Saudi Telecom Telecom Industrial STC AB: Saudi Arabia 21 June 2016

Transcription

1 RSI10 Saudi Telecom STC AB: Saudi Arabia Rating Target price Current price Key themes OVERWEIGHT SAR80.00 (25.3% upside) SAR63.83 We expect the company to start announcing more details, post shifting to an IFRS regime. We expect minimal impact from GCC roaming rate cuts as well as interconnection rate cuts. Near term, Q2 is likely to be impacted by seasonality and finger print regulatory requirement. STC is one of the key beneficiaries of the Kingdom s Vision 2030 blueprint. Share information Market cap (SAR/US$) 127.7bn / 34.04bn 52-week range Daily avg volume (US$) Shares outstanding mn 2,000mn Free float (est) 16% Performance 1M 3M 12M Absolute 0.3% -7.5% -4.6% Relative to index 2.6% -9.8% 26.6% Major Shareholder: Public Investment Fund 70.0% Gen. Organisation for Social Insce. 7.0% Valuation 12/14A 12/15A 12/16E 12/17E P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield 5.5% 6.3% 6.7% 7.0% Performance Price Close Relative to TADAWUL FF (RHS) /15 09/15 12/15 03/16 Source: Bloomberg, Company data, Al Rajhi Capital Company summary STC is the incumbent in the Saudi Telecom sector. It has a dominance in fixedline space and has captured around half of the mobile market. STC also has operations internationally, which constitute ~10% of its topline Saudi Telecom Company OW: Safe bet We believe STC is one of the safe bets in current times with meaningful upside and healthy dividend yield. Post a shift to IFRS accounting standards from Q1 2017, we believe there will likely be additional financial disclosures giving more clarity on the business. In the long term, STC will be the key beneficiary of the technological transformation of the Kingdom as outlined in the recently released NTP program, in our view. Near term, we believe Q2 will be impacted by the finger print exercise and Ramadan seasonal effect. However impact of GCC roaming rate cuts will be benign and, the second set of regulatory interconnection cuts will be insignificant in our view. The company is employing strategies to push ARPU up, such as phasing out one-time data plans for prepaid subscribers. With major impairments done in 2015 at its challenging international JVs, the company looks much leaner and cleaner. A tower sale and lease back, if implemented, will barely move the stock price in our view. Key downside risks to our estimates are increased provisions, and high number of subscriber accounts cancelled post finger print exercise. Our dividend estimates imply an attractive yield of 6.7%, which makes STC one of the top dividend picks in the Kingdom. We maintain our Overweight rating on the company with a TP of SAR80/share. Safe bet. Being the dominant player in a defensive sector, with solid cash flow generation and high dividend yield, the company is one of the safe bets in the Kingdom especially in the current market environment. Long term, we believe STC will likely be the key beneficiary of the Govt. s technological transformation as outlined in Vision 2030 document. The mandatory move to IFRS accounting standards would be a medium term catalyst for the stock in our view, if additional Key Performance Indicators (KPI) are also reported. Weaker Q2. Q1 was relatively weak, with 3% top-line growth (partly attributed to allocation of resources to finger print activity) after posting 10% growth in Q2 will be weaker given the continued impact from finger print exercise, and Ramadan, partly offset by higher contribution from Viva Kuwait. Barely any impact from regulatory decisions. Recent regulatory decision to cut GCC roaming rates will barely make an impact. Moreover, these are highly price elastic services. Cut in interconnection rate cuts will be insignificant as well given symmetric interconnection rates and higher on-net calls in our view. Valuation. The company is one of the top 10 picks in terms of dividend yields and is rated as A- by S&P. Based on a mix of DCF and relative valuation methodologies, we value the stock at SAR80/share and maintain OW rating. Key downside risks include cancellation of active accounts that have not provided finger prints, impairments at international subsidiaries and regulatory fines. Period End (SAR) 12/13A 12/14A 12/15A 12/16E 12/17E Revenue (mn) 45,605 45,826 50,651 52,071 54,006 Revenue Growth 1.9% 0.5% 10.5% 2.8% 3.7% Gross profit margin Pritish K. Devassy, CFA Head of Equity Research Tel , devassyp@alrajhi-capital.com EBITDA margin 38.1% 40.7% 38.1% 37.4% 37.9% Net profit margin 21.7% 23.9% 18.3% 19.8% 21.5% EPS EPS Growth 38.2% 10.7% -15.5% 11.6% 12.5% ROE 18.9% 18.7% 15.2% 16.8% 18.3% ROCE 16.2% 15.5% 16.0% 15.7% 16.3% Capex/Sales 16.3% 13.3% 18.3% 18.0% 18.0% Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.

2 Well positioned for the long term In the last year when oil prices declined 19.5% and TASI was down 31%, STC s share price was relatively stable with only 4.5% decline. Being the dominant player in a defensive sector, STC is one of the safest bets in the market with a meaningful upside and attractive dividend yield of 6.7%. It continues to trade below its historical (2-year) EV/EBITDA multiple and its peers as well. We believe it will continue to remain defensive and is well positioned for the long term. In the short term, STC will shift to IFRS reporting standards from Q as all listed companies are mandated to implement IFRS accounting standards beginning from We believe this will lead to a lot more financial details being reported. If the company starts reporting additional details (beyond that mandated by IFRS) such as detailed revenue mix, subscriber data etc., then this would eliminate some opacity discount applied on the stock and could push the stock above its current trading band of around SAR60-65 in the past year. The reverse phenomenon was seen in 2013, when the company started accounting for some of the non-core assets as associates and JVs instead of fully consolidating and this led to more clarity (downward revision) of domestic business drivers, pushing the stock lower. Key beneficiary of NTP While the above is likely to only eliminate the perceived discount, the company will see tangible value created as STC is likely to be the key beneficiary in the technology transformation of the Kingdom. As per Vision2030, Saudi government is committed to expanding telecom coverage and capacity, especially for high speed broadband through investment in infrastructure within and around cities. In addition, the Government will also work on improving regulations and build effective partnership with providers, enabling them to build essential infrastructure and simultaneously encourage local investments. We believe STC being the leading telecom provider is well-placed to benefit from this broadband push. As per the NTP document, the Govt plans to increase FTTH penetration to 80% in 2020 from 44% currently. STC has already laid down FTTH cables of 147,000 km and has the largest internet gateway in the Middle East, with a capacity of 1,533 gigabyte per sec and more than 12,000 terabyte daily giving it the easy advantage. Not just Telecom, the company is investing into cloud and IT as well. We have summarised the salient targets for the telecom and related sectors set in the NTP book: - Increase the contribution of the IT industry to non- oil GDP from 1.12% to 2.24% - Increase the frequency of spectrum available for telecom services out of the total allocated resources from 42% to 80% - Increase FTTH coverage in densely populated urban areas from 44% to 80% - Broaden wireless broadband network coverage (more than 10mbps) in remote areas from 12% to 70% - Increase the number of internet users in the Kingdom from 63.7% to 85% Disclosures Please refer to the important disclosures at the back of this report. 2

3 Minimal impact of regulatory changes While telecom companies across the globe have experienced regular regulatory actions, the Saudi Telecoms sector had been immune till Starting from 2015, the Saudi telecom sector saw a flurry of changes cutting of interconnection rates (twice), GCC roaming rate cuts, 100% Saudization of telecom sector, finger print requirement etc. Most of these were not totally unexpected, as discussions on most of the changes were on-going in the past, with only the timelines unknown. The impact of these new regulations- cutting GCC roaming rates, reduction in termination fee, etc. were widely feared to be a downside risk for the stock. Based on our analysis and discussion with the companies the impact is likely to be minimal. Cut in GCC roaming rates GCC countries decided in June 2015 to gradually reduce the roaming rates in phases, as a part of the economic integration plan among the GCC countries, which includes outgoing voice calls, SMS and data services. This was after the initial set of cuts (setting the price caps) which was only on outgoing calls, implemented way back in The new reductions of roaming charges will be on both inter-operator wholesale level and end user retail level and will take place gradually, over a three years period, for voice calls and SMS services, and over a five years period for mobile data services as seen below. Figure 1 Revised roaming rates for a typical GCC telecom company* Rates Prev. As of 1 April 2016 As of 1 April 2017 As of 1 April 2018 As of 1 April 2019 Within the Visited Country (SAR) To other GCC Member States including home country (SAR) Calls received while roaming(sar) As of 1 April 2020 SMS (SAR) Data (SAR) / MB Source: Al Rajhi Capital, CRA Qatar,. *Mobily s roaming rates, Emirates247 Based on our understanding, call prices are to be cut by a total ~40% over a 3 year period. The cuts are only 2-3% in 2016 and higher in 2017 and 2018 by ~18%. Post 2018, prices will be cut only for data as seen below: Figure 2 Changes in rates over the years % change Weights 1st year 2nd year 3rd year 4th year 5th year Within the Visited Country 13% -6% -4% -4% To other GCC Member States including home country 13% -4% -3% -3% Calls received while roaming 15% 0-20% -21% SMS 5% 0-13% -15% Data 54% 0-35% -29% -17% -16% Weighted average -1.2% -23.1% -20.6% -9.1% -8.7% Source: Al Rajhi Capital, CRA Qatar, Emirates247 This will lead to collective user savings of ~ $1.13bn (SAR4.24bn), reducing the financial burden on GCC users (Source: GCC Economic affairs). We believe this to be over five years with calculations as shown below: Figure 3 Calculation of cumulative user savings In USDm Current year 1st year 2nd year 3rd year 4th year 5th year GCC Roaming revenues Savings per year Cumulative savings 1,211 Disclosures Please refer to the important disclosures at the back of this report. 3

4 STC does not provide exact contribution of roaming revenues which makes it difficult to calculate the impact of roaming rate cuts. Based on GCC regulatory data, we calculate GCC roaming revenues to be 1.3% of total telecom revenues. This is below the industry average (5% of top line for average European telecom company) as this takes into account only GCC roaming revenues (as against international roaming revenues). As STC has significant contribution from fixed line segment and others, GCC roaming revenues could be less than 1% of top line. As per GCC regulatory data, the average GCC margins are likely to be around 50% (average of inbound and outbound margins). Applying the percentage of inbound and outbound visitors to and from Saudi Arabia on the margins, we arrive at an average 45% margin for roaming calls for the Saudi Telecom players. Figure 4 Calculation of margin for roaming services 2014 data (in thousand trips) Inbound tourists Outbound tourists All inclusive 18,259 20,051 GCC alone 6,057 10,013 Weightage based on direction of visits 26% 19% Average margin 45% Source: SAMA, Al Rajhi Capital Thereby with a 1% revenue contribution and 45% net profit margin, the impact on STC will be minimal at SAR90m spread over next 3 years with 2016 impact to be less than SAR10m. Second round of rate cuts on mobile and fixed lines Saudi Arabia s Communication and Information Technology Commission (CITC) announced the second revision of the interconnection rates for mobile and landline in March The initial rate revision was announced in February 2015, when interconnection rates were reduced by 40% to SAR0.15 (from SAR0.25) for mobile and for landline by 30% to SAR0.07 (from SAR0.10). Zain acted on it by reducing the call rates to SAR0.19 for all calls, followed by Mobily in June 2015, introducing new plans that slashed their on-net, off-net calls and SMS rates to SAR The second set of rates cut was announced in March 2016, under which mobile interconnection rates were reduced by 33% for mobile to SAR0.10 and landlines by 36% to SAR With the cut in interconnectivity charges, CITC is looking to increase competition among the existing operators and also enable the MVNOs to compete in the already saturated market. We believe the current termination rates are in-line with the global average (SAR0.08 for MTRs) and do not expect any more big cuts in the near future. In a hypothetical ideal scenario with symmetric interconnection rates, there should be no impact of cut in interconnection rates as interconnection revenues should equal interconnection expenses. However in the case of the telecom sector in the Kingdom we estimate the percentage off-net calls lesser than the ideal scenario. As per our understanding with all the bundled packages promoting on-net calls, there is a high percentage of on-net calls in the Kingdom. Also the termination rates are symmetric. Hence, we believe that the decline in interconnection rates should be insignificant as was seen post the first set of cuts. For the smaller companies this should be only slightly beneficial, as was noticed in the financials post the first cuts. Overall the net result was that it increased competition as Zain cut its call rates to 19halalas. As mentioned above, we believe the net impact of the second rate cut will be similar to the first wherein all the companies saw a 10-13% reduction in access charges (see table). For STC we estimate access charges to decline by 10% in As there was no major impact on financials post the first cuts, one could estimate at a similar decline for interconnection revenues as well. Disclosures Please refer to the important disclosures at the back of this report. 4

5 Figure 5 Reported Access charges (in SAR bn ) STC % -6% -11% Mobily % -3% -13% Zain % -9% -10% Finger print regulations In Jan 2016, the CITC issued directives to all telecommunication service providers in the Kingdom to take fingerprints of subscribers of mobile telephone services. The period (post grace time) ended on June 2 for prepaid subscribers. The lack of numbers disclosed by CITC does not help us in estimating the impact from this. However initially around 18m finger prints were not registered at the start of the year (Arabnews). We believe that extensions will be provided so that most active accounts will not be suspended or cancelled. All the companies are aggressively trying to ensure its subscribers are all covered. STC has introduced double credit for those validating their numbers between May 21 and June 21- though is valid only for two days. All the three telecom companies revealed that costs increased in Q1 because of this exercise and this is likely spill over to Q2 as well. Based on our understanding of STC management discussion, not just an impact on costs, Q1 sales also were slightly impacted because of allocation of sales force to implement this. This will be less pronounced in Q but nevertheless will have an impact relative to its normal run-rate prior to the exercise. We ran a scenario analysis on the possible impact using the 18mn subscribers mentioned above as the starting point and using STC s market share of 49%, we arrive at the following results: Figure 6 Scenario Analysis % of accounts cancelled Revenue impact (SAR '000) % of 2015 Revenues 1% 97, % 2.50% 242, % 5% 485, % 7.50% 728, % 10% 970, % Even after cancellation of 10% accounts, the impact is a paltry 2% of 2015 topline because STC s top-line is diversified across PSTN, fixed broadband and international businesses. On other regulations, lastly, the Ministry of Labor and Social Development s decision to Saudize the telecom industry will barely have an impact on the telecom revenues. Disclosures Please refer to the important disclosures at the back of this report. 5

6 Pushing up ARPU Change in mobile data strategy shift to higher ARPU band We note that the company has been actively making changes in its data plans. Based on our observation of its data plans, STC has made two changes a) It has changed all one-time internet plans for prepaid customers to recurring plans b) The company has made some changes that could increase its average ARPU. For example a 2GB plan used to cost SAR100 per month. Now this plan has been eliminated and there is only a 1GB plan which costs SAR90 per month. The next higher data plan is a 5GB plan that costs SAR200. This should ideally provide an incentive for customers to shift to higher bands package for better value. Ideally, if customers continue to stick on with STC, this will result in higher ARPUs but there are obvious risks to the change, the key risk being migration of subscribers to competitors given its cheaper plans. Please see appendix for the plans. Taking to the next level through Jawwy Being a commoditized product, differentiation in telecom products is about unique packaging. Following the trend in developed markets, 2012 saw the advent of bundle-based competition in Saudi Arabia. STC was able to leverage its fixed line infrastructure to offer bundles that combine fixed voice, IPTV and ADSL/FTTH broadband, while Mobily and Zain KSA competed on bundled offers that combine voice and data. Now STC is taking to the next level with its unique service Jawwy. STC is aiming to take higher market share with Jawwy wherein one can design his or her own bundles with more or less of data or voice depending on the need. This is the next level post bundling products in our view. The impact is too early to be estimated, however this shows that STC is actively trying to capitalize on its leadership position and its strength as an integrated player. Wireline data advantage STC is the major beneficiary of the increase in fixed broadband revenues as we estimate STC to have bulk of the revenue market share in fixed-line and data revenues. Thus despite market penetration being saturated for mobile business, it enjoys dominance in the fixed broadband space. Given entry of new content based services (eg. Netflix) and fair usage limit for mobile broadband, there is likely to be a shift from mobile broadband to fixed line broadband gradually, which have unlimited data packages. Figure 7 Saturated mobile market Figure 8 Total Fixed Wireline and Wireless data subscribers in Saudi Arabia 54,000 53,500 53,000 52,500 52,000 51,500 51,000 50,500 50,000 49,500 53, % 3.7% 53,000 52,700 50, % -4.2% 5.0% 4.0% 52, % 2.0% 1.0% 0.2% 0.0% -1.0% -2.0% -3.0% -4.0% % % % 3.8% % 35% 30% 25% 20% 15% 10% 5% 49, % % Mobile subscribers ('000) y-o-y growth Fixed Wireless and Wireline Broadband lines(mn) y-o-y growth Source: CITC, Al Rajhi Capital Source: CITC, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 6

7 International operations The book value of its investments in joint ventures has reduced to ~SAR5bn in 2015 from ~SAR12bn in 2012, mainly because of impairments at Oger Telecom, one of its challenging JVs. After significant impairments to Oger, we believe there is not much downside from this level (reduced to SAR0.48bn from SAR2.23bn). While this will not impact our valuation, this lowers EPS of the company. Figure 9 Investments in joint ventures (SAR 000's) Binariang GSM Holding - Malaysia 6,633 4,256 4,565 4,566 Oger Telecom Ltd. U.A.E. 5,313 3,713 2, ,946 7,969 6,799 5,053 Viva Kuwait The company increased its stake in VIVA Kuwait to 51.8% (from ~26%) in February 2016, and is the currently the largest contributor within its international segment. Based on our estimates, we expect the increase in stake will result in an incremental net profit growth of ~2% in Similar to Saudi Arabian telecom market Kuwaiti market is saturated but its ARPUs are higher than the domestic market and will benefit from increase in margins. Figure 10 Blended average ARPU in SAR Viva Kuwait STC Saudi Impact of shifting Ramadan seasonality Usually Ramadan period is a weak period for businesses in the Kingdom and telecom business is no exception. As Ramadan shifts forward by 2 weeks annually, this year most of Ramadan will fall in the month of June. Q2 in 2016 will be weaker than Q because of this shift. In contrast Hajj season is positive for telecom business as volume of calls is likely to be higher. Figure 11 Ramadan shifting into Q2 this year Year Ramadan Quarter Hajj Dates Quarter Aug - 31 Aug Q Nov - 07 Nov Q Aug - 19 Aug Q Oct - 26 Oct Q Jul - 8 Aug Q Oct - 15 Oct Q Jun - 28 Jul Q Sept - 4 Oct Q3 -Q Jun - 18 Jul Q2 - Q Sep - 24 Sep Q Jun - 07 Jul Q Sep - 13 Sep Q Source: timeanddate.com, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 7

8 Tower sale and leaseback option While sale and leaseback activity is common in the real estate sector in the Middle East, telecom tower sale and lease back activity is unprecedented in the Kingdom. Mobily and Zain KSA are looking at options to sell their towers. As per Argaam, even STC is considering sale of its mobile towers, which is a bit surprising because company already has sufficient cash and the company has the widest network coverage in the Kingdom. Based on our interaction with the company, despite there being no real need for the company to sell its tower assets and lease it back, they would be interested only if it is financially lucrative and as it improves efficiency. For Mobily and Zain, a tower sale would help them reduce debt and reduce their financial expenses. A tower sale would lower capital needs and also help the company focus on its core business. What is the possibility in Saudi Arabia? We believe a tower company will find a deal less lucrative in the Kingdom relative to other markets because: The market is already saturated with mobile penetration at 167.5% - implying not much room for mobile towers (relatively to other markets). Topline growth for a tower company comes from potential increase in new shared sites and tenancy. In Saudi Arabia there are only three operators so there is a lesser pool of targets to increase the tenancy ratio. On average the existing tenancy ratio average is quite high for tower companies which will likely not be the case in Saudi Arabia. Contrary to the perceived notion, cost of running tower sites in the Kingdom is higher than market average, because of high real estate rentals. We believe operating costs could be more than US$10,000 annually. Thus the lease rates will be higher. What is the financial impact? As for the financial impact, a sale and lease back offer will result in lower EBITDA as the company will have a higher lease rate compared to existing tower related operating expenses. However the decrease in net income will be partly mitigated by reduction in financial expenses (or increase in interest income) and lower depreciation. This cash received could help them deleverage, meet debt and other obligations and even could even free capital for activities such as M&A. There are disadvantages as well (especially for the market leader) as this could give up competitive advantage by sharing towers assets with competitors. Contrary to general perception of lower costs of operating a tower in Saudi Arabia, relative to other markets because of lower fuel costs, operating costs of a tower is higher at around ~SAR4,000/month, which translates to ~US$13,000 annually (based on our interaction with one of the companies in the region). This is in line with the expenses in the US which come to US$12,000-14,000 per tower annually. The lease rates in the US are at around US$20,000. Lease rates ideally are dependent on a lot of variables such as the tenancy ratio, cost of maintaining a tower, cost of building a tower etc. The exact details are not available, but it would be logical to assume higher lease rate in Saudi Arabia, than in the US given possibly lower tenancy ratios in the Kingdom. Using these assumptions for 5,000 towers, entering into a tower deal would reduce EBITDA by SAR169mn, insignificant compared to 2015 EBITDA of SAR19.2bn. Assuming an EV/EBITDA of 7x, this would mean the company should benefit only if the tower sale proceeds are greater than SAR1.2bn (EV EBITDA of 7* reduction in EBITDA of SAR169mn), which would mean value per tower of USD63k. This we note is much lower than the valuation of ~USD150k per tower, reported in the media. Logically speaking, given that a tower sale is not too important for STC as compared to Zain and Mobily, a deal will not be struck unless it is positive for the company. However this would not have a material impact on the company. Disclosures Please refer to the important disclosures at the back of this report. 8

9 Among the best dividend yields in the Kingdom Working capital increased STC saw a surge in its accounts receivables in 2015, which is mainly attributed to Govt. receivables. The accounts receivables still at SAR12.6bn is not a worry for two reasons: a) Based on historical evidence, Govt. could delay payments but will not default b) The company has to pay fees every year to Govt. of around 4bn and so these receivables can be netted if required in the future. Already Government payables are at SAR2bn. However, provisions notably surged 41% to 1.7bn from 1.2bn compared to only a 10% increase in revenue in Dividend policy Based on its new dividend policy (from Q4 2015), STC will continue to pay a dividend of atleast SAR1 per share quarter (SAR4 per year) for the next three years. However, the regulatory changes and increased working capital requirements have not helped the company to increase its dividend payments. We believe STC will continue to generate a healthy FCF (SAR4.5/share in 2016 and SAR5.3/share in 2017) which will allow it to maintain its dividend payout and sustain a healthy cash position. Our forecast for STC s annual dividend is SAR4.25 per share, with a dividend yield of ~6.7%. Figure 12 Dividend yields and dividend per share estimates for STC 6 7.6% 8% % % % % % 6% 5% % % 3% 2% 1% 0 FY13 FY14 FY15 FY16E FY17E FY18E 0%. Disclosures Please refer to the important disclosures at the back of this report. 9

10 Valuation We use a mix of DCF and relative valuation methodologies to value the firm. For DCF method, we employ a terminal growth of 1.5% and a WACC of 9.8%. As for relative valuation, the company is trading below its peers as well as historical multiples on a EV/forward EBITDA basis. As Tax (Zakat) is lower compared to its peers (as most of the Govt. related fees etc. come above the EBITDA level), ideally STC should be trading at a higher EV/EBITDA multiple. Figure 13 Calculation of target price Method Valuation Weight ARC Target DCF % 62.1 Relative % Fair Price as on today 80.0 UPSIDE 25%, Bloomberg We arrive a target price of SAR80 as seen above. Figure 14 DCF Valuation methodology(on a per share basis) Component Value Appraised value of the enterprise 68.8 Add: Sukuks / Investments 3.2 Value of associates and non-core assets 7.0 Less: Net debt 8.3 Minorities (1.4) Provisions & Other liabilities (3.3) Target Price 82.7 Figure 15 Trading below peers and 2 year historical multiples(ev/ebitda basis) STC Comparables average Source: Al Rajhi Capital, Bloomberg Disclosures Please refer to the important disclosures at the back of this report. 10

11 Figure 16 Valuation multiples for peers Est P/E Current Yr Est P/E Next Yr EV/EBITDA Current Yr EV/EBITDA Next Yr Saudi Telecom Co Oman Telecommunications Co Maroc Telecom Bahrain Telecom Co Partner Communications Co Telkom Sa Soc Ltd Emirates Integrated Telecomm Bezeq The Israeli Telecom Co Ooredoo Qsc Emirates Telecom Group Co Cellcom Israel Ltd Vodacom Group Ltd Mtn Group Ltd Global Telecom Holding Safaricom Ltd Mobile Telecommunications Co Etihad Etisalat Co Telecom Egypt Average , Bloomberg consensus estimates. Risks Near term downside risks are cancellation of active subscriber accounts which have not complied with finger print requirement, impairments or unexpected regulations which can affect its international operations which have been problematic in the past, further decline in oil markets, negative outcome of their changes in its packages or data plans, regulatory risks such as introduction of new fees or fines. Disclosures Please refer to the important disclosures at the back of this report. 11

12 Appendix Figure 17 Mobily prepaid plans Package Bundle Fees/ SR MB Included Additional MB (SAR) Internet Basic Free 0 2 Hourly Package 10 SR/ Hour Unlimited - Daily Package 24 SR / Day Unlimited - Internet 30 MB 10 SR / Month 30 MB 2 Internet 50 MB 15 SR / Month 50 MB 2 Internet 100 MB 25 SR / Month 100 MB 2 Internet 150 MB 30 SR / Month 150 MB 2 Internet 500 MB 60 SR / Month 500 MB 2 Internet 1 GB* 79 SR / Month 1 GB 2 Internet 2 GB 100 SR / Month 2 GB 2 Internet 3 GB 130 SR / Month 3 GB 2 Internet 5 GB 200 SR / Month 5 GB 2 Unlimited Internet 350 SR / Month Unlimited - Figure 18 Zain KSA prepaid plans Package Plan Price (SAR) Validity Internet Light Plans 500 MB 10 One Day 50 MB 15 One Month 100 MB 20 One Month 250 MB 30 One Month 500 MB 45 One Month Internet Basic Plans 1 GB 69 3 GB GB 200 One Month 40 GB 300 Internet Unlimited Monthly 500 Figure 19 STC prepaid plans Prepaid Package Price Data Validity Sawa 200 MB 30 SAR 200 MB 7 days with auto renew Sawa 500 MB 50 SAR 500 MB 7 days with auto renew SAWA 250 MB 50 SAR 250 MB 30 days with auto renew SAWA 1 GB 90 SAR 1 GB 30 days with auto renew Sawa 5 GB 200 SAR 5 GB 30 days with auto renew SAWA 20 GB 350 SAR 20 GB 30 days with auto renew Source: Company website, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 12

13 Figure 20 STC data sim plans Connet 4G Infinity package Package Name Promotion Fee Infinity 6 Months (Data SIM & 4G Router) SAR 650 Infinity 12 Months (Data SIM & 4G Router) SAR 1,200 4G Router only SAR 180 Bundle Initial Subscription Price Connect 2GB Data SIM 1 month SR 55 Connect 5GB Data SIM 1 month SR 90 Connect 4G USB 3 months SR 345 Connect 4G Router 3 months SR 405 Connect 4G Mini WIFI 3 months SR 395 Connect 4G Mini WIFI (Big Battery) 3 months SR 425 Connect 10GB Data SIM 3 months SR 270 Connect 4G USB 3 months SR 370 Connect 4G Router 3 months SR 480 Connect 4G Mini WIFI 3 months SR 450 Connect 4G Mini WIFI (Big Battery) 3 months SR 500 Connect 20GB Data SIM 3 months SR 300 Connect 4G USB 6 months SR 720 Connect 4G Router 6 months SR 860 Connect 4G Mini WIFI 6 months SR 830 Connect 4G Mini WIFI (Big Battery) 6 months SR 880 Connect 60GB Data SIM 6 months SR 575 Connect 4G USB 12 months SR 1270 Connect 4G Router 12 months SR 1410 Connect 4G Mini WIFI 12 months SR 1380 Connect 4G Mini WIFI (Big Battery) 12 months SR 1430 Figure 21 Mobily data sim plans Package 1 month 3 months 6 months 12 months 2GB SR 45 SR 105 SR 185 SR 350 5GB SR 80 SR 210 SR 370 SR GB SR 90 SR 230 SR 410 SR GB SR 95 SR 255 SR 450 SR 850 Infinity 60GB N/A N/A SR 490 SR 920 Source: Company website, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 13

14 Figure 22 Zain data sim plans Plan Price Validity Free Multi-SIM Free On-net SMS Delight* (Pay as You Go) SAR 20 N/A N/A N/A 2 GB SAR 45 1 Month 0** GB SAR Months 0** GB SAR Months GB SAR Months Unlimited SAR Months N/A 1000 SAR Months N/A 1500 SAR Months N/A 2000 Speed 4G Renewal Prices Plan Price Validity Free On-net SMS 2 GB SAR 45 1 Month GB SAR 69 1 Month GB SAR Months GB SAR Months GB SAR Months 800 Unlimited Plans Renewals Prices: Plan Price Validity Free On-net SMS Unlimited SAR Months 1000 SAR Months 1500 SAR Months 2000 *400 MBs, Pay As You Go 6 Halala/MB **Up to 3 Multi-SIMs, SAR 10 per each Source: Company website, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 14

15 Income Statement (SARmn) 12/13A 12/14A 12/15A 12/16E 12/17E Revenue 45,605 45,826 50,651 52,071 54,006 Access Charges (18,191) (17,670) (20,306) (21,866) (22,147) Employee Costs Government Charges S.G. & A. Costs (8,943) (9,095) (11,051) (10,718) (11,369) Repairs & Maintenance Costs (1,104) (399) Operating EBIT 10,989 11,632 11,859 11,981 12,954 Cash Operating Costs (28,238) (27,164) (31,357) (32,584) (33,516) EBITDA 17,367 18,661 19,294 19,487 20,490 Depreciation and Amortisation (6,378) (7,030) (7,434) (7,506) (7,536) Operating Profit 10,989 11,632 11,859 11,981 12,954 Net financing income/(costs) (1,083) (496) (1,023) (216) (70) Forex and Related Gains Provisions Other Income Other Expenses (797) (845) (594) Net Profit Before Taxes 10,448 12,163 10,486 11,452 12,848 Taxes (230) (775) (697) (755) (824) Minority Interests (321) (429) (531) (368) (410) Net profit available to shareholders 9,897 10,959 9,258 10,329 11,615 Dividends (4,500) (7,000) (8,000) (8,500) (9,000) Transfer to Capital Reserve 12/13A 12/14A 12/15A 12/16E 12/17E Adjusted Shares Out (mn) 2,000 2,000 2,000 2,000 2,000 CFPS (SAR) EPS (SAR) DPS (SAR) Growth 12/13A 12/14A 12/15A 12/16E 12/17E Revenue Growth 1.9% 0.5% 10.5% 2.8% 3.7% EBITDA Growth 8.0% 7.5% 3.4% 1.0% 5.1% Operating Profit Growth 12.8% 5.9% 2.0% 1.0% 8.1% Net Profit Growth 38.2% 10.7% -15.5% 11.6% 12.5% EPS Growth 38.2% 10.7% -15.5% 11.6% 12.5% Margins 12/13A 12/14A 12/15A 12/16E 12/17E EBITDA margin 38.1% 40.7% 38.1% 37.4% 37.9% Operating Margin 24.1% 25.4% 23.4% 23.0% 24.0% Pretax profit margin 22.9% 26.5% 20.7% 22.0% 23.8% Net profit margin 21.7% 23.9% 18.3% 19.8% 21.5% Other Ratios 12/13A 12/14A 12/15A 12/16E 12/17E ROCE 16.2% 15.5% 16.0% 15.7% 16.3% ROIC 32.2% 31.4% 30.9% 33.0% 34.6% ROE 18.9% 18.7% 15.2% 16.8% 18.3% Effective Tax Rate 2.2% 6.4% 6.6% 6.6% 6.4% Capex/Sales 16.3% 13.3% 18.3% 18.0% 18.0% Dividend Payout Ratio 45.5% 63.9% 86.4% 82.3% 77.5% Valuation Measures 12/13A 12/14A 12/15A 12/16E 12/17E P/E (x) P/CF (x) P/B (x) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) EV/IC (x) Dividend Yield 3.5% 5.5% 6.3% 6.7% 7.0% Disclosures Please refer to the important disclosures at the back of this report. 15

16 Balance Sheet (SARmn) 12/13A 12/14A 12/15A 12/16E 12/17E Cash and Cash Equivalents 960 5,467 4,504 5,536 7,279 Current Receivables 24,509 22,862 28,598 29,140 29,189 Inventories Other current assets 23,531 17,863 20,689 20,726 20,873 Total Current Assets 32,171 31,845 36,989 38,600 40,539 Fixed Assets 38,402 38,229 40,488 43,006 45,819 Investments 12,189 16,273 14,402 14,449 14,478 Goodwill Other Intangible Assets 4,608 4,523 4,783 4,197 3,652 Total Other Assets Total Non-current Assets 55,199 59,024 59,672 61,652 63,949 Total Assets 87,370 90,869 96, , ,488 Short Term Debt 1,561 1,997 1,903 1,903 1,903 Trade Payables 10,171 9,856 15,949 16,786 17,501 Dividends Payable Other Current Liabilities 7,929 4,189 4,862 5,096 5,378 Total Current Liabilities 19,660 16,043 22,714 23,786 24,783 Long-Term Debt 6,976 7,785 5,744 5,744 5,744 Other LT Payables 4,570 4,937 6,240 6,573 6,932 Provisions Total Non-current Liabilities 11,547 12,722 11,984 12,317 12,676 Minority interests (67) 906 1,421 1,789 2,199 Paid-up share capital 20,000 20,000 20,000 20,000 20,000 Total Reserves 36,230 41,198 40,541 42,360 44,830 Total Shareholders' Equity 56,230 61,198 60,541 62,360 64,830 Total Equity 56,163 62,104 61,962 64,149 67,029 Total Liabilities & Shareholders' Equity 87,370 90,869 96, , ,488 Ratios 12/13A 12/14A 12/15A 12/16E 12/17E Net Debt (SARmn) (9,252) (10,032) (13,659) (14,691) (16,434) Net Debt/EBITDA (x) (0.53) (0.54) (0.71) (0.75) (0.80) Net Debt to Equity -16.5% -16.2% -22.0% -22.9% -24.5% EBITDA Interest Cover (x) BVPS (SAR) Cashflow Statement (SARmn) 12/13A 12/14A 12/15A 12/16E 12/17E Net Income before Tax & Minority Interest 10,448 12,163 10,486 11,452 12,848 Depreciation & Amortisation 6,378 7,030 7,434 7,506 7,536 Decrease in Working Capital (1,339) (1,742) Other Operating Cashflow , Cashflow from Operations 16,472 17,633 20,922 19,957 21,737 Capital Expenditure (7,428) (6,100) (9,248) (9,373) (9,721) New Investments (182) (616) (1,100) (521) (540) Others (91) 133 (1,388) - - Cashflow from investing activities (7,700) (6,584) (11,737) (9,894) (10,261) Net Operating Cashflow 8,771 11,050 9,185 10,064 11,476 Dividends paid to ordinary shareholders (3,998) (6,470) (8,019) (8,500) (9,000) Proceeds from issue of shares Increase in Loans (368) 1,238 (1,763) - - Effects of Exchange Rates on Cash (144) Other Financing Cashflow (147) (155) (160) Cashflow from financing activities (4,512) (5,387) (9,942) (8,065) (9,101) Total cash generated 4,259 5,663 (757) 1,999 2,375 Cash at beginning of period 3, ,467 4,504 5,536 Implied cash at end of year 7,767 6,623 4,711 6,503 7,911 Ratios 12/13A 12/14A 12/15A 12/16E 12/17E Capex/Sales 16.3% 13.3% 18.3% 18.0% 18.0% Disclosures Please refer to the important disclosures at the back of this report. 16

17 IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to major U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act ). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 20 Broad Street 26th Floor, New York NY 10005, a registered broker dealer in the United States. 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18 Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company ( Al Rajhi Capital ) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. 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"Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price on a 12 month time horizon. "Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Target price": We estimate target value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company s profits or operating performance exceed or fall short of our expectations. Contact us Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh Kingdom of Saudi Arabia research@alrajhi-capital.com Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No /37. Disclosures Please refer to the important disclosures at the back of this report. 18