mobily Broadband under the Spotlight December 23, 2010 key data Fair Value per Share (SAR) 70.00 Closing Price (SAR) * 54.50 52-week High / Low (SAR) 56 / 43.10 YTD / 12-month Return 26.15% / 24.15% Trailing P/E 10.0 Market Cap (SAR Mn) 38,150 Shares Outstanding (Mn) 700 Free Float 61.40% Reuters / Bloomberg 7020.SE / EEC AB *As of December 22, 2010. Sources: Bloomberg, Zawya, and NBK Capital key metrics 2009A 2010F 2011F 2012F EPS (SAR) 4.31 5.55 6.35 6.78 EPS Growth 8% 29% 14% 7% P/E 12.7 9.8 8.6 8.0 Dividend Yield 2.3% 3.6% 4.7% 6.1% EV/ EBITDA 9.4 7.6 6.6 6.2 Revenue (SAR Millions) 13,058 15,634 17,725 18,647 Revenue Growth 21% 20% 13% 5% EBITDA (SAR Millions) 4,837 5,988 6,877 7,366 EBITDA Growth 27% 24% 15% 7% EBITDA Margin 37.0% 38.3% 38.8% 39.5% Sources: Company financial statements and NBK Capital quarterly forecasts (SAR Millions) 4Q2009A 3Q2010A 4Q2010F 1Q2011F Revenue 3,537 3,989 4,092 3,888 EBITDA 1,520 1,648 1,772 1,513 a=actual, f=forecast. Sources: Company financial statements and NBK Capital Rebased Performance 60 55 50 45 40 Highlights 12-Month Fair Value: SAR 70 Recommendation: Buy-Risk Level**: 4 Reason for Report: Adjusting 4Q2010/FY2010 Forecasts After six years of operation, and having reached a market share of 40%, Mobily is still proving to be a growing company. Revenue for 3Q2010 grew by 14% year-over-year (YoY) to SAR 3.99 billion, in line with our forecast. The increased revenue contribution from the broadband segment (known to have higher margins), lower interconnections costs on international calls, and lower direct costs associated with other services revenues increased EBITDA by 29% to SAR 1.65 billion, which was 12% above our forecast. Mobily was able to maintain its position in the market by grasping around 40% of the net additional subscribers during 9M2010. The total number of active mobile subscribers grew by 16% during 9M2010, pushing the penetration rate in the country to 149%. Since 4Q2010 includes the Hajj season (known to boost profitability) and with 3Q2010 results above our expectations, we have revised our previous forecast for Mobily upward. Accordingly, we increased our 4Q2010 EBITDA forecast to SAR 1.77 billion (from SAR 1.73 billion). We still believe that revenue and EBITDA will grow at a compound annual growth rate (CAGR) of 3% and 5% between 2011 and 2014, respectively. The board of directors announced on October 23, 2010, that starting in 2011 the company will distribute dividends semiannually. The company is currently trading at an expected 2010 dividend yield of 3.6% based on our forecast payout ratio of 35%. Due to the healthier outlook on Mobily s operation, we increased the 12-month fair value estimate for Mobily s share price from SAR 66 to SAR 70. Given that our fair value is 28% higher than the last closing price, our new recommendation for Mobily is Buy. 35 30 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Mobily Tadawul All Share Index (TASI) Sources: Reuters and NBK Capital Analysts Diala Hoteit T. +971 4365 2855 E. diala.hoteit@nbkcapital.com Alok Nawani T. +971 4365 2856 E.alok.nawani@nbkcapital.com ** Please refer to page 4 for recommendations and risk ratings. nbkcapital. com
Outlook With the highest number of mobile subscribers in the Middle East and North Africa (MENA) region, the mobile market in Saudi Arabia is still exhibiting double-digit growth. Until the end of September 2010, the total number of active mobile subscribers grew by 16% and reached around 42 million, stimulated mainly by Mobily and Zain-Saudi Arabia, which grasped together around 76% of the net additional subscribers. Going forward, we still believe that mobile subscribers will grow at a CAGR of 4% between 2011 and 2014. However, we increased Mobily s market share to 39% in 2014 (versus our previously expected 37.4%) due to the operator s better-thananticipated market share performance in 9M2010. During the first nine months of 2010, Mobily s blended average revenue per user (ARPU) decreased by 6% mainly due to the increased competition in the mobile market in Saudi Arabia. We maintain our same blended ARPU forecast, decreasing it from USD 18 in 9M2010 to USD 15 in 2014. Figure 1 Mobile Market in Saudi Arabia Key Metrics 2009a 9M2010a 2010f 2011f 2012f 2013f 2014f Total Subscribers ('000s) * 36,005 41,882 43,582 48,536 51,165 53,425 55,277 Growth 26% 16% 21% 11% 5% 4% 3% A competitive market Market Share: Mobily 39% 40% 40% 40% 40% 39% 39% Others 61% 60% 60% 60% 60% 61% 61% Mobily Blended ARPU (USD) * 19 18 18 17 16 16 15 *based on estimated active subscribers. Sources: Informa database and NBK Capital Accordingly, we revised our revenue forecast for 4Q2010 upwards to SAR 4.1 billion, bringing the FY2010 revenue estimate to SAR 15.6 billion. However, we did not change our long-term revenue forecast and kept it at a CAGR of 3% between 2011 and 2014. Since EBITDA improved at a faster pace than we expected due to increased revenue contribution from the broadband segment, which is known to have higher margins, in addition to lower interconnection costs on international calls and lower direct costs associated with other services revenues, we have revised our EBITDA forecast upwards. Going forward, we foresee EBITDA will grow at a CAGR of 5% between 2011 and 2014, which will translate into an EBITDA margin of 40.5% in 2014. Figure 2 New 4Q2010 and FY2010 Forecasts (SAR M illions) 4Q2010F FY2010F CAGR 2011-2014 Revenue 4,092 15,634 3% EBITDA 1,772 5,988 5% EBITDA Margin 43% 38% Sources: Company financial statements and NBK Capital The operator s 9M2010 capital expenditures (CAPEX) stood at SAR 2.5 billion (representing 22% of sales). During December 2010, Mobily awarded three contracts worth SAR 799 million to Ericsson, Huawei, and Nokia Siemens Networks for the capacity expansion of its mobile broadband network (as of 1H2010, broadband revenue contributed to 18% of the total revenue). Under the agreement, Mobily will be upgrading sections of its network from 3.5G to 3.75G technology. For FY2010, we are still expecting CAPEX to represent around 21% of sales. As for FY2011, we are expecting CAPEX to sales to be around 18% and then to settle at 11% in the coming years. nbkcapital. com 2
Financial Statements Balance Sheet (SAR Thousands) Historical Forecast Fiscal Year Ends December 2008 2009 2010 2011 2012 2013 2014 ASSETS Cash and Short-Term Investments 1,263,995 933,407 3,335,050 5,879,113 7,845,829 11,833,506 15,037,780 Total Receivables, Net 3,098,248 5,481,035 6,019,238 6,735,366 6,899,535 6,939,090 6,973,694 Total Inventory 107,563 132,396 175,887 199,402 205,121 207,315 206,394 Others 2,151,526 2,030,528 2,110,766 2,166,592 2,186,869 2,200,139 2,207,225 Total Current Assets 6,621,332 8,577,366 11,640,940 14,980,473 17,137,354 21,180,050 24,425,093 Property/Plant/Equipment, Total - Net 8,117,399 10,369,515 12,263,262 13,887,162 14,379,298 14,562,966 14,615,500 Goodwill, Net 1,529,886 1,529,886 1,529,886 1,529,886 1,529,886 1,529,886 1,529,886 Intangibles, Net 10,922,932 10,449,714 9,927,425 9,405,136 8,882,848 8,360,559 7,838,270 TOTAL ASSETS 27,191,549 30,926,481 35,361,514 39,802,657 41,929,386 45,633,460 48,408,748 LIABILITIES & EQUITY Accounts Payable 4,367,232 6,167,343 7,739,020 8,773,700 9,025,338 9,121,853 9,081,342 Accrued Expenses 2,565,005 2,939,377 3,283,221 3,722,176 3,915,952 4,003,321 4,079,319 Current Port. of LT Debt/Capital Leases 3,148,128 2,147,120 1,694,886 1,694,886 189,461 163,636 663,636 Other Current Liabilities 668,501 934,873 939,547 944,245 948,966 953,711 958,480 Total Current Liabilities 10,748,866 12,188,713 13,656,675 15,135,007 14,079,717 14,242,521 14,782,778 Long-Term Debt 6,642,086 6,448,069 6,407,831 6,285,672 6,499,876 7,555,869 7,774,051 Other Liabilities, Total 46,287 46,517 46,517 46,517 46,517 46,517 46,517 Total Liabilities 17,437,239 18,683,299 20,111,022 21,467,196 20,626,111 21,844,908 22,603,346 Total Equity 9,754,310 12,243,182 15,250,492 18,335,461 21,303,275 23,788,553 25,805,403 TOTAL LIABILITIES AND EQUITY 27,191,549 30,926,481 35,361,514 39,802,657 41,929,386 45,633,460 48,408,748 Income Statement (SAR Thousands) Historical Forecast Fiscal Year Ends December 2008 2009 2010 2011 2012 2013 2014 Total Revenue 10,794,566 13,058,256 15,634,384 17,724,647 18,647,392 19,063,433 19,425,331 Cost of Revenue 4,768,243 5,511,706 7,035,473 7,976,091 8,204,852 8,292,593 8,255,766 Gross Profit 6,026,323 7,546,550 8,598,911 9,748,556 10,442,539 10,770,840 11,169,565 Selling/General/Admin. Expenses 2,232,257 2,709,799 2,610,942 2,871,393 3,076,820 3,145,466 3,302,306 Depreciation/Amortization 1,298,859 1,628,867 1,833,590 2,088,825 2,267,840 2,435,598 2,606,541 Operating Income 2,495,207 3,207,884 4,154,379 4,788,338 5,097,880 5,189,775 5,260,718 Interest Income (Exp), Net Non-Operating (437,448) (204,305) (192,838) (253,870) (255,711) (281,115) (306,598) Other, Net 41,211 41,049 - - - - - Net Income before Taxes 2,098,970 3,044,628 3,961,540 4,534,468 4,842,169 4,908,660 4,954,119 Zakat 7,187 30,756 79,231 90,689 96,843 98,173 99,082 Net Income 2,091,783 3,013,872 3,882,310 4,443,778 4,745,325 4,810,487 4,855,037 Cash Flow (SAR Thousands) Fiscal Year Ends December 2008 2009 2010 2011 2012 2013 2014 Cash from Operating Activities 3,546,611 4,245,597 7,163,066 7,464,156 7,523,628 7,655,073 7,761,406 Cash from Investing Activities (5,571,688) (2,888,954) (3,205,049) (3,190,436) (2,237,687) (2,096,978) (2,136,786) Cash from Financing Activities 2,585,874 (1,687,231) (1,556,375) (1,729,656) (3,319,224) (1,570,419) (2,420,347) Net Change in Cash 560,797 (330,588) 2,401,643 2,544,063 1,966,716 3,987,677 3,204,273 Sources: Company s financial statements and NBK Capital Historical Forecast nbkcapital. com 3
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