Etihad Etisalat Company (EEC)

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1 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Global Research Result Update Equity Saudi Arabia Telecommunication Sector 31 March, 2013 Market Data Bloomberg Code: EEC AB Reuters Code: 7020.SE CMP (30 March 2013): SAR 81.8 O/S (mn) Market Cap (SAR mn): 62,947 Market Cap (USD mn): 16,786 P/E 2013e (x): 9.6 P/Bv 2013e (x): 2.6 Price Performance 1-Yr High (SAR): 83.0 Low (SAR): 55.9 Average Volume: (000) Data story intact; tapping the potential in corporate segment Planned spending of SAR22.0bn to maintain competitive edge Growing dividends and attractive multiples Recommendation upgraded to BUY; Fair value upgraded BUY Target Price SAR91.0 Mobily once again pulled up a positive surprise by posting a better than expected 4Q12 profit. The company continues to invest heavily in its infrastructure and generate good returns by leveraging its leadership position in mobile broadband. The company plans to spend SAR22.0bn over the next five years and increase its presence in the fixed line segment by expanding the fiber optic network and venturing into provision of IPTV services. The company is also vying to become a full ICT provider by providing a whole suite of B2B services. On the valuation front, the company is still trading at attractive multiples despite the rally in its stock price and offers a growing dividend yield. 1m 3m 12m Absolute (%) Relative (%) Price Volume Performance 5,000 4,000 3,000 2,000 1,000 0 Source: Zawya Volume ('000) Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel.: (965) Umar Faruqui, CFA, ACCA Senior Financial Analyst ufaruqui@global.com.kw Tel.: (965) Global Investment House EEC (SAR) Data revenues expected to increase to 30.0% in 2013 Data revenue as a % of total revenue increased to 27.0% in 2012 from 22.0% in With voice revenues staying stagnant, data revenue is expected to contribute 30.0% to total revenues in Revenues from data services will remain the main growth driver for the company in the forecast period. Increase in smart phone penetration, demographics, high per capita income, few entertainment alternatives, network reach and affordability all point towards further growth in the segment. The growth in data demand can be gauged from the increase in volume of data over the wireless broadband network to 750TB per day in 2012 from 163TB per day in According to ABI research, global mobile data service revenue is expected to grow to 40.0% of total revenue by 2014 while in North America, data revenue is expected to surpass voice revenue by These numbers reflect the change in user patterns and increase in usage of mobile apps and OTTs. We expect the trend in Saudi Arabia not to be very different compared to the developed world due to high mobile and smart phone penetration, high per capita income and extensive rollout of 3G and 4G network. Dividends set to grow Mobily offers good dividend growth. The company paid DPS of 3.77(adjusted for bonus shares) in We expect the company to pay DPS of SAR4.6 and SAR5.0 in 2013 and 2014 translating into a dividend yield of 5.6% and 6.1% respectively. Despite the high capex levels, Mobily is in a position to offer dividend growth due to healthy free cash flow generation. 1Q13 estimate We expect revenue to grow by 9.5%YoY in 1Q13 which is lower than the growth of 16.7%YoY experienced in 4Q12 and 11.7%YoY in 1Q12. The growth in previous periods was partially driven by growth in smart phone sales which we believe will remain stagnant going forward. Revenue will mainly be driven by increase in data services which is likely to reflect in improvement in EBITDA margin compared to the corresponding period last year. The QoQ decline is due to the Haj which fell in 4Q12. Haj season witnesses a spike in sales and profitability as pilgrims converge in Saudi Arabia for the annual pilgrimage. SAR mn 1Q12 4Q12 1Q13e QoQ YoY Revenue 5,009 6,772 5, % 9.5% EBITDA 1,811 2,541 2, % 10.6% Net Profit 1,207 1,878 1, % 16.3% EBITDA margin 36.2% 37.5% 36.5% - - Source: Global Research

2 Global Research Saudi Arabia Heavy investment in network to continue We expect Mobily Capex to be SAR5.01bn (20.0% of revenues) in 2013 and remain around 15.0% of revenue till 2016e as the company invests heavily in 4G and 3G network to sustain its leadership position in the mobile broadband segment. The company is also expanding its fiber optic network to reach 500,000 residential units by the end of 2013 for provision of fixed broadband and also plans to introduce IPTV in Over the next five years, the company plans to spend SAR22.0bn on 4GLTE, 3G and fixed broadband. Capex % Dividends % % 20.0% 15.0% % 6.0% 5.0% 4.0% e 2014e 2015e 2016e 10.0% 5.0% 0.0% e 2014e 2015e 2016e 3.0% 2.0% 1.0% 0.0% Capital expenditure (SR bn) Capex as % of revenue DPS (SR) Dividend yield Source:Company reports, Bloomberg & Global Research Mobily vying to become a full ICT player; B2B segment expected to grow strongly Mobily is focusing on becoming a full ICT service provider by focusing on the corporate segment. According to some estimates, the expected size of the corporate segment is expected to become SAR37.6bn by 2017 from SAR26.5bn in 2012 ( CAGR of 7.2%). The company will also focus on the I aspect of ICT i.e. information technology by offering services such as cloud computing, hosting services, managed services, data security services and business continuity and disaster recovery functions. The company has entered into partnership agreements with renowned companies such as IBM and Cisco to provide service delivery. According to the Mobily presentation, 15-25% of total revenue of developed countries comprise of B2B revenues while in Saudi Arabia it is currently between 10-12%. Thus, the corporate segment offers a huge opportunity for growth. Financial results 4Q12 Mobily continues with the string of positive surprises. 4Q12 net profit grew by 10.6%YoY and 24.2%QoQ to SAR1,878mn. Net profit was driven by strong growth in sales revenue by 16.7%YoY and 9.5%QoQ which in turn was driven by data revenue. Data revenue grew by 41.0%YoY (30.0% of the total revenue in 4Q12 compared to 28.0% in 4Q11). The company also cited growth in increase in sale of smart phones and business sector revenues. In addition, the number of roaming subscribers increased by 24.0% during the Haj season. Meanwhile EBITDA grew by 10.3%YoY and 15.5%QoQ to SAR2.54bn in 4Q12. However, EBITDA margin declined to 37.5% in 4Q12 compared to 39.7% in 4Q11 due to increase in sales of low-margin smart phones. Full year 2012 Sales revenue increased by 17.9% to SAR23.6bn in 2012 driven by increase in data revenues. Data revenue contributed 27.0% to total revenues in 2012 compared to 22.0% in 2011, implying a growth in data revenues of 44.7% in EBITDA grew by 15.2% to SAR8.59bn. However, EBITDA margin declined to 36.3% in 2012 compared to 37.2% in The decline in EBITDA has been due to higher sales of low-margin equipment which comprised an estimated 17.0% of total sales in Meanwhile, net profit increased by 18.4% in 2012 (Net margin stable at 25.5%) after increasing by 20.7% in Summary Financials SAR mn 4Q11 3Q12 4Q12 QoQ YoY Change % Revenue 5,802 6,183 6, % 16.7% 20,052 23, % EBITDA 2,305 2,200 2, % 10.3% 7,454 8, % Operating profit 1,754 1,569 1, % 8.4% 5,305 6, % Net Profit 1,697 1,511 1, % 10.6% 5,083 6, % EBITDA margin 39.7% 35.6% 37.5% % 36.3% - Source: Global Research March

3 Global Research Saudi Arabia Revision in estimates We have increased our revenue, EBITDA and net profit forecasts in light of the strong performance in We have also increased our Capex estimates. Mobily has invested heavily in enhancing its infrastructure and will continue to do so for the next few years. In the process, it is reaping the benefits offered by provision of data services in the Saudi market. We believe, Mobily will continue to leverage its leadership position in mobile broadband by investing in 4GLTE. With expansion of Zain Saudi network being restrained by debt servicing obligations, Mobily faces a relatively benign competitive environment compared to other GCC telco operators. In addition, it is also focusing on high potential business and enterprise segments. The company is also venturing into fixed broadband which is part of its plan to become a full ICT provider. SAR mn Earlier Estimates Revised estimates 2013e 2014e 2015e 2013e 2014e 2015e Revenue 23,959 24,822 25,318 25,508 27,243 28,569 EBITDA 8,669 8,914 9,112 9,319 9,921 10,375 Net profit 5,848 6,001 6,046 6,538 6,897 7,166 Capex 3,687 3,608 3,556 5,066 4,230 4,353 EBITDA margin 36.2% 35.9% 36.0% 36.5% 36.4% 36.3% Capex as % of sales 15.4% 14.5% 14.0% 19.9% 15.5% 15.2% Valuation Mobily stock price has increased 19.4%YTD and by 43.4% in Despite the rally, the stock still offers a potential upside of 11.3%. We have increased our fair value to SAR91.0 per share from SAR73.0 per share in light of the revised forecasts. Decline in equity risk premium, rollover to the next period and increase in terminal growth rate has also contributed to the increase in fair value. We have also upgraded our recommendation to BUY from HOLD. Mobily s 2013e P/E of 9.6x is at a discount of 26.0% compared to emerging and frontier markets telco operators 2013e P/E of 13.1x and at a discount of 5.0% compared to GCC Telco operators 2013 P/E of 10.1x (Based on Global Research coverage). We believe, Mobily deserves to trade at a premium to GCC telcos multiple in view of its growth prospects and strong management. The stock also offers an attractive 2013e dividend yield of 5.6% which is higher compared to average yield of 4.0% for Tadawul companies and higher than average yields of 5.2% for GCC telecom operators. We expect dividend payout to increase progressively during the forecasted period as the company enters the maturity stage and focus turns towards free cash flow generation. We expect dividend payout/fcff ratio to be between 70-80% during e. Key Risks to Valuation SAR mn Change 2013e 2014e 2015e Revenue 6.5% 9.8% 12.8% EBITDA 7.5% 11.3% 13.9% Net Profit 11.8% 14.9% 18.5% Source: Global Research Cannibalization of voice revenues Increase in data services is encroaching on voice revenues. Higher/lower than expected decline in voice revenues can have an effect on our valuation. Zain Saudi restructuring Zain Saudi has under-invested in its network in the past (Capex/revenue 8.7% in 2012 compared to 20.6% by Mobily) due to heavy debt servicing obligations. This has led to a relatively benign competitive environment for Mobily. However, postrestructuring any possible increase in competitive pressure by Zain Saudi poses a downside risk for our valuation. Impact of MVNOs Saudi Arabia plans to issue three MNVO licenses in The impact may not necessarily be negative for operators such as Mobily, which is focusing on high value customers, as mobile re-sellers tend to cater to the lower-end of the market. However, more than expected increase in competition by MNVOs and their extension into higher value segments pose a downside risk to our valuations. Regulatory changes; Possible restriction/ban on OTTs Regulatory changes can have an adverse or positive impact on our valuation. According to media reports, CITC has requested telecom companies to meet regulatory requirements in relation to services such as Whats Ap and Skype. Any possible restrictions or ban on these services can have a positive effect on our valuation. Venturing overseas Mobily does not have any plans to increase its foot print outside of Saudi Arabia due to the immense potential present in the Saudi Market. However, any such decision can have an adverse or positive impact on our valuation. March

4 Ratio Analysis Cash Flow Balance Sheet Income Statement Global Research Saudi Arabia Financial Statements (SAR mn) e 2014e 2015e 2016e Revenue 16,013 20,052 23,642 25,508 27,243 28,569 29,283 Revenue Growth 22.6% 25.2% 17.9% 7.9% 6.8% 4.9% 2.5% EBITDA 6,165 7,454 8,591 9,319 9,921 10,375 10,633 EBITDA growth 27.5% 20.9% 15.2% 8.5% 6.5% 4.6% 2.5% Depreciation and amortization 1,810 2,149 2,399 2,558 2,831 3,046 3,278 EBIT 4,355 5,305 6,192 6,760 7,090 7,329 7,355 Financial Charges Other revenues Profit Before Taxation 4,279 5,138 6,088 6,625 6,988 7,260 7,319 Taxation Net Profit 4,211 5,083 6,018 6,538 6,897 7,166 7,224 Net profit growth 39.7% 20.7% 18.4% 8.7% 5.5% 3.9% 0.8% Cash and Bank Balance 1,661 1,690 1,302 1,011 1,076 1,498 1,967 Receivables and Prepayments 5,736 6,323 5,904 6,478 6,757 6,970 7,031 Inventories Investments Due from related parties Other Assets 1,249 1,399 2,493 2,992 3,590 4,308 5,170 Net property plant and equipment 12,457 16,412 17,255 20,326 22,175 23,842 25,201 Goodwill 1,530 1,530 1,530 1,530 1,530 1,530 1,530 License acquisition fee 10,028 9,665 9,412 8,849 8,399 8,038 7,750 Total Assets 33,430 37,501 38,623 41,964 44,364 47,073 49,561 Trade & other payables 6,198 7,808 5,580 5,667 5,838 6,172 6,352 Short term loans 599 1, Other current liabilities 3,335 3,949 3,609 3,790 3,979 4,178 4,387 Long-term debt 5, ,506 7,268 6,251 5,282 4,358 Employee end-of-service benefits Share capital 7,000 7,000 7,000 7,700 7,700 7,700 7,700 Retained Earnings 7,510 9,810 11,726 14,069 16,426 18,833 21,100 Other reserves 1,070 1,578 2,180 2,134 2,823 3,540 4,262 Total Shareholders Equity 15,580 18,388 20,906 23,902 26,949 30,073 33,062 Total Equity & Liability 33,430 37,501 38,623 41,964 44,364 47,073 49,561 Cash Flow from Operating Activities 5,470 6,673 7,037 8,290 9,209 9,833 10,020 Cash Flow from Investing Activities (3,227) (3,408) (5,086) (5,066) (4,230) (4,353) (4,348) Cash Flow from Financing Activities (1,516) (3,237) (2,338) (3,515) (4,914) (5,057) (5,202) Change in Cash (387.5) (292) Net Cash at End 1,661 1,690 1,302 1,011 1,076 1,498 1,967 EBITDA Margin 38.5% 37.2% 36.3% 36.5% 36.4% 36.3% 36.3% Net Profit Margin 26.3% 25.4% 25.5% 25.6% 25.3% 25.1% 24.7% Return on Average Assets 13.1% 14.3% 15.8% 16.2% 16.0% 15.7% 15.0% Return on Average Equity 27.0% 27.6% 28.8% 27.4% 25.6% 23.8% 21.8% Net debt / EBITDA Interest coverage Debt / Equity (x) Capex as % of sales 20.5% 18.5% 20.6% 19.9% 15.5% 15.2% 14.8% EV/EBITDA (x) EV/Revenues (x) FCF Yield 5.1% 7.4% 3.5% 4.8% 7.5% 8.2% 8.4% Adjusted EPS (SAR) Adjusted Book Value Per Share (SAR) Adjusted Market Price (SAR) * Market Capitalization (SAR mn) 38,675 36,750 51,800 62,948 62,948 62,948 62,948 Dividend Yield 2.3% 6.2% 5.6% 5.6% 6.1% 6.4% 6.7% P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research * Market price for 2013 and subsequent years as per closing prices on March 30, 2013 March

5 Global Research Saudi Arabia Disclosure The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Recommendation Bloomberg Ticker Reuters Ticker Price Disclosure Etihad Etisalat Company BUY EEC AB 7020.SE SAR ,10 1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year, Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition STRONG BUY BUY HOLD SELL Fair value of the stock is >20% from the current market price Fair value of the stock is between +10% and +20% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is < -10% from the current market price Disclaimer This material was produced by Global Investment House KSCC ( Global ),a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities ( securities ), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgment. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice. Past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations. March

6 Global Investment House Website: Global Tower Sharq, Al-Shuhada Str. Tel. + (965) Fax. + (965) P.O. Box: Safat, Kuwait Research Faisal Hasan, CFA (965) fhasan@global.com.kw Brokerage Fouad Fahmi Darwish (965) fdarwish@global.com.kw Wealth Management Rasha Al-Qenaei (965) alqenaei@global.com.kw Global Kuwait Tel: (965) Fax: (965) P.O.Box Safat, Kuwait Global Egypt Tel: (202) /06 Fax: (202) Cleopatra St., Masr El Gedida, Cairo Global Bahrain Tel: (973) Fax: (973) P.O.Box 855 Manama, Bahrain Global Saudi Arabia Tel: (966) Fax: (966) P.O. Box Riyadh 11586, Kingdom of Saudi Arabia Global UAE Tel: (971) Fax: (971) P.O.Box Dubai, UAE Global Jordan Tel: (962) Fax: (962) P.O.Box 3268 Amman 11180, Jordan Global Wealth Manager contactus@global.com.kw Tel: (965)