TELEcOM SEcTOR IN SaUDI aRaBIa: caLLING FOR

Transcription

SAUDI telecom sector
Regulated by CMA - License no. 06017-37
equity
equity
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MOBILY
ZAIN
Kingdom of Saudi Arabia
STC
Current price
SAR 51.50
Current price
SAR 35.10
Current price
SAR 11.75
Fair price
SAR 63.95
Fair price
SAR 53.44
Fair price
SAR 11.69
Recommendation accumulate
table of contents
Global Industry Outlook
Global Telecom Sector
Performance
2
6
Telecom Sector
in Saudi Arabia
7
Companies in Perspective 12
Saudi Telecom Company
Company Overview
Investment Rationale
Financial Analysis
Pro Forma Financials
Valuation
Etihad Etisalat (Mobily) Company Overview
Financial Analysis
Valuation
Zain Saudi Arabia
Company Overview
Financial Analysis
Valuation
Appendix
18
19
21
24
26
28
30
31
32
35
37
39
41
42
43
45
46
47
48
Recommendation BUY
Recommendation HOLD
TELECOM SECTOR IN SAUDI ARABIA:
CALLING FOR GROWTH
RELATIVELY DEFENSIVE ON THE DOWNSIDE WHILE STILL ENJOYING A SHARE
IN THE UPSIDE
Telecoms have demonstrated less sensitivity to market risk relative to companies in other
sectors during market downturns and tend to benefit from the improved market sentiment
and fundamentals during recoveries. This is due to their superior dividend yields, solid balance
sheets, and high earnings visibility. Using the top-down approach, we have initiated coverage
on Saudi telecoms. The Kingdom’s strong fundamentals of a high growth population with 38%
of the inhabitants below the age of 15 and a broadband penetration rate under 5% are favorable
characteristics for telecom companies.
STC: FURTHER OVERSEAS EXPANSION AS DOMESTIC MARKET SHARE LESSENS
The company’s expansion plans in 2007 and onward have made its earnings less dependent on
domestic competition, but more susceptible to country and currency risk, especially from Turk
Telekom and South Africa’s Cell C. Foreign currency exposure has been improving against the dollar
in the second quarter of 2009.
MOBILY: THE GROWTH STORY
Mobily’s growth story is reflected in its price target of SAR 53.44. The company’s growth drivers are
its focus on broadband and quality services. Furthermore, the company’s Saudi-only operations,
sheltered from foreign currency risk, make this stock our favorite pick in the Saudi telecom sector.
ZAIN SAUDI ARABIA: START-UP WITH A STRONG NEED FOR FINANCING
We cannot deny that Zain KSA’s entry into the Saudi telecom sector has triggered profound changes. Its savvy advertising and aggressive promotions compelled other operators to follow suit by
offering discounted international rates. However, we believe that the company’s aggressive capital
expenditures to build its own network and its entrance at a time when the mobile penetration rate
is already above 100% will make it difficult for Zain’s free cash flow to reach the break-even point
within the next two years.
Stock Data
sector coverage
Louna Merhi
Equity Analyst
Louna.Merhi@asib.com
Youssef Nizam, CFA
Head of Equity Research
Youssef.Nizam@asib.com
FOOTNOTES
July 1, 2009
Mobily
Zain KSA
Market Cap (SAR)
103,000,000,000
24,570,000,000
16,450,000,000
Market Cap (USD)
27,470,203,000
6,552,843,570
4,387,231,450
Number of Shares
2,000,000,000
700,000,000
1,400,000,000
Free Float (est.)
16%
58%
45%
Average Monthly Liquidity (SAR)
1,450,551,178
841,375,717
4,618,287,862
52-week High (SAR)
70.00
42.24
24.75
52-week Low (SAR)
33.80
22.50
10.15
PE 09 E
9.26
9.44
NA
PB
2.75
2.53
1.50
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GLOBAL INDUSTRY OUTLOOK
It’s a brave new world for the global telecom industry, with the evolution of key success drivers in
the market. The relatively mature level of voice usage has compelled industry leaders to expand
their horizons and tackle new growth opportunities. The market has been moving towards exploiting data-driven services, a relatively new growth segment.
The diagram below illustrates the driving factors shaping the telecom industry today.
Figure 1: Factors Affecting the Telecom Industry
Customers
Want more speed,
value-added services
Regulations
Introducing new
competitors, lower prices
Competition
New players in the
market, substitutes
Technology
Evolving technology to
meet customer desires
MacroEconomics
Telecom
Industry
Slower GDP growth,
slower growth prospects
THE GLOBAL STORY OF TELECOM NOW
Despite the hardships anticipated for 2009, the industry may have reached a historical inflection
point, moving towards a data-based rather than a voice-based service future. Telecom industry
leaders are experiencing reduced revenue growth in mature and overcrowded markets, pressure
to lower prices, and slower subscriber growth. A change in the dynamics of the industry is being
witnessed. To stimulate growth, the global industry is relying increasingly on data services, convergence, overseas expansion, and consolidation.
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1 Broadband
Broadband expansion is accelerating due to cheaper services and improvements in infrastructure.
For example, Vodafone Group, one of the world’s leading mobile telecom companies, has derived
8.2% of its revenues from data services for the quarter ending March 31, 2009. The company is tapping into emerging markets that are i) underpenetrated in terms of users relative to population and
ii) still new in introducing internet services on mobile phones.
Chart 1: World Broadband Subscribers (millions)
400
CAGR = 31.4%
300
284
200
100
104
350
406
216
158
2008
2007
2006
2005
2004
2003
0
Source: International Telecommunication Union (ITU)
Chart 2: Vodafone Data Revenues (GBP millions)
7.4%
CAGR = 43.1%
3,000
2,000
3.8%
6.2%
4.6%
3,046
2.7%
1,000
727
2,186
1,109
1,438
Data Revenues
03/09
03/08
03/07
03/06
03/05
0
Percent of Total Revenues
Source: Bloomberg
1 Convergence
Telecom players are on the way to converging services through the bundling of video, voice, and
data or other services (offering triple play services). Bundling services, such as broadband and media
services with wireless voice services, will enable telecom providers to offer competitive rates. The
notion of convergence in the telecom industry has led to wireless players diversifying away from
mobile-only services. British Telecom, the oldest telecommunication company in the world, has recently started providing converged services. This was after the telecoms regulator recommended
the company to offer triple play services comprising of phone, broadband, and television services.
This deregulation will stimulate competition between telecom providers as they compete for more
attractive packages to offer customers.
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1 Foreign Expansion
Industry leaders are expanding their footprint in emerging markets with high growth potential
in order to boost revenue growth. For example, Telefonica Group is one of the leading integrated
telecom providers worldwide offering communications, information, and entertainment solutions
to over 252 million customers today. It has been extending its services overseas, mainly in Latin
America and Eastern European countries.
Chart 3: Revenue Contribution from Selected Regions for Telefonica Group
40%
37.0%
34.0%
35.0%
30%
24.0%
27.0%
26.0%
20%
10%
0%
Latin America
Source: Company Data
2008
Europe
2007
2006
1 Consolidation
The industry is heading towards consolidation, leaving two or three large telecom operators in each
country. This will lead to companies acquiring a larger market share and customer base, lower churn
rates, improved profitability, and greater efficiency. In December 2006, AT&T’s acquisition of Bell
South Company was approved. AT&T’s first quarter earnings for 2007 increased to USD 2.8 million
from USD 1.4 million year-on-year (Y-o-Y), a 100% increase. The company’s churn rate was reduced
by 18.75% compared to the previous year. In addition, the merger implied a fusion of wireless fixed
and satellite services that can be offered in a bundled package. In North America, the wireless industry in 2007 was characterized by acquisitions of smaller regional carriers by major carriers.
Table 1: Selected AT&T financials with the consolidation of Bell South Company
USD million
Net Income
Total Revenues
Operating Income
EBIT Margin (%)
Wireless Revenues
Q1 07
Q1 06
Percent change
2,848
2,229
27.77%
28,969
20,927
38.43%
4,664
3,437
35.70%
16.10%
16.42%
-1.97%
9,070
3,600
151.94%
Sources: Company Data, Forbes
FOOTNOTES
July 1, 2009
*We have adjusted the table above to show the synergies of the companies by consolidating their
financials in the first quarter of 2006 and in order for the figures to be comparable year-on-year.
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FROM SALAD BOWL TO MELTING POT
Mobiles will become
an infinite function utility
In the future, mobile phone capabilities will entail countless applications to support mobile banking, investing and payments, advertising, and medical care among other applications. Telecom
providers will continue to partner with application providers, reaching a point where mobiles will
become an infinite-function utility.
SAME INDUSTRY DRIVERS IN THE GCC, BUT AT THE BEGINNING OF THE STORY
Telecom in the Gulf region is on the threshold of a broadband boom, although it is currently still in
the stage of sector liberalization. Telecom Egypt is the sole fixed line provider in Egypt, and Qatar
Telecom is currently the only telecom operator in Qatar. But new operators are emerging. Vodafone
Qatar, the winner of the second mobile license, is expected to commence operations in 2009. Saudi
Arabia issued 3 new fixed line licenses and is studying the possibility of a fourth mobile license. Over
the next few years, the GCC markets will become crowded with players and growth margins will
deteriorate. GCC operators will be looking for the same growth opportunities that global telecom
leaders are exploiting today. Regional operators will follow the leaders’ strategies, which include
focusing more on data services, offering triple play services (which Saudi Telecom Company has
already done), consolidating with other providers (horizontal or vertical consolidation) to enhance
revenues and operating efficiency.
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GLOBAL TELECOM SECTOR PERFORMANCE:
NOT ENTIRELY BULLET PROOF
MYTH #1: Telecoms are outperforming the market
Despite the defensiveness of telecom, the sector is not entirely immune to market downturns. On
a year-to-date basis, the Dow Jones Index showed a 1.9% decline, while the Dow Jones Telecom
Index showed a 10.3% increase in value. On the other hand, the Bloomberg World Index increased
by 10.3%, whereas the Bloomberg World Telecom Index dropped by 0.9%.
Table 2: General Indices vs. Telecom Indices Performance
Relative Telecom Performance
Country
General Equity Indices
YTD
MTD
World
Bloomberg
World Index
10.3
0.3
USA
Dow Jones Index
-1.9
EMEA
MSCI Emerging
Markets Index
KSA
Tadawul Index
WTD Telecom Equity Indices
%
YTD
MTD
WTD
%
YTD
MTD
WTD
%
Bloomberg World
-2.2 Telecom Index
-0.9
0.5
-1.6
-11.2
0.2
0.7
1.3
-2.1 Dow Jones Telecom Index
10.3
1.9
-1.7
12.2
0.6
0.4
27.8
-1.5
-2.8 MSCI EMEA Telecom Index
19.1
1.7
-0.6
-8.7
3.2
2.2
26.2
2.9
14.2
1.3
1.7
-12.0
-1.6
-0.3
2.0 Tadawul Telecom Index
Source: Bloomberg¹
MYTH #2: Dividend yields in the telecom sector are not as high as in other sectors
In the United States, the 12-month dividend yield (weighted according to market capitalization) of
the Dow Jones Index and the Dow Jones Telecom Index was 3.4% and 3.9%, respectively. In general,
telecom indices show a higher dividend yield than general indices.
Table 3: Dividend yield of General Indices vs. Telecom Indices
Country
General Equity Indices
World
Bloomberg World Index
3.1 Bloomberg World Telecom Index
4.4
USA
Dow Jones Index
3.4 Dow Jones Telecom Index
3.9
KSA
Tadawul Index
3.3 Tadawul Telecom Index
3.6
Dividend Yield (%) Telecom Equity Indices
Dividend Yield (%)
Source: Bloomberg2
MYTH #3: Telecom companies have higher debt positions and lower liquidity
positions than companies in other sectors
As of June 16, 2009, the top 20 companies (by market capitalization) in the Bloomberg World Telecom Index had a value-weighted debt-to-EBITDA ratio of 1.3, while the top 20 in the Bloomberg
World Index had a debt-to-EBITDA ratio of 2.2. Telecoms showed a net debt-to-EBITDA ratio of 0.58
compared to 1.0 for the Bloomberg World Index, reflecting a lower degree of financial leverage.
To sum up why we like telecoms
The telecom sector presents an attractive investment opportunity due to its relatively defensive
nature, solid dividends, strong balance sheets, and earnings visibility.
¹Performance as of June 16, 2009, 4:38 PM
FOOTNOTES
July 1, 2009
2Figures as of June 16, 2009, 4:38 PM
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TELECOM SECTOR IN SAUDI ARABIA
From the peak of the global financial crisis in August 31, 2008 till June 16, 2009 the performance of
the Saudi telecom index was better than other key sectors in Saudi Arabia, such as banking, petrochemicals, and building and construction. Moreover, the Telecom Index performed above average
relative to the 31% decline of the Tadawul All-Share Index. Among the telecom sector, Mobily was
the outperformer with a drop of only 4%.
Table 4: Performance of Sectors and Benchmark in Saudi Arabia
Performance as of
31/08/08 till 16/06/09
31/08/07 till 16/06/09
0%
-15%
-24%
Tadawul Hotel Index
Tadawul Retail Index
-6%
Tadawul Energy Index
-10%
-14%
Tadawul Agriculture Index
-14%
-19%
Tadawul Media Index
-16%
-47%
Tadawul Transportation Index
-18%
-14%
Tadawul Insurance Index
-20%
-58%
Tadawul Telecom Index
-20%
-36%
-30%
Tadawul Real Estate Index
-26%
Tadawul Industrial Index
-27%
-18%
Tadawul Banking Index
-28%
-26%
Tadawul Cement Index
-29%
-33%
Tadawul Petrochemical Index
-42%
-21%
Tadawul Building Index
-46%
-24%
Tadawul All Share Index
-31%
-26%
Source: Bloomberg
Table 5: Performance of Telecom Companies in Saudi Arabia
Performance as of
Mobily
Zain Saudi Arabia
31/08/08 till 16/06/09
-4%
-15%
-44%
31/08/07 till 16/06/09
-37%
-24%
-38%
Source: Bloomberg¹
SAY GOODBYE TO SOLOS
Saudi Telecom Company (STC) was the only mobile operator in 2004. At the time, the mobile penetration rate was 40% and there were only 9.2 million subscribers. The monopoly was broken with
the entry of Etihad Etisalat (Mobily) in 2005. The liberalization of the Saudi Arabian mobile market
caused the penetration rate to soar to 109% in 2007, implying a 6-year CAGR of 50% for subscriber
growth. In the second half of 2008, Zain, a third mobile rival, entered the local market. The impact
of Zain’s entry still remains uncertain in terms of how much of the company’s growth will be due to
new subscribers and how much will be from capturing existing subscribers.
FOOTNOTES
July 1, 2009
¹Zain Saudi Arabia’s performance is from the date of its IPO (March 23, 2008) instead of August 31, 2007.
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Similarly, fixed line operations in Saudi Arabia will be transformed from solo to multi-player and STC
will face competition in the fixed line segment as well. The Communication and Information Technology Commissions (CITC) has issued 3 new fixed licenses. Competition will stimulate demand for
this relatively underpenetrated market.
The liberalization of the telecom sector in Saudi Arabia has led to key changes, such as breaking
the 100% mobile penetration mark, de-monopolizing the fixed line segment by approving 3 new
fixed line licenses, and the launching of aggressively competitive promotions launched by all three
mobile players.
SAUDI TELECOM SECTOR OUTLOOK
The industry is currently in the phase of expansion with new players entering the market. Licenses
in Saudi Arabia are still being issued and a study for a fourth mobile license is ongoing according to
a statement by Dr. Abdulrahman Al-Jafary, the governor of CITC, in February 2009.
The global industry outlook leads us to derive a potential outlook for the Saudi sector. The global
trend towards consolidation of fixed and wireless providers allows fixed providers to guard their
subscriber bases due to the fixed-to-mobile substitution trend. Also, the offering of triple play services to customers through the convergence of mobile and fixed telecom operators is likely in the
future. We expect Etihad Etisalat and Zain Saudi Arabia to acquire, converge, or to merge with one
of the three coming fixed line operators over the long term.
We estimate that data revenues in Saudi Arabia will show a 4-year CAGR of 15% by 2012. We expect
that when prices are lowered, demand for broadband will rise, and so will its revenue contribution.
(STC) is incorporated.
Communication &
Information Technology
Commission (CITC) is
established.
IPO of STC (20%).
Liberalization of data and
mobile services. Etisalat
wins second mobile
license. IPO of Mobily.
Mobily launches services.
3G services launched.
Zain KSA launches services.
IPO of Atheeb Telecom, the
second fixed line company
Liberalization of fixed
services. Issuance of 3 fixed
line licenses. MTC Zain wins
third mobile license.
Figure 2: Overview of the Saudi Telecom Sector
1998
2001
2002
2004
2005
2006
2007
2008
2009E
Total mobile
subscribers
(millions):
2.5
5
9.2
14.1
19.7
28.4
34.0
38.0
Mobile
Penetration:
12%
23%
40%
61%
82%
109%
128%
139%
6%
16%
36%
100%
2005
STC
56%
64%
84%
2001
38%
2008
2007
Mobily
Zain
Sources: CITC, Companies Data, Audi Saudi Arabia Estimates
July 1, 2009
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phics
kdown
DOUBLE S (SOLID AND STABLE) MACROECONOMIC INDICATORS
2007
38.20%
59.40%
2.40%
100.00%
Saudi Arabia has a relatively robust economy which can support sustained growth in demand for
mobile services. According to the IMF, the Kingdom’s population is expected to grow at a steady rate
of 2.5% annually in the coming years. Also, the country’s demographics are favorable. 38% of the
population is below the age of 15, allowing for a higher expected addressable market in the future.
Chart 4: Age structure of the Saudi population
2%
38%
60%
0-14
15-64
65+
Source: Saudi Arabian Monetary Agency (SAMA)
In 2008, Saudi Arabia’s real GDP growth was higher than the average global GDP growth. Saudi Arabia’s real GDP growth was 4.6% in 2008 and is projected at 2.9% in 2010, while global growth was
estimated at 3.2% and 1.9% for 2008 and 2010, respectively. Despite a reduction in IMF estimates,
GDP growth in KSA is expected to continue to exceed global GDP growth. It is worth to note that
Saudi Arabia’s nominal GDP per capita was USD 19,345 (SAR 72,448) for 2008.
Chart 5: Real GDP Growth
8%
6%
4%
2%
0%
KSA GDP
2012E
2011E
2010E
2009E
2008E
2007
2006
2005
2004
2003
2002
-2%
World GDP
Source: International Monetary Fund (IMF)
In 2007, expatriates accounted for 4.9 million out of a total population of 24.3 million, a 20.16%
share. It is expected that the number of expatriates will continue to rise due to labor needed to
work on six new planned economic cities in the Kingdom and Saudi Arabia’s announcement of an
expansionary budget of SAR 475 billion for 2009.
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BROADBAND TO EXPERIENCE EXPONENTIAL GROWTH
The broadband penetration rate of 4.1% in Saudi Arabia in 2008 is quite low relative to other countries. A barrier to the spread of broadband usage is high prices. However, when prices will fall due
to greater competition, penetration rates will rise exponentially, leading to improved broadband
revenues for all providers. With the issuance of 3 new fixed licenses in Saudi Arabia, broadband usage should witness double digit growth.
We believe that with 3 additional providers of broadband coming to the country, the penetration
rate will easily reach 20% and possibly even more. As to when this will happen, this will depend on
when the new fixed line providers will launch their IPOs. Atheeb Telecom already went through with
its IPO and has started commercial operations in June. In the context of current market conditions,
we expect the other 2 fixed providers to delay their offering. In order to capture broadband growth,
the companies should lower prices in order to gain large subscriber additions before new entrants
arrive.
All countries in the GCC are relatively underpenetrated with Bahrain and Qatar having the highest
broadband penetration rates of 12.14% and 12.08% as of the end of 2008, respectively.
Chart 6: Broadband Penetration Rates (2008)
30%
20%
10%
UK
Germany
Hong Kong
Estonia
Singapore
Italy
Portugal
Greece
Bahrain
Qatar
UAE
Bulgaria
Argentina
Turkey
KSA
Russia
Oman
Egypt
Kuwait
0%
Source: ITU
Chart 7: World Broadband Subscribers (millions)
1000
538
750
104
158
216
2005
66
354
2004
329
2003
250
286
2002
500
377
520
409
284
350
406
Broadband Subscribers
2008
2007
2006
0
Internet Subscribers
Source: ITU
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THE MARKET SHARE SPLIT
The pie gets bigger in absolute terms but the size of each slice remains to be
determined
We expect subscriber numbers to grow by a 3-year CAGR of 7.0% to reach 46.5 million by 2012. This
growth is stimulated by a youthful population, high population growth, a larger addressable market
due to higher penetration rates, stronger competition that will lower prices and thereby stimulate
subscriber growth, and an increased demand for data services.
As the number of slices increase, the pie will get even bigger
As the number of players increases, competition between them will fuel growth. Competition will
cause players to create more attractive packages and promotions for their customers. This can be
achieved through decreasing tariffs or providing value-added services. If prices decrease, and we
expect they will, a new lower-income customer segment will come into the addressable market. The
burden will be on the operators as their ARPUs decrease from lower pricing on voice services and
value-added services.
The question is not whose slice is bigger but who will be able to maintain or grab a bigger slice than their existing one
Whether or not Saudi Telecom will continue to have the biggest mobile market share is irrelevant
to its capability to generate higher organic revenue growth. The company’s mobile market share is
expected to stay dominant, but to drop to 50% by 2012.
We believe that Mobily will demonstrate its resilience by preserving its market share. It will have
more subscribers and higher revenue with the expansion of the addressable market.
Even with Zain Saudi Arabia accessing the market and adding the most in subscriber market share,
we believe it is still not enough for it to breakeven by 2012, due to the high costs of license amortization, rising depreciation from aggressive capital expenditures, management fees, and royalty fees
expensed yearly.
Chart 8: Market Share 2008
Market Share 2008
Market Share 2012E
6%
15%
38%
35%
CAGR = 7%
56%
50%
Mobily
STC
Zain KSA
Sources: CITC, Audi Saudi Arabia Estimates
July 1, 2009
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Chart 9: Mobile Revenues
21
18
46
47
2012E
11
34
30
44
2011E
10
8
2002
20
25
41
2010E
CAGR = 27.3%
30
2001
SAR billion
40
37
2009E
CAGR = 6.3%
50
2008E
2007
2006
2005
2004
2003
0
Chart 10: Forecasted Saudi Active Mobile Subscribers (millions)
50
40
30
20
10
0
3.4
4.5
5.7
7.0
20.1
21.5
22.4
23.3
14.4
15.3
15.8
16.3
2009E
2010E
2011E
2012E
Mobily
STC
Zain KSA
COMPANIES IN PERSPECTIVE
TRANSPARENCY ISSUES NEED TO BE ADDRESSED
Transparency in the Saudi telecom sector is below industry norms. Penetration rates are not disclosed in financial statements by operators. The CITC (Communications and Information Technology
Commissions) has indicated a mobile penetration rate of 116% for 2007. We believe that the 2007
penetration rate has surpassed the 100% mark, but is lower than 116% due to an overstated subscriber count from the operators. Our estimates indicate a 128% mobile penetration rate for Saudi
Arabia in 2008.
In order to calculate actual penetration rates, the active subscriber count must be used. CITC declared
that all three operators report subscribers active within the last three months, not clarifying whether
‘active’ subscribers include those that only receive incoming calls. Saudi Telecom announced 19 million active subscribers for 2008. Mobily has recorded a total subscriber base, including inactive subscribers, of 14.8 million customers. Zain Saudi Arabia has announced 2 million active subscribers for
the year 2008.
Despite penetration rates being overstated, we believe that the Saudi market is highly penetrated
and has potential for further expansion. The Saudi penetration rate is slightly below average and the
Kingdom remains underpenetrated relative to its GCC peers and other comparable countries.
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Chart 11: GDP per Capita versus Mobile Penetration Rate (2008)
100,000
200%
USD
80,000
150%
60,000
100%
40,000
50%
20,000
0%
Egypt
Bulgaria
Argentina
Turkey
Russia
Estonia
Oman
KSA
Portugal
Bahrain
Hong Kong
Greece
Singapore
Italy
UK
Germany
Kuwait
UAE
Qatar
0
GDP per Capita
Penetration Rate
Sources: IMF, ITU, Audi Saudi Arabia estimates
Moreover, discrepancies arise concerning the calculation of ARPU (average revenue per user). ARPUs are not stated in the companies’ financial statements, nor is there a clear standard for calculating ARPU. There are no agreed-upon international standards for calculating ARPU. However, stating
ARPUs in financial statements is a recommended international standard.
20
30
31
32
Bahrain
30
Saudi
Arabia
40
10
55
55
44
Oman
USD
50
Qatar
60
Kuwait
Chart 12: Selected Country Mobile ARPUs (2008)
17
8
UAE
Jordan
Egypt
0
Sources: Regulators, Audi Saudi Arabia estimates
LICENSE FEES, ROYALTY FEES AND MANAGEMENT FEES
CONSTITUTE THE BULK OF EXPENSES
Mobily paid USD 3.45 billion for a 25-year license, while Zain KSA bought the third mobile license
for USD 6.1 billion. The Saudi government imposes a royalty fee on all telecom companies. There
are talks about reducing royalty fees, but no decision has been taken yet. The impact of reducing
royalty fees would be particularly high for Mobily and Zain Saudi Arabia since the entirety of their
revenues are subject to royalty fees, unlike STC’s revenues which are diversified due to overseas expansion. We estimate that 79% of STC’s total revenues are from local operations and will be subject
to Saudi royalty fees in 2008. In addition to royalty fees, the subsidiaries of Zain and Etisalat also pay
management fees.
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Table 6: Saudi Arabia Royalty Fees and Parent Company Management Fees
Fee Type
Comments
Mobile Royalty
15% of mobile revenue in year 1, 10% in year 2, and 5% in year 3,
plus 1% of revenue for operating license
Fixed
10% of fixed voice revenue, plus 1% of revenue for operating license
Management
For Mobily: SAR 37.5 million (USD 10 million) per year
For Zain KSA: 4% of revenues for year 1 and 2, dropping to 2% in year 5
plus 0.7% of annual revenues for brand royalties to Zain Group
Source: Communication and Information Technology Commissions (CITC)
HAJJ EFFECT ON PROFITABILITY
It is estimated that around 3 million subscribers visit Saudi Arabia during the Hajj pilgrimage¹ season, which is reflected in the seasonality of Mobily’s fourth quarter earnings. Mobily recorded its
highest quarterly earnings during the fourth quarter, and we suppose this seasonal peak to stem
mainly from the increase in visitor roaming revenues. STC revenues do not exhibit such seasonality.
In fact, over the last 3 years, fourth quarter earnings have been worse than the previous 2 quarters.
Chart 13: Mobily Quarterly Earnings (SAR millions) Chart 14: STC Quarterly Earnings
(SAR billions)
4
778
800
700
539
514
500
480
448
400
330
300
3.06 3.03
3.01
2.72
2.49
2.5
1.5
1.16
1
116
0.5
37
Source: Bloomberg
Mar-09
Sep-08
Dec-08
Jun-08
Mar-08
Dec-07
Jun-07
Sep-07
Mar-07
Dec-06
Sep-06
Jun-06
Mar-09
Dec-08
Jun-08
Sep-08
Mar-08
Dec-07
Jun-07
Sep-07
Mar-07
Dec-06
Jun-06
0
Sep-06
Mar-06
3.10 3.14
2.79
2
326
304 311
251
217
200
0
3.20
3
600
100
3.84
3.5 3.41 3.40
Source: Bloomberg
TO OWN OR NOT TO OWN INFRASTRUCTURE
In its first two years of operation, Mobily leased transmission capacity from STC’s backbone networks. In the meantime, Mobily has completed building its own capacity infrastructure to support
itself. Zain, being new to the market, is leasing transmission capacity from both Mobily and STC. This
will generate an additional stream of revenue for Mobily and STC depending on Zain’s usage capacity. We have not included this revenue stream in our financials for Mobily and STC since it is early to
quantify its significance. We expect that Zain will build its own infrastructure in the future when its
usage capacity rises to a point where it would be cheaper to build than rent.
FOOTNOTES
July 1, 2009
¹ Hajj pilgrimage is an obligation that must be carried out at least once in the lifetime of every
Muslim who can afford to do so.
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telecom
PROMOTIONS BY OPERATORS
Competition in the Saudi telecom industry has been escalating with the entry of a third mobile
player. At high penetration rates, players are pursuing lower pricing strategies to retain customers
and attract new ones. The mobile number portability feature allows subscribers to switch operators
without losing their original mobile number. Therefore, with low switching costs, customers have a
higher bargaining power and more flexibility in choosing a telecom operator that is most appealing
to them in terms of pricing. This signifies a highly competitive landscape for the telecom industry.
After Zain’s launching of two aggressive pricing promotions, the remaining two operators offered
attractive promotions for its customers in order to be on the same level of competition.
Figure 3: The commencement of mobile promotions in Saudi Arabia
Aug 2008
Zain introduced the 'One Network' coverage
Aug 2008
Zain introduced 'one month on you, one month on us'
Oct 2008
Mobily introduced an international roaming agreement with 56 countries
Nov 2008
STC launched a roaming alliance with 158 countries
Sources: Companies’ data
In August 2008, Zain launched two promotions called the “One Network” and the “One month on
you, one month on us” package. The “One Network” coverage allows businessmen traveling within the Middle Eastern and African region to talk at discounted rates. The “One month on you, one
month on us” is a lifetime promotion whereby subscribers pay their phone bills every other month.
In October, Mobily offered discounted international rates in 56 countries and STC followed suit in
November.
CAPITAL STRUCTURE
Saudi Telecom was debt-free until 2007, when it began expanding overseas. The debt-to-capital
ratio of 43% is still at a conservative level and we expect leverage to decline to 39% for 2009. We
believe its net debt-to-EBITDA ratio will be reduced to less than 1.1 in 2009.
Mobily has improved its capital structure from 69% of leverage in 2005 to 50% in 2008. We expect
Mobily to obtain financing in the second half of 2009 for upgrading and maintaining its network. Its
net debt-to-EBITDA ratio should be below 2.0 for 2009.
Zain KSA reported debt of SAR 11.9 billion for the year ended 2008. It has a debt-to-equity capital
target structure of 50-50. We believe Zain will need substantial financing for the coming years and
will increase its leverage from 50% to over 60% in 2009.
STC has the most conservative capital structure. Although Zain was leveraged at about the same
percentage as Mobily at the end of 2008, we expect it to obtain additional debt financing to implement its own infrastructure. Its other option for financing would be to seek a rights issue, making its
debt-to-total-capital ratio more attractive. Zain’s relatively high leverage position is to be expected
for a start-up telecom company. We believe an optimal debt-to-equity ratio to be 50-50.
July 1, 2009
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telecom
Chart 15: Leverage Position of STC (SAR billions)
35
30
25
20
15
10
5
0
42.9%
39.3%
27.4%
0%
0%
13.58
31.99
30.18
2005
2006
2007
2008
2009E
Debt
Debt/Total Capital
Sources: Company financials, Audi Saudi Arabia Estimates
Chart 16: Leverage Position of Mobily (SAR billions)
14
12
10
8
6
4
2
0
69.3%
67.6%
60.1%
50.1%
51.6%
8.95
9.44
8.92
9.79
12.41
2005
2006
2007
2008
2009E
Debt
Debt/Total Capital
Chart 17: Leverage Position of Zain (SAR billions)
20
16
64.3%
59.7%
50.3%
12
8
4
11.86
15.24
16.61
0
2008
2009E
2010E
Debt
July 1, 2009
Debt/Total Capital
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telecom
Chart 18: Net Debt to EBITDA
6
4.4
2.2
2.8
1.9
-0.2
0.4
1.0
0.9
2010E
1.2
0
1.4
2009E
3
2008
2007
2006
-3
STC
Mobily
July 1, 2009
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STC
Current price
Fair price
SAR 51.50
SAR 63.95
RecommendatioN ACCUMULATE
SAUDI TELECOM COMPANY –
REINVENTING ITS CORPORATE IDENTITY
WE INITIATE AN ACCUMULATE RECOMMENDATION WITH A TARGET PRICE OF SAR 63.95
Currency fluctuations from subsidiaries in Turkey and South Africa have been improving in the second quarter of 2009. A significant portion of STC’s income is exposed to FX risk, as 21% of its revenues come from overseas subsidiaries. With foreign currencies picking up, we advise an Accumulate
recommendation on STC with a target price of SAR 63.95, and a 24.17% upside potential.
OFFERING ONE OF THE HIGHEST DIVIDEND YIELDS IN THE REGION
STC currently offers a dividend yield of 7.28%. The distribution of quarterly dividends to investors is
characteristic of the company. Although dividends have been cut to SAR 0.75 for the last two quarters, they still remain relatively high. Its dividend yield makes this stock attractive to investors.
ONLY INTEGRATED OPERATOR
Saudi Telecom is the only integrated operator in Saudi Arabia to offer triple play services. It will be
able to offer better pricing on land lines in the future.
DOMESTIC GROWTH TO SLOW WITH NEW COMPETITION IN MOBILE AND FIXED SEGMENTS
With the introduction of competition in the fixed line business in Saudi Arabia and increased competition in the mobile market, STC’s profitability will be impaired in both business segments. For
Saudi fixed line operations, we expect a 4-year CAGR of 3% for revenues by 2013. We estimate revenues from mobile operations to grow by a 4-year CAGR of 1% by 2013.
INTERNATIONAL EXPANSION: GOOD OR BAD?
It is uncertain whether STC’s overseas acquisitions have realized significant returns. In our opinion,
STC’s expansion in overcrowded markets such as India may not yield significant returns. While expansion has bolstered the company’s revenues, it may take 3 years to realize bottom-line profits
from overseas expansions which require significant capital expenditures. Entering mature markets
and pumping capital into these expansionary ventures could have a double loss effect since a saturated market will not provide substantial returns and capital expenditures will add to losses in a
mature market.
Stock Data
Market Cap (SAR)
103,000,000,000
Market Cap (USD)
27,470,203,000
Free Float
16.00%
Av. Monthly Liquidity (SAR)
1,450,551,178
52-week High (SAR)
70.00
52-week Low (SAR)
33.80
PB
2.75
Trailing PE
9.81
PE 09 (E)
9.26
(SAR million)
70
50
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
30
2008
2009 E
2010 E
2011 E
2012 E
2013 E
11,038
11,118
11,897
12,104
12,234
13,433
EPS (SAR)
5.52
5.56
5.95
6.05
6.12
6.72
DPS (SAR)
3.75
3.75
4.00
4.50
5.00
5.50
Net Income
July 1, 2009
90
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STC
COMPANY OVERVIEW
PROFILE
Saudi Telecom (STC) was established as a KSA joint stock company on April 2, 1998. It is listed on
the Tadawul Stock Exchange. STC provides a range of telecommunication services including mobile,
fixed line local and international telecom services.
Incumbent operator witnesses
market share decline
STC was the only operator in Saudi Arabia until the monopoly was broken by mobile operator Etihad
Etisalat in 2005. In 2008, STC still dominated the subscriber market with a share of 56%. Nevertheless, it has witnessed a decline in market share due to greater competition with the entrance of
Zain Saudi Arabia. With three new fixed licenses released, STC will face competition in its fixed line
services for the first time.
Expansion projects started in 2007
In September 2007, the company began expanding on an international scale by acquiring 25% of
Malaysian-based Maxis Group. Maxis Group manages mobile operations in Malaysia, India, and Indonesia. STC also has a 35% stake in Oger Telecom. By 2008, it had acquired 26% of Kuwait TelecoCompany, a new mobile operator in Kuwait. In January 2009, the company acquired Bahrain’s third
mobile license for USD 230 million.
Figure 4: Saudi Telecom Company’s International Operations
Saudi Telecom Co.
51%
25%
NTS (Indonesia)
26%
Binariang
35%
KTC (Kuwait)
55%
Turk
Telekom
Maxis
100%
75%
Cell C
(S. Africa)
95%
Cyberia
81%
74%
Maxis
(Malaysia)
STC Bahrain
Oger Telecom
100%
44%
25%
Aircel
(India)
Avea
(Turkey)
Source: Company data
Chart 19: STC Ownership Structure
KSA Public Investment Fund
70%
KSA Public Pension Fund
7%
7%
16%
General Organization
for Social Insurance
Free Float
Source: Tadawul
The Saudi Telecom Company is mostly a state-owned entity in which the government holds a controlling stake. The chairman of the company is Dr. Muhammad bin Sulaiman Al-Jasser.
FOOTNOTES
July 1, 2009
*Cyberia operates in KSA, Lebanon, and Jordan as an Internet Service Provider (ISP).
**STC won the license for Bahrain’s third mobile telecom company,
which is expected to start operations by 2010.
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STC
STRATEGY
The company has evolved from a local to a regional player since 2007. The company aims to maintain its leadership position in the local telecom sector despite new competition in the market from
wireless and wired line services.
Expanded footprint from 1 to 10
countries within 2 years
Its coverage expanded from one country to ten countries within 2 years. Oger Telecom alone provides STC exposure to four countries (Turkey, Lebanon, Jordan, and South Africa).
PROFILE OF KEY ASSETS
1 Saudi Fixed Line
Fixed line competition to enter the
market in the second half of 2009
From 1998 until 2008, STC monopolized the Saudi wired line voice operations. Its total revenues
from fixed line operations (voice and data services) should trend upwards with stronger demand
for data services. We estimate that DSL subscribers have reached 4.12 million households as of the
end of 2008.
The introduction of 3 new fixed line licenses, won by Atheeb Telecom (owned by Bahrain Telecom
Co), Optical Communications (owned by Verizon of the USA), and Mutakamilah (owned by PCCW of
Hong Kong) will negatively affect STC’s wired line revenues starting 2009 and should drive up fixed
line penetration rates.
1 Saudi Mobile
With the competition slashing their prices, ARPUs are expected to decline to SAR 104 by 2012. We
estimate that ARPU reached SAR 118 by the end of 2008. Market share will have to be split among
3 operators. We expect STC’s market share to be 52% by 2010. We project it to be down to 50% by
2012, reaching 23.3 million subscribers and reflecting a 4-year CAGR of 5.9% for subscriber growth.
Saudi Telecom will thus continue to have the dominant share of the mobile market. The Saudi mobile market penetration level is below the levels observed for 2007 in Qatar and Bahrain which are
136% and 166%, respectively.
1 Turk Telekom/Avea
Saudi Telecom owns 35% of Oger Telecom, which has a 55% stake in Turk Telekom. Turk Telekom,
a fixed line operator, is consolidated in Oger Telecom’s financials. Turk Telecom owns 81% of Avea,
Turkey’s third mobile operator. Since no geographical revenue breakdown is provided in STC’s financials, we estimate Turk Telekom’s fixed line revenues to constitute 7.35% of total 2008 revenues. We
project this share to decline gradually (assuming no further drop in the Turkish Lira) to 6.8% of total
revenues in 2013. Our estimates indicate that Turk Telekom ended the year 2008 with 17.5 million
subscribers. The number of Turk Telekom’s subscribers from wired line voice services is expected to
be below 16.5 million by 2012. This is due to the fixed-to-mobile substitution trend. We estimate
that Turk Telekom had 7.59 million ADSL subscribers as of the end of 2008 and will have over 15.0
million by 2013.
We estimate Avea’s revenues to make up 2.34% of STC’s 2008 revenues and 2.5% of 2013 revenues.
Avea’s subscribers are expected to number over 16.0 million by 2013 compared to 12.4 million
in 2008.
July 1, 2009
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STC
1 Maxis (Malaysia)
STC owns 25% of Maxis through Binariang Holding. According to 2008 estimates, Maxis’ Malaysianbased subsidiary contributes 5% to total STC revenue, a figure which we expect to remain relatively
steady until 2013. Binariang Holding also has subsidiaries in India and other countries, but we believe the Maxis subsidiary in Malaysia to be the main contributor to Binariang Holding revenues.
Therefore, we use the Maxis subsidiary in Malaysia as a proxy to value Binariang’s contribution to
the Group.
1 Other Assets
STC’s 26%-owned Kuwait Telecom Communications began operations in the second half of 2008. Its
start-up nature makes its contribution to the total valuation of the company’s on-going operations
minimal at this stage and it is therefore not included in our valuation, which focuses on core assets.
Table 7: Selected Operations for STC
Country
Name
Saudi Arabia Saudi Telecom Co.
Ownership
Mobile
No. of
Market Share Operators
Subscribers
(Millions)
Contribution
to Revenue
As of
100.0%
56.0%
18.5
54.0%
2008
3
Malaysia
Maxis Malaysia
25.0%
41.0%
3
10.2
5.0%
2008
India
Aircell
18.5%
4.5%
11
9.5
1.8%
2008
Kuwait
Kuwait Telecom Co.
26.0%
4.0%
3
0.4
N/A
2008
Turkey
Avea
16.0%
19.0%
3
12.4
2.3%
2008
South Africa
Cell C
11.0%
10.0%
3
5.1
0.5%
2008
Bahrain
STC Bahrain
25%
-
3
-
-
2009
Sources: Company Data, Audi Saudi Arabia Estimates
INVESTMENT RATIONALE
Trading at a favorable PE
1 STC’s forward PE is estimated to be lower than comparable companies in the region. STC’s forward PE is 9.26x compared to a 9.67x weighted average PE of regional telecom companies.
One of the highest dividend yields for
telecom companies in the region
1 STC has a dividend yield of 7.28%. Moreover, STC distributes dividends every quarter. The board
of directors recommended a dividend per share of SAR 0.75 for the first quarter of 2009, a more
conservative distribution than last year’s first quarter dividend of SAR 1.0. We have factored into our
forecasts a more conservative dividend policy going forward. Nevertheless, the dividend per share
remains high.
1 According to our estimates, STC captures the highest mobile market share of 56% for 2008.
STC continues to be the dominant provider of fixed line voice services in Saudi Arabia, with new
competition introduced in June 2009.
Expect net debt/EBITDA
to fall below 1.1
July 1, 2009
1 Before 2007, STC had no leverage on its balance sheet, but that has changed with its foreign
expansion drive. Total debt reached SAR 31.99 billion in 2008, with a net debt/EBITDA ratio of 1.18.
We expect the net debt/EBITDA ratio to fall below 1.1 for 2009.
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STC
1 STC has diversified its revenue streams through its geographical expansion. 21% of revenues
from 2008 are generated from foreign operations.
1 The company has entered the Kuwaiti market, which had a relatively high ARPU of USD 55-60
and a penetration rate of 88% for 2008. Viva Kuwait had 400,000 subscribers as of the end of 2008.
STC benefits doubly from interregional tourism. On average, around 1 million visitors a year come
from Kuwait to Saudi Arabia.
Recently entered Kuwait and will
soon enter Bahrain
1 STC also won Bahrain’s third mobile license in 2009. It is estimated that 1 million visitors come
from Bahrain to Saudi Arabia and 8 million Saudi nationals travel to Bahrain on a yearly basis. STC’s
interconnection charges should be reduced as frequent flyers to Kuwait and Bahrain would have an
incentive to switch mobile operators. EBITDA margins are expected to improve from 42.8% in 2008
to 44.8% in 2013.
STC is the leader
in fixed broadband in KSA
1 The company’s DSL services in Saudi Arabia have been utilized by more than one million customers. Around 4.1 million households are currently subscribed to STC’s DSL services. The majority
of subscribers are using fixed broadband, while 50,000 are wireless customers. In 2008, the fixed
broadband market was split, with 1.0 million for STC and 250,000 for Mobily. Although STC is the
leader in fixed broadband in the Kingdom, Mobily is the leader in wireless broadband.
Deployment of NGN could be a
growth driver for STC
1 STC representatives indicated that Next Generation Networks (NGN) will contribute to future
company growth. Next Generation Network is a telecommunications network that has the capacity
to handle multiple types of traffic including voice, data, and multimedia. We have not integrated this
in our analysis since it is too early to value its effective contribution.
Ongoing promotional offers
to compete with operators
expected to hurt margins
1 STC continues to provide promotional offers. It has initiated a new offer for mobile customers
where every minute after three minutes have passed will be cut to 50 halalas per minute for all outgoing (local and international) calls. The offer began on March 21, 2009 and lasted for one month.
For example, calling any of the GCC countries will cost SAR 1.3 per minute for the first three minutes
and then 50 halalas for each following minute.
Emerging markets less attractive
due to overcrowding
1 While operators believe that emerging countries with low penetration rates are attractive, declining ARPUs in overcrowded emerging countries result in lower-than-expected revenues. For example, with 11 mobile operators in India, market share will have to be split among all players. Operators may have to compete through lower pricing.
We expect a positive earnings
surprise in the second quarter
of 2009
1 The Turkish Lira depreciated against the US dollar by 7.7% between the last quarter of 2008 and
the first quarter of 2009 and stayed at about the same level YTD (from June 16, 2009). The South
African Rand has appreciated by 19.0% YTD (from June 16, 2009), improving Cell C’s revenue contribution compared to the first quarter. We expect revenues from Turk Telekom and Cell C to be higher
in the second quarter of 2009 than the previous quarter, assuming all else constant. However, the
uncertain direction of foreign currency exposure makes the company’s earnings more volatile than
those of Mobily and Zain, that do not have overseas operations.
The bottom line is:
We issue an Accumulate recommendation on the company based on its low PE relative to peers,
its attractive dividend yield, the recent improvement in foreign currency exposure, and its foreign
acquisitions which should generate bottom-line profits in the long run.
July 1, 2009
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STC
SWOT Analysis
strengths
1 High dividend yield
1 Dominant mobile market share
1 Dominant fixed broadband market share
1 Fully integrated telecom company offering mobile, fixed line, and data services
and only KSA operator offering triple play services
1 Saudi government owns high ownership stake
1 Modest net debt/EBITDA ratio of 1.18 (compared to 2.25 for Mobily)
1 Wholesale revenue from Zain KSA and Etihad Atheeb
Weaknesses
1 Wireless broadband market share is dominated by Mobily
1 Losing mobile market share from increased competition
1 Earnings volatility from emerging country currency exposure
opportunities
1 Constantly looking for overseas expansion
1 Kuwait’s third mobile operator, with a relatively high APRU of USD 55-60
1 Won Bahrain’s third mobile license
1 Rising demand for data services in the broadband segment
1 Larger addressable market due to lower pricing resulting from competition
1 Continuing to provide value-added services
threats
1 Intense competition in mobile market
1 Issuance of 3 new fixed licenses is expected to decrease ARPUs and reduce fixed market share
1 Currency fluctuations in Turkey and South Africa
1 Mobile Number Portability
July 1, 2009
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STC
FINANCIAL ANALYSIS
FIRST QUARTER OF 2009:
1 Revenues for the first quarter were SAR 12,143 million, a 1% decrease q-o-q and 27% increase
y-o-y. This can be attributed largely to growth in mobile revenues of 3.5% q-o-q from SAR 7,926 to
SAR 8,203 million.
1 Saudi Telecom Company reported quarterly earnings of SAR 2,488 million in the first quarter
of 2009 compared to SAR 1,166 million in the fourth quarter of 2008 and SAR 3,029 million in the
first quarter last year, a 113% increase q-o-q and an 18% decline y-o-y. EBITDA margins increased
to 46.2% from 36.9% in the fourth quarter of 2008. However, we maintain our EBITDA margin expectation at a modest level as we believe that the EBITDA margin will be lower in the quarters to
come. In the past, STC’s first quarter EBITDA margins have generally been higher than the other
three quarters.
Chart 20: Quarterly Earnings (SAR millions) vs. EBITDA Margins
51.2%
48.4%
47.9%
46.2%
36.9%
60%
50%
40%
30%
20%
3,029
3,840
3,012
1,166
2,488
10%
Earnings
1Q 09
4Q 08
3Q 08
2Q 08
0%
1Q 08
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
EBITDA margins
Source: Company financials
1 Fourth quarter earnings comprised a FX loss of SAR 2 billion, while first quarter FX losses amounted to SAR 695 million. Excluding Foreign exchange losses, first quarter earnings remained approximately the same as fourth quarter earnings. First quarter earnings would be almost 5% higher y-o-y
after adjusting for foreign exchange losses.
July 1, 2009
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STC
2008 AT A GLIMPSE:
Revenue growth driven by mobile
and data revenues
1 The company’s revenues soared by 37.8% y-o-y from SAR 34,458 million to SAR 47,469 million,
driven mainly by a boost in GSM revenues reaching SAR 32,644 million and growth in data revenues
of SAR 5,690 million, constituting 12.0% of total revenues. According to our estimates, the mobile
penetration rate rose from 109% in 2007 to 128% in 2008.
Higher advertising costs for
start- up operations and protection
of domestic market share
1 Total operating expenses grew by 53.7% from 2007 mainly as a result of a 195% increase in
selling, general and administrative expenses. This was mostly due to foreign acquisitions of startup businesses incurring high advertising costs and intensive advertising and marketing campaigns
initiated with the entrance of Zain Saudi Arabia to protect market share. We expect selling, general,
and administrative expenses to be 15% of revenue for 2009, lower than 2008’s 15.2%. This is above
historical percentages, but explained by the entry of a third mobile player into the Saudi market in
2008 and Etihad Atheeb telecom launching operations in the second half of 2009.
1 EBITDA margins deteriorated from 48.5% to 42.8% in 2008. We believe there is a strong correlation between EBITDA margins and earnings. With the exception of 2006, higher EBITDA margins
translated into higher probability.
1 Profitability took a hit in 2008 due to foreign exchange fluctuations in Turkey and Bangladesh
and lower EBITDA margins attributable to promotional offers launched at discounted rates to compete with mobile players. Earnings decreased by 8.2%, from SAR 12,022 million to SAR 11,038 million.
Chart 21: Yearly Earnings (SAR millions) vs. EBITDA Margins
13,000
52.9%
50.9%
48.5%
12,500
60%
42.8%
42.3%
50%
12,000
40%
11,500
30%
11,000
20%
10,500
12,447
12,799
12,022
11,038
11,118
10%
0%
Earnings
2009E
2008
2007
2006
2005
10,000
EBITDA Margins
Sources: Company financials, Audi Saudi Arabia estimates
July 1, 2009
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STC
PRO FORMA FINANCIALS
Table 8: Consolidated Balance Sheet
(SAR million)
2006
2007
2008
2009 E
2010 E
2011 E
2012 E
2013 E
(unconsolidated)
Cash and Cash Equivalents
2,909
7,618
8,061
10,712
9,174
7,784
8,628
9,909
Short Term Investments
5,599
-
-
-
3,000
3,000
3,000
3,000
Accounts Receivable (net)
3,939
4,973
8,120
8,278
8,508
8,656
8,749
8,896
915
1,386
2,765
2,819
2,897
2,948
2,979
3,029
Total Current Assets
13,362
13,977
18,946
21,809
23,579
22,388
23,356
24,834
Property, Plant, & Equipment (net)
30,128
34,369
44,382
46,754
49,614
51,346
52,238
52,221
732
13,856
31,695
30,903
30,130
29,377
28,642
27,926
1,140
2,404
2,452
2,427
2,403
2,427
2,476
2,501
759
4,205
2,287
2,409
2,557
2,646
2,692
2,691
Total Non Current Assets
32,759
54,834
80,816
82,493
84,703
85,796
86,048
85,339
Total Assets
46,121
68,811
99,762
104,302
108,282
108,184
109,404
110,173
Accounts Payable
1,960
3,082
6,649
6,870
6,962
7,083
7,159
7,073
Other Payables
2,420
6,217
4,335
5,682
5,758
5,859
5,921
5,850
Accrued Expenses
3,749
5,587
5,762
5,937
6,016
6,121
6,187
6,113
Current Portion of Deferred Revenues
1,394
1,773
2,249
2,288
2,352
2,393
2,419
2,459
-
560
3,905
2,930
3,060
2,148
2,781
2,111
9,523
17,219
22,900
23,707
24,149
23,603
24,467
23,607
Prepayments and Other Current Assets
Intangible Assets (net)
Equity Method and Investments
Other Non Current Assets
Current Portion of Long Term Borrowings
Total Current Liabilities
624
-
-
-
-
-
-
-
-
13,019
28,081
27,252
25,343
21,285
18,065
15,587
1,820
1,932
2,738
3,152
3,195
3,250
3,285
3,246
-
748
3,482
3,597
3,646
3,709
3,749
3,704
2,444
15,700
34,301
34,002
32,184
28,245
25,100
22,537
Total Liabilities
11,967
32,919
57,201
57,708
56,332
51,848
49,566
46,144
Contributed Capital
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
Statutory Reserve
5,818
7,020
8,233
9,345
10,534
11,745
12,968
14,312
Retained Earnings
8,339
8,659
9,783
12,289
16,108
19,191
21,412
23,725
-
197
-379
-
-
-
-
-
-3
-
-
-
-
-
-
-
34,154
35,876
37,637
41,634
46,643
50,936
54,380
58,036
Deferred Revenues
Borrowings
Employees' End of Service Benefits
Other Payables
Total Non Current Liabilities
Financial Statements' Translation Differences
Unrealized Loss on Other Investments
Total Common Shareholders' Equity
-
16
4,924
4,960
5,307
5,400
5,458
5,992
Total Shareholders' Equity
34,154
35,892
42,561
46,594
51,950
56,336
59,838
64,029
Total Liabilities and Equity
46,121
68,811
99,762
104,302
108,282
108,184
109,404
110,173
Minority Interest
July 1, 2009
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STC
Table 9: Consolidated Income Statement
(SAR million)
2006
2007
2008
2009 E
2010 E
2011 E
2012 E
2013 E
(unconsolidated)
Wireless Revenues
26,392
27,087
27,370
27,223
27,308
Avea
1,150
1,243
1,305
1,340
1,299
Maxis - Malaysia
2,542
2,517
2,501
2,506
2,689
Other
3,008
3,085
3,429
3,589
3,912
33,093
33,931
34,606
34,658
35,207
11,751
12,226
12,372
12,918
13,266
3,548
3,579
3,625
3,569
3,531
Saudi Wireless
Total Wireless Revenues
22,631
25,165
32,119
Wired Line Revenues
Saudi Fixed
Turk Telekom
Total Wired Lined Revenues
9,763
9,293
15,350
15,299
15,805
15,997
16,487
16,797
32,394
34,458
47,469
48,392
49,737
50,602
51,145
52,004
Government Expense
4,446
4,825
5,542
5,650
5,807
5,908
5,971
6,072
Interconnection Expense
3,810
4,427
6,131
6,291
6,217
6,072
5,882
5,980
Employee Expense
4,284
4,275
6,164
6,284
6,459
6,571
6,641
6,753
Selling, General and Administrative Fees
1,932
2,442
7,194
7,259
7,212
7,084
6,905
6,761
Maintenance
1,438
1,773
2,127
2,420
2,487
3,036
3,580
3,120
Depreciation and Amortization
3,836
4,098
6,407
6,775
6,963
7,084
7,160
7,021
Operating Expenses
19,746
21,840
33,565
34,678
35,144
35,756
36,139
35,706
EBITDA
16,484
16,716
20,311
20,489
21,556
21,931
22,166
23,318
EBIT
12,648
12,618
13,904
13,714
14,592
14,846
15,006
16,298
Early Retirement Programme
500
548
675
735
755
768
777
790
Interest and Other Expenses
-994
-376
1,186
869
893
908
918
933
Total Revenues
Zakat and Taxes
Earnings
343
427
833
820
862
877
887
933
12,799
12,019
11,210
11,291
12,082
12,293
12,424
13,642
-
-2
172
173
185
189
191
209
12,799
12,021
11,038
11,118
11,897
12,104
12,234
13,433
EPS (SAR)
6.40
6.01
5.52
5.56
5.95
6.05
6.12
6.72
DPS (SAR)
5.75
5.00
3.75
3.75
4.00
4.50
5.00
5.50
Minority Interest
Common Earnings
FOOTNOTES
July 1, 2009
The geographical distribution of revenues is not disclosed in historical financial
statements and are Audi Saudi Arabia Estimates.
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STC
VALUATION
DIVIDENd DISCOUNT MODEL
Using the Dividend Discount model, we have arrived at an intrinsic value of SAR 66.49 for STC.
The assumptions of the model were based on a 5-year forecast period, with a risk-free rate of 2.78%,
a beta of 0.838, and a market risk premium of 8.7%; a required return on equity of 10.07% was derived. We assumed a perpetual growth rate of 3%.
Table 10: Dividend Discount Model
2009 E
2010 E
2011 E
2012 E
2013 E
11,118
11,897
12,104
12,234
13,433
Earnings per Share (SAR)
5.56
5.95
6.05
6.12
6.72
Dividends per Share (SAR)
3.75
4.00
4.50
5.00
5.50
Present Value of Dividends per Share (SAR)
3.41
3.30
3.37
3.41
Net Income (SAR million)
Number of Shares Outstanding (million)
2,000
Present Value of Terminal Value (SAR)
3.40
49.59
Cost of Equity
10.07%
Terminal Growth Rate
3.00%
Fair Value (SAR)
66.49
Source: Audi Saudi Arabia Estimates
PEER VALUATION
Using the peer-weighted average forward PE of 9.67, a fair value of SAR 53.77 was derived for STC
based on our 2009 EPS estimate of SAR 5.56.
Table 11: Peer Valuation Sample
Company Name
Saudi Telecom Co.
Etihad Etisalat (Mobily)
Qatar Telecom
MTC Zain
Wataniya Telecom
Orascom Telecom
Emirates Tele. Co. (Etisalat)
Country
PE
Forward PE
PB
Saudi Arabia
Saudi Arabia
Qatar
Kuwait
9.81
9.39
7.56
12.54
9.26
9.44
8.12
11.13
2.75
2.53
1.89
2.37
Kuwait
Egypt
UAE
10.55
16.26
8.35
10.25
15.48
7.93
2.33
4.43
2.32
10.64
10.27
10.23
9.67
2.66
2.57
Arithmetic Average
Weighted Average
Sources: Audi Saudi Arabia Estimates, Bloomberg (Prices as of June 30, 2009)
July 1, 2009
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STC
FAIR VALUE
Combining the DDM Valuation and the Peer Valuation, we arrive at a fair value of SAR 63.95. We allocate 80% of the valuation weight to the DDM methodology and 20% to the Peer Valuation.
Table 12: Combination of Valuation Methodologies
Methodology
DDM Valuation
Peer Valuation
Fair Value (SAR)
Valuation Weight
Weighted Fair Value
66.49
53.77
80%
20%
SAR 63.95
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MOBILY
Current price
SAR 35.10
Fair price
SAR 53.44
RecommendatioN
BUY
ETIHAD ETISALAT (MOBILY) –
WELL PREPARED FOR THE COMING RISE
WE INITIATE A BUY RECOMMENDATION WITH A TARGET PRICE OF SAR 53.44
By 2006, two years after the start of operations, the company reported positive earnings. For 2009,
we predict that Mobily will realize earnings of SAR 2,604 million, generating a positive free cash flow
of SAR 2,052 million, and stable dividend growth of 33.33%. Mobily’s Saudi-only operations, aggressive entry into data services and continuous launching of new value-added services make it a top
telecom stock pick in the region.
MOBILY RECEIVED SAR 4.6 BILLION IN BIDS FOR RIGHTS ISSUE
The company’s rights issue was oversubscribed more than 2 times. The SAR 2 billion rights issue supports the company’s liquidity position. According to Mobily, the proceeds will be used to continue
the expansion of its infrastructure.
GAINING GROUND IN THE BROADBAND MARKET
Mobily has completed the acquisition of 96% of Zajil International Telecommunications for SAR
80 million. It previously purchased 99.9% of Bayanat Al Oula, another Saudi data service provider.
Broadband revenues constituted 10% of Mobily’s revenues in the fourth quarter of 2008, a significant contribution. With a broadband penetration rate of 4.1% in Saudi Arabia for 2008, the data
services segment is expected to continue growing.
OPERATIONS GROWING IN A DOMESTIC FRAME
Mobily eliminates foreign exchange risk by having operations solely in Saudi Arabia. The country’s
strong fundamentals of a high growth population and a high percentage of expatriates are favorable characteristics for telecom companies. It is in the best interest of Mobily to remain local, in
our opinion, since regional telecom players’ decisions to go international have usually led to higher
leveraging and lower than expected profitability from overseas operations.
Stock Data
July 1, 2009
Market Cap (SAR)
24,570,000,000
Market Cap (USD)
6,552,843,570
Free Float
58.00%
841,375,717
52-week High (SAR)
42.24
52-week Low (SAR)
22.50
PB
2.53
Trailing PE
9.39
PE 09 (E)
9.44
60
50
40
30
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
20
(SAR million)
2008
2009 E
2010 E
2011 E
2012 E
2013 E
Net Income
2,092
2,604
2,922
3,287
3,364
3,645
EPS (SAR)
4.00
3.72
4.17
4.70
4.81
5.21
DPS (SAR)
0.75
1.00
1.25
1.34
1.70
2.03
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MOBILY
COMPANY OVERVIEW
PROFILE
Etihad Etisalat (Mobily) launched operations as Saudi Arabia’s second GSM mobile operator, breaking Saudi Telecom’s mobile monopoly. Mobily was established by UAE-based Emirates Telecommunications Corporation (Etisalat).
First to offer many value-added
services in the Saudi telecom market
Mobily acquired the second mobile license in Saudi Arabia in 2005 for SAR 13 billion. Mobily
launched its services in May 2005, ending the year with 2.3 million subscribers, constituting 16%
of the Saudi mobile market. By the end of 2008, we estimate that the company reached a 38% market share, with 13.02 million active subscribers. The company was the first to introduce Blackberry
services and the iPhone in Saudi Arabia. It was also the first mobile Saudi operator to introduce
value-added services such as MMS (picture messaging), location-based services (LBS), international
roaming for prepaid subscribers, GPRS/GPRS EDGE roaming, and other services. Mobily was the first
Saudi wireless operator to launch in-flight calls abroad, through Aero Mobile, a specialized aviation
mobile operator. It also initiated the first video mail service in KSA and pioneered the launch of 3.5G
services in KSA in June 2006.
Chart 22: Mobily Ownership Structure
4%
Etisalat
11%
58%
27%
General Organization
for Social Insurance
Other
Free Float
Source: Tadawul
Mobily successfully completed
the SAR 2 billion capital increase
In April 2008, Mobily’s founders floated an additional 20% for the public, in compliance with the
royal decree mandating a 20% increase in the company’s equity in its third year of operations. On
September 15, 2008, the 40% rights issue was successfully completed, increasing the company’s
capital from SAR 5 billion to SAR 7 billion.
STRATEGY
Acquired two data services
operators in less than a year
Mobily is successfully reaching its long term vision: to transform from a pure mobile operator to a
multi-functional telecom operator in Saudi Arabia. In 2008, Mobily acquired 99.9% of Bayanat Al
Oula and 96% of Zajil International Telecom, two data service providers in KSA. Bayanat has a WIMAX
license. For the fiscal year 2009, we estimate that data services revenues will amount to 10-12% of
total revenues.
Cost containment measures
through establishment of an
independent stand-alone network
Mobily is optimizing the cost of existing operations through its acquisition of a 66.6% stake in the
Saudi National Fiber Network (SNFN) which replaces the use of STC’s international gateway network. The proceeds of the SAR 2 billion capital raise are used for upgrading, funding, or rolling out
networks.
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MOBILY
Mobily takes the lead
in wireless broadband market
1 The company’s focus on broadband, 3.5G services, and other value added services distinguish it
from other telecom operators. With a broadband penetration rate below 5% in the Kingdom, there
are growth opportunities that Mobily is exploiting through its recent acquisitions of Bayanat Al-Oula and Zajil. Mobily had 300,000 High Speed Packet Access (HSPA) wireless broadband subscribers,
while STC has 50,000 subscribers as of the end of 2008. HSPA-based broadband allows subscribers
to access the internet simply by plugging the device into the USB port. This eliminates the need for
customers to wait for the initial setup and delivery of services as is required for fixed-line broadband.
1 Although we do not see financing as being an issue for Mobily given the historical growth in
its earnings, successful completion of the rights issue ensures that funding is available to pursue
expansions.
Saudi-only focus
is a key investment point
1 Mobily’s Saudi-only focus is a key investment point. Having operations only in Saudi Arabia
removes foreign exchange and political risk. We have seen several companies suffer from unfavorable foreign exchange movements, such as Qatar Telecom from the Indonesian Rupee depreciation
against the dollar and Orascom Telecom from the Pakistan Rupee depreciation against the dollar.
Therefore, Mobily’s Saudi-only focus makes its earnings less volatile compared to regional players
such as Qatar Telecom and STC.
Fiber network will meet
customers’ demands
1 Mobily has its own backbone infrastructure thanks to its stake in the Saudi National Fiber Network (SNFN). SNFN is a 12,500 km fiber optic network covering all of Saudi Arabia. The Kingdom’s
largest network, with a cost of SAR 1 billion, is expected to be completed in 2009. Benefits from
this project include lower transmission costs, since Mobily will no longer lease line capacity from
STC. Mobily will also be able to offer faster and better quality of data and voice services, especially
to business entities. Leasing capacity to other telecom operators will generate additional revenue.
Zain has an exclusive agreement to lease capacity from Mobily. Also, three new fixed licenses have
been issued to Batelco, PCCW, and Verizon. We believe that these players will initially start by leasing capacity from either STC or Mobily. Etihad Atheeb, owned by Batelco, has already agreed with
Mobily that it will be renting capacity from its networks.
1 In addition, Mobily has an active investment stake of 33.3% in an E-cable project. This project is
expected to be completed by the end of June 2009 and will facilitate internet and voice traffic between Asia and Europe through the Middle East. The cable extends to the UAE, Saudi Arabia, Egypt,
and European countries.
July 1, 2009
DPS of SAR 0.75 for 2008
1 A dividend per share of SAR 0.75 has been distributed for 2008, a 50% increase from last year’s
SAR 0.50. This is a positive signal for investors, since the company continues to invest in network
roll-outs and upgrades while at the same time giving out dividends, and all this with merely three
years of operations. While Mobily’s DPS is lower than STC’s SAR 3.75, the infant company argument
justifies the disparity.
Strong provider
of value-added services
1 Mobily launched the iPhone 3G on February 22, 2009. It is the exclusive provider of this service in
the Kingdom. According to Zawya, 25,000 customers ordered the iPhone within hours of the launch.
This illustrates how, despite the high mobile penetration rate, Mobily is increasing its subscriber
base through value-added services.
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MOBILY
Capex to increase cash flow
generation in the long run
1 Mobily’s high capital expenditures for infrastructure purposes will affect free cash flows but
improve EBITDA margins. In the long-run this will stimulate free cash flow generation as costs are
optimized. We believe that investing in telecom assets today will be to the advantage of the company. Mobily is the first operator in the Kingdom to provide broadband internet services through
3.75G networks by using the High Speed Uplink Access (HSUPA). Mobily has put aside SAR 1 billion
for the project.
Lower net debt/EBITDA
expected for 2009
1 The company’s net debt/EBITDA ratio for 2008 is 2.25, lower than the 2007 ratio of 2.79. 2009’s
net debt/EBITDA ratio should be lower, between 1.7 and 2.0. This will be due to the anticipated improvement in EBITDA and positive cash generation.
The bottom line is:
Mobily’s entrance into the Saudi telecom sector when the penetration rate stood at a mere 61%
gave it a big advantage for capturing a solid piece of the market share. To retain its market share,
Mobily continues to provide value-added services (such as the recent iPhone launching), expand its
broadband services and lead in wireless broadband services (although it ranks second in broadband
over-all). Most importantly, its earnings are less volatile due to its operations being purely domestic.
We issue a Buy recommendation on Mobily.
July 1, 2009
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MOBILY
SWOT ANALYSIS
STRENGTHS
1 Diversifying revenue streams through focusing on value-added services and data services
1 Saudi-only operations avoid currency and country risks
1 Quickly responded to Zain’s One Network services by establishing roaming agreements with
almost 100 operators in 56 countries
1 Successful capital increase
1 Fiber network targeting business entities
1 Indirectly supported by the UAE government through Etisalat
1 Wholesale revenue from Zain KSA and Etihad Atheeb
1 Dominant wireless broadband share
WEAKNESSES
1 90% of customers are prepaid subscribers, signaling lower ARPUs and high sensitivity
to pricing
1 Fixed broadband market share is dominated by Saudi Telecom and STC is ranked first
in broadband overall
OPPORTUNITIES
1 Convergence with a fixed line provider in the future in order to enable competitive pricing
for customers
THREATS
1 Intense competition in mobile market
1 New entrants in fixed line operations (affects broadband revenues)
1 Mobile number portability
July 1, 2009
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MOBILY
FINANCIAL ANALYSIS
1Q 09 revenues up 22%
First quarter revenues were SAR 2,810 million up 22% y-o-y from SAR 2,308 million. We did not
compare it to the preceding quarter, since the fourth quarter for Mobily exhibits seasonality across
previous periods and is therefore not a suitable basis for comparison.
The company’s first quarter earnings were SAR 480 million, a 47% increase y-o-y from SAR 326 million. This is due to higher subscriber growth, improved EBITDA margins (from 31.5% in 1Q 08 to
32.3% in 1Q 09), and continuing growth in broadband.
Chart 23: Quarterly Earnings (SAR millions) vs. EBITDA Margins
800
31.5%
34.3%
33.4%
40.0%
32.3%
40%
600
30%
400
20%
200
326
448
539
778
480
0
10%
Earnings
1Q 09
4Q 08
3Q 08
2Q 08
1Q 08
0%
EBITDA Margins
Source: Company financials
The chairman of Mobily announced that the first quarter of 2009 ended with 15 million subscribers
primarily on account of Mobily’s exclusivity rights to the iPhone launched in February 2009, and
increased demand for data services. We estimate that the company ended the quarter with 13.5
million active subscribers.
A GLIMPSE OF 2008:
Data revenues should be 11%
of revenues in 2009 and 15% in 2010
1 Mobily reported revenues of SAR 10,795 million, a 27.9% boost from the previous year’s SAR
8,440 million. Data revenues contributed 10% of revenues for the fourth quarter. We expect data
revenues to constitute 11% and 15% of revenues in 2009 and 2010, respectively.
1 Operating expenses increased by 28.4%, from SAR 2,745 million to SAR 3,525 million due to
rising selling, administrative, and general expenses. Advertising expenses were higher than during
previous periods because of Zain entering the market in 2008. EBITDA margins will improve in 2009,
since Mobily will no longer use STC’s international gateway, but the Saudi National Fiber Network
(SNFN).
1 EBITDA margins rose to 35.1% in 2008 compared to 34.9% in 2007.
1 Mobily earnings increased from SAR 1,380 million to SAR 2,092 million, a 51.6% rise due to accelerated subscriber growth, an increase in minutes of usage from competitive promotions, data
revenues growth, and the development of a proprietary network.
July 1, 2009
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MOBILY
Chart 24: Annual Earnings (SAR millions) vs. EBITDA Margins
34.9%
34.3%
3,000
35.1%
35.9%
30%
2,000
1,000
700
1,380
2,092
0
-1,000
2,604
-10%
-1,167
-30%
-2,000
-38.9%
Earnings
2009E
2008
2007
-50%
2006
2005
-3,000
10%
EBITDA Margins
Source: Company financials, Audi Saudi Arabia estimates
July 1, 2009
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MOBILY
Table 13: Consolidated Balance Sheet
(SAR million)
2006
2007
2008
2009 E
2010 E
2011 E
2012 E
2013 E
(unconsolidated) (unconsolidated)
548
703
1,263
3,794
3,383
1,727
3,721
1,176
-
-
1,050
2,000
1,500
1,750
2,000
2,250
734
1,460
3,098
3,484
3,788
4,017
4,141
4,354
5
71
39
40
42
43
42
43
38
69
108
115
125
131
133
140
1,357
Short Term Investments
Due from Related Parties
Inventory
717
810
1,063
1,116
1,172
1,231
1,292
Prepaid Expenses and Other Assets
2,042
3,113
6,621
10,549
10,009
8,897
11,329
9,320
3,848
5,479
8,117
9,908
11,466
12,711
14,104
15,922
11,800
11,287
10,923
10,410
9,896
9,383
8,869
8,356
-
-
1,530
1,500
1,500
1,500
1,500
1,500
License Acquisitions Fees (net)
Goodwill
-
2
-
-
-
-
-
-
Investment in Unconsolidated Subsidiary
15,648
16,768
20,570
21,817
22,862
23,594
24,473
25,777
Total Assets
17,690
19,881
27,191
32,367
32,872
32,491
35,802
35,097
Short Term Loans
7,840
-
1,862
889
889
445
222
111
-
1,011
1,286
2,371
2,899
3,047
3,551
730
5,992
Current Portion of Long Term Loan
2,526
3,142
4,365
4,910
5,337
5,594
5,699
Due to Related Parties
Accounts Payable
179
111
78
81
84
85
84
87
Accrued Expenses and Other Liabilities
998
1,765
3,157
3,261
3,393
3,451
3,417
3,510
11,543
6,029
10,748
11,511
12,602
12,621
12,974
10,430
-
7,912
6,642
9,147
6,248
3,202
3,651
2,922
13
26
46
51
56
61
67
74
Shareholder Loan
1,600
-
-
-
-
-
-
-
1,613
7,938
6,688
9,198
6,304
3,263
3,718
2,996
13,156
13,967
17,436
20,709
18,906
15,884
16,692
13,426
5,000
5,000
7,000
7,000
7,000
7,000
7,000
7,000
-
138
347
607
900
1,228
1,565
1,929
Long Term Loans
Provision for Employees' Indemnities
Total Liabilities
Contributed Capital
Statutory Reserve
Retained Earnings
Total Liabilities and Shareholders' Equity
-467
775
2,407
4,051
6,066
8,379
10,545
12,742
4,533
5,913
9,754
11,658
13,966
16,607
19,110
21,671
17,690
19,881
27,191
32,367
32,872
32,491
35,802
35,097
Sources: Company Financials, Audi Saudi Arabia Estimates
July 1, 2009
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MOBILY
Table 14: Consolidated Income Statement
(SAR million)
2006
2007
2008
2009 E
2010 E
2011 E
2012 E
2013 E
(unconsolidated) (unconsolidated)
Total Revenues
5,840
8,440
10,795
12,488
13,575
14,395
14,840
15,604
Cost of Sales
2,680
3,779
4,774
5,370
5,837
6,118
6,233
6,554
Gross Profit
3,160
4,662
6,021
7,118
7,738
8,277
8,607
9,051
Selling and Marketing Expenses
365
641
816
944
1,026
1,088
1,122
1,180
General and Administrative Expenses
670
1,073
1,411
1,686
1,805
1,885
1,915
2,013
Other Operating Expenses
124
-
-
-
-
-
-
-
2,001
2,948
3,794
4,488
4,907
5,304
5,571
5,858
EBITDA
Operating Income
Interest Expense
Other Income
Earnings before Tax
Zakat
845
1,031
1,298
1,347
1,535
1,716
1,941
1,973
1,156
1,917
2,496
3,141
3,372
3,587
3,630
3,885
479
556
438
520
429
274
239
208
23
43
41
50
54
58
59
62
700
1,404
2,099
2,671
2,997
3,371
3,450
3,739
-
24
7
67
75
84
86
93
700
1,380
2,092
2,604
2,922
3,287
3,364
3,645
EPS (SAR)
2.64
4.00
3.72
4.17
4.70
4.81
5.21
DPS (SAR)
0.50
0.75
1.00
1.25
1.34
1.70
2.03
Net Income
July 1, 2009
38
equity research
MOBILY
telecom
VALUATION
FREE CASH FLOW MODEL
Using the Discounted Cash Flow model, we have estimated the intrinsic value of Mobily derived
from the forecasted financials below. The assumptions of the DCF were based on a 5-year forecast
period, with a WACC of 8.14% and a long term growth rate of 3%. The fair value obtained from this
model is SAR 53.44, indicating a 52.25% upside potential over the current price of SAR 35.10.
Table 15: Forecasted Free Cash Flows
(SAR million)
Net Income
2009 E
2010 E
2011 E
2012 E
2013 E
2,604
2,922
3,287
3,364
3,645
-203
-193
-21
117
-103
Non-Cash Charges
1,347
1,535
1,716
1,941
1,973
Capex
2,622
2,579
2,447
2,820
3,277
520
429
274
239
208
Change in Working Capital
Interest Expense
Free Cash Flow to the Firm
2,052
2,499
2,851
2,608
2,653
Present Value of Free Cash Flow to the Firm
1,898
2,137
2,254
1,907
1,794
Present Value of Terminal Value
35,946
Intrinsic Value of the Firm
45,936
Net Debt
8,527
Intrinsic Value of Equity
37,409
WACC
8.14%
Shares Outstanding (million)
NAV (SAR)
3.0%
700
53.44
July 1, 2009
39
equity research
MOBILY
PEER VALUATION
Using the peer-weighted average forward PE of 9.67, a fair value of SAR 35.97 was derived for Mobily
based on our 2009 earnings per share (EPS) estimate of SAR 3.72.
Because Mobily is the only purely local player in the sample, the PEs are not comparable and the target price derived from peer valuation is unreliable. Therefore, we do not factor it into our valuation
and rely exclusively on the discounted cash flow model to arrive at our target price of SAR 53.44.
Table 16: Peer Valuation
Company Name
Saudi Telecom Co.
Etihad Etisalat (Mobily)
Qatar Telecom
MTC Zain
Wataniya Telecom
Orascom Telecom
Emirates Tele. Co. (Etisalat)
Country
PE
Forward PE
PB
Saudi Arabia
Saudi Arabia
Qatar
Kuwait
9.81
9.39
7.56
12.54
9.26
9.44
8.12
11.13
2.75
2.53
1.89
2.37
Kuwait
Egypt
UAE
10.55
16.26
8.35
10.25
15.48
7.93
2.33
4.43
2.32
10.64
10.27
10.23
9.67
2.66
2.57
Arithmetic Average
Weighted Average
Sources: Audi Saudi Arabia Estimates, Bloomberg (Prices as of June 30, 2009)
July 1, 2009
40
equity research
ZAIN KSA
Fair price
SAR 11.75
SAR 11.69
RecommendatioN
HOLD
Current price
ZAIN SAUDI ARABIA – ROUGH WAY TO GO
WE INITIATE A HOLD RECOMMENDATION WITH A TARGET PRICE OF SAR 11.69
We believe that Zain will not report positive earnings before 2012 because of high operating expenses during the company’s start-up phase, high recurring amortization expenses from the USD
6.1 billion license fee, cost of renting network capacity from STC and Mobily, and price slashing due
to intense competition. Zain reported a 7% market share for 2008. We expect it to reach17% by 2015.
ZAIN KSA REPORTED 2 MILLION SUBSCRIBERS FOR 2008
The company reported 2 million active subscribers for the year ended 2008. According to our estimates, Zain will capture 9% of the market in its second year of operations and reach 15% in 2012 with
7.0 million subscribers, a 3-year CAGR of 27.2%. We believe that there still remains an unaddressed
segment of subscribers from the low income bracket. We expect penetration rates to increase even
further in 2010 and Zain Saudi Arabia to contribute to the expansion of the addressable market.
ZAIN KSA EXPECTS TO BREAKEVEN IN 2010?
Zain’s former CEO, Dr. Marwan Al Ahmadi, predicted EBITDA would reach the breakeven point in
2010. He also expressed confidence that the company will have its own independent infrastructure
in 3 years, 2 years earlier than expected. We believe that aggressive capital expenditure initiatives,
along with an overpriced license (leading to a high annual amortization expense) will make it difficult to achieve profitability within two years. Mobily’s earnings turned positive in 2006, its second
operating year. However, Mobily’s amortization expense was less and the mobile penetration rate
was only 61% in 2005, providing much greater room for growth.
WE REMAIN BULLISH ON THE ABILITY TO FINANCE AND REFINANCE
We believe there is a good chance for Zain KSA to obtain debt financing and refinancing to fund
its aggressive capital expenditures which are necessary given that it is still in its initial phase of
development. Under current market conditions, the highly visible nature of telecoms earnings is a
significant positive factor that banks take into account when studying the loan repayment capability of a company. Borrowing is tempting at currently low rates.
Stock Data
Market Cap (SAR)
16,450,000,000
Market Cap (USD)
4,387,231,450
Free Float
45.00%
4,618,287,862
52-week High (SAR)
24.75
52-week Low (SAR)
10.15
PB
1.50
Trailing PE
NA
PE 09 (E)
NA
(SAR million)
25
20
15
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
10
2008
2009 E
2010 E
2011 E
2012 E
2013 E
(2,278)
(1,416)
(1,091)
(715)
(359)
(24)
EPS (SAR)
(1.33)
(1.01)
(0.78)
(0.51)
(0.26)
(0.02)
DPS (SAR)
0.00
0.00
0.00
0.00
0.00
0.00
Net Income
July 1, 2009
30
41
equity research
ZAIN KSA
COMPANY OVERVIEW
PROFILE
Zain Saudi Arabia is the third mobile provider offering 2G and 3G mobile services to be introduced
in the Kingdom. Zain KSA started operations in the third quarter of 2008. It is a subsidiary of Zain
Kuwait, which submitted the highest bid of USD 6.1 billion for the 25-year GSM license in Saudi
Arabia in March 2007. The company’s IPO began in February 2008. It offered 50% of its shares on the
Saudi Stock Exchange to raise USD 1.87 billion. The company is targeting an optimal structure of a
50-50 debt-to-equity ratio.
Chart 25: Zain KSA Ownership Structure
5% 11%
MTC Zain Kuwait
7%
Saudi Plastic Factory
7%
25%
Faden Trading Contracting Est.
45%
General Retirement Est.
Other
Free Float
Source: Tadawul
STRATEGY
The company’s former CEO Dr. Marwan Al Ahmadi said that the company will have its own network infrastructure and that EBITDA will breakeven by 2010. Additionally, the company stated that
it plans to have a long term market share of approximately 20% within 5 years.
Zain KSA has been aggressively advertising its promotions such as ‘One Network’ coverage and
‘Weekend X 2’ package, giving the company a competitive edge over the other telecom companies.
It was Zain KSA’s ‘One Network’ coverage promotion that prompted other mobile providers to follow
suit by offering discounted international rates in order to retain their customers.
July 1, 2009
42
equity research
ZAIN KSA
High annual
amortization cost of license
1 Zain Saudi Arabia’s mobile license was purchased for a steep USD 6.1 billion (SAR 22.9 billion),
whereas the second KSA mobile license, granted to Mobily, had a USD 3.45 billion (SAR 13 billion)
price tag. In our estimates, the expensive license, as well as the startup costs and interconnection
fees, will keep the company’s free cash flow far from breaking even until 2012.
Cons: third market entrant,
intense competition
1 We think Zain faces three inevitable obstacles on its way to success. Firstly, the track record of
third market entrants for mobile providers in the EMEA region has shown that long term market
share does not usually exceed 20%. Secondly, Zain’s competitive environment obliges it to either
reduce prices in order to capture market share or to provide value-added services. Thirdly, Zain KSA
is entering a market with a penetration rate of above 100%.
1 If Zain is to be able to compete with STC and Mobily in a market approaching saturation, then it
should be price-competitive. However, this would come at the expense of more time for its earnings
to reach the breakeven level.
Price-competitive or
value-added-services-competitive?
We think it’s a little bit of both
1 Zain’s lower prices will be reflected in lower ARPUs. In order to increase its revenues, Zain should
focus on non-voice services, an area where STC and Mobily are trying to gain ground.
1 Zain’s competitive promotions such as ‘One Network’ coverage appeals to all expatriates, except
those from Asian countries or businessmen traveling to countries outside the Middle East and Africa. Zain’s ‘One month on us, one month on you’ promotion is limited to the first 500,000 subscribers,
a number Zain now exceeds by more than 1.5 million. The promotion will retain existing subscribers,
but not attract additional ones. We do not deny the attractiveness of the promotions yet wish to
highlight their limits.
Zain is targeting business entities
1 In March 2009, the company released an offer called the ‘Zain Business Package’ targeting business entities. This package offers a discounted tariff to all numbers of the same organization. Before
the Business offer, the company announced the launch of its “Weekend X 2” offer for all customers
starting January 31, 2009. During weekends, Zain subscribers will receive as a bonus double the
amount spent during the weekdays.
Net debt-to-equity ratio
to rise to 2 in 2012
1 The total amount of Zain’s debt was SAR 11.86 billion for 2008, with a net debt to equity ratio of
0.96. In addition to the capital raised, there is a strong need for financing to fund capital expenditures for infrastructure. In our forecasts, we therefore expect future capital to be provided through
shareholders and debt. The recent interest rate cuts and injections of funds into the banking sector
indicate that it may now be easier for Saudi companies to obtain financing from local banks. We
expect Zain’s level of debt to increase, and the net debt-to-equity ratio rise to 2 in 2012.
The bottom line is:
Being a third market entrant, paying a high licensing fee, facing intense competition, entering at
a penetration rate above 100%, and an estimated free cash flow breakeven point in 2012 were the
main factors for our issuing a Hold recommendation on the company.
July 1, 2009
43
equity research
ZAIN KSA
SWOT ANALYSIS
STRENGTHS
1 Savvy advertising and marketing campaigns
1 Brand name recognition
1 Offering value-added services and competitive international rates
1 Indirectly supported by the Kuwait Investment Authority through Zain Group
WEAKNESSES
1 High license cost
1 No dividends in the near term
1 Free cash flow to reach breakeven level in 2012
1 Massive capex to be incurred
1 High net debt/equity level at 0.96
OPPORTUNITIES
1 Low borrowing rates under current conditions
1 Convergence with a fixed line provider in the future in order to enable competitive pricing
for customers
THREATS
1 Intense competition in mobile and data services
1 Entered when mobile penetration rate was above 100%
1 Third market entrant
1 Mobile number portability
1 Refinancing needed
July 1, 2009
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equity research
ZAIN KSA
FINANCIAL ANALYSIS
The first quarterly revenues that Zain Saudi Arabia reported were at a level of SAR 581 million, with
a gross profit of SAR 146 million. Operating losses were SAR 656 million and net losses amounted to
SAR 765 million. The losses are due to the recent start of operations, high depreciation and amortization expenses, and selling, general, and administrative expenses a start-up telecom company
would normally incur.
We estimate that the number of subscribers reached 2.4 million for the first quarter of 2009.
2008 AT A GLIMPSE:
The company’s revenues came in at SAR 505 million for the year 2008. The company officially started
operating in August 2008. Gross profits amounted to SAR 16.5 million and operating losses were
SAR 1,700 million for the year 2008. The company recorded revenues for 4 months and expenses for
18 months, reporting a net earnings loss of SAR 2,278 million.
July 1, 2009
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equity research
ZAIN KSA
Table 17: Balance Sheet
(SAR million)
2008
2009 E
2010 E
583
319
305
889
625
484
550
318
665
876
1,006
1,104
1,126
1,204
Prepaid Expenses and Others
221
332
436
543
650
730
800
60
58
72
91
109
123
133
1,182
1,373
1,690
2,530
2,489
2,462
2,686
Inventory
Intangibles (net)
Other Assets
2011 E
2012 E
2013 E
2014 E
2,409
4,219
5,756
6,934
7,764
8,546
9,087
23,075
22,159
21,242
20,326
19,409
18,493
17,577
0
440
484
528
533
559
615
25,484
26,817
27,483
27,788
27,706
27,598
27,280
Total Assets
26,666
28,191
29,172
30,318
30,195
30,061
29,967
Accounts Payable
414
955
1,200
1,512
1,810
2,030
2,199
Vendor Financing
534
900
900
1,200
1,400
2,000
2,500
Murabaha Facility
9,164
5,785
1,173
4,000
2,000
3,000
4,000
Short Term Loans
0
2,500
2,500
3,000
3,000
3,000
3,000
315
1,006
1,256
837
500
250
0
2,175
Current Portion of Shareholder Loan
Current Portion of Long Term Debt
0
0
1,326
1,362
2,034
2,103
Other Current Liabilities
2,664
1,685
2,140
2,689
3,218
3,611
3,922
13,091
12,831
10,495
14,599
13,962
15,994
17,796
1,849
2,843
1,587
750
0
0
0
0
2,207
7,871
6,464
8,088
5,945
3,834
Shareholder Loans
Long Term Debt
Employees' End of Year Indenmity
4
4
4
5
5
6
6
1,853
5,054
9,462
7,219
8,093
5,951
3,840
Total Liabilities
14,944
17,885
19,957
21,819
22,054
21,945
21,636
Contributed Capital
14,000
14,000
14,000
14,000
14,000
14,000
14,000
Retained Earnings
-2,278
-3,694
-4,785
-5,501
-5,860
-5,884
-5,670
11,722
10,306
9,215
8,499
8,140
8,116
8,330
Total Liabilities and Shareholders' Equity
26,666
28,191
29,172
30,318
30,195
30,061
29,967
July 1, 2009
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equity research
ZAIN KSA
Table 18: Income Statement
(SAR million)
2008
2009 E
2010 E
2011E
2012 E
2013 E
2014 E
Revenues
505
2,558
3,368
4,193
5,019
5,631
6,173
Cost of Sales
489
1,126
1,415
1,782
2,133
2,393
2,593
Gross Profit
16
1,433
1,954
2,411
2,886
3,238
3,580
1,021
1,151
1,179
1,258
1,129
1,126
1,235
260
358
455
545
627
676
710
Selling and Marketing Expenses
General and Administrative Expenses
EBITDA
-1,265
-77
320
608
1,129
1,436
1,636
435
1,107
1,179
1,239
1,287
1,335
1,375
-1,699
-1,183
-859
-631
-157
101
261
226
301
304
160
281
209
134
EBIT
Interest
Other Income
Earnings for the Period
65
68
72
75
79
83
87
-1,859
-1,416
-1,091
-715
-359
-24
215
Pre-operating Expenses
418
-
-
-
-
-
-
-2,278
-1,416
-1,091
-715
-359
-24
215
EPS (SAR)
-1.33
-1.01
-0.78
-0.51
-0.26
-0.02
0.15
DPS (SAR)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Net income
VALUATION
FREE CASH FLOW MODEL
A small variation in market share, ARPU, or discount rate can lead to a significant change in the
target price. We estimate that the figures and target price are fairly presented. Subjective estimates
play a major role in valuing a company in its early phase of operations.
Using the Discounted Cash Flow model, we have estimated the intrinsic value of Zain derived from
forecasted financials below. The assumptions of the DCF were based on a 6-year forecast period,
with a WACC of 6.92%. The model uses a long term growth rate of 3%. The fair value obtained from
this model is SAR 11.69, implying a 0.51% downside potential from the current price of SAR 11.75.
Table 19: Forecasted Free Cash Flows
(SAR million)
2009 E
2010 E
2011E
2012 E
2013 E
2014 E
-77
320
608
1,129
1,436
1,636
-954
-370
-604
-604
-499
-323
2,000
1,800
1,500
1,200
1,200
1,000
Free Cash Flow to the Firm
-1,122
-1,110
-288
534
734
959
Present Value of Free Cash Flow to the Firm
-1,050
-971
-236
408
526
EBITDA
Change in Working Capital
Capex
642
Present Value of Terminal Value
28,320
Intrinsic Value of the Firm
27,639
Net Debt
11,279
Intrinsic Value of Equity
16,360
WACC
6.92%
3.00%
Shares Outstanding (million)
1,400
NAV (SAR)
11.69
July 1, 2009
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equity research
telecom
APPENDIX: OWNERSHIP STRUCTURE OF REGIONAL TELECOM PLAYERS
Saudi Government
UAE Government
70%
60%
Etisalat
0.80%
27%
Mobily
Qatar Telecom
51%
Wataniya
21%
Kuwait Investment
Authority
24%
Kuwait Telecom
26%
STC
25%
Zain Kuwait
25%
Zain KSA
Sources: Companies’ financials
July 1, 2009
48
equity research
Fair Value Definition
Recommendation Guide
telecom
It is an unbiased estimate of the 12-month potential market price of the stock
SELL
Downside
REDUCE
-30%
HOLD
-10%
ACCUMULATE
+10%
+30%
BUy
Upside
BUY: Upside potential in share price is more than 30%
ACCUMULATE: Upside potential in share price is between 10 and 30%
HOLD: Upside or downside potential in share price less than 10%
REDUCE: Downside potential in share price is between 10 and 30%
SELL: Downside potential in share price is more than 30%
Address
Audi Saudi Arabia
Centria Building • Prince Mohammad bin Abdulaziz Road (Tahlia) • P.O. Box 250744 • Riyadh 11391 • Saudi Arabia
Phone: +966 1 2199300 • Fax: +966 1 4627942 • Email: contactus@audisaudiarabia.com
DISCLAIMER
“All rights reserved. This research document is prepared for the use of clients of Audi Saudi Arabia and Bank Audi SAL
and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Audi Saudi Arabia and Bank Audi SAL. Receipt and review of this research document constitute
your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information
contained in this document prior to public disclosure of such information by Audi Saudi Arabia and Bank Audi SAL.
The information herein was obtained from various public sources believed to be reliable but we do not guarantee its
accuracy. Audi Saudi Arabia and Bank Audi SAL make no representations or warranties whatsoever as to the data and
information provided and Audi Saudi Arabia and Bank Audi SAL do not represent that the information content of this
document is complete or free from any error. This research document provides general information only. Neither the
information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities
or other investment products related to such securities or investments. It is not intended to provide personal investment
advice and it does not take into account the specific investment objectives, financial situation and the particular needs
of any specific person who may receive this document.
Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other
investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other
investments, if any, may fluctuate, and that the price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Audi Saudi Arabia and Bank Audi SAL or its officers or one
or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related
investments. Audi Saudi Arabia and Bank Audi SAL shall not be liable for any loss or damages that may arise, directly or
indirectly, from any use of the information contained in this research document. This research document is subject to
change without prior notice.”
July 1, 2009
49

TELEcOM SEcTOR IN SaUDI aRaBIa: caLLING FOR

Transcription

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