Saudi Telecom Company (7010.SE)

Transcription

1 CEEMEA Saudi Arabia Integrated Telecommunication Services (GICS) Telecommunications Services (Citi) Company Focus 48 pages Saudi Telecom Company (7010.SE) Unveiling a Telecoms Giant Two reasons why you need to look at Saudi Telecom First, STC is the largest mobile operator by market cap in CEEMEA. Second, it has a diversified footprint stretching from South Africa, to India and its core operation in Saudi. Saudi and a diversified footprint Through acquisition, STC has built up an impressive portfolio of telecoms assets, including Oger Telecom and Maxis. This has diversified revenues geographically (c80% of revenue is from Saudi). Also, while Saudi domestic operations are contingent on oil revenues, its exposure through Oger is to non-oil-producing economies (Turkey and S. Africa). Initiation of coverage Buy/Medium Risk 1M Price (19 Nov 08) SRIs51.00 Target price SRIs60.00 Expected share price return 17.6% Expected dividend yield 8.8% Expected total return 26.5% Market Cap SRIs102,000M US$27,188M STC well placed to expand existing holdings STC has access to capital from domestic shareholders. Given that STC owns minority stakes in most of its recent acquisitions, it has a clear path for expansion, and the capital base to execute on this opportunistically. Risks to the investment case Disclosure is below the standard of most of the other CEEMEA operators. Investors may not appreciate that earnings in FY08E will decline, and only recover by FY09E. STC also has a weak market position or declining market share in most of its operations. Valuation attractive, but in line with peers STC trades on a 2009E PE of 8.6x and a 2008E DY of 8.8%. Our DCF-based SoTP valuation is SAR 100. However, macro concerns and investor risk aversion mean that all the CEEMEA stocks we cover are trading well below our DCF valuations. We expect sentiment to remain depressed over the next 12 months, hence we set our target price for STC at SAR 60, a 40% discount to our DCF valuation. Even so, this implies an ETR of 26.5%, and we initiate coverage with a Buy/Medium Risk (1M) rating. Saudi Telecom Company (SAR) Year to 31 Dec 2006A 2007A 2008E 2009E 2010E Sales (SRIsM) 32, , , , ,784.0 Net Income (SRIsM) 12, , , , ,847.9 Diluted EPS (SRIs) Diluted EPS (Old) (SRIs) PE (x) EV/EBITDA (x) DPS (SRIs) Net Div Yield (%) Rhys D Summerton rhys.summerton@citi.com Dilya Ibragimova 1 dilya.ibragimova@citi.com Maria Gratsova 1 maria.gratsova@citi.com See Appendix A-1 for Analyst Certification and important disclosures. Citi Investment Research is a division of Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Non-US research analysts who have prepared this report are not registered/qualified as research analysts with the NYSE and/or NASD. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Customers of the Firm in the United States can receive independent third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at (for retail clients) or (for institutional clients) or can call (866) to request a copy of this research. 1 Ltd

2 For further data queries on Citi's full coverage universe please contact CIR Data Services Europe at or Fiscal year end 31-Dec E 2009E 2010E Valuation Ratios P/E adjusted (x) EV/EBITDA adjusted (x) P/BV (x) Dividend yield (%) Per Share Data (SRIs) EPS adjusted EPS reported BVPS DPS Profit & Loss (SRIsM) Net sales 32,394 34,458 43,806 49,249 50,784 Operating expenses -19,745-21,820-30,104-33,592-34,925 EBIT 12,648 12,637 13,702 15,657 15,859 Net interest expense Non-operating/exceptionals ,027-1,097 Pre-tax profit 13,141 12,442 12,293 14,152 14,392 Tax ,283-1,375 Extraord./Min.Int./Pref.div ,039-1,170 Reported net income 12,799 12,015 10,813 11,830 11,848 Adjusted earnings 12,799 12,015 10,813 11,830 11,848 Adjusted EBITDA 16,484 16,736 19,673 22,780 23,115 Growth Rates (%) Sales EBIT adjusted EBITDA adjusted EPS adjusted Cash Flow (SRIsM) Operating cash flow 15,873 18,534 13,740 19,451 19,964 Depreciation/amortization 3,836 4,098 5,970 7,123 7,256 Net working capital -1,062 1,909-3, Investing cash flow -5,326-16,919-33,061-8,728-9,336 Capital expenditure -3,393-8,335-15,178-8,763-9,374 Acquisitions/disposals , Financing cash flow -11,642 3,087 11,984-8,595-8,687 Borrowings 0 13,580 20, Dividends paid -11,642-10,508-9,250-9,634-9,857 Change in cash -1,096 4,702-7,337 2,127 1,940 Balance Sheet (SRIsM) Total assets 46,122 68,811 93,495 94,358 99,053 Cash & cash equivalent 8,508 7,618 3,527 1,718 4,037 Accounts receivable 3,939 4,973 6,322 7,108 7,329 Net fixed assets 30,128 34,369 43,577 45,216 47,334 Total liabilities 11,967 32,919 55,449 53,288 54,827 Accounts payable 1,960 3,082 3,893 4,172 4,358 Total Debt 0 13,580 38,110 35,292 36,462 Shareholders' funds 34,154 35,892 38,047 41,070 44,226 Profitability/Solvency Ratios (%) EBITDA margin adjusted ROE adjusted ROIC adjusted Net debt to equity Total debt to capital

3 Investment Thesis Figure 1. STC Operations Summary Country Service Subscribers Revenue (US$m) Period EBITDA (US$m) EBITDA % Position on the market(x / of x) Revenue CAGR 08-11F Saudi Telecom KSA Fixed/ ADSL FL 4.1m/ DSL 861k 1/ 4 Saudi Telecom KSA Wireless GSM 17.8m 9,957 08F 4, % 1/ 3 5.6% Oger Telecom Turk Telekom Turkey Fixed/ ADSL FL 17.7m/ ADSL 5.5m 6,535 08F 2, % 1/ 1 5.5% Avea Turkey Wireless GSM 11.7m 1,651 08F % 3/ % Cell-C South Africa Wireless GSM 5.4m F % 3/ 3 1.7% Maxis Malaysia Wireless GSM 10m 2,366 07E 1, % 1/ 4 na NTS Axis Indonesia Wireless GSM 1.5m na na na 5*/ 5 na Aircel India Wireless GSM 13.9m na na na 7/ 12 na Viva Kuwait Wireless GSM Launch planned na na na 3 3 na *Axis among GSM operators. Source: Company data, Global Insight, Citi Investment Research estimates Background Saudi Telecom is a mobile, fixed and international telephone service provider, with operations in: Saudi Arabia India Malaysia Turkey and South Africa Figure 2.. STC: Valuation Mix Oger Telecom 6% Kuwait 1% Binariang 1% Saudi Telecom (KSA) 92% Source: Citi Investment Research estimates 3

4 Figure 3. STC: Ownership General Organisation for Social Insurance 7% Public Pension Fund 7% Public float 17% Source: Tadawul, 19 Nov 08 Government 69% SCT Ownership STC was previously a state-owned monopoly. Since the 2002 IPO, STC has been trading on the Tadawul (Saudi Stock Exchange). Although an IPO was held, 69% of the company is still owned by government. 17% is owned by private investors and the remaining 14% by state pension funds and the General Organisation for social Insurance. In short, it s government controlled. Why look at STC? Investors may be sceptical about investing in STC. Recently, when we initiated on Qtel and Wataniya (other GCC-listed operators), the investors we spoke to raised questions over corporate governance and long-term returns. But we think STC deserves closer examination for the following reasons: In the context of CEEMEA, it is the largest telco. It has exposure to markets to which international investors have historically enjoyed only limited access. STC is one of the top-five-rated telecommunications companies in the world, having an A+credit rating from S&P and classified as A1 by Moody s; these ratings place it ahead of its regional competitors. With a market capitalisation of around USD 27,200m as of 19 November 2008, the stock is the secondlargest on the Saudi market, as well as the largest telecommunications stock in the MENA region. Figure 4. CEEMEA Telcos: Market Cap as of 19 November 2008 (US$m) 30,000 27,000 MarCap, UD$m 24,000 21,000 18,000 15,000 12,000 9,000 6,000 3,000 - Comstar MobiNil Cellcom Partner Sistema Magyar T Wataniya Bezeq Tel Egypt Orascom T Qtel Telkom Cesky TPSA VimpelCom MTS Turkcell Zain Maroc Tel MTN Saudi T Co Source: Powered by datacentral datacentral is Citi Investment Research's proprietary database, which includes Citi estimates, data from company reports and feeds from Reuters, Datastream, First Call, IBES and Toyo Keizai. 4

5 Investment Positives Stable cash generation in Saudi STC s Saudi operations typically generate c.us$3bn of FCF annually. Initially a fixed line business only, STC expanded in its home market to include mobile. So while cash flow takes a temporary hit from mobile domestic expansion, Saudi operations are still generating excess cash flow to fund expansion into new markets. Figure 5. STC Saudi Operations: EBITDA Margin (%) and FCF (US$m) 54.0% 4, % 50.0% 48.0% 46.0% 44.0% 42.0% 3,500 3,000 2,500 2,000 1,500 1, % F 2009F 2010F 2011F 2012F - Source: Company data, Citi Investment Research estimates Our forecasts for FCF are also conservative. We include a declining EBITDA margin due to new competition entering the market. Including this declining margin assumption, we still expect FCF to recover to c.us$3bn by FY09E. High dividend relative to benchmark yield STC s strong FCF even considering the investments it is making translates into a 2008E dividend yield of 9%. Against the peer group, STC s yield is good but not standout, a reflection of how cheap the sector is, in our view. Below, we have compared STC s dividend yield to long-term government bonds. STC s yield is nearly 2x government bonds in line with the best yields globally. 5

6 Figure 6. European Telcos: Dividend Yield Relative to Government Bond Yields 14% Div Yld 08E 13% 13% 13% 12% Government LT bond Yld 11% 10% 8% 7% 7% 8% 8% 10% 8% 9% 8% 9% 6% 4% 6% 4% 6% 5% 4% 5% 6% 5% 6% 5% 5% 2% 0% KPN Partner OTE Deutsche Vodafone Cellcom Telecom Saudi Telecom TP SA Magyar Telecom Tef O2 CzechR Mobinil BT Group Prices for stocks not shown in Figure 26: KPN (KPN.AS; 10.54; 1M), OTE (OTEr.AT; 10.42; 1H), Deutsche Telekom (DTEGn.DE; 10.59; 2M), BT (BT.L; 1.24; 2H) Source: Reuters, Citi Investment Research estimates 6

7 Clear path to expansion Figure 7. STC: Worldwide Presence Saudi Telecom Turkey Turk Telekom (Fixed Line) Avea (GSM) Saudi Telecom Oger Telecom (35%) Binariang (25%) Lebanon Cyberia (ISP) Malaysia Maxis (GSM) Jordan Cyberia (ISP) Indonesia NTS (GSM) Kuwait Vivo (GSM) South Africa Cell-C (GSM) Saudi Arabia Fixed Line GSM +3G India Aircel (GSM) Source: Citi Investment Research STC has a clear path to continue its expansion without going into territories with which it is unfamiliar. As we have seen with other operators such as Orascom and Qtel, buying out minority shareholders is sometimes more valueenhancing than acquiring new ventures. Also, most of our operators particularly the integrated ones such as Tef O2 Czech Rep and TPSA have no obvious acquisition path to follow as opportunities are limited, or too expensive. Conversely, STC has a clear acquisition path purely from filling up the leakage in its existing portfolio. Below (Figure 8) we show the effective and direct shareholdings of STC s international holdings. 7

8 Figure 8. STC: Summary of Direct and Effective Ownership Ownership Oger Telecom 35.0% Turk Telekom 19.1% Avea 28.1% Cell-C 26.3% Cyberia 33.3% Kuwait 26.0% Binariang [Maxis (Malaysia)] 25.0% NTS Axis (Indonesia) 62.0% Aircell (India) 18.5% Source: Company data, Citi Investment Research Value-enhancing? In our view, the key driver to value creation could be an increase in STC s stake in Oger Telecom. Oger Telecom in turn has minority positions in Turk Telecom, Avea and Cell-C, and could also consolidate its positions. Further acquisitions would clearly be dependent on price, and the willingness of minorities to sell out. Our point is that, in the current market environment, STC is likely one of the few telecoms operators in emerging markets with the cash generation and shareholder support to execute on further acquisitions, or fill in on existing positions. This means STC is likely to have more pricing power if any of the existing shareholders look to exit. Another factor is that the size of the subsidiaries is material. Acquiring more of Oger Telecom would change the revenue split from 79% in Saudi to 57.3% if STC s stake were increased to 100% (from 35% currently) (see Figure 9). Figure 9. STC: Revenue Mix Current vs. Implied by Change of Oger Ownership Assuming 100% of Oger Telecom Current Revenue Split (08E) Oger Telecom 42.7% 21% Saudi Telecom 57.3% 79% Source: Company data, Citi Investment Research estimates In addition to the recent acquisitions described above, STC is widely reported to be among the bidders for a 25% stake in Omantel, which is currently being sold by the government of Oman. The company reports that, when required, it receives assistance from the Saudi government to support its international expansion. We believe that its acquisition strategy has legs. STC identifies its synergy potential as being divided into four categories: revenue increase, roaming charges saving, opex saving and capex saving. It reckons that because of its position as the largest telecom operator in the Middle East, above-average synergies can be realised due to economies of scale. In addition, Hajj and Umrah traffic is not an insignificant contributor to value creation through synergies across the Islamic world. STC sees scope for existing shared services infrastructure to be leveraged to incorporate international operations, and for the cash capability to be leveraged to reduce various incremental costs. 8

9 Broadband growth potential We view broadband growth as a potential new revenue driver. Only 10.3% of Saudi homes have access to broadband, which is low relative to the GDP per capita and PC penetration. Figure 10. Broadband Household Penetration by Country 70% 60% 61.3% 63.2% 50% 48.5% 40% 30% 25.0% 28.5% 28.5% 30.4% 20% 17.0% 10% 2.7% 4.1% 9.7% 10.3% 0% Egypt Ukraine Russia Saudi Arabia Greece Turkey Hungary Poland Czech Rep Germany UK France Source: EIU, company data, Citi Investment Research 9

10 Negatives No EPS growth until FY09E Given STC s expansion into new markets and the related increased interest expense, we expect earnings to decline in FY08. Although growth rebounds in FY09E, the FY09-FY11E CAGR is still below 3%. Figure 11. STC: EPS (SAR) Figure 12. STC: EPS Growth (%) Earnings per Share, SAR 10.0% 5.0% % -5.0% 2006A 2007A 2008F 2009F 2010F 2011F % % % A 2007A 2008F 2009F 2010F 2011F -25.0% EPS Growth % Source: Company data, Citi Investment Research estimates Source: Company data, Citi Investment Research estimates Market position weak in mobile Although its fixed line businesses are market leaders, we do not regard STC s overall market position as particularly strong: Figure 13. STC: Market Positions of Fixed and Mobile Operations Market Position / No. of Operators Saudi Telecom (Fixed Line) 1/ 4 Saudi Telecom (Wireless) 1/ 3 Oger Telecom Turk Telekom (Fixed Line, Turkey) 1/ 1 Avea (Wireless, Turkey) 3/ 3 Cell-C (Wireless, South Africa) 3/ 3 Maxis (Wireless, Malaysia) 1/ 4 NTS Axis (Wireless, Indonesia) 5*/ 5 Aircel (Wireless, India) 7/ 12 Viva (Wireless, Kuwait) 3 3 *Among GSM operators only. Source: Company data, Citi Investment Research Its mobile operations that are number 1 are facing competition. New mobile operations run the risk of not reaching our market share forecasts, as their position is weak, requiring more investment. An example of market share not improving is Cell-C in South Africa, the market share of which has been running at below 10% for four years. 10

11 Figure 14. STC: Market Share by Market F 2009F 2010F STC 89.4% 69.1% 60.9% 57.4% 53.7% 51.2% Kuwait % 1.0% 4.0% 7.0% Indonesia % 2.5% 4.2% 5.9% Malaysia 40.3% 41.4% 41.7% 41.6% 41.4% 41.0% South Africa 9.2% 8.8% 9.1% 9.3% 9.6% 9.9% Source: Company data, Citi Investment Research estimates High margins imply limited room for improvement STC already generates an EBITDA margin in its main operations of 46%. Normally, fixed line operators at similar stages of liberalization have low margins, with scope for improvement. However, STC s margins are already close to sector highs. We believe that one of the reasons for this is that interconnection costs are low. We expect these rates to rise as mobile and competition increases. Figure 15. Interconnect Rates Across Selected CEEMEA Countries Interconnect F2M* [LC] M2M [LC] F2M [US$] M2M [US$] FX LC:US$ South Africa $0.138 $ Saudi Arabia $0.027 $ Israel $0.055 $ Turkey $0.080 $ Russia $0.056 $ Egypt $0.081 $ *Peak where applicable; Turkey for Turkcell Source: Company data, ICASA, MoC Israel, Citi Investment Research 11

12 Saudi Valuation In the rest of our CEEMEA universe we model integrated operators mobile and fixed-line businesses separately. However, given limited disclosure, we have insufficient data to adopt a similar approach for STC. DCF valuation Figure 16. STC: SoTP Valuation Valuation EV 100% Effective EV Proportionate Per Share % Method SARm Ownership SARm SAR Total Saudi Telecom (KSA) DCF 212, % 212, % Oger Telecom Acquisition Price 41, % 14, % Turk Telekom DCF 69, % 13, % Avea DCF 9, % 2, % Cell-C DCF 1, % % Cyberia EV/EBITDA 07 6x % % Kuwait Acquisition Price 26.0% 3, % Binariang (Maxis (Malaysia)) Acquisition Price 11, % 2, % NTS Axis (Indonesia) Acquisition Price 62.0% Aircell (India) Acquisition Price 18.5% EV Total 233, % Net Debt 34, % 34, Equity Value 198, Source: Citi Investment Research estimates (except acquisition prices, which are announced) As with the rest of our CEEMEA universe, DCF is our primary valuation tool. We cross-check our DCF-based valuation against peer group multiples. WACC Our WACC assumption is 8.2%. Key features are as follows: The benefit of leverage is restricted to the cost of funding only there is no benefit from being able to offset interest costs with tax. The current debt to equity ratio is running at c.22%. We would expect debt levels to fall in the current environment, which may be flattering to the discount rate we use in our model. Our use of a beta of 1 is merely to be consistent with our view that, in the long term, a stable telephone company will trend to the performance of the market. The Bloomberg quoted beta is

13 Figure 17. STC Saudi Operations: WACC Assumptions WACC 8.2% Terminal WACC 8.2% Risk free 4.0% Equity premium 5.0% Beta 1.0 Cost of equity 9.0% Cost of debt 4.5% Effective tax rate 0.0% Post-tax cost of debt 4.5% Market cap, US$mn 27,200 Debt 6,000 WACC 8.2% Source: Citi Investment Research estimates FCF generation Post capex, we expect STC s Saudi operations to generate US$2.3bn of FCF in FY08. The FCF generated in 2006 was US$3.5bn. The recent decline in FCF generation is due to STC s investment in its mobile business. By 2012, we expect FCF to have recovered to close to FY06 levels. Figure 18. STC Saudi Operations: FCF FCF Saudi (SARm) F 2009F 2010F 2011F 2012F EBITDA 17,198 16,484 16,736 17,441 17,903 18,052 18,403 19,066 Tax/ Zakyat ,007 1,044 1,088 CAPEX FCF SARm 12,517 13,127 7,358 8,630 10,652 10,562 11,056 12,059 Change 16% 5% -44% 17% 23% -1% 5% 9% FCF US$m 3,340 3,505 1,965 2,305 2,835 2,812 2,943 3,210 Source: Company data, Citi Investment Research estimates 13

14 DCF Sensitivity Our base case DCF valuation is SAR 212 bn, based on a WACC assumption of 8.2% and a terminal growth rate of 1% (we generally use terminal growth rates of zero for fixed-line operators, and 3% for mobile in CEEMEA). Figure 19. STC Saudi Operations: DCF Sensitivity, EV (SAR bn) Terminal Growth rate -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 5.2% % % WACC 8.2% % % % Source: Citi Investment Research Figure 20. STC Saudi Operations: DCF Sensitivity, EV (US$ bn) Terminal growth rate -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 5.2% % % WACC 8.2% % % % Source: Citi Investment Research Figure 21. STC Saudi Operations: DCF Sensitivity, per Share (SAR) Terminal growth rate -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 5.2% % % WACC 8.2% % % % Source: Citi Investment Research 14

15 Other operations For STC s other operations, our DCF valuations of the underlying assets are higher than the prices paid, by c. 33% overall. Figure 22. Oger Telcom, SOTP Valuation EV 100% Ownership EV (SARm) Per Share % Total Method SARm Proportionate SAR Oger Telecom Acquisition Price 41, % 14, % Turk Telekom DCF 69, % 13, % Avea DCF 9, % 2, % Cell-C DCF 1, % % Cyberia EV/EBITDA 07 6x % % Source: Citi Investment Research estimates (except acquisition prices, which are announced) Figure 23. Turk Telekom: Summary Income Statement F 2009F 2010F 2011F 2012F Net Revenue TRYm 7,219 7,750 10,476 11,465 12,159 12,748 Cost of Sales TRYm (2,639) (2,932) (2,601) (2,700) (2,788) (2,852) Gross Profit TRYm 4,580 4,818 7,875 8,765 9,371 9,896 S&M TRYm (425) (784) (1,023) (1,288) (1,571) (1,894) General Mngmt expenses TRYm (907) (1,177) (1,335) (1,461) (1,550) (1,625) Total Operating expenses TRYm (1,332) (1,961) (2,359) (2,749) (3,121) (3,519) Operating Profit TRYm 3,249 2,857 5,516 6,016 6,250 6,378 Financial Income/(expense) TRYm FX gains/(losses) TRYm PBT TRYm 3,620 3,294 6,044 6,578 6,900 7,082 Current period tax TRYm (65) (388) (561) (811) (900) (944) Tax TRYm (65) (388) (561) (811) (900) (944) PAT TRYm 3,555 2,906 5,483 5,767 5,999 6,137 Net Income TRYm 3,555 2,906 5,483 5,767 5,999 6,137 EBITDA TRYm 3,788 4,163 4,038 5,265 5,619 5,837 Source: Company data, Citi Investment Research estimates 15

16 Figure 24. Avea: Summary Income Statement F 2009F 2010F 2011F 2012F Revenues TRYm 1,701 2,129 2,483 2,760 3,036 3,359 % change % 29% 25% 17% 11% 10% 11% C'o's as % of revenue 54.5% 51.3% 50.6% 50.4% 50.4% 50.5% Cost of service TRYm (926) (1,092) (1,256) (1,390) (1,530) (1,695) G&A TRYm (189) (206) (219) (230) (241) (253) Selling and Marketing TRYm (274) (333) (377) (407) (434) (466) Other operating income - net TRYm EBITDA EBITDA margin 16.4% 23.4% 25.4% 26.6% 27.3% 28.1% D&A TRYm (472) (505) (493) (476) (522) (591) Total operating costs TRYm (1,423) (2,136) (2,345) (2,502) (2,728) (3,006) Operating profit/(loss) TRYm 279 (7) Financial Income - net TRYm (168) (179) (184) (190) (195) (201) Gain on monetary position TRYm PBT TRYm 154 (142) (2) Tax TRYm (31) 28 0 (22) (31) (39) Net income TRYm 123 (113) (2) Source: Company data, Citi Investment Research estimates Figure 25. Cell-C Summary Income Statement (ZARk) F 2009F 2010F 2011F 2012F Net revenues Rk 7,603,263 8,394,324 8,739,041 8,798,882 8,826,269 8,973,020 % change % 17% 10% 4% 1% 0% 2% COGS Rk (3,879,557) (4,082,088) (4,281,807) (4,504,906) (4,661,463) (4,807,316) Cost of hardware Rk (844,524) (836,491) (800,376) (708,087) (605,307) (511,035) Gross profit Rk 2,879,182 3,475,745 3,656,858 3,585,890 3,559,499 3,654,668 GP margin % 38% 41% 42% 41% 40% 41% SG&A Rk (878,665) (970,083) (961,829) (922,300) (881,115) (853,109) Other expenses Rk (958,281) (1,138,820) (1,203,579) (1,257,654) (1,309,136) (1,362,475) As % of Revenues % -12.6% -13.6% -13.8% -14.3% -14.8% -15.2% EBITDA Rk 1,042,236 1,366,842 1,491,450 1,405,936 1,369,248 1,439,084 EBITDA margin % 13.7% 16.3% 17.1% 16.0% 15.5% 16.0% EBITDA margin ex handsets 15.1% 17.8% 18.6% 17.2% 16.5% 16.9% D&A Rk (720,831) (831,108) (873,244) (881,029) (880,146) (945,135) Operating profit Rk 321, , , , , ,949 Investment income Rk 39,383 39,383 39,383 39,383 39,383 39,383 Interest paid Rk (1,141,054) (1,102,089) (1,269,803) (1,443,678) (1,583,701) (1,737,706) Financing costs Rk (19,905) (19,905) (19,905) (19,905) (19,905) (19,905) FX Rk 66,159 (830,907) (409,339) (230,459) (252,554) (138,084) Share of results in JV Rk (156,137) EBT Rk (890,149) (1,377,785) (1,041,457) (1,129,752) (1,327,676) (1,362,364) Taxes Rk 126, , , , , ,849 Net income Rk (763,447) (1,116,006) (843,580) (915,099) (1,075,417) (1,103,515) Source: Company data, Citi Investment Research estimates 16

17 Peer group comps Its open for debate whether STC is best compared with mobile operators or integrated incumbents. For the purpose of this exercise, we include it in wireless, as we think that QTel provides the most relevant benchmark. We believe P/E multiples are the most useful valuation metric valuation, as they take into account different the tax rates among operators. EV/EBTIDA multiples do not make STC look attractive, simply because we are comparing a zero-tax rate company to other operators who do pay tax. Figure 26. CEEMEA Telecoms Comps Table CIR Price Mkt Cap EV/EBITDA P/E (ex goodwill) FCF Yld Dividend Yield Rating 18-Nov-08 (US$m) 08E 09E 10E 08E 09E 10E 08E 09E 10E 08E 09E 10E CEEMEA Integrated Tef O2 Czech Rep 1L CZK , % 12.1% 11.9% 12.8% 12.8% 12.8% Magyar Telekom 1M HUF542 2, % 22.2% 24.3% 11.4% 11.9% 12.7% TPSA 1M PLN , % 13.5% 14.0% 10.5% 11.7% 11.8% Telkom SA 1M ZAR , % 9.5% 11.3% 6.3% 0.2% 0.1% CEEMEA Wireless MobiNiL 1M EGP , % 9.5% 31.7% 13.5% 13.8% 16.0% Orascom Telecom 1H USD , % 16.5% 25.2% 6.3% 9.4% 12.2% MTS 1M USD , % 23.0% 30.5% 14.5% 15.7% 18.0% VimpelCom 2M USD8.94 8, % 12.2% 17.3% 8.3% 9.2% 16.6% MTN Group 1H ZAR , % 9.2% 14.9% 1.9% 1.9% 2.6% Turkcell 3H TRY7.7 9, % 8.7% 9.3% 8.8% 9.6% 9.4% Partner 1L ILS66 2, % 10.0% 11.0% 7.2% 8.5% 9% Cellcom 1L ILS95 2, % 14.2% 15.3% 9.7% 10.3% 11.6% Qtel 1M QAR , % 17.3% 22.9% 2.1% 3.8% 4.5% Wataniya 1H KWD1.46 2, % 11.9% 12.6% 4.8% 6.4% 6.7% Saudi Telecom 1M SAR55 27, % 9.5% 9.5% 8.2% 9.0% 9.3% Developed Market Wireless Vodafone 1M GBP , % 6.7% 7.2% 6.1% 6.4% 6.7% Telenor 2H NOK , % 11.6% 13.6% 11.5% 12.2% 13.7% TeliaSonera 1M SEK , % 6.5% 6.9% 4.9% 5.7% 5.7% CEEMEA Sector avg 7, % 13.9% 18.5% 8.6% 9.6% 11.1% CEEMEA Integrated avg 5, % 14.3% 14.9% 10.7% 11.4% 11.7% CEEMEA Wireless avg 7, % 11.4% 19.1% 7.3% 8.2% 9.7% Source: Powered by datacentral. 17

18 What Does the Market Look Like? Fixed Line Players from monopoly to liberalisation STC has been a fixed-line monopoly up until Three new fixed-line licences have been granted this year to Batelco (Bahrain), PCWW (Hong Kong) and Verizon Communications (US). The three newcomers are expected to launch operations by the end of this year. They are expected to compete on traditional voice services, as well as internet and data. In addition, Etisalat a competitor in mobile recently acquired stakes in local internet providers. In total, the internet sector has many more players in the country than does telephony, with some 20 private providers active in the market. Penetration Fixed-line penetration in Saudi Arabia is at 99.5% and seems likely to stay that way. Fixed-line yoy growth was 3.8% in 2005, 1.6% in 2006 and 4.6% in We assume roughly 3.4% growth in the coming years to reflect population growth. Figure 27. Fixed Line Growth YoY (%) 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F Source: Company data, Citi Investment Research estimates Despite the abundance of ISPs, the 2007 internet penetration rate was only 26.3%. We forecast this to increase to 53.3% by Only a small proportion of subscribers are currently on broadband (600,000 broadband subscribers out of a total of 1,800,000 internet subscribers). These numbers imply significantly higher growth potential in data services than in wireline telephony, but there are also many more takers for a share of this market. 18

19 Figure 28. Broadband Household Penetration by Country 70% 60% 61.3% 63.2% 50% 48.5% 40% 30% 25.0% 28.5% 28.5% 30.4% 20% 17.0% 10% 2.7% 4.1% 9.7% 10.3% 0% Egypt Ukraine Russia Saudi Arabia Greece Turkey Hungary Poland Czech Rep Germany UK France Source: EIU, company data, Citi Investment Research Services Offered Saudi Telecom offers a range of services for both individual and business customers in the wireline sector, marketed under the name Al Hatif. The unit also encompasses phonecard, public telephone and prepaid card services. The packages provided are Hatif 30, Hatif 45, Jood and Jood Plus. Various plans are also offered such as the Favourite Country Plan, Friends & Family Service and Favourite Call Number. On the internet side, there are a range of options available for individual users. AFAQ DSL Service, AFAQ DSL Shamil, AFAQ DSL Shamil with modem, AFAQ DSL cards and Easynet are examples of internet services offered by STC. Pricing and tariffs Below is an illustration of fixed-line tariffs in local currency for the four main packages. Hatif packages have cheaper monthly subscription fees but no free calls included, while Jood packages have much higher monthly fixed fees, but offer free calling. Jood Plus also includes additional free services, including called ID, call waiting and conference calling. Figure 29. Fixed-Line Tariffs (SAR) Monthly Local calls subscription National Favourite Call Privacy calls country management management Hatif Hatif Jood 99 free free free free free Jood Plus 399 free free free free free Source: Company data, Citi Investment Research 19

20 Below are illustrations of the pricing of some of the different internet services provided by STC. AFAQ DSL is a continuous high-speed connection without interference with the phone line, sold in packages with various connection speeds. Monthly charges vary between SAR 109 and SAR 999 for packages of between up to 128 Kbps and up to 20 Mbps. Figure 30. AFAQ DSL Service Charges Connection Monthly charge Installation fee <128 Kbps SAR 109 SAR 300 <256 Kbps SAR 149 SAR 300 <512 Kbps SAR 199 SAR 300 <1 Mbps SAR 299 SAR 300 <2 Mbps SAR 459 SAR 300 <4 Mbps SAR 759 SAR 300 <8 Mbps SAR 839 SAR 300 <10 Mbps SAR 889 SAR 300 <16 Mbps SAR 959 SAR 300 <20 Mbps SAR 999 SAR 300 Source: Company data, Citi Investment Research Another way to gain access to the internet with STC is through a DSL card, prices for which are displayed below. Prices vary according to the connection speed and time period chosen. Figure 31. DSL Card Prices Connection 1 month 3 months 6 months 1 year <128 Kbps SAR 19 SAR 57 SAR 114 SAR 228 <256 Kbps SAR 49 SAR 134 SAR 239 SAR 419 <512 Kbps SAR 79 SAR 224 SAR 419 SAR 779 <1 Mbps SAR 149 SAR 419 SAR 779 SAR 1439 <2 Mbps SAR 279 SAR 779 SAR 1439 SAR 2639 <4 Mbps SAR 549 SAR 1529 SAR 2819 SAR 5159 <8 Mbps SAR 599 SAR 1679 SAR 3119 SAR 5759 <10 Mbps SAR 629 SAR 1769 SAR 3299 SAR 6119 <16 Mbps SAR 669 SAR 1889 SAR 3539 SAR 6599 <20 Mbps SAR 689 SAR 1949 SAR 3659 SAR 6839 Source: Company data, Citi Investment Research 20

21 STC - Mobile Players The mobile market is divided up between 3 GSM players and one push-to-talk BOT operator, Wataniya. STC is the largest player in the market with 57% market share in 2008E. The major challenge currently faced by STC is intensifying competition in its domestic market, where it held a mobile (as well as fixed-line) monopoly until Figure 32. STC vs. Mobily: Mobile Market Share in Saudi Arabia Figure 33. STC vs. Mobily: Share of Mobile Net Additions in Saudi Arabia 100% 90% 80% 70% 60% 100% 90% 80% 70% 60% 50% 40% 30% 100% 89% 69% 61% 57% 50% 40% 30% 66% 20% 10% 20% 10% 28% 42% 40% 0% F 0% F STC Mobily STC Mobily Source: Company data, Citi Investment Research estimates Source: Company data, Citi Investment Research estimates Liberalisation of the telecommunications sector initiated by the regulator has had a negative impact on STC, the market share of which has been declining at a rapid pace (down from 100% in 2004 to 61% in 2007). While the main wireless competitor to date has been Etisalat (through the Mobily brand), Zain is set to aggressively challenge the two main operators after entering the market in mid In line with this, we forecast STC s market share to drop to around 45% by We model Zain s market share rising to 15% by 2015, taking away proportionally more subscribers from STC than from Mobily, in line with the experience of market leaders in other geographies. While Wataniya is also present in Saudi Arabia, we expect its role will remain marginal, as it has been to date. 21

22 Figure 34. STC vs. Peers: Mobile Market Share in Saudi Arabia Figure 35. STC vs. Peers: Share of Mobile Net Additions in Saudi Arabia 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008F 2009F 2010F 2011F 2012F 0% 2008F 2009F 2010F 2011F 2012F STC Zain Mobily STC Wataniya Zain Mobily Source: Citi Investment Research estimates Source: Citi Investment Research estimates STC s advantage Despite the end of monopoly, the one advantage that STC still retains over its competitors is the fact that it is the only operator to provide both wireline and wireless telephony in the country (as well as the internet), placing it in a position to offer bundled services. This advantage has not yet been used, but the company has suggested this might be a strategy to revert to in the wake of increasing competition in all three operational segments. Penetration Total vs. active subscribers Despite mobile penetration of over 100%, we see Saudi Arabia as a rapidly growing mobile market due partly to its population structure (predominantly young) and growth (fairly fast), and partly to usage habits (multiple SIMs). It is worth noting that the 2007 penetration rate of 117% shown in Figure 36 represents total subscribers rather than active subscribers in the mobile market. However, according to a Communications and Information Technology Commission decision, reporting of active subscribers is in the process of being made mandatory in the sector in order to obtain accurate and realistic information that reflects the actual development of the various markets of the CIT sector (Public Consultation Document Regarding Definition of Active Subscriber to Mobile Telecommunications Services, 3 September 2007). This would imply lower penetration numbers for the Saudi market due to reclassification, giving a more realistic picture of the sector, and leaving more scope for penetration growth than implied by pre-regulatory change numbers. However, our numbers do not take the change into consideration just yet, as there is lack of clarity on both the timing of the regulatory reform and the extent to which it will affect subscriber numbers. 22

23 Figure 36. Mobile Penetration in Saudi Arabia 220% 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F Source: Company data, Citi Investment Research estimates Services offered Figure 37. Postpaid Avg Price/Min in Saudi Arabia Postpaid ave On-net peak Off-net peak Mobily STC Zain KSA Source: Company data, Citi Investment Research Pricing and tariffs As opposed to its competitors in Saudi Arabia, STC has different on-net and off-net pricing on all of its postpaid tariff plans. Similarly, on-net and off-net text messages are priced differently. Worth noting about the tariffs are the cuts undertaken by STC both prior to and after entry of competition into the Saudi mobile market. We think it is likely that more cuts will follow in response to Zain s aggressive attempts to gain market share. Do price cuts worry us? As we have seen in many other markets (Russia, Israel etc), elasticity runs above 1x in most CEEMEA markets. Generally, elasticity is higher in higher inflationary markets, as the relative price of mobile becomes cheaper in real terms. Figure 38. SMS Average Price in Saudi Arabia SMS ave On-net Off-net Mobily STC Zain KSA Source: Company data, Citi Investment Research Already, Zain has lower per minute prices for off-net postpaid calling than the two main market players: SAR 0.30/min, with STC and Mobily charging more under almost all of their tariff plans. Further tariff cuts would hurt STC s ARPU unless usage were to increase significantly. We think it may nevertheless have to consider cutting off-net peak call rates as these are currently the most expensive of all operators, as are its off-net SMS. ARPU ARPU is on the decline in both the mobile and fixed-line operational segments. The decline is faster for mobile and more subdued for fixed operations (-12.2% in 2008E and -2.8% in 2016E for mobile; but -4.8% and -0.8%, respectively, for fixed-line). 23

24 Company disclosure on ARPU is minimal, thus the data in Figure 39 are our estimates. For 2008, we forecast mobile ARPU of around SAR , or US$31.8. For the fixed-line segment, we forecast SAR , giving a blended ARPU of SAR Figure 39. STC Saudi Operations: ARPU (SAR) F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F Mobile Fixed Blended Source: Citi Investment Research estimates Revenue per line vs. peers The revenue per line that STC achieves is in line with the peer group. However, STC s revenues are exposed to cannibalization from mobile, whereas its peers have already seen this happen. In other words, we would be cautious on STC s fixed-line revenues as mobile substitution grows. 24

25 Figure 40. CEEMEA Telcos: Revenue per Fixed Line (US$) STC Magyar Telecom Telkom SA Turk Telecom Cesky Telecom TPSA Note: 2008 data are CIR estimates. Source: Company data, Citi Investment Research Adjusting for GDP per capita highlights Saudi as having revenue upside potential. However, a more important impact is the spend from corporates, which varies significantly across countries, as shown below. Figure 41. CEEMEA Telcos: Revenue per Fixed Line as a % of GDP per Capita 1.20% 1.00% STC Magyar Telecom Telkom SA Turk Telecom Cesky Telecom TPSA 0.80% 0.60% 0.40% 0.20% 0.00% Note: 2008 data are CIR estimates. Source: Company data, Citi Investment Research 25

26 SG&A/revenue SG&A as a percentage of revenue is on the increase we forecast it to exceed 11% by the end of 2008 and reach almost 13% by the end of This reflects the impact of new competitors entering the market. YTD, we have already seen SGA up 40% yoy. Figure 42. STC Saudi Operations: SG&A/Revenue 14.0% SG&A %Sales 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2004A 2005A 2006A 2007A 2008F 2009F 2010F 2011F 2012F Source: Company data, Citi Investment Research estimates EBITDA margins STC s EBITDA margins started to decrease in 2007 and we expect them to continue to fall, from 46.2% in 2008E to 43% by 2012E. 26

27 Figure 43. STC: Group EBITDA Margins 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% F 2009F 2010F 2011F 2012F EBITDA Margin Source: Company data, Citi Investment Research estimates Capex spend Our analysis suggests that group capex/sales does not follow a clear trend. It decreased in 2006, then grew threefold in Beyond 2007, we see it decreasing to a stable level of 16-17% in E. Figure 44. STC: Group Capex/Sales 30.0% 25.0% Capex/ Sales 20.0% 15.0% 10.0% 5.0% 0.0% 2004A 2005A 2006A 2007A 2008F 2009F 2010F 2011F 2012F Source: Company data, Citi Investment Research estimates 27

28 Capex/sales for STC s domestic operations has followed a similar trend. Only from 2008E do we see some minor divergence due to the contribution of Oger Telecom in the group chart above. Figure 45. STC Saudi Operations: Capex/Sales 30.0% 25.0% Capex/ Sales 20.0% 15.0% 10.0% 5.0% 0.0% 2004A 2005A 2006A 2007A 2008F 2009F 2010F 2011F 2012F Source: Company data, Citi Investment Research estimates Figure 46. CEEMEA Telcos: Capex/Sales for Fixed Line Segment 25% 20% STC Magyar Telecom Telkom SA Turk Telecom Cesky Telecom TPSA 15% 10% 5% 0% Note: data are CIR estimates Source: Company data, Citi Investment Research 28

29 Capex/depreciation Depreciation as a percentage of capex is high for STC (which is a good thing). It was over 200% in 2007, but looks set to fall to 149% in 2008E. We forecast a decline of 31ppts to 118% in 2009, before a slight increase to 131% in the following year, then further falls after Figure 47. STC Saudi Operations: Depreciation as a % of Capex 250% 225% 200% 175% 150% 125% 100% 75% 50% 25% 0% Note: data are CIR estimates Source: Company data, Citi Investment Research estimates We cover very few operators whose depreciation policies are at the same level as capex. Assets that are being utilised longer than their expected lives are typically written back, artificially boosting earnings. In the case of STC, we think that the numbers are more reliable, as depreciation follows capex. Population density Population density is a demographic factor that can affect the costs involved in building and operating a mobile network. We note that density of 11/sq km in Saudi Arabia is very low, making it more costly for STC and other operators to efficiently cover the entire country. Apart from Oman at 8/ sq km, most other countries in the MENA region have higher population densities. Egypt and Morocco have rates of 72/sq km and 68/sq km, respectively, while some smaller countries have even higher rates (Kuwait and Bahrain, for example, have rates of 131/sq km and 1002/sq km, respectively). Yet, it is worth remembering that covering the whole country might not be viable or indeed desirable, given that the vast majority of the country s population is concentrated a few urban centres. 29

30 Figure 48. CEEMEA Telcos: Lines per Employee STC Magyar Telecom Telkom SA TPSA Turk Telecom Cesky Telecom BT Note: data are CIR estimates Source: Company data, Citi Investment Research estimates Figure 49. Population Density (People/sq km) Bahrain Kuwait Qatar Egypt Morocco Jordan UAE Saudi Arabia 11 8 Oman Source: UNSTATS 30

31 Figure 50. Population and Surface Area by Country Population density Population Surface area (sq km) China: Hong Kong SAR 6,708,389 1,099 Qatar 744,029 11,000 Kuwait 1,575,570 17,818 Israel 5,548,523 22,145 Czech Republic 10,230,060 78,866 UAE 2,411,041 83,600 Portugal 10,148,259 91,982 Greece 10,964, ,957 Nepal 23,151, ,181 UK 58,789, ,900 Italy 57,110, ,318 Poland 38,230, ,685 Malaysia 23,274, ,847 Germany 82,491, ,022 Thailand 60,617, ,115 France 58,520, ,500 Chile 15,116, ,096 Turkey 67,803, ,562 Pakistan 130,579, ,095 Nigeria 88,992, ,768 South Africa 44,819,778 1,221,037 Indonesia 206,264,595 1,904,569 Mexico 97,483,412 1,958,201 Saudi Arabia 22,678,262 2,149,690 Argentina 36,260,130 2,780,400 India nf 3,287,263 Brazil 169,799,170 8,514,877 China nf 9,596,961 US 281,421,906 9,629,091 Canada 30,007,095 9,970,610 Source: UNSTATS Operating costs Government charges are the largest operating cost for STC s Saudi operations, at 28% of the total. We include this in the operating cost line, even though it effectively works as a corporate tax. Access charges are the next largest expense, at 25%, followed closely by employee costs, at 23%. Administrative and marketing expenses form 14% of the total and repairs and maintenance are 10%. 31

32 Figure 51. STC: Operating Cost Breakdown, 2008E Figure 52. Turk Telecom: Operating Cost Breakdown, 2008E Administrative and marketing expenses 14% Repairs and maintenance 10% Government charges Other 18% Government charges 28% Repairs and maintenance 8% 5% Interconnect 11% Employee costs 23% Access charges 25% Administrative and marketing expenses 7% Employee costs 51% Source: Citi Investment Research estimates Source: Citi Investment Research estimates Figure 53. Magyar Telecom: Operating Cost Breakdown, 2008E Figure 54. Tef O2 Czech Rep: Operating Cost Breakdown, 2008E Interconnect 20% Other 32% Interconnect 24% Other 43% Employee costs 37% Repairs and maintenance 9% Administrative and marketing expenses 6% Employee costs 29% Source: Citi Investment Research estimates Source: Citi Investment Research estimates 32

33 Figure 55. Telkom South Africa: Operating Cost Breakdown, 2008E Figure 56. TPSA: Operating Cost Breakdown, 2008E Repairs and maintenance 9% Other 15% Interconnect 33% Other 33% Interconnect 24% Administrative and marketing expenses 9% Employee costs 34% Administrative and marketing expenses 9% Employee costs 34% Source: Citi Investment Research estimates Source: Citi Investment Research estimates Economic outlook Saudi Arabia is the largest Arab economy, with nominal GDP of US$ bn in 2008E. In nominal GDP terms (PPP), the country ranks around 20 th worldwide. To a large extent, this is due to the fact that Saudi Arabia is the world s top oil producer and exporter, as well as holding 22% of the world s total oil reserves (264.3bn barrels). Despite the recent fall in oil prices, we believe this will remain an advantage for the country for the foreseeable future. In terms of GDP per capita (which is particularly relevant to countries with high population growth rates), Saudi Arabia does not rank quite as high as in nominal GDP terms (around 50 th place). Nevertheless, GDP per capita of US$24,260 in 2008E means more disposable income among the population than in most emerging markets: something for operators to capitalise on, if not necessarily through call tariffs (more likely to be driven down by competition), then through additional data services and more usage. Our economists nominal GDP growth estimates (accounting for inflation) are moderately high for Saudi Arabia, at 8.1% in 2008E and 5% in 2009E. We believe that growth could, in fact, be somewhat slower due to recent global economic turmoil, but the country is still better placed than many others to weather the storm. It has anticipated the limitations of growth based solely on natural resources by actively diversifying its economy (e.g. into petrochemicals), and making the country a more investment-friendly environment (e.g. corporate tax on foreign-owned firms was reduced from 45% to 30% in 2000 and cut further to 20% in 2004). 33

34 Foreign Ventures While the majority of STC s operations are in Saudi Arabia, constituting c80% of operating revenues for 2008E, STC is also present in Kuwait, India, Indonesia, Malaysia, Turkey, Lebanon, Jordan and South Africa via its subsidiaries and associates. If slightly later than many other emerging market telecommunications operators (including its peers from MENA), it has joined the consolidation trend in the industry. Figure 57. STC: Worldwide Presence Saudi Telecom Turkey Turk Telekom (Fixed Line) Avea (GSM) Saudi Telecom Oger Telecom (35%) Binariang (25%) Lebanon Cyberia (ISP) Malaysia Maxis (GSM) Jordan Cyberia (ISP) Indonesia NTS (GSM) Kuwait Vivo (GSM) South Africa Cell-C (GSM) Saudi Arabia Fixed Line GSM +3G India Aircel (GSM) Source: Citi Investment Research Kuwait s third licence In December 2007, STC purchased 26% of the KD 50m share capital of Newtel in Kuwait for a consideration of SAR 3,442m, giving it a small share of a market dominated by Zain and Wataniya. The launch of its commercial brand, Viva, took place in mid-september The company IPO was 2.4 times oversubscribed and generated $93.6m (KD 25m). Despite its reasonably successful IPO, we think Viva s aim of capturing a 10% market share in its first year in Kuwait could prove ambitious. It is interesting to note that the second-highest bid for Newtel (KD 195m by Kuwait Finance House) was significantly lower than that of STC (KD 248m). 34