440 10,795 12,372 13,444 14,076 14,673 Cost of providing services 967 2,680 3,779 4,773 5,409 5,848 6,106 6,351 Gross Margin 694 3,160 4,662 6,021 6,963 7,596 7,970 8,323 Selling & marketing expenses ,016 1,050 1,080 General & administrative expenses ,073 1,411 1,577 1,690 1,762 1,830 EBITDA reported (after tax) (113) 2,001 2,947 3,794 4,450 4,890 5,158 5,413 Depreciation & amortization ,031 1,298 1,580 1,651 1,690 1,711 EBIT (852) 1,156 1,916 2,496 2,871 3,238 3,467 3,702 Financing costs & other income, net Income before Zakat (1,167) 700 1,404 2,099 2,475 2,858 3,177 3,542 Zakat Net profit (1,167) 700 1,380 2,092 2,438 2,801 3,111 3,466 EPS (1.67) Avg shares O/S (000) Key Ratios Year to December E 2010E 2011E 2012E Growth Revenues 251% 45% 28% 15% 9% 5% 4% EBITDA reported 1874% 47% 29% 17% 10% 5% 5% Net profit 160% 97% 52% 17% 15% 11% 11% Equity 18% 30% 65% 20% 18% 15% 13% Total assets 9% 12% 37% 6% 6% 1% -4% Leverage Net interest coverage (x) Debt / Equity (x) Debt / Market Cap (x) Net Debt / Market Cap (x) Margins & Profitability Gross margin 41.8% 55.2% 55.8% 56.3% 56.5% 56.6% 56.7% Selling and marketing expenses/ Revenue 6.3% 7.6% 7.6% 7.6% 7.6% 7.5% 7.4% G&A / Revenue 11.5% 12.7% 13.1% 12.8% 12.6% 12.5% 12.5% EBITDA (after-tax) margin 34.3% 34.9% 35.1% 36.0% 36.4% 36.6% 36.9% Net profit margin 12.0% 16.3% 19.4% 19.7% 20.8% 22.1% 23.6% ROE 16.7% 26.4% 26.7% 22.8% 22.0% 21.0% 20.6% ROA 4.1% 7.3% 8.9% 8.7% 9.4% 10.1% 11.5% Valuation Y/E Number of shares ('000) 700, , , , , , ,000 EPS (SAR) DPS (SAR) BVPS (SAR) Share price P/E (x) P/BV (x) EV / EBITDA adj. pre-tax (x) Dividend yield 0.0% 1.0% 2.1% 2.8% 4.1% 5.5% 6.9% April 6th,

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21 Research Head of Research / Chief Economist Mahdi H. Mattar, Ph.D mmattar@shuaacapital.com Strategy and Economics Ahmad M. Shahin ashahin@shuaacapital.com Jafar Shami jshami@shuaacapital.com Commercial Banks and other Financial Services Mahdi H. Mattar, Ph.D mmattar@shuaacapital.com Sofia El Boury selboury@shuaacapital.com Ghida Obeid gobeid@shuaacapital.com Data Ahmad M. Shahin ashahin@shuaacapital.com Nicole Chamat nchamat@shuaacapital.com Heavy Industries and Utilities Mahdi H. Mattar, Ph.D mmattar@shuaacapital.com Hala Fares hfares@shuaacapital.com Telecommunications, Media and Technology Simon Simonian, CFA ssimonian@shuaacapital.com Jessica Estefane jestefane@shuaacapital.com Consumer, Retail and Pharma Laurent-Patrick Gally lgally@shuaacapital.com Transportation and Logistics Kareem Z. Murad kmurad@shuaacapital.com Real Estate, Construction and Construction Materials Roy Cherry rcherry@shuaacapital.com Taher Safieddine tsafieddine@shuaacapital.com Technical Analysis Nabil Effat, CFTe, MSTA neffat@shuaacapital.com Adel Merheb amerheb@shuaacapital.com Design Jovan Ruseski jruseski@shuaacapital.com Client Services: +971 (4) UAE toll free clientservices@shuaacapital.com Sales Trading Desk: +971 (4) (2) tradingdesk@shuaacapital.com April 6th,

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