Mobily high growth phase continues

Vol mn RSI10 Etihad Etisalat Company EEC AB: Saudi Arabia US$11.15bn 55.3% US$10.10mn Market cap Free float Avg. daily volume Target price 70.03 17.2% over current Consensus price 71.21 19.2% over current Current price 59.75 as at 1/2/2012 Underweight Neutral Overweight Key themes We expect mobile to continue to outperform fixedline telecom in Saudi Arabia over the next few years. Mobily has taken a clear lead in 3.5G mobile data, which is the fastest-growing segment of the market. While Mobily s strong focus on mobile is a clear positive, it is also making selective investments in fixed-line service. Implications Our preferred stock in the Saudi telecom sector is Mobily, which we rate as Overweight. Mobily is performing well operationally and offers strong grown in the near term at a reasonable valuation. Performance 61 56 51 46 41 70 30-10 6 4 2 Earnings Period End (SAR) 12/11A 12/12E 12/13E 12/14E Revenue (mn) 20,052 22,857 25,273 27,289 Revenue Growth 25.2% 14.0% 10.6% 8.0% EBITDA (mn) 7,454 8,275 8,826 9,278 EBITDA Growth 20.9% 11.0% 6.7% 5.1% EPS 7.26 8.12 8.42 8.97 EPS Growth 20.7% 11.9% 3.6% 6.5% Valuation 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Price Close MAV10 MAV50 Relative to SASEIDX (RHS) 02/11 05/11 08/11 11/11 EV/Sales (x) 01/09 01/10 01/11 01/12 114 112 109 107 104 102 99 97 94 92 89 Research Department Mazhar Khan, Equity Research Analyst 966 12119248, khanm@alrajhi-capital.com Mobily high growth phase continues Mobily again achieved impressive results for Q4 2011 featuring year-on-year sales growth of 30% and net profit growth of 16%, driven largely by Hajj season and increasing smartphone sales. Despite declining gross margin, operating profit grew by 20% supported by lower SG&A costs as a proportion of sales. Looking ahead, we expect net profit growth to moderate to 12% for 2012. We believe that strong top line growth, sound financials, and rising dividends (our estimate is SAR4.0 per share for 2012) will remain key drivers for the stock in 2012. We have revised our forecasts slightly but maintained our target price at SAR70, implying 17% upside from the current price. We remain Overweight. Revenues up by 30% year-on-year: The most important feature of Mobily s Q4 results was the year on year revenue growth of 30%, topping our estimate of 17%. The driving force behind this growth was increasing demand for mobile broadband service. Mobily ended 2011 with 8.5mn broadband accounts and data services now account for 22% of its revenues. Launch of iphone 4s in December coupled with Hajj season also boosted sales in Q4. Focus on postpaid customers and launch of new smartphones such as iphone 5 in 2012 should further support sales this year. We estimate revenues to reach SAR22.8bn, 14% increase over 2011. Pressure on gross margin to restrain: Continuous promotions and smartphone sales boosted Mobily s revenues but dented gross margin in the last couple of quarters. Gross margin was recorded at 53.2% in Q4; over 400 basis point decline from the same period last year. Though we expect margins to shrink further by about 100-150 bps, as we think the contraction will be less severe in 2012. This will bring the gross margin down to 50.4% in 2012. In our view, the major adverse impact on margins from the company s smartphone sales has already been felt in 2011. Nevertheless, declining gross margin is justified by the strong growth in top line which trickles down to boost profits. Financials remain solid: Net debt went down to SAR5.4bn, an impressive 15% decline since Q4 2010. As a result, Mobily ended 2011 with a net debt/ebitda ratio of 0.72x, versus 0.95x a year ago. With financials remaining healthy, Mobily can invest for growth as well as afford to distribute higher dividends in future. Increasing dividends key driver: Mobily had announced SAR3.25 per share dividends for 2011, above our estimate of SAR3.0. Thus, based on current share price, the dividend yield stands at a robust 5.4%. Mobily plans to disburse quarterly dividends from 2012 onwards, which will be another catalyst for the stock. Based on our discussion with Mobily, we expect SAR4.0 per share for 2012, implying an attractive 7% dividend yield. Valuation and conclusion: Q4 results were mostly in line with our view, which we had presented in our telecoms report (dated 4 th Dec 2011) that Mobily is well placed to achieve double digit growth for few more quarters. We have increased our overall forecasts, in line with the Q4 results but haven t changed our target price of SAR70. Mobily still trades at an attractive 2012 PE of 7.4x coupled with decent dividend yield of 5.4%. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform 1

Corporate summary Share information Valuation Etihad Etisalat (Mobily) is the secondplaced telecoms operator in Saudi Arabia, with a market value of US$11.15bn. Mobily has a market share of mobile accounts of about 40%, although its revenue share is lower at 30%. Mobily have at least 42% of mobile broadband subscriptions; this is the fastest-growing segment of the Saudi telecoms market. Mobily s presence in fixed-line service is very limited, but should expand due to selective acquisitions. Mobily is an affiliate of Emirates Telecoms Corp., which owns 27.5% of its shares. Market cap (SAR/US$) 41.83bn / 11.15bn 52-week range 43.00-59.75 Daily avg volume (US$) 10.10mn Shares outstanding 700.0mn Free float (est) 55.3% Performance: 1M 3M 12M Absolute 14.4% 16.6% 15.5% Relative to index 10.1% 8.3% 10.9% Major Shareholder: Emirates Telecoms Corp. 27.5% Gen. Organisation for Social Insce. 11.2% Source: Bloomberg, Al Rajhi Capital Period End 12/11A 12/12E 12/13E 12/14E Revenue (SARmn) 20,052 22,857 25,273 27,289 EBITDA (SARmn) 7,454 8,275 8,826 9,278 Net Profit (SARmn) 5,083 5,686 5,893 6,279 EPS (SAR) 7.26 8.12 8.42 8.97 DPS (SAR) 3.25 4.00 4.00 4.25 EPS Growth 20.7% 11.9% 3.6% 6.5% EV/EBITDA (x) 6.3 5.7 5.2 4.7 P/E (x) 8.2 7.4 7.1 6.7 P/B (x) 2.3 2.0 1.7 1.5 Dividend Yield 5.4% 6.7% 6.7% 7.1% Q4 2011: strong growth Mobily achieved strong growth in Q4; revenues increased by 30% y-o-y. While gross margin contracted by more than 400bps, EBITDA and operating profit showed strong growth of 18.3%and 20% respectively. Fall in margins seems to be offset by higher topline and bottom-line growth Figure 1 Mobily summary of Q4 & FY 2011 (SAR mn) 2010Q4A 2011Q4A % chg. y-y 2010A 2011A % chg. y-y Revenues 4,471 5,802 29.8% 16,013 20,052 25.2% Gross profit 2,573 3,085 19.9% 8,783 10,324 17.5% Gross margin 57.5% 53.2% (4.3)pp 54.9% 51.5% (3.4)pp EBITDA 1,948 2,305 18.3% 6,165 7,454 20.9% EBITDA margin (%) 43.6% 39.7% (3.9)pp 38.5% 37.2% (1.3)pp Operating profit 1,465 1,754 19.8% 4,355 5,305 21.8% Net profit 1,459 1,690 15.8% 4,211 5,083 20.7% Capex 1,104 650-41.1% 3,376 3,690 9.3% Capex/sales (%) 24.7% 11.2% (13.5pp) 21.1% 18.4% (3.7)pp Net debt 6,310 5,383-14.7% 5,383 4,848-9.9% Net debt/annualised EBITDA (x) 0.8 0.6 n/a 0.87 0.65 n/a Outlook: Q1 & FY 2012 Exciting offers and innovations key for the market One of the key reasons for Mobily strong performance in Saudi market is it success in launching new products ahead of its competitors and constantly engaged in network improvement. Offers such as bundling packages, various smartphone packages and the recent cloud server are all examples of innovative marketing. These offers seem to payoff considering revenues are noticeably growing while SG&A costs as a percentage of sales are falling. Competition might increase after the introduction of MVNO s in the market; but it is still early days to estimate it Competition to step up in 2012 CITC is considering awarding three fresh licenses for MVNO s (Mobile Virtual Network Operator) in the Kingdom. Introduction of new players in the market will definitely intensify the competition among operators. These players will share network from the existing operators which means less gestation period for the companies. This will further deepen the rivalry as the newer players will try to reduce tariffs in a bid to gain market share from incumbents whereas existing companies will benefit from network sharing fees which they will charge from these companies. We believe Mobily, being a reputed brand in the market, should be the least affected among the players. Disclosures Please refer to the important disclosures at the back of this report. 2

2012: growth momentum to continue As noted earlier, we believe exciting offers, strong focus on the domestic market coupled with increasing smartphones sales are the key triggers for Mobily in 2012. We expect net profit to grow 12% in 2012 supported by revenue growth of 14%. Likewise, we expect dividends to increase to SAR4.0 per share in 2012. We assume capex at around 14% of sales this year mainly on expanding 4G network to cover 85% of the Kingdom. Below we present our forecasts for Q1 2012 and full year 2012: We expect revenues to grow 16% y-o-y and net profit by 17% in Q1 2012 Figure 2 Mobily summary of Q1 & FY 2012 (our estimates) (SAR mn) 2011Q1A 2012Q1 ARC est. % chg. y-y 2011A 2012 ARC est. % chg. y-y Revenues 4,484 5,210 16.2% 20,052 22,857 14.0% Gross profit 2,289 2,600 13.6% 10,324 11,525 11.6% Gross margin 51.0% 49.9% (0.1)pp 51.5% 50.4% (1.1)pp EBITDA 1,577 1,860 17.9% 7,454 8,275 11.0% EBITDA margin (%) 35.2% 35.7% 0.5pp 37.2% 36.2% (1.0)pp Operating profit 1,054 1,238 17.5% 5,305 5,862 10.5% Net profit 998 1,168 17.0% 5,083 5,686 11.9% Capex 1,139 1,042-8.5% 3,690 4,218 14.3% Capex/sales (%) 25.4% 20.0% 5.4pp 18.4% 18.5% 1pp Net debt 7,238 5,662-21.8% 4,848 5,040 4.0% Net debt/annualised EBITDA (x) 1.1 0.8 n/a 0.65 0.61 n/a Disclosures Please refer to the important disclosures at the back of this report. 3

We estimates a revenue growth of 14% for 2012; powered by handset sales and broadband growth Income Statement (SARmn) 12/10A 12/11A 12/12E 12/13E 12/14E Revenue 16,013 20,052 22,857 25,273 27,289 Cost of Goods Sold (7,230) (9,728) (11,332) (12,570) (13,645) Gross Profit 8,783 10,324 11,525 12,703 13,645 Government Charges S.G. & A. Costs (2,619) (2,870) (3,249) (3,877) (4,366) Operating EBIT 4,355 5,305 5,862 6,062 6,440 Cash Operating Costs (9,849) (12,598) (14,582) (16,447) (18,011) EBITDA 6,165 7,454 8,275 8,826 9,278 Depreciation and Amortisation (1,810) (2,149) (2,414) (2,764) (2,839) Operating Profit 4,355 5,305 5,862 6,062 6,440 Net financing income/(costs) (146) (213) (172) (125) (76) Forex and Related Gains - - - - - Provisions - - - - - Other Income 70 46 92 76 76 Other Expenses - - - - - Net Profit Before Taxes 4,279 5,138 5,782 6,013 6,440 Taxes (67) (54) (96) (120) (161) Minority Interests - - - - - Net profit available to shareholders 4,211 5,083 5,686 5,893 6,279 Dividends (1,400) (2,275) (2,800) (2,800) (2,975) Transfer to Capital Reserve - - - - - We expect Mobily to pay a dividend of SAR4.0 this year and next year We expect gross margin to gradually fall in 2012 and beyond on account of increasing share of mobile sales carrying low margins Mobily s ROIC is well above its WACC Mobily trades on a PE of 7.4x and EV/EBITDA of 5.7x 12/10A 12/11A 12/12E 12/13E 12/14E Adjusted Shares Out (mn) 700.0 700.0 700.0 700.0 700.0 CFPS (SAR) 8.60 10.33 11.57 12.37 13.03 EPS (SAR) 6.02 7.26 8.12 8.42 8.97 DPS (SAR) 2.000 3.250 4.000 4.000 4.250 Growth 12/10A 12/11A 12/12E 12/13E 12/14E Revenue Growth 22.6% 25.2% 14.0% 10.6% 8.0% Gross Profit Growth 16.4% 17.5% 11.6% 10.2% 7.4% EBITDA Growth 27.5% 20.9% 11.0% 6.7% 5.1% Operating Profit Growth 35.8% 21.8% 10.5% 3.4% 6.2% Net Profit Growth 39.7% 20.7% 11.9% 3.6% 6.5% EPS Growth 39.7% 20.7% 11.9% 3.6% 6.5% Margins 12/10A 12/11A 12/12E 12/13E 12/14E Gross profit margin 54.9% 51.5% 50.4% 50.3% 50.0% EBITDA margin 38.5% 37.2% 36.2% 34.9% 34.0% Operating Margin 27.2% 26.5% 25.6% 24.0% 23.6% Pretax profit margin 26.7% 25.6% 25.3% 23.8% 23.6% Net profit margin 26.3% 25.4% 24.9% 23.3% 23.0% Other Ratios 12/10A 12/11A 12/12E 12/13E 12/14E ROCE 20.6% 27.4% 26.7% 24.2% 22.6% ROIC 22.2% 24.5% 24.2% 22.9% 22.6% ROE 30.3% 29.9% 28.9% 26.2% 24.4% Effective Tax Rate 1.6% 1.1% 1.7% 2.0% 2.5% Capex/Sales 21.1% 18.4% 18.5% 17.9% 17.5% Dividend Payout Ratio 33.2% 44.8% 49.2% 47.5% 47.4% Valuation Measures 12/10A 12/11A 12/12E 12/13E 12/14E P/E (x) 9.9 8.2 7.4 7.1 6.7 P/CF (x) 6.9 5.8 5.2 4.8 4.6 P/B (x) 2.7 2.3 2.0 1.7 1.5 EV/Sales (x) 3.0 2.4 2.1 1.8 1.6 EV/EBITDA (x) 7.7 6.3 5.7 5.2 4.7 EV/EBIT (x) 11.0 8.9 8.0 7.5 6.8 EV/IC (x) 2.2 2.0 1.8 1.6 1.5 Dividend Yield 3.3% 5.4% 6.7% 6.7% 7.1% Disclosures Please refer to the important disclosures at the back of this report. 4

We expect cash balance to cross SAR5bn by 2014 Net debt/ebitda is now below 1.0x; Mobily can invest for growth We are expecting Capex of SAR4.2bn for 2012 Balance Sheet (SARmn) 12/10A 12/11A 12/12E 12/13E 12/14E Cash and Cash Equivalents 1,661 1,690 2,063 3,390 5,030 Current Receivables 6,186 6,323 5,936 7,826 7,641 Inventories 297 470 569 567 655 Other current assets 1,721 1,411 1,411 1,411 1,411 Total Current Assets 9,415 9,893 9,978 13,193 14,737 Fixed Assets 12,457 16,412 18,764 21,080 23,564 Investments - - - - - Goodwill 1,530 1,530 1,530 1,530 1,530 Other Intangible Assets 10,028 9,665 9,118 8,571 8,024 Total Other Assets - - - - - Total Non-current Assets 24,015 27,607 29,412 31,181 33,118 Total Assets 33,430 37,501 39,391 44,374 47,855 Short Term Debt 2,442 6,096 6,096 6,096 6,096 Trade Payables 9,533 11,757 10,388 12,278 12,280 Dividends Payable - - 700 700 700 Other Current Liabilities 281 194 194 194 194 Total Current Liabilities 12,256 18,047 17,377 19,268 19,270 Long-Term Debt 5,529 977 1,000 1,000 1,000 Other LT Payables - - - - - Provisions 66 89 89 89 89 Total Non-current Liabilities 5,595 1,066 1,089 1,089 1,089 Minority interests - - - - - Paid-up share capital 7,000 7,000 7,000 7,000 7,000 Total Reserves 8,580 11,388 13,924 17,017 20,496 Total Shareholders' Equity 15,580 18,388 20,924 24,017 27,496 Total Equity 15,580 18,388 20,924 24,017 27,496 Total Liabilities & Shareholders' Equity 33,430 37,501 39,391 44,374 47,855 Ratios 12/10A 12/11A 12/12E 12/13E 12/14E Net Debt (SARmn) 5,860 5,383 5,033 3,706 2,065 Net Debt/EBITDA (x) 0.95 0.72 0.61 0.42 0.22 Net Debt to Equity 37.6% 29.3% 24.1% 15.4% 7.5% EBITDA Interest Cover (x) 42.1 34.9 48.1 70.5 122.6 BVPS (SAR) 22.26 26.27 29.89 34.31 39.28 Cashflow Statement (SARmn) 12/10A 12/11A 12/12E 12/13E 12/14E Net Income before Tax & Minority Interest 4,279 5,138 5,782 6,013 6,440 Depreciation & Amortisation 1,810 2,149 2,414 2,764 2,839 Decrease in Working Capital (727) (792) (1,081) 3 98 Other Operating Cashflow 109 179 (96) (120) (161) Cashflow from Operations 5,470 6,673 7,019 8,659 9,216 Capital Expenditure (3,376) (3,690) (4,218) (4,532) (4,776) New Investments 150 450 - - - Others - (168) - - - Cashflow from investing activities (3,227) (3,408) (4,218) (4,532) (4,776) Net Operating Cashflow 2,243 3,265 2,800 4,127 4,440 Dividends paid to ordinary shareholders (875) (2,275) (2,450) (2,800) (2,800) Proceeds from issue of shares - - - - - Effects of Exchange Rates on Cash - - - - - Other Financing Cashflow - - - - - Cashflow from financing activities (1,516) (3,237) (2,427) (2,800) (2,800) Total cash generated 728 28 374 1,327 1,640 Cash at beginning of period 933 1,661 1,690 2,063 3,390 Implied cash at end of year 1,661 1,690 2,063 3,390 5,030 Ratios 12/10A 12/11A 12/12E 12/13E 12/14E Capex/Sales 21.1% 18.4% 18.5% 17.9% 17.5% Disclosures Please refer to the important disclosures at the back of this report. 5

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