Refer to important terms or use, disclaimers and disclosures on back page. Saudi Fransi Capital
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Mobily played out; STC unfolding
We initiate coverage on the Saudi telecom sector with an optimistic outlook. The Kingdom‘s
telcos have been investing in network upgrades and are, in our opinion, well-placed to tap
emerging broadband and data services opportunities. We see Saudi Telecom Company
(7010/STC AB), which is ahead in the capex cycle, offering a free cash flow yield nearly twice
that of Etihad Etisalat (Mobily) (7020/EEC AB), which is currently making considerable capital
investments. We find STC‘s valuation most attractive, the risk perception around the shares to
be overdone and the recent weakness in the shares as a lucrative entry point. Mobily, a pure
play on the Saudi market, has recorded strong earnings growth and ROE well above peer
average, however, shares had a phenomenal run and we see them as almost fairly valued at
current levels.
BUY STC with TP of SAR 51.1/share, HOLD Mobily: With STC regaining the
domestic market initiative backed by an upgraded fixed broadband infrastructure
capable of bringing interactive entertainment and high-speed data to every Saudi
home and business, much of its capex spend behind coupled with some international
operations turning EBITDA positive – STC is undoubtedly our top-pick. We start STC
with BUY recommendation and Target Price (TP) of SAR 51.1 per share – implying an
upside of 28%. Our initiation on Mobily is with HOLD recommendation and TP of SAR
80.6 per share, suggesting a moderate upside of 8%. With an EV/EBITDA 2013 of
4.6x 2013, STC is at a 17% discount to the Middle East and Africa (MEA) peers, while
at 6.9x, Mobily is trading at a premium of 24% to MEA peers.
Increasing broadband penetration and data revenue to drive top line: We expect
STC to deliver a top-line CAGR of 3.9% versus Mobily‘s 5.4% for the period 2012-17e.
Broadband services is the main driver to revenue growth, with segment penetration
(as a % of household) forecast to reach 60% in 2017 compared to an estimated 45%
in 2012. Favorable demography (high percentage of a tech–savvy, young population,
~57% under 30y), rising number of internet users, low levels of broadband penetration,
increasing smartphone adoption in the Kingdom coupled with a potentially large
appetite for data intensive entertainment solutions and a push towards e-government
would primarily drive demand in the broadband market. Unlike voice services (where
mobile services substituted fixed line), the emerging trend of data service adoption
through Wi-Fi networks (vis-à-vis cellular network) is gaining traction across several
developed markets.
EBITDA margins to expand; earnings outlook positive: We forecast broadband to
drive growth for Saudi telcos, with STC expected to leverage on its dominant market
position in the fixed line/FTTH operations (fiber ~10x Mobily), push into mobile
broadband and pricing power while international market growth prospects convert into
EBITDA contribution. Leadership position in mobile broadband space, management
track record and superior ROE‘s are positives for Mobily. We expect EBITDA margins
for both entities to expand ~120-250 bps to ~38-39% levels. Earnings are projected to
grow at an average 4-7% yoy over the next five years.
International markets offer long-term growth prospects for STC: International
markets offer long-term growth opportunities and earnings diversification. However, in
view of the ongoing political risks across the Middle East region and recent one-off
hits, investors are likely to attach a discount to diversified telcos like STC. We believe
the Saudi market is relatively well-insulated from various regional risks and domestic
focused Mobily offer a better perceived risk profile vis-à-vis STC. However, we see
that the attractive growth prospects of STC‘s international operations, including Kuwait
(top line up ~127% during 2011–2012) and Bahrain (up ~170% over the same period),
have been overshadowed. Nevertheless, with an estimated ~77% of EBITDA coming
from Saudi Arabia, the 33% discount on EV/EBITDA 2013 on STC relative to Mobily is,
in our opinion, excessive and should narrow in the coming year.
Rating Summary
Company Rating Price Target
Price Upside
Saudi Telecom (STC)
BUY 39.9 51.1 28.0%
Etihad Etisalat
(Mobily)
HOLD 74.8 80.6 7.8%
Zain KSA NC* - -
Prices as of February 11, 2013; * Not covered
Valuation Summary 2013e
Company P/E EV/
EBITDA
Dividend yield
Cash flow
yield
Saudi Telecom (STC)
9.0 4.6 5.0% 12.8%
Etihad Etisalat
(Mobily)
9.0 6.9 6.2% 7.3%
Sources: Company, Saudi Fransi Capital analysis
Telecom stock movement vs TASI
Source: Bloomberg
Sector Coverage
Roy Cherry
+966- 1-2826844
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Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 2
STC: Key Forecast
Revenue and EBITDA margin (2012-2017e)
EPS vs Net income margin (2012-2017e)
Capex vs Capex-Sales (2012-2017e)
Sources: Company reports, Saudi Fransi Capital analysis
Note: Forecast based on existing accounting methodology, EBITDA and net income margins exclude one-off‘s.
Mobily: Key Forecast
Revenue and EBITDA margin (2012-2017e)
EPS vs Net income margin (2012-2017e)
Capex vs Capex-Sales (2012-2017e)
Sources: Company reports, Saudi Fransi Capital analysis
Note: 2012 EPS adjusted for 770mn shares
59.4 60.7 62.765.5
68.571.8
30%
32%
34%
36%
38%
40%
42%
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3.7
4.4 4.64.9
5.25.6
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EPS Net Income Margin (%) (RHS)
8.8
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Capex Capex-sales (%) (RHS)
23.625.6 26.5
27.929.4
30.8
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34%
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42%
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7.88.3
8.89.4
9.810.2
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28%
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4.24.5
4.74.9
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Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 3
Summary financials and ratios – STC and Mobily
STC (in SARmn) 2008 2009 2010 2011 2012 2013e 2014e
Revenue 47,469 50,780 51,787 55,662 59,372 60,722 62,659
EBITDA 21,743 20,612 19,621 20,025 20,945 22,191 23,132
Net Profit 11,038 10,863 9,436 7,729 7,351 8,875 9,135
Earnings per share, SAR 5.5 5.4 4.7 3.9 3.7 4.4 4.6
Dividend per share, SAR 3.8 3.0 3.0 2.0 2.0 2.0 2.5
Total Assets 99,762 109,587 110,781 111,402 117,912 127,512 133,970
Total Debt 36,321 36,109 33,697 33,598 34,823 37,526 38,360
Total Equity 42,562 50,833 53,464 54,082 58,969 64,543 69,467
Key Ratio and Valuation
EBITDA margin (%)* 45.8% 40.6% 37.9% 36.0% 35.3% 36.5% 36.9%
Capex/ Sales 34.3% 30.8% 21.9% 14.1% 14.8% 16.0% 15.0%
ROAA (%) 13.3% 10.7% 9.1% 7.1% 7.0% 7.8% 7.5%
ROAE(%) 30.5% 28.0% 23.1% 17.2% 16.3% 17.8% 16.9%
Cash flow yield (%) 6.1% 0.4% 12.3% 10.8% 4.2% 12.8% 14.1%
P/Earnings 6.6 7.2 7.3 10.3 10.9 9.0 8.7
P/Book 2.2 2.1 1.9 1.7 1.6 1.4 1.3
EV/ EBITDA 5.5 5.2 5.7 5.6 5.2 4.6 4.2
P/Sales 2.3 1.7 1.6 1.4 1.3 1.3 1.3
Mobily (in SARmn) 2008 2009 2010 2011 2012 2013e 2014e
Revenue 10,795 13,058 16,013 20,052 23,642 25,553 26,461
EBITDA 3,794 4,837 6,165 7,454 8,591 9,267 9,660
Net Profit 2,092 3,014 4,211 5,083 6,018 6,406 6,797
Earnings per share, SAR 2.7 3.9 5.5 6.6 7.8 8.3 8.8
Dividend per share , SAR 0.7 1.1 1.8 3.0 3.9 4.6 4.9
Total Assets 27,192 30,926 33,430 37,501 38,623 42,617 46,468
Total Debt 9,790 8,595 7,972 7,073 8,258 9,039 9,468
Total Equity 9,754 12,243 15,580 18,388 20,906 23,769 26,808
Key Ratio and Valuation
EBITDA margin (%) 35.1% 37.0% 38.5% 37.2% 36.3% 36.3% 36.5%
Capex/ Sales 27.4% 25.2% 20.5% 18.5% 20.6% 17.5% 16.0%
ROAA (%) 8.9% 10.4% 13.1% 14.3% 15.8% 15.8% 15.3%
ROAE(%) 26.7% 27.4% 30.3% 29.9% 30.6% 28.7% 26.9%
Cash flow yield (%) 1.0% 1.7% 3.8% 5.2% 3.8% 7.3% 8.6%
P/Earnings 27.5 19.1 13.7 11.3 9.6 9.0 8.5
P/Book 5.9 4.7 3.7 3.1 2.8 2.4 2.1
EV/ EBITDA 17.4 13.5 10.4 8.4 7.5 6.9 6.5
P/Sales 5.3 4.4 3.6 2.9 2.4 2.3 2.2
Sources: Bloomberg, Company reports, Saudi Fransi Capital analysis
Note: Per share data for Mobily based on 770mn shares;
* Excluding One-off charges
Historical multiples based on closing prices as of February 11, 2013
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 4
TABLE OF CONTENTS
Mobily played out; STC unfolding ..................................................................................................................................... 1
Summary financials and ratios – STC and Mobily ........................................................................................................... 3
Investment Thesis ............................................................................................................................................................... 6
Mobily mostly played-out, STC still unfolding.................................................................................................................................................. 6
Saudi Arabian Telecom Market ........................................................................................................................................ 13
Mobile revenue accounts for 80% of Saudi market ...................................................................................................................................... 13
Saturated mobile penetration in Saudi Arabia with three operators, STC leading ........................................................................................ 13
Similar prices for mobile services leave little to differentiate on pricing front ................................................................................................ 15
Competitive pricing for iPhones; most players attracting customers through “free” offers ............................................................................ 16
STC’s dominance in fixed line to continue .................................................................................................................................................... 17
Broadband opportunity untapped; attractive growth prospects for data services ......................................................................................... 19
STC’s superior pricing power for high-speed FTTH services ....................................................................................................................... 21
Internet usage in Saudi Arabia has substantial room for growth .................................................................................................................. 22
Trend reversal of fixed-mobile substitution could unfold in data service; STC at a competitive advantage ................................................. 25
Intensifying competition; STC enjoys pricing power in FTTH ....................................................................................................................... 26
Margins under pressure; high ARPU data services to drive EBITDA ........................................................................................................... 26
High bad debt provision for STC, potential to improve exists ....................................................................................................................... 27
Potential value creation opportunity through network sharing for both STC and Mobily .............................................................................. 27
STC ahead in capex cycle; opportunity to drive asset returns higher ........................................................................................................... 28
Moderate regulatory risks & stable royalty fees ............................................................................................................................................ 28
Regulatory cost pressure easing, room for margin expansion as data revenue mix increase ...................................................................... 29
Strong balance sheet position; capital return prospects are high ................................................................................................................. 30
STC: Investment Highlights ............................................................................................................................................. 31
Investment Thesis ............................................................................................................................................................. 33
STC’s background: Leader among GCC telecoms ....................................................................................................................................... 33
Well established network infrastructure; competitive advantage in fixed broadband .................................................................................... 34
International markets offer long-term growth for STC, but investor concerns exist ...................................................................................... 36
Change in reporting method starting 1Q 2013 .............................................................................................................................................. 40
New international opportunities for STC – Morocco, Algeria and Libya ........................................................................................................ 40
Margin outlook positive ................................................................................................................................................................................. 41
Improving core operating environment to drive earnings .............................................................................................................................. 41
Legacy PSTN a drag on STC’s returns ......................................................................................................................................................... 43
Capex program mostly behind for STC ......................................................................................................................................................... 44
Strong balance sheet to support dividends ................................................................................................................................................... 44
Our forecast vs. consensus ........................................................................................................................................................................... 45
4Q 2012 results: One-off charges impact bottom line ................................................................................................................................... 45
In a worst case scenario, STC could take upto 32% knock on earnings ...................................................................................................... 45
Valuation ............................................................................................................................................................................ 46
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 5
We arrive at a fair value of SAR 51.1 per share for STC .............................................................................................................................. 46
Mobily: Investment Highlights ......................................................................................................................................... 53
Investment Thesis ............................................................................................................................................................. 55
Mobily establishing itself as market leader from being market challenger .................................................................................................... 55
Solid mobile infrastructure; but behind in fixed broadband ........................................................................................................................... 55
Data services the key margin driver, EBITDA outlook positive ..................................................................................................................... 56
Earnings outlook is positive ........................................................................................................................................................................... 57
Management track record and superior ROE are positives for Mobily ......................................................................................................... 58
Mobily to continue its ambitious capex program ........................................................................................................................................... 59
Mobily is a key asset for Etisalat; a case for future stake increase exists ................................................................................................... 60
Mobily expected to continue with the shareholder-friendly policy ................................................................................................................. 60
Our forecast vs. consensus ........................................................................................................................................................................... 60
4Q 2012 results: Continuous business momentum ...................................................................................................................................... 61
Valuation ............................................................................................................................................................................ 62
We arrive at a fair value of SAR 80.6 per share for Mobily ........................................................................................................................... 62
Appendix: Telecom sector ............................................................................................................................................... 68
Appendix: Saudi Telecom Company ............................................................................................................................... 70
Appendix: Etihad Etisalat Company (Mobily) ................................................................................................................ 71
Recommendation Framework .......................................................................................................................................... 72
Research & Advisory Department ................................................................................................................................... 73
Disclaimer .......................................................................................................................................................................... 74
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 6
Mobily mostly played-out, STC still unfolding
While Etihad Etisalat (Mobily) has outperformed the Tadawul All-Share Index (TASI), Saudi Telecom Company (STC)
has been an obvious long-term under-performer. STC‘s underperformance was initially warranted based on concerns
about: 1) growing domestic competition, 2) under-performing acquisitions, 3) burden of fixed line network, 4)
perceived lack of agility and innovation compared to newcomers, and 5) exposure to regional countries facing
instability.
STC underperforms market; Mobily a clear outperformer (2007 to February 11, 2013)
Sources: Bloomberg, Saudi Fransi Capital analysis
Today STC has absorbed the initial ‗shock‘ to its business, regrouped and is, in our view, back on the offensive on
multiple fronts. In our opinion, STC is regaining the domestic market initiative backed by an upgraded fixed
broadband infrastructure capable of bringing interactive entertainment and high-speed data to every Saudi home and
business coupled with international operations delivering growth and starting to turn EBITDA positive – STC is
undoubtedly our top-pick.
In short, we believe the stock is at a turning point and initiate our coverage with a BUY recommendation and a target
price (TP) of SAR 51.1 – implying an upside of 28% to the last of SAR 39.9 per share. In contrast, we believe Mobily
is almost fairly valued at current price levels and start our coverage of the stock with a HOLD recommendation and a
TP of SAR 80.6, suggesting a moderate upside of 8% to the most recent closing price of SAR 74.8 per share.
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TASI STC Mobily
Investment Thesis
Mixed performance by Saudi telcos; Mobily outperforms on strong fundamentals
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 7
While Mobily, is a more purist play, continuing to command a sector premium, we believe the regained traction at
STC will shrink the gap in 2013. We see the recent weakness in STC‘s shares, on the back of the one-off expenses
recorded in 4Q 2012, as an attractive entry point. STC is down ~8% YTD, compared to a rise of around 8% for
Mobily.
STC is our top pick
Company Rating Investment merits Investment risks
Saudi Telecom Company
(STC AB)
BUY
Well established infrastructure to support broadband demand
Pricing power in high-speed broadband services
Attracting customers through bundled service offerings
International growth avenues; diversified income streams
Attractive dividend yield
Legacy PSTN network to drag company’s ROE
Near-term risks attached with international operations – Bahrain/Kuwait and India
Declining market share in mobile services
Recent management changes pose near term risks
Etihad Etisalat/ Mobile
(EEC AB)
HOLD
Industry leading ROE’s
Market leadership in Mobile broadband
A priced asset for Etisalat’s regional growth ambition
Attractive dividend yield
Faster migration of broadband data into fixed networks
Source: Saudi Fransi Capital analysis
Both STC and Mobily are trading at a P/E of 9.0x on 2013 earnings in line with GCC peers, but at a discount of 10%
to their counterparts in the Middle East and Africa (MEA). On EV/ EBITDA basis, STC is trading at 4.6x on 2013
EBITDA, a 17% discount to MEA and 1% discount to GCC peers, while Mobily trades at a 24% premium to MEA
peers and 48% premium to GCC peers.
Current valuation under prices improving growth/risk profile of telcos
Saudi Telecom Index valuation trend
(Past P/E and P/B based on historical prices/ forward
multiples based on current prices)
Saudi Telecom Index valuation trend
(Past EV/EBITDA and EV/ Sales based on historical prices
/ forward multiples based on current prices)
18.0
14.9
10.912.3
13.1
10.99.9
2.2 2.2 1.8 1.9 2.1 1.9 1.7
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2009 2010 2011 2012 Current 2013e 2014ePrice/Earnings (x)Price/Book Value (x)Linear (Price/Earnings (x))Linear (Price/Book Value (x))
3.12.8
2.1 2.2 2.3 2.2 2.1
9.4
8.2
6.27.0 7.1
6.46.0
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2009 2010 2011 2012 Current 2013e 2014eEV/SalesEV/EBITDALinear (EV/Sales)Linear (EV/EBITDA)
International diversification prospects overshadowed by ongoing tension in the region; a drag on STC’s valuation
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 8
Sources: Bloomberg, Saudi Fransi Capital analysis
Potential to drive asset returns higher; capex cycle is mostly behind especially for STC
The declining capex-to-sales ratio augurs well for the sector‘s asset return. We expect STC‘s capex-to-sales to
moderate further to 13% during the forecast period, while Mobily is expected to maintain an average 16% capex-to-
sales for the next five years. Mobile network coverage is well in place for both STC and Mobily (>95% in Saudi
Arabia) and services such as ADSL, FTTH and 3G/4G are being made network ready. With the international
operations of STC gaining traction and FTTH services taking off in Saudi Arabia, STC is thus expected to see its
capex-to-sales decline from a peak 15% expected in 2013 to 13% by 2017. In comparison, mature global players
have capex-to-sales ratios of around 10-13% - implying our assumption is on the conservative side. However, for
STC, the legacy PSTN network is expected to remain a drag on returns, which explains the gap in ROE/ROA
between Mobily and STC. This would continue to be a structural gap between the telcos, with Mobily warranting a
sector premium.
ROE/ROA of Saudi telcos vs. MEA peers
Return on Equity (%) (LFY)*
*LFY: Last Fiscal Year
Return on Assets (%) (LFY)
Sources: Bloomberg, Saudi Fransi Capital analysis
STC
Mobily
Etisalat
Du
Batelco
Omantel
Zain Kuwait
Qtel Jordan Telecom
Turkcell
Vodacom
MTN
Maroc Telecom
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Size of bubble indicates market cap
STC Mobily
Etisalat
Du
Batelco
Omantel
Zain Kuwait
Qtel
Jordan Telecom
Turkcell
Vodacom
MTN
Maroc Telecom
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EV / EBITDA 2013e
Size of bubble indicates market cap
16.3
30.6
22.8
19.4
11.8
23.4
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14.3
22.1
11.5
60.7
24.9
44.2
22.1
0 10 20 30 40 50 60
STC
Mobily
Etisalat
Du
Batelco
Omantel
Zain Kuwait
Qtel
Jordan Telecom
Turkcell
Vodacom
MTN
Maroc Telecom
MEA - Median
7.0
15.8
7.9
8.9
8.9
16.0
8.1
2.6
13.6
7.3
22.7
12.3
17.0
8.9
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STC
Mobily
Etisalat
Du
Batelco
Omantel
Zain Kuwait
Qtel
Jordan Telecom
Turkcell
Vodacom
MTN
Maroc Telecom
MEA - Median
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 9
STC offers ~2x higher free cash flow yield than Mobily
Although Mobily enjoys a superior ROE, STC‘s attractive free cash flow yield (~2x that of Mobily) is a positive in our
view. As a percentage of free cash flows, we believe that Mobily would re-invest 80–90% in the business as it
commences network upgrade/fiber rollout; for STC, however, we see this proportion being relatively lower with most
of its FTTH expansion completed.
STC generates ~2x higher free cash flows than Mobily
STC – free cash flows (SAR bn)
STC – Capex as a % of free cash flows (%)
Mobily – free cash flows (SAR bn)
Mobily – Capex as a % of free cash flows (%)
Sources: Saudi Fransi Capital analysis
STC 2013e free cash flows offer a yield of 12.8% compared with Mobily‘s 7.3%. Therefore, at current prices, we
would prefer buying STC‘s cash flows to Mobily‘s.
10.211.3
12.012.8
14.4
0
4
8
12
16
2013E 2014E 2015E 2016E 2017E
95.2%
83.4%79.1%
75.0%
64.9%
0%
20%
40%
60%
80%
100%
120%
2013E 2014E 2015E 2016E 2017E
4.2
5.05.5
5.96.3
0
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2
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6
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2013E 2014E 2015E 2016E 2017E
105.7%
85.2%81.8% 79.9% 78.1%
0%
20%
40%
60%
80%
100%
120%
2013E 2014E 2015E 2016E 2017E
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 10
STC’s attractive free cash flow yield
Free cash flow yield – STC (%) 2013e-17e
Free cash flow yield – Mobily (%) 2013e-17e
Sources: Saudi Fransi Capital analysis
Higher risk premium for regionally diversified STC to remain a near-term stock overhang
Despite prospects of earnings diversification and growth opportunity in international operations, the ongoing regional
tension is likely to remain an investor concern on STC for the near term. STC is relatively less exposed (than GCC
peers) to the various Middle East countries currently undergoing political tension (Egypt, Syria, Libya, Yemen and Iraq).
However, uncertainty in Bahrain and to a much lesser extent Kuwait poses a risk for STC‘s Viva operations in the GCC
region. In our view, the Saudi market is relatively well insulated from regional tension and Mobily offers a better risk
profile than STC. One-off charges (totaling SAR 1.2bn) during 4Q 2012 have renewed investor concerns over STC‘s
international operations.
Growth at home – Key market forecasts
We expect Saudi telcos to deliver healthy earnings growth over the next five years (average growth of 5.1% to 8.5%
during the forecast period to 2017), led by attractive growth prospects in the domestic market. Expected increase in
broadband penetration in the Kingdom and a better mix of high ARPU data services with growing post-paid customer
base should support EBITDA margins. Penetration of high ARPU data services is expected to arrest the downtrend in
EBITDA margins; our margin projection is in the range of 36-39% over the forecast period. Both STC and Mobily are
operating at margins below the MEA average.
Broadband and data services to drive revenue growth
We project single-digit yoy revenue growth for STC and for Mobily over the next five years. Increasing broadband
penetration is expected to drive the top line. The broadband opportunity in the Kingdom is currently untapped. A young,
tech-savvy population and growing internet user base bode well for data services. With broadband penetration as low
as 5.7% of population, the Kingdom offers significant long-term potential, compared to a GCC average of 9%. While
Mobily is expected to lead the mobile broadband market, we expect STC to benefit from a trend of increasing data
traffic through fixed line networks. Mobile broadband is witnessing a competitive pricing environment, but we see STC
commanding higher pricing power for home broadband services through its FTTH network and ability to offer bundled
services including, in addition to broadband, IP TV and landline.
Mobily to attain 40% market share in mobile by 2017; STC to dominate fixed lines
We expect Mobily to garner 40% market share (of subscribers) by 2017, inching closer to market leader STC, while
Zain KSA is forecasted to capture 15% of the total market. While ongoing challenges at ZAIN KSA are expected to
12.8%
14.1%15.1%
16.0%
18.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2013E 2014E 2015E 2016E 2017E
7.3%
8.6%9.5%
10.2%11.0%
0%
2%
4%
6%
8%
10%
12%
14%
2013E 2014E 2015E 2016E 2017E
Favorable environment for adoption of high ARPU data services
Favorable environment for adoption of high ARPU data services
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 11
translate into near-term gains for both STC and Mobily, we have conservatively projected some growth in Zain KSA‘s
long-term market share. We expect STC to continue leading the fixed line market with 90% share.
Telecom penetration levels
Target market penetration* estimate (%) 2017e
Source: Saudi Fransi Capital analysis
*Fixed line/ Fixed broadband penetration as a % of households
STC is expected to gain mobile market share and lose some of its advantage in fixed broadband market to Mobily.
Market share forecast
Fixed line target market share estimate (%) 2017e
Mobile market share estimate (%) 2017e
Fixed broadband target market share estimate (%) 2017e
Mobile broadband market share estimate (%) 2017e
Source: Saudi Fransi Capital analysis
67%
45%
186%
43%
70%60%
210%
70%
0%
50%
100%
150%
200%
250%
Fixed Line Fixed Broadband Mobile Mobile Broadband
2012e 2017e
97%90%
3%10%
0%
20%
40%
60%
80%
100%
120%
2012e 2017e 2012e 2017e
STC Others
47%
45%
39%40%
34%
36%
38%
40%
42%
44%
46%
48%
2012e 2017e 2012e 2017e
STC Mobily
95%90%
5%10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012e 2017e 2012e 2017e
STC Mobily
23%
35%
73%
55%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2012e 2017e 2012e 2017e
STC Mobily
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 12
Key investment risks
Downside risks
Aggressive price-based competition could impact telcos’ profitability: We see high degree of competition in
the telecom sector, especially in the mobile and broadband markets, with Zain KSA fast establishing its market
presence. New MVNO licenses could see higher levels of competition for customer acquisition and aggressive
pricing strategies could negatively impact profitability of operators.
Political tension in the region could drive equity risk premium higher for telecom: We fail to see investors
attaching a premium for international market opportunities of Saudi telcos considering the ongoing political
tension in various Middle East/African nations. Although Saudi Arabia is well insulated from these risks and STC
operations are less exposed (than peers) to crisis-hit regions, investors could attribute a higher risk to regional
exposure. Also, poor track record of Zain and Etisalat is expected to remain a concern over the prospects of
international strategies by GCC telcos. However, at this stage, we do not foresee any risk to STC‘s operations in
Turkey due to Syria‘s ongoing crisis and Turkey‘s response to the same (missile deployment at the border).
Risks attached to technology changes: The telecom market is characterized by rapid technology changes,
and adoption of new market technologies could impede operator returns. STC had to scale back its WiMax
operations due to emergence of alternate technologies. Data traffic could increasingly turn to fixed Wi-Fi from
cellular network. Such trends could significantly change operator profitability and impact asset turnover in the
sector.
Moderate regulatory risks, renewed investor concern for regional telcos: Besides, new MVNO license
considerations at CITC, there could be potential new telecom licenses issued in the Kingdom – however, this
seems unlikely at the moment. In event such a development would materialize, it would be detrimental to the
prospects of existing players and could significantly alter the competitive landscape and impact sector profitability
and our forecasts. The recent regulatory action in the UAE (royalty fee structure changes for Etisalat/ Du)
renewed investors concerns over regulatory risks for regional telcos, however, our understanding is that no such
plans are in the making in Saudi Arabia.
Escalation of Euro area crisis could lead to a market sell-off: While the telecom sector in Saudi Arabia is well
insulated from the Euro area crisis, renewed concerns in Europe could trigger a return of risk aversion and lead
to a market sell-off, thereby impacting overall stock market performance, including that of the telecom sector.
Upside risks
Continued challenges at Zain KSA could be positive for both STC and Mobily: We see Zain KSA‘s
corporate restructuring as a near-term challenge that the management is attempting to sort out. However, any
further delay in restructuring could benefit both STC and Mobily. The resulting decrease in the level of
competition within the sector could bring about positive changes to risk/ growth profile and drive STC/ Mobily‘s
valuation higher.
Higher uptake of new broadband services, more sustainable ARPU’s: Higher than expected up take of new
broadband services in the Kingdom could sustain ARPU‘s higher for both STC and Mobily.
Reduction in Government charges, especially Mobile services could provide further upside: While we do
not expect any changes in the royalty fee structure, we note that CITC had earlier reduced the fixed line royalties
from (15% to 10%) post introduction of new licenses. Mobile services are charged at 15% currently and any
reduction of the same could drive margins and hence valuation positively.
Increased disclosure, especially on STC’s international operations, could help reduce perceived
investment risks attached into the sector: Investor have limited insight into STC‘s international operations and
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 13
are therefore attaching a risk premium to the business, something we could see decline significantly in case of
increased disclosure.
Mobile revenue accounts for 80% of Saudi market
Revenues from domestic telecom services (comprising mobile/GSM, fixed and data) rose at a CAGR of 13.2% to SAR
65.7bn during 2005–11. The total sector revenue, including international operations, increased at a CAGR of 17.7% to
SAR 83.9bn during the same period.
Dominance of mobile; STC commands ~55% revenue share
Revenue market share (2008 – 2017e)
Segment-wise trends in sector revenue (in SAR bn)
(Total excluding international revenue)
Sources: CITC, Saudi Fransi Capital analysis
Revenues from mobile services have increased at a CAGR of 13% since 2005 and account for 80% of the Saudi
telecom market. Amongst all operators, STC was the most negatively impacted initially, having lost considerable
subscriber share. Nonetheless, STC commands a lead over Mobily in terms of revenue share (an estimated 55% in
Saudi Arabia in 2012).
Saturated mobile penetration in Saudi Arabia with three operators, STC leading
Mobile services have been the key driver of the Saudi telecom sector. Mobile penetration increased to 191% in 2011
from 61% in 2005, reflecting a mature market. Currently, the Saudi penetration rate exceeds that in the rest of GCC,
baring the UAE. Emergence of new players such as Etihad Etisalat (Mobily) and Zain KSA ended STC‘s monopoly.
However, STC continues to lead the market with ~47% subscriber share. We forecast this share to decline to 45% over
the next five years due to increased competition. Mobily has acquired 39% market share in its seven years of
operations; we forecast its share to stabilize at 40% by 2017. The third operator Zain KSA was fast establishing its
market presence, but has more recently been facing financial and growth challenges, Zain KSA is likely to hold 15%
share over the next five years. We estimate penetration to rise to 210% and mobile subscriber base to 66.5mn by 2017.
0%
20%
40%
60%
80%
100%
Mobily Zain KSA STC- Saudi Arabia
25.2 28.5 33.2 38.0 39.0 45.1
52.4 9.0
9.8 9.3
11.2 13.5
15.5 13.3
9.5 14.5
16.6 18.2
0
15
30
45
60
75
90
2005 2006 2007 2008 2009 2010 2011
Mobile Fixed & Data International
34.2
65.7
61.6
52.5
49.2
42.538.4
Saudi Arabian Telecom Market
Mobile services – key driver of telecom
Saturated mobile market in Saudi Arabia
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 14
Mobily and Zain KSA expanded market presence
Mobile penetration Saudi Arabia vs. MEA/ BRIC (2011)
Market share by subscribers – Mobile (2005–17e)
Sources: ITU, IMF, CITC, Saudi Fransi Capital analysis
Led by rapid penetration of mobile services, the share of new prepaid connections in the total subscriber base
increased to nearly 88% in 2011 from 67% in 2005. However, with saturation of penetration levels, operators are
focusing on improving the post-paid customer mix. Furthermore, CITC‘s stricter regulation on SIM card registration
brought down the number of prepaid subscribers to 45.4mn in 3Q 2012 from 47.1mn in 2011. Accordingly, we expect
prepaid to account for 85% of the total subscribers by 2017. On the other hand, the share of postpaid subscribers is
expected to improve moderately to 15% by 2017.
Postpaid subscribers to increase; STC and Mobily benefit from weakness at Zain KSA
Prepaid/Postpaid mix – Mobile (2005–17e)
YoY revenue growth (2009–4Q 2012)
Sources: Company reports, Saudi Fransi Capital analysis
Increasing accessibility due to better affordability intensified competition and rapidly expanded the mobile segment.
Consequently, ARPUs declined to less than SAR 80 per month in 2012 (estimated) from ~SAR 150 per month in 2005.
We expect the mobile ARPU‘s to decline further amid the prevailing competition, segment maturity and possible
inclusion of MVNOs in the coming years. We estimate ARPU in the mobile segment to decline 1–4% annually during
our forecast period.
124%
180%
74%
73%
191%
130%
135%
218%
150%
156%
104%
99%
114%
120%116%
0% 40% 80% 120% 160% 200% 240%
Brazil
Russia
India
China
Saudi Arabia
Qatar
Kuwait
UAE
Bahrain
Oman
Egypt
Algeria
Morocco
Jordan
Tunisia
83%
69%61%
53% 48% 47% 47% 47% 45%
17%
31%39%
41%41%
37% 39% 39% 40%
6%12% 16% 14% 14% 15%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012e2017e
STC Mobily Zain KSA
33%23%
17% 15% 14% 12% 12% 13% 15%
67%77%
83% 85% 86% 88% 88% 87% 85%
0%
20%
40%
60%
80%
100%
2005
2006
2007
2008
2009
2010
2011
2012e
2017e
Post-Paid (%) Pre-Paid (%)
21% 23%25%
12% 11%
33%
17%13%
3%
-4%
-15%
1%
7%
2%6%
17%
8% 9%
2%
-20%
-10%
0%
10%
20%
30%
40%
2009 2010 2011 Mar 12 Jun 12 Sep 12Dec 12
Mobily Zain KSA STC- Saudi Arabia
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 15
Mobile subscriber additions at the cost of declining ARPU levels
Mobile subscribers vs. ARPU (2005–17e)
Mobile ARPU – STC/ Mobily (2011–17e) in SAR per month
Sources: CITC, Saudi Fransi Capital analysis
Given STC‘s better postpaid subscriber mix (postpaid mix of 20–30% is high compared with the regional benchmark of
10–15%), we continue to assign it a mobile ARPU premium of 4–7% over Mobily for the near term. However, over the
long term, we expect STC‘s ARPU to be in line with Mobily as it protects mobile market share by lowering tariffs.
Meanwhile, Mobily would increasingly chase postpaid customers, which is expected to support ARPU. Thus, we expect
faster contraction in mobile ARPU for STC over the forecast period (~4% annual) than Mobily (~1% annually).
Similar prices for mobile services leave little to differentiate on pricing front
With focus increasingly shifting toward the broadband space, there is little differentiation on the pricing front among
players providing traditional mobile services (Voice/SMS). Analysis of basic plans (STC - Sawa, Mobily – 7ala and Zain
KSA Hala) indicates that prepaid pricing is mostly comparable between players, while there are differences in postpaid
offerings. For instance, all players charge prepaid customers with 55 halalas per minute for voice calls and 25 halalas
for SMS. For postpaid customers, Zain KSA (Mazaya Light plan) and STC (Jawal Easy) offer voice calls at 25/35
halalas respectively, while Mobily (Khatty) offers the same for 45 halalas.
Competitive pricing for mobile services
Mobile - Prepaid pricing – Basic offers
Voice call: in halalas per minute; SMS: in halalas per message
Mobile - Postpaid pricing – Basic plans
Voice call: in halalas per minute; SMS: in halalas per
message
Sources: Saudi Fransi Capital analysis
14.1
19.7
28.4
36.0
44.8
51.653.7 53.5
66.9
50
60
70
80
90
100
110
120
130
140
150
0
10
20
30
40
50
60
70
80
2005 2007 2009 2011 2017e
AR
PU
(S
AR
pe
r m
on
th)
Su
bscrib
ers
(m
n)
20
30
40
50
60
70
80
90
2011 2012e 2013e 2014e 2015e 2016e 2017e
STC - Mobile ARPU Mobily - Mobile ARPU
25
55
25
30
55
25
20
55
25
0
10
20
30
40
50
60
Fee (SAR) Voice Call SMS
STC - Sawa Mobily - 7ala Zain KSA - Hala
20
35
25
20
45
25
20
25 25
0
10
20
30
40
50
Fee (SAR) Voice Call SMS
STC -Jawal Easy Mobily - Khatty Zain KSA - Mazaya Light
Subscriber additions at the cost of ARPU contraction
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 16
We note players are competing through ―free benefits‖ plans to make free calls/SMS, with STC‘s pricing being more
attractive. For instance, STC charges SAR 99 for monthly free benefits compared to SAR 140 by Mobily and Zain KSA.
Overall, we find Zain KSA playing the pricing game, while STC is drawing customers through ―free benefits‖ offers. Zain
KSA remains the most aggressive offering attractive pricing plans.
STC’s attractive pricing of “free benefits plan”
Free benefits plans - Charge by validity (in SAR)
Free benefits include unlimited free calls (within network) and free SMS
Sources: Saudi Fransi Capital analysis
Competitive pricing for iPhones; most players attracting customers through “free” offers
Besides competitive pricing for Voice/SMS, telcos are offering attractive pricing plans for smartphones. iPhone offerings
are competitively priced in the Kingdom, with Zain KSA triggering a competition by recently slashing prices by 15–35%
across variants. However, most players are pushing the product free of cost to monetize through high APRU postpaid
connections. For instance, STC offers entry level 8GB iPhone free to customers who sign up for 12 months at SAR 249
per month, and most iPhone variants (except 64GB) free for a 18-month period. Zain offers iPhone 4 (8GB) for just
SAR 45 in its SAR 150 per month plan, while it offers iPhone free of cost in the SAR 450 per month plan(Mazaya Elite).
Mobily‘s offer of 8/16 GB free with SAR 349 per month plan appears the least attractive. STC also offers iPhone 5
(16Gb) free of cost for customers who sign-up for 18 months. Overall, we note that while Zain KSA has attractively
priced iPhone products, STC‘s ―free‖ offerings are drawing relatively more customer sign ups.
Zain KSA aggressively pricing “iPhone offerings”
iPhone product pricing (in 000‘ SAR)
Starting plans for free iPhone offers (in SAR per month)
* Zain has attractively priced the iPhone 4 (8 GB) at just SAR 45
Sources: Saudi Fransi Capital analysis
7 10 10
29
45 45
99
140 140
0
20
40
60
80
100
120
140
160
STC - Sawa Mobily - 7ala Zain KSA - Hala
1 day 1 Week 1 Month
1.6
2.5
2.9
3.2
2.32.5
2.9
3.2
1.5
2.22.4
2.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4 - 8GB 4S - 16GB 4S - 32GB 4S - 64GB
STC Mobily Zain
249
349
150
249
349
450
249
NA
450
0
100
200
300
400
500
STC Mobily Zain*
4 - 8GB 4S - 16GB 4S - 32GB
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 17
Introduction of mobile number portability (MNP) has also increased the level of competition in the Kingdom. Although
operators are focusing on converting a share of prepaid to post-paid mix to reduce subscriber churn, we expect service
quality to determine operator switching than competitive pricing. In our view, STC has a slightly better edge over Mobily
due to its better network coverage and bundled services offerings that may inhibit operator switching. In addition, STC
can draw operational experience from Turkey (through Oger Telecom), where MNP was introduced few years back.
Quality of Service – All players meet CITC benchmarks
Service quality 2011
Voice quality standards (score) 2011
Sources: CITC, Saudi Fransi Capital analysis
Operators are also cashing in on the high traffic during the Hajj season (Islamic pilgrimage) in the Kingdom. STC
launched two types of SAWA Haj SIM cards for the Haj season. STC also provided IP based Virtual Private Network
(IPVPN) connectivity to all railway stations. Mobily too is investing for Hajj traffic adding 150 new towers at Makkah and
Mashair. In addition, Mobily provided free internet access to pilgrims via WiFi in select regions. Mobily also tied up with
Bahrain Air for distribution of free pre-paid SIMs for travelers. Overall, we find STC at a relative competitive advantage
over Mobily due to its operating presence in Muslim populated countries such as Malaysia / Indonesia, who are
frequent travelers for Hajj season.
Note that the Hajj season which in recent years has been commencing in the fourth quarter and will continue to do so
for the next couple of years has some impact on earnings seasonality. Typically, the quarter accounted for an average
27% of total annual revenue in 2011 and 2012. Due to differences between the lunar and solar year/calendar the
starting date for the pilgrimage will be 10-11 days earlier each year. The Hajj is expected to move into the third quarter
(both commencements and finalization) starting 2015.
STC’s dominance in fixed line to continue
The Kingdom had 4.7mn fixed line subscribers in 3Q 2012 (please see Appendix A for subscriber data across fixed,
mobile and broadband services). An estimated 72% (3.4mn) are connected to households, with the balance 28%
(1.4mn) attributed to businesses.
Most notably, fixed line subscriptions are turning the tide and delivering growth again. Total subscribers picked up to
4.7mn, supported by growth in both segments, after an initial stagnation around the 4-4.2mn level during 2007-2010.
We believe, this offers further indication of STC‘s renewed push which has been enhanced by better offers and
bundling services and thus bringing supposedly dying assets/capabilities back to life as part of a comprehensive
customer experience. STC currently holds an estimated 97% market share of fixed lines.
0.41%0.61%
1.0%
0.0%
1.0% 1.0%
<2% <2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Unsuccessful Call rate Call drop rate
STC Mobily Zain KSA CITC Standards
3.73.7
4.0
>3.5
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.0
4.1
STC Mobily Zain KSA CITC Standards
Fixed line market in Saudi Arabia relatively less competitive; STC to dominate the segment
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 18
STC loses share to competition; room for growth in fixed lines
Fixed line penetration Saudi Arabia vs. MEA/ BRIC (2011)
Market share trends in fixed line segment (2005–17e)
Sources: CITC, Company reports, Saudi Fransi Capital analysis
Nevertheless, faster adoption of mobile services in the Kingdom suppressed the subscriber base for fixed lines, which
grew at a CAGR of just 3.9% since 2005 vis-à-vis 25% for mobile. In line with regional trends of fixed to mobile
substitution, we forecast a moderate increase in fixed line penetration. STC is expected to continue to lead with 90%
market share until 2017, while new operators such as Etihad Atheeb (―Go‖ brand) is expected to capture the rest.
We forecast the number of residential lines in Saudi Arabia to increase at a CAGR of 5.5% during 2011–17 and reach
4.1mn toward the end of our projection period. In addition to growth in the consumer market, the enterprise/corporate
sector offers key opportunities for Saudi telcos. We expect STC to sustain its competitive advantage in this segment.
The company accounts for the majority of the Kingdom‘s backbone infrastructure capacity (please see Appendix B for
STC‘s infrastructure details of STC); in fact, even competitors rely on this capacity. We expect the number of business
lines to increase at a CAGR of 9.3% to 2.2mn between 2011 and 2017.
Unlike the mobile segment, fixed line is less competitive. However, faster penetration of mobile services (subsititution
effect) has dented ARPU in the fixed line segment. We estimate ARPU in residential fixed line to have declined to less
than SAR 125 per month in 2012 from ~SAR 210 per month in 2005. We expect ARPU in the residential sector to
continue falling due to competition from mobile offerings. STC, which dominates the fixed line market in the Kingdom, is
now offering bundled services (broadband) to fixed line subscribers to arrest the fall in ARPU. Through its ‗Jood‘
packages, STC offers high-speed internet services along with unlimited fixed local/national calls and attractive
discounts on calls to international numbers.
Unlike residential fixed line, business line yields relatively better ARPU (estimated at ~1.5x), stemming from higher
minute usage/ data. We estimate ARPU in business fixed line to have declined to less than SAR 190 per month in 2012
from ~SAR 315 per month in 2005. During our forecast horizon, we expect ARPU in fixed line to decline 1–4% annually
for both residential and business lines.
22.1%
31.0%
2.7%
21.2%
16.4%
17.3%
15.8%
34.0%
24.5%
9.3%
10.8%
8.5%
11.1%
7.4%11.4%
0% 10% 20% 30% 40%
Brazil
Russia
India
China
Saudi Arabia
Qatar
Kuwait
UAE
Bahrain
Oman
Egypt
Algeria
Morocco
Jordan
Tunisia
100% 100% 100% 100% 100% 99% 99%97%
90%
1% 1% 2%3%
10%
84%
86%
88%
90%
92%
94%
96%
98%
100%
2005 2006 2007 2008 2009 2010 2011 2012e2017eSTC Others
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 19
Fixed line subscriber growth picking up, sharp decline in ARPU levels
Residential fixed line subscribers (2005–17e)
Business line subscribers vs. ARPU (2005–17e)
Sources: CITC, Company reports, Saudi Fransi Capital analysis
The wider economic development in Saudi Arabia, is translating into establishment of new economic cities, and
favorable investment climate is driving new business establishments, thereby creating robust demand for connectivity.
Development initiatives in the ICT sector by the government also bode well for enterprise sector demand. The
increasing number of new establishments in the Kingdom is a positive for the segment growth prospects. STC has long
enjoyed competitive advantage over peers due to its long-standing relationship with large corporations.
The favorable investment climate for new enterprises in the Kingdom and demand from SMEs are expected to drive
uptake in the business lines. While the global economy has been in turmoil, Saudi GDP growth has run between 5.1-
7.1% over the past three years and it is projected to expand by 4.2% in 2013 according to IMF. Meanwhile, bank
lending continues to expand at a rate of 17% (3Q 2012) - providing further indication of the growth underway and
prospects for expansion in business line uptake.
STC‘s current focus is on medium and large-sized businesses, while SME is considered an attractive growth market,
going forward. The company has more than 55 corporate sales outlets in the Kingdom and has won several prestigious
smart city projects such as KEC, ITCC, KAFD, and Olaya Towers & Knowledge City.
However, new players – Zain KSA, Etihad Atheeb and Mobily – are increasingly capitalizing on enterprise market
opportunities in Saudi Arabia. Despite challenges, Zain KSA could make inroads into the enterprise segment
(specifically targeting global players having presence in the Kingdom) through its strategic partnership with Vodafone.
According to Mobily, the size of the ICT market for enterprise segment in Saudi Arabia is estimated to reach SAR 29bn
by 2015.
Broadband opportunity untapped; attractive growth prospects for data services
The Saudi mobile market is saturated with a penetration of 191% in 2011, higher than the GCC average. Furthermore,
increasing competition from new players is clouding growth prospects. However, we expect opportunities in broadband
and data to drive Saudi telcos. Broadband penetration in the Kingdom is currently low at 6% of the population and
below the GCC average. Increasing internet users, favorable demographics (high percentage of tech-savvy young
population, ~57% are below 30 years), and rising smartphone uptake in the Kingdom would drive the broadband
market. Internet users in the Kingdom increased to 15.2mn in 3Q 2012 from just 3mn in 2005, reflecting an average
annual growth rate of 27%.
2.8 2.9 2.9 3.0 3.0 3.13.3
3.5
4.1
80
100
120
140
160
180
200
220
240
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
2005 2007 2009 2011 2017e
AR
PU
(S
AR
pe
r m
on
th)
Re
sid
en
tia
l lin
es (
mn
)
Residential lines ARPU (RHS)
0.91.0 1.1 1.1
1.21.0
1.31.4
2.2
80
110
140
170
200
230
260
290
320
350
0
0.5
1
1.5
2
2.5
2005 2007 2009 2011 2017e
AR
PU
(S
AR
pe
r m
on
th)
Bu
sin
ess lin
es (
mn
)
Business lines ARPU (RHS)
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 20
Mobily a clear leader in mobile broadband; STC closing in
Mobile broadband – Subscribers vs. ARPU
Mobile broadband – Mrket share (%)
Sources: CITC, Company reports, Saudi Fransi Capital analysis
We forecast the mobile broadband subscribers to reach 22.3mn towards the end of our projection period, implying a
CAGR of 11.9% for the period 2011-2017. We expect Mobily to lose out its initial advantage in the mobile broadband
space to STC/ competition and expect, STC to make market share gains (to 35% by 2017) as against an estimated
23% in 2012 while Mobily is expected to retain its leadership position with 55% share of the market in 2017.
For the fixed broadband market we forecast subscribers to reach 3.5mn towards the end of our projection period,
implying a CAGR of 10.5% for the period 2011-2017. STC dominates the fixed broadband segment and is expected to
retain 90% of the market share during the forecast period. However, competition from Mobily is expected to remain
high given its plans for an aggressive fixed broadband strategy, posing a long-term threat to STC‘s dominance in this
segment.
STC to dominate the fixed broadband market
Fixed broadband – Subscribers vs. ARPU
Fixed broadband – Market share (%)
Sources: CITC, Company reports, Saudi Fransi Capital analysis
We estimate ARPU in broadband to have declined to less than SAR 100 per month in 2012 from ~SAR 180 per month
in 2007. We expect a moderate 1–4% decline annually in ARPU during the forecast period. In terms of pricing in mobile
broadband, STC and Mobily are comparable; however, the former commands a 18–25% premium on home broadband.
We do not expect Zain‘s aggressive pricing to remain sustainable in the mobile broadband segment.
1.42.7
11.312.4
14.2
16.2
18.1
20.2
22.3
50
60
70
80
90
100
110
120
130
140
150
0
5
10
15
20
25
2009 2011 2013e 2015e 2017e
AR
PU
(S
AR
pe
r m
on
th)
Mo
bile
Bro
ad
ba
nd S
ub
src
ibe
r (
mn
)
Subscribers ARPU (RHS)
16% 13%20% 23% 25% 28% 30% 33% 35%
83% 85%77% 73% 69% 66% 62% 59% 55%
1% 2% 3% 4% 5% 7% 8% 9% 10%
0%
20%
40%
60%
80%
100%
2009 2011 2013e 2015e 2017eSTC Mobily Zain KSA
1.4
1.72.0
2.32.6
2.83.0
3.33.5
50
60
70
80
90
100
110
120
130
140
150
160
0
1
2
3
4
2009 2011 2013e 2015e 2017e
AR
PU
(S
AR
pe
r m
on
th)
Fix
ed
Bro
ad
ba
nd S
ub
scrib
ers
(m
n)
Subscribers ARPU (RHS)
100% 98% 96% 95% 94% 93% 92% 91% 90%
0% 2% 4% 5% 6% 7% 8% 9% 10%
0%
20%
40%
60%
80%
100%
2009 2011 2013e 2015e 2017eSTC Mobily
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 21
Competitive pricing for broadband, but STC holds substantial advantage in fixed
Mobile broadband plans – SAR per month
Home broadband plans – SAR per month
Sources: Company, Saudi Fransi Capital analysis
STC’s superior pricing power for high-speed FTTH services
STC enjoys superior pricing power for FTTH services, which offers speeds up to 200 Mbps, significantly higher than
its peers. The company priced high-speed offerings at ~2-3x that of the current 2/4 Mb offerings of competitors. We
consider this sustainable in the near term, as competitor Mobily is behind STC in terms of cable reach in the kingdom
(FTTH coverage ~1/10 that of STC) and expect STC to enjoy the first mover advantage in the near term. However,
we expect a significant fall in FTTH broadband pricing over the long term.
STC’s superior pricing power for high-speed FTTH offerings
STC‘s FTTH pricing for various speeds (in SAR per month)
Sources: Saudi Fransi Capital analysis
99
199
350
100
200
350
40
100
280
0
50
100
150
200
250
300
350
400
1GB/ 2GB 5 GB Unlimited
STC - QUICKnet Mobily - Connect Zain KSA - Speed 4G
249
199
NA
199
169149
199
175149
0
50
100
150
200
250
300
2/4 MBps 1MBps 512Kbps
STC - Jood Mobily - Broadband @ home Etihad Atheeb - Go
249296
346
799
0
100
200
300
400
500
600
700
800
900
4 Mbps 20 Mbps 40 Mbps 200 Mbps
Average pricing of competitors
Zain KSA competes on pricing in mobile broadband; STC commands pricing power in high-speed broadband
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 22
Internet usage in Saudi Arabia has substantial room for growth
Benchmarked with the MEA region, we believe internet usage in Saudi Arabia is low, indicating the growth momentum
would continue in the near term. Also keep in mind that in the absence of entertainment options like cinema, we believe
the significance of broadband as an entertainment gateway is potentially much higher than less conservative markets.
Similarly, access to computers in the Kingdom leaves room for growth and government initiatives toward overall
Information Communication and Technology (ICT) development bode well for the sector.
Room for further penetration of computers/internet users in Saudi Arabia
Internet users Saudi Arabia vs. MEA/BRIC (2011)
Computer access Saudi Arabia vs. MEA/BRIC (2011)
Sources: ITU, IMF, CITC, Saudi Fransi Capital analysis
According to Communications and Information Technology Commission (CITC), there were 11.7mn mobile broadband
subscribers in 3Q 2012 compared with just 1.4mn at the end of 2009. The Kingdom‘s mobile broadband penetration
reached 41% at the end of 3Q 2012, and is comparable with that of the developed world. While the traditional voice
market is on the decline, broadband opportunities through ADSL and FTTH services offer growth opportunities in the
fixed line market. Fixed line technologies offer superior speeds compared to Mobile broadband. (See Appendix C for
more details of technologies in Fixed/ Mobile). STC has a comprehensive strategy of bundling content and applications
into its high-speed network infrastructure and is positioning itself through triple play offers as a one-stop shop for
communication and entertainment. Through Interactive TV services (InVision), STC is successfully playing up the
entertainment appeal, which is strong in Saudi Arabia. The company also owns 71% stake in Dubai based Intigral, now
a leading regional provider of content services and digital media – serving several regional operators. Besides
distributing content, Intigral‘s main competitive advantage is its proprietary methods of content management – allowing
content to be tailored and facilitate user censoring. For example, InVision users will get a heads-up if an upcoming
scene could be unsuitable by Saudi norms, through the movie or tv show turning into slow-motion seconds before –
thus allowing the user to skip if they desire.
45.0%
49.0%
10.1%
38.3%
47.5%
86.2%
74.2%
70.0%
77.0%
68.0%
35.6%
14.0%
51.0%
34.9%39.1%
0% 20% 40% 60% 80% 100%
Brazil
Russia
India
China
Saudi Arabia
Qatar
Kuwait
UAE
Bahrain
Oman
Egypt
Algeria
Morocco
Jordan
Tunisia
45.4%
55.0%
6.1%
35.4%
57.3%
87.0%
69.0%
76.0%
87.0%
58.0%
20.0%
34.2%
51.4%
19.1%
0% 20% 40% 60% 80% 100%
Brazil
Russia
India
China
Saudi Arabia
Qatar
Kuwait
UAE
Bahrain
Oman
Algeria
Morocco
Jordan
Tunisia
Increasing internet users and tech-savvy, young population in Saudi Arabia – positives for broadband uptake
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 23
Low broadband penetration levels in the Kingdom; rising trend of net users positive
Broadband penetration Saudi Arabia vs MEA/ BRIC (2011)
Trend in internet users (2005-3Q 2012)
Sources: ITU, IMF, CITC, Saudi Fransi Capital analysis
With increasing internet users, social network usage in the Kingdom has grown. The number of users on Twitter and
Facebook in the Kingdom is growing across all age and social groups. According to CITC, there were an estimated
4.8mn users of Facebook in Saudi Arabia at the end of 2011, a penetration rate of 16.8% and 35.3% of total internet
users.
High per capita GDP and young population – positives for sector
% population under 30 years
Per capita GDP 2011 (USD)
Sources: UN, IMF, Saudi Fransi Capital analysis
Alongside growing internet users, Smartphone penetration in the Kingdom is picking up. Industry sources cite one in
every two handsets sold in the Kingdom is a smartphone. According to Informa Telecoms and Media, Saudi Arabia had
a smartphone penetration rate of 17.1% in 2011, which is expected to reach 44.8% by 2015. Besides, driving demand
for data services, higher smartphone penetration is expected to increase overall mobile penetration rate due to the
presence of some dual-SIM models and many Saudis carrying more than one handset. Industry surveys point toward
high adoption of smartphones, tablets and laptops in the Kingdom, well ahead of many developed markets.
8.6%
12.2%
1.1%
11.6%
5.7%
9.2%
1.3%
16.1%
16.2%
1.7%
2.3%
2.8%
1.8%
3.2%5.1%
0% 4% 8% 12% 16% 20%
Brazil
Russia
India
China
Saudi Arabia
Qatar
Kuwait
UAE
Bahrain
Oman
Egypt
Algeria
Morocco
Jordan
Tunisia
3.0
4.8
7.6
9.310.3
11.4
13.6
15.2
5%
15%
25%
35%
45%
55%
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2005 2006 2007 2008 2009 2010 2011 3Q 2012
Internet Users % of Population (RHS)
50.9%
37.1%
57.9%
43.2%
57.0%
44.8%
54.4%
49.6%
49.5%
62.9%
48.9%
47.8%
47.0%
54.7%44.0%
30% 40% 50% 60% 70%
Brazil
Russia
India
China
Saudi Arabia
Qatar
Kuwait
UAE
Bahrain
Oman
Egypt
Algeria
Morocco
Jordan
Tunisia
2,493
12,993
1,514
5,417
21,196
98,144
43,723
63,626
22,918
23,572
2,932
5,503
3,084
4,6184,317
0 20,000 40,000 60,000 80,000100,000
Brazil
Russia
India
China
Saudi Arabia
Qatar
Kuwait
UAE
Bahrain
Oman
Egypt
Algeria
Morocco
Jordan
Tunisia
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 24
High penetration of tablets & smartphones in KSA; data traffic to multiply by 2016
Tablet/Smartphone/Laptop usage
Data traffic forecast (MB per month) by type of device
Sources: Cisco, Google survey(2012), Saudi Fransi Capital analysis
The high penetration of data-centric devices in the Kingdom is expected to drive data traffic multi-fold. According to
Cisco, globally the average monthly data traffic of smartphones is forecasted to surge 17 times (from 150Mb per month
per device in 2011 to average 2.6Gb per month by 2016). Data usage levels in laptops/notebooks would continue to
remain the highest and multiply by 3.3x between 2011 and 2016 (from 1.5Gb per month per device in 2011 to average
6.9Gb per month by 2016).
While the demand environment for broadband services in the Kingdom is well in place, the access route toward the
same is likely to determine operators‘ success over the long term. STC is aggressively rolling out both mobile
broadband and fixed line networks for offering broadband services, while Mobily is riding on the fast adoption of mobile
broadband services in the Kingdom. According to Cisco, global data traffic is carried predominantly through fixed
network, but mobile is expected to increase its share to 17% by 2016 from 5% in 2011. Driven by rising smartphone
penetration and net users, the consumer space is forecasted to account for 77% of data traffic compared with 51% in
2011.
Fixed networks dominate global data traffic; Consumer segment to surge
Data Traffic forecast by type of network 2011 & 2016e
Data Traffic forecast by segment 2011 & 2016e
Sources: Cisco, Saudi Fransi Capital analysis
STC accounted for an estimated 90% of the total daily Internet and data traffic, which exceeded 1,600Tb in Saudi
Arabia, in 2011. Moreover, the company‘s superior and upgraded fixed broadband network, which now extends to
nearly 300,000 km in the Kingdom (compared to an estimated 30,000 km for Mobily), is a further testament to its strong
position in the high-growth data segment.
63%
68%
5%
30%
50%
49%
60%
61%
26%
28%
38%
44%
16%
24%
6%
7%
7%
0% 20% 40% 60% 80%
Saudi Arabia
UAE
Egypt
Italy
France
Spain
Tablet Smartphone Laptop/ Notebook 0 2,000 4,000 6,000 8,000
Non smartphone device
Smartphone
Portable gaming console
Tablet
Laptop/ Netbook
2016e
2011~25x
~17x
~8.2x
~3.3x
In MB per month per device
95%83%
5%17%
0%
20%
40%
60%
80%
100%
2011 2016eFixed Mobile
51%
77%
49%
23%
0%
20%
40%
60%
80%
100%
2011 2016eConsumer Business
Smartphones and tablets are well penetrated in the Kingdom; data traffic set to surge
Globally, fixed networks carry higher data traffic than mobile; consumer segment to outpace business demand in data usage
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 25
Trend reversal of fixed-mobile substitution could unfold in data service; STC at a competitive advantage
Unlike voice services (where mobile services substituted fixed lines), emerging technology trend of data service
adoption through Wi-Fi networks (vs. using a cellular network) is gaining traction across many developed markets. We
expect data market adoption trends in Saudi Arabia to be characterized by regional/global trends. According to Cisco,
data traffic volumes in the MEA region were mostly through fixed lines, accounting for 95% in 2011 and expected to
reach 83% by 2016, reflecting a CAGR of 53%, while mobile data traffic is expected to outpace fixed traffic with a
CAGR of 103%, during the same period, from a much lower base.
Tablet users prefer WiFi/WLAN; Smartphone users prefer mobile networks
Data access mode – Tablet/ Notebook
Data access mode – Smartphones
Sources: Google survey (2012), Saudi Fransi Capital analysis
The evolving trend of mobile traffic getting offloaded through fixed networks offers significant long-term prospects for
fixed line operators such as STC. The drivers of mobile-fixed transition include bandwidth constraints for mobile in high-
density population areas, spectrum constraints limiting scalability of services, and relatively poor indoor connectivity of
mobile broadband. Fixed broadband connectivity, thus, offers a better technology option to address the growing
demand for data services in the long term.
According to a Google survey, in Saudi Arabia, WiFi/WLAN is the preferred data access route among tablet users, while
mobile is being mostly used for smartphones. Thus, STC would potentially look to monetize its fixed network
investments by tapping Wi-Fi opportunities. STC is successfully adding customers through service bundling (triple-play
offerings) and is thus placing data-heavy entertainment services into its high-speed fixed broadband network. More than
300,000 km of fiber-optic cable are already operational in the Kingdom and STC‘s FTTH services, branded as VERVE,
offer broadband speeds up to 1 GBps – far greater than any other competitor. In addition to attractive service offerings,
STC attracts customers through integrated services and billing across fixed line and broadband services. Besides
opportunities in the residential market, an anticipated shift toward e-government/e-health in Saudi Arabia is likely to
benefit Saudi telcos, primarily STC.
75%79%
42%
64%
83%
62%55%
38%
48%
16%23% 20%
0%
20%
40%
60%
80%
100%
Saudi Arabia
UAE Russia Italy France Spain
WiFi/ WLAN @ home UMTS/3G/4G/LTE
60% 57%
4%
41%45%
53%
65%69%
97%
48%
77%
63%
0%
20%
40%
60%
80%
100%
Saudi Arabia
UAE Egypt Italy France Spain
WiFi/ WLAN @ home UMTS/3G/4G/LTE
Wi-Fi access gains prominence in Saudi Arabia; STC may monetize fixed network investments
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 26
Intensifying competition; STC enjoys pricing power in FTTH
Broadband and data being the next leg of growth for telecom, operators are increasingly chasing the market across
segments. STC dominance in fixed broadband is being challenged by Mobily. Through its acquisition of Bayanat Al
Oula, Mobily is targeting the demand for high-speed Internet by offering service through its 3.5G network. Fixed line
broadband competition in the Fiber-to-home market is also expected to intensify with new players deploying competing
networks and have strong support from GCC incumbents—Batelco and Etisalat. However, STC is expected to retain its
competitive advantage of attracting customers through bundled service offerings. In addition, we see the recent
slowdown in Zain KSA (sales down on YoY basis) benefitting both STC and Mobily.
While overall revenue growth for the sector is showing moderate signs of improvement, we belive ARPUs would be
supported by:
a) Expected pick up in postpaid customer mix: Operators are focusing on prepaid to postpaid conversion. For
instance, STC continued to push for prepaid to postpaid migration in 2009 by offering 2G ―SAWA‖ customers
an upgrade option to a 3G postpaid plan for no additional fees while retaining the number. In fact, we see
postpaid subscribers increasing at a faster pace than prepaid, indicating that operators are successfully
migrating the user base.
b) Challenges at Zain KSA offer near-term advantage for both STC and Mobily: Aggressive pricing by Zain KSA
may not be a sustainable business strategy for the company currently. Zain has priced its mobile broadband
offerings (Speed 4G) at a discount to STC/Mobily rates.
c) Uptake in data services to support ARPUs: Current pricing plans for mobile broadband are ~1.5–2x the
estimated sector ARPU. We estimate fixed line ARPUs to deteriorate at a much slower pace than mobile
ARPUs. While the traditional voice market is on a decline, broadband opportunities through ADSL and FTTH
services offer scope for growth in the fixed line market. In fact, we see STC enjoying pricing power through its
bundled services and ability to offer a one-stop shop for communication, business and gradually also
entertainment The ongoing gradual shift to e-government and e-health services coupled with existing links to
government provide further strength to the story.
Margins under pressure; high ARPU data services to drive EBITDA
Amid growth opportunities, the high degree of competition amongst telcos in Saudi Arabia is impacting operator
margins. EBITDA margins have contracted to low 30s from high 40s over the past 5–6 years. While the entry of new
players pushed mobile penetration higher, sector profitability was impacted by a) downward pressure on ARPUs
resulting from competitive pricing and b) higher sales and marketing costs – subscriber acquisition costs. However,
telcos have focused on cost cutting measures to partly offset the negative impact on margins by reducing General and
Administration expenses.
Margin trend less favorable; competition impacts margins
EBITDA margin trend for Saudi Telcos (2007–4Q 2012)
Gross margin trend for Saudi telcos (2007– 4Q 2012)
Sources: Company reports, Saudi Fransi Capital analysis
46%
41%
36%35%
34% 35% 35%
33%
30%
25%
30%
35%
40%
45%
50%
2007 2008 2009 2010 2011 Mar 12
Jun 12
Sep 12
Dec 12
STC Mobily Industry
60%61%
59%
56%
54%55% 55%
54%53%
40%
45%
50%
55%
60%
65%
2007 2008 2009 2010 2011 Mar 12
Jun 12
Sep 12
Dec 12
STC Mobily Industry
EBITDA margins under pressure; falling ARPUs and increasing acquisition costs impact margins
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 27
High acquisition costs; telcos focus on cutting overhead costs
Selling and marketing as a % of revenue (2007–4Q 2012)
General and Admin. as a % of revenue (2007–4Q 2012)
Sources: Company reports, Saudi Fransi Capital analysis
We expect increased adoption of data services to drive EBTIDA margins. The reasonably affluent characteristic of the
population (high per capita income) makes Saudi Arabia a market that could adopt high ARPU value-added services
such as online gaming, video streaming and other data heavy applications.
High bad debt provision for STC, potential to improve exists
STC incurred SAR 1.6bn as bad debt provision in 2012, significantly higher than SAR 236mn incurred at Mobily. As a
percentage of sales STC incurred a cost of 2.7% as a result of high bad debt provision in 2012 compared to just
1.0% in Mobily. While this reflects Mobily‘s superior management of receivables, we see this as an area STC could
potentially improve going forward. However, we note that receivable days at STC is significantly lower at STC (~60
days) compared to Mobily (~90 days) in 2012. Mobily is thus offering extended credit days to ensure a more
profitable operation than STC.
STC incurs bad-debt costs ~ 6-7x that of Mobily, room for improvement
Bad debt provisions as % of sales: STC vs Mobily
Receivable DSO‘s: STC vs Mobily
Sources: Company reports, Saudi Fransi Capital analysis
Potential value creation opportunity through network sharing for both STC and Mobily
Amid high competition impacting profitability, we see asset sharing opportunity for both STC and Mobily potentially
driving cost synergies. In fact, STC currently offer mobile site sharing services, allowing competitors to put their base
station antennas on STC towers. STC's network consists of around 5,000 base stations covering around 97% of the
population. In addition, industry sources cite potential capex savings for new installations through tower sharing, a
positive for cash flows. Competitor Mobily has already initiated development in network sharing. The company recently
6%7%
14%14%
13% 13%12%
14%13%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2007 2008 2009 2010 2011 Mar 12
Jun 12
Sep 12
Dec 12
STC Mobily Industry
8%
13%
8%7% 7% 8%
8%
7%7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2007 2008 2009 2010 2011 Mar 12
Jun 12
Sep 12
Dec 12
STC Mobily Industry
1.5%
1.9%
3.0% 3.1%
2.4%2.7%
3.0%
1.1%0.9% 0.8% 0.9% 1.0%
0%
1%
2%
3%
4%
5%
2007 2008 2009 2010 2011 2012
STC Mobily
5362
82
61 57 6163
105
153
131
115
91
0
30
60
90
120
150
180
2007 2008 2009 2010 2011 2012
STC Mobily
Tower sharing opportunity could reduce operating expenses by 12–15% – a potential margin driver.
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 28
announced infrastructure sharing with Atheeb Telecom in the fixed broadband segment. Synergistic opportunities thus
exist for Saudi telcos through potential sharing of each other‘s assets to tap the broadband market opportunity, an
arrangement that could gather prominence in the near future. However, we highlight that there is no decision yet on
this topic and note that a key driver for tower sharing globally has been funding requirements (through selling towers to
third party). STC and Mobily do not have the same urge for new funds. In addition, we sense that there is a degree of
uncertainty surrounding the comparative gains from this.
STC ahead in capex cycle; opportunity to drive asset returns higher
In order to tap the emerging opportunities in data and broadband services in the Kingdom, Saudi telcos are
aggressively investing in building a network infrastructure to support these services. Mobile network coverage is well in
place for both STC and Mobily (>95% in Saudi Arabia). Services such as ADSL, FTTH and 3G/4G is been made
network ready. STC launched commercial 4G Long Term Evolution (LTE) mobile broadband networks in 2H 2011 and
has presence in over 38 cities. STC aims to achieve 4G mobile broadband network coverage of 95% of the population
by 2014. Similarly, Mobily‘s 4G LTE network, operated by subsidiary Bayanat Al-Oula, has coverage in 31 cities and is
targeted to cover 85% of the Saudi population. STC is also fast rolling out its fiber-based internet services in the
Kingdom. The sector‘s capex-to-sales ratio is on decline (24% in 2007 to ~16% in 4Q 2012). We expect ROA for both
STC and Mobily to be driven by these investments. Thus, capex is mostly lower for STC, with the potential to improve
asset turnover. Ex-acquisitions, STC‘s capex-to-sales declined from 17% in 2007 and is expected to reach 13% by
2017, while for Mobily, capex-to-sales is estimated to be relatively higher at ~18% over the next three years and
thereafter decrease to 16% by 2017. In comparison, mature global players are typically sustaining a capex/sales ratio
of 10-13% - our figures on Saudi operators are more conservative.
Capex cycle mostly behind; network deployed for value-added services
STC‘s Capex-to-sales ( ex-acquisitions) (2007– 2017e)
Mobily‘s Capex-to-sales (ex- acquisitions) (2007–2017e)
Sources: Company reports, Saudi Fransi Capital analysis
Moderate regulatory risks & stable royalty fees
Post the introduction of Zain KSA, the third mobile operator, we believe the regulatory environment has moderated
significantly. While CITC is pursuing an overall developmental goal for the telecom sector, we see limited risks ahead
for the sector. The CITC is working on introducing MVNO licenses, and recently requested proposals from interested
parties – with a deadline set for May 4th 2013.
In a scenario of new MVNO licenses, we expect entry of well-established regional operators into Saudi Arabia. For
instance, players such as Du (UAE) have already expressed interest in exploring the MVNO opportunity in the
Kingdom. Q-tel amongst other telcos, which was outbid by Zain KSA for the third mobile license, could look to
participate in the MVNO opportunity. Considering that MVNO typically chases the low ARPU/untapped customer
segments, we see Zain KSA at a larger risk than STC/Mobily. Furthermore, considering the ongoing challenges at Zain
KSA, the new entrants are likely to target its customer base. European experience of MVNO‘s indicate that a potential 5
-10% share, could be captured by the new players. STC is expected to be at a competitive advantage over Mobily, as it
17%
12% 12%
10%
14%15%
16%15%
15%14%
13%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2007 2009 2011 2013E 2015E 2017E
24%
27%
25%
21%
18%
21%
17%16%16%16%16%
0%
5%
10%
15%
20%
25%
30%
2007 2009 2011 2013E 2015E 2017E
Decreasing capex-to-sales ratio – a positive; network coverage well in place across technologies
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 29
could draw operational and managerial expertise from Oger Telecom (35% stake) which runs a successful MVNO in
South Africa – Virgin Mobile through its holdings in Cell C. Also, MVNO could present STC with a wholesale business
opportunity, allowing it to sell excess bandwidth to new players.
Overall, we see moderate regulatory risks to the sector, which are overshadowed by strong market and growth
fundamentals underpinned by growing demand for data services and we find STC at a relative competitive advantage
over its peers. We also highlight, that Saudi Arabian regulatory environment has typically enjoyed a more balanced and
structured approach than some GCC markets. Moreover, unlike some key markets in the region Saudi Arabia already
satisfies the WTO‘s requirement of three mobile operators.
Regulatory cost pressure easing, room for margin expansion as data revenue mix increase
Royalties/ Government charges are regulated by CITC for telecom operators in the Kingdom. Besides, license fee
and fee for usage of frequency spectrum, Saudi based operators are required to pay commercial service provisioning
fee to the regulator. CITC has a fee structure of 15% of net revenue (revenue less interconnection costs) for mobile
services, 10% of net revenue for landline services and 8% of net revenue for data services. While we do not expect
any changes to the fee structure in our forecast period, there exists room for moderating the same, especially in the
mobile services.
Royalty fee charges for telecom services in Saudi Arabia
Service Type As a % of net revenue (revenue less interconnection costs)
Mobile services 15%
Landline services 10%
Data services 8%
Sources: CITC, company reports, Saudi Fransi Capital analysis
In fact for both STC and Mobily, the government charges (as % of sales) is witnessing a declining trend indicating
lower regulatory costs as a result of increasing mix of data revenue, where royalty fee is relatively lower. For STC
government charges (% of sales) have declined from 14% (in 2007) to 9.4% in 2012 while for Mobily it declined from
12.4% (in 2007) to 5.7% (in 2012).
Regulatory costs (as a % of sales) on a decline, a positive for margins
STC‘s government charges ( % of sales) (2007– 2012)
Mobily‘s government charges ( % of sales) (2007– 2012)
Sources: Company reports, Saudi Fransi Capital analysis
Government charges include : Royalty, license and frequency usage charges
Revenue include handset sales and others
14.0%
11.7%11.2% 11.1% 11.3%
9.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2007 2008 2009 2010 2011 2012
12.4% 12.6%
9.6%8.7%
7.8%
5.7%
0%
2%
4%
6%
8%
10%
12%
14%
2007 2008 2009 2010 2011 2012
Room for margin expansion exist through lower government charges as data revenue mix increases
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 30
Strong balance sheet position; capital return prospects are high
While new international opportunities exist for Saudi telcos, in light of the ongoing regional tension, any investments
are likely to be highly selective. In fact, any international investments are likely to emanate from STC – as we believe
other operators are restricted from expanding beyond Saudi, by their main stakeholders and license restrictions.
Following the global financial crisis and the Arab spring, companies focused on consolidating existing operations (STC
recently increased its stake in Axis, Indonesia to 80% from 51% earlier). The declining net debt/EBITDA in the sector
is, overall, a positive, in our view. The net debt-to-EBITDA has declined to 0.5x in 4Q 2012 from a high 2.8x for Mobily
in 2007, while for STC the ratio came down to 0.6x in 4Q 2012 from 1.2x historically. There could be a likely capital
return phase in the near term than chasing new growth avenues. We, thus, expect STC to balance out growth/returning
cash to shareholders. Furthermore, the current dividend yields are attractive for both STC and Mobily, though
moderately below peers in GCC/ MEA.
Saudi telcos are well capitalized
Net Debt – EBITDA ratio ( 2007-4Q2012)
STC / Mobily dividend yield (%) vs GCC/ MEA peers
Sources: Company reports, Saudi Fransi Capital analysis
1.0
2.0 2.1
1.8 1.6 1.6
1.5
1.2
0.7
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2007 2008 2009 2010 2011 Mar 12
Jun 12
Sep 12
Dec 12
STC Mobily Industry
5.1
6.2
6.2
5.6
9.6
7.0
7.4
2.6
6.9
5.1
4.8
7.7
6.2
0 2 4 6 8 10 12
STC
Mobily
Etisalat
Du
Batelco
Omantel
Zain Kuwait
Qtel
Jordan Telecom
Vodacom
MTN
Maroc Telecom
MEA - Median
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 31
STC: Investment Highlights
We initiate coverage on Saudi Telecom Company (7010/ STC AB) with a BUY rating and a TP of
SAR 51.1, implying an upside of 28% to the last close of SAR 39.9 per share. At 4.6x EV/EBITDA
ratio on 2013 estimates, STC is trading in line with GCC peers but at a 17% discount to MEA
comparables. While one-off charge in 4Q 2012 (in its International operations) and the recent
management changes are of concern, we see a misplaced risk perception on the counter not
crediting the attractive long-term growth prospects both in Saudi Arabia and international markets.
We forecast EPS 2013 of SAR 4.4, 8.5% higher YoY (ex-one off items). Assuming maintained
DPS, the implied dividend yield is 5.0%. However, we see upside potential on dividends as cash
continues to pile up.
We believe the company is well placed to benefit from the emerging trend of
mobile-fixed convergence in broadband services: STC dominates the Kingdom‘s
fixed line market (~90% share). The company has aggressively rolled out its high-speed
fixed line network across the Kingdom (300,000 km, ~10x Mobily) and enjoys a
competitive advantage over peers. STC is well placed to exploit the emerging
opportunity of broadband access via tablets/smartphones through both fixed lines (Wi-
Fi) and mobile. We expect STC‘s revenue to grow at a low single-digit average of 3.9%
YoY during 2012–17. We forecast 2013e top-line of SAR 60.7bn, 2.3% higher YoY.
65% from Saudi Arabia and 35% from international operations.
Pricing power in broadband; attractive opportunity in service bundling: STC
enjoys pricing power in high-speed broadband services through its Jood and VERVE
brand, an FTTH service with download speed up to 1000Mbps. While we are cautious
about competitor GO fast rolling out its services, we expect STC to maintain its
competitive advantage through bundled service offerings (InVision) and superior fixed
broadband speed, which is successfully adding new customers. STC added 100,000
new customers into its fiber optic network (home and business) in 4Q 2012, an increase
of more than 1000% over 4Q 2011. The company also achieved a 15% growth in
subscribers for the bundled services in 4Q 2012.
International diversification a long-term positive; currently overshadowed by
regional tension: Besides acquisition-led international presence (Oger and Maxis),
STC has made successful inroads into the saturated Kuwaiti and Bahraini markets
(capturing an estimated mobile share of 20% and 35%, respectively in 2011) through
green field operations, which is noteworthy. Yet we would like to stress that despite the
ongoing protests in Bahrain, Viva Bahrain saw revenues spike by some 166% and Viva
Kuwait 127% during the two years of 2011-2012 compared to 2010 and have turned
EBITDA positive. All in we forecast, a 5.6% yoy growth in STC‘s EBITDA in 2013 to
reach SAR 22.2bn. CAGR for our forecast period is 5.3%. We expect EBITDA margins
of 36.5% in 2013e, 127bps higher yoy.
Legacy PSTN networks to remain a drag on ROE; penetration of data services to
drive asset returns: The traditional PSTN network (14% of revenue) remains a
structural drag on the company‘s return profile (ROA of -0.8% in 2012 versus 6.4% for
the company). Consequently, we forecast STC‘s ROE to range in the high teens until
2017 driven by a high mix of data services, which are expected to account for nearly
26% of total revenue by 2014 compared to 23% in 2012. Near-term catalysts for the
stock include traction in FTTH services and potential value unlocking in tower assets.
Rating Summary
STC BUY
TARGET PRICE (SAR) 51.1
Upside/(Downside) 28.0%
Stock Details
Current Price* SAR 39.9
Market Capitalization SAR Mn 80,000
Shares Outstanding Mn 2000
52-Week High SAR 46.5
52-Week Low SAR 35.8
Price Change (YTD) % -7.6
EPS 2013e SAR 4.4
Beta (1 Year Adj.) 0.68
Ticker (Reuters/ Bloomberg)
7010.SE STC AB
* Price as of February 11, 2013
Key Shareholders
Public Investment Fund 70.0%
Public Pension Agency 6.6%
General Organization for Social Insurance
7.0%
Publicly Held 16.4%
Source: Zawya
Price Multiples
Current 2013e
P/E(x) 10.9 9.0
EV/ EBITDA (x) 5.2 4.6
Dividend Yield (%) 5.0 5.0
Sources: Bloomberg, Saudi Fransi Capital analysis
STC vs. TASI
Source: Tadawul
Sector Coverage
Roy Cherry
+966-1-2826844
0.00.20.40.60.81.01.21.41.6
STC TASI
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 32
FINANCIALS & RATIOS
Key Financials (in SAR mn) 2008 2009 2010 2011 2012 2013E 2014E
Revenue 47,469 50,780 51,787 55,662 59,372 60,722 62,659
EBITDA 21,743 20,612 19,621 20,025 20,945 22,191 23,132
EBIT 12,042 12,130 10,977 8,488 9,281 10,387 10,699
Net Profit 11,038 10,863 9,436 7,729 7,351 8,875 9,135
Balance Sheet (in SARmn)
Current Assets 18,946 22,663 18,704 21,967 28,783 38,570 46,128
Property Plant and Equipment 44,382 52,737 55,127 55,085 56,005 56,972 56,957
Net intangible assets 31,695 29,222 31,837 29,318 28,162 26,843 25,585
Total Assets 99,762 109,587 110,781 111,402 117,912 127,512 133,970
Total Debt 36,321 36,109 33,697 33,598 34,823 37,526 38,360
Total Equity 42,562 50,833 53,464 54,082 58,969 64,543 69,467
Total Liabilities 99,762 109,587 110,781 111,402 117,912 127,512 133,970
Cash Flow Statement
Net cash provided by operating activities 21,149 15,956 21,185 16,488 12,106 23,682 23,749
Cash flows from Investing Activities (35,468) (13,542) (13,175) (8,264) (9,301) (9,321) (8,996)
Cash flows from Financing Activities 14,763 (2,765) (9,669) (7,686) (4,278) (4,006) (6,869)
Key Ratio 2008 2009 2010 2011 2012 2013E 2014E
Gross margin (%) 62.4% 61.0% 58.6% 56.3% 56.6% 57.2% 57.6%
EBITDA margin (%) 45.8% 40.6% 37.9% 36.0% 35.3% 36.5% 36.9%
Revenue growth (%) 37.8% 7.0% 2.0% 7.5% 6.7% 2.3% 3.2%
Growth in EBITDA (%) 30.1% -5.2% -4.8% 2.1% 4.6% 5.9% 4.2%
Growth in earnings (%) -8.2% -1.6% -13.1% -18.1% -4.9% 20.7% 2.9%
Debt/ Equity (x) 0.8 0.7 0.7 0.6 0.6 0.6 0.6
Capex/ Sales 34.3% 30.8% 21.9% 14.1% 14.8% 16.0% 15.0%
ROAA (%) 13.3% 10.7% 9.1% 7.1% 7.0% 7.8% 7.5%
ROAE(%) 30.5% 28.0% 23.1% 17.2% 16.3% 17.8% 16.9%
Cash flow yield (%) 6.1% 0.4% 12.3% 10.8% 4.2% 12.8% 14.1%
Per Share Ratios 2008 2009 2010 2011 2012 2013E 2014E
Earnings per share 5.5 5.4 4.7 3.9 3.7 4.4 4.6
Dividend per share 3.8 3.0 3.0 2.0 2.0 2.0 2.5
Valuation Ratios 2008 2009 2010 2011 2012 2013E 2014E
P/Earnings 6.6 7.2 7.3 10.3 10.9 9.0 8.7
P/Book 2.2 2.1 1.9 1.7 1.6 1.4 1.3
EV/ EBITDA 5.5 5.2 5.7 5.6 5.2 4.6 4.2
P/Sales 2.3 1.7 1.6 1.4 1.3 1.3 1.3
Sources: Bloomberg, Company reports, Saudi Fransi Capital analysis
Historical multiples based on closing prices as of February 11, 2013
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 33
STC’s background: Leader among GCC telecoms
Established in 1998, Saudi Telecom Company is the incumbent telecom operator in Saudi Arabia, offering services
across fixed, mobile, data and internet to both consumer and enterprise users. STC, which enjoyed monopoly in
Saudi Arabia until 2004, is now competing in the domestic market with new players that are backed by other leading
GCC operators such as Etisalat (Mobily), Zain (Zain KSA) in mobile and Batelco (Atheeb Telecom) in fixed lines.
STC has successfully diversified its business into other regional and international markets such as Turkey (Oger
Telecom), Kuwait and Bahrain (Viva operations) in the MEA region and Malaysia, Indonesia (Maxis) and India in Asia
(please see the company‘s timeline in Appendix A). STC is the largest telecom operator based out of GCC with a
customer base of ~160mn across 10 countries in MEA and Asia. STC‘s interests in various operations are detailed
below.
STC – Company structure
Sources: Company reports, Saudi Fransi Capital analysis
Investment Thesis
STC is a leader among GCC telecoms; presence in more than 10 countries and has ~160mn customer base.
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 34
Well established network infrastructure; competitive advantage in fixed broadband
We have a positive outlook on STC considering the expected domestic market growth led by data segment demand
and its diversified and growing international business.
In our opinion, well-established telecom networks are a key competitive advantage for STC, which holds infrastructure
assets across fixed, mobile and data operations in both domestic and international markets. The company also
provides backbone infrastructure capacity for IP-based services to other operators. In addition, the company is now
positioned in the Saudi market as the only one-stop communication/entertainment shop. Besides a comparable mobile
offering, it has a dominant presence in fixed line that it is gradually being able to reposition and bring back to life as
value added in its bundled offers. The roll-out of IP-TV and FTTH internet with speeds reaching up to 200 Mb/sec is
also another first on this scale in the Kingdom.
The trend of fixed-mobile substitution in Saudi Arabia impacted STC the most. Nonetheless, the company remains the
market leader with an estimated share of 47% in mobile services and dominates the fixed line segment with its 97%
share. STC‘s high mix of postpaid customers (~20–30% versus regional benchmark of 10–15%) is a key positive. Until
2014, we expect the company to retain 46% market share in mobile operations as well as its leadership position in fixed
line (with 90% share).
Demand for broadband in the Kingdom has been mostly mobile based (in terms of subscribers, while traffic volumes
are predominantly over fixed lines), but we see an emerging global trend of mobile-fixed convergence in accessing the
Internet. STC is positioning itself through fiber roll-outs across Saudi Arabia (300,000 km of fiber, 10x Mobily/Bayanat).
Furthermore, STC is aggressively rolling out the fiber network to provide high-speed internet services (speed up to 200
Mb/sec) and aims to cover more than 1.5mn homes by 2014. Its fixed broadband subscribers grew 19% in 4Q 2012
compared to 4Q 2011.
We expect the company to make inroads in the mobile broadband segment, which is currently dominated by Mobily.
STC launched commercial 4G Long Term Evolution (LTE) mobile broadband networks in 2H 2011 and has presence in
over 38 cities. The company aims to achieve 4G mobile broadband network coverage of 95% of the population by
2014.
We forecast STC‘s revenues to reach SAR 60.7bn in FY 2013 and increase to SAR 62.7bn by 2014, (ex-accounting
change). Segment-wise, while mobile services remain the major revenue source, we see an increasing trend of data
contribution to the company‘s business mix. Data segment is expected to account for 31% of total business compared
to 23% in 2012.
Increasing contribution from Data segment
Revenue Breakup – Segment (in SAR bn)
Revenue Breakup – Segment (%)
Sources: Company reports, Saudi Fransi Capital analysis
Note: Based on current accounting method
32.6 34.1 34.2 37.9 38.0 37.6 38.3 39.3 40.2 41.2
9.1 9.3 10.28.3 8.4 8.8 8.8 9.0 9.1 9.25.7
7.2 7.19.4
13.4 14.6 16.4 18.3 20.422.7
0
15
30
45
60
75
GSM PSTN Data Others
69% 67% 66% 68% 64% 62% 61% 60% 58% 57%
19% 18% 20% 15%14% 15% 14% 14% 13% 13%
12% 14% 14% 17%23% 24% 26% 28% 30% 31%
-20%
0%
20%
40%
60%
80%
100%
GSM PSTN Data Others
Infrastructure assets across fixed, mobile and data applications in both Saudi and international markets
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 35
We forecast STC‘s mobile subscribers in Saudi Arabia to reach 25.9mn in 2013 and increase to 27mn by 2014, while
mobile ARPU are expected fall 4% annually to SAR 69 per month by 2014. In the fixed line segment, we expect a total
5.2mn lines in 2014 (Home + Residential), while blended ARPU are conservatively estimated to contract to SAR 138
per month by 2014.
Steady growth in mobile and fixed lines market
Mobile segment - Subscribers vs ARPU (2010-2017e)
Fixed lines - Subscribers vs ARPU (2010-2017e)
Sources: Company reports, Saudi Fransi Capital analysis
In the broadband market, we expect STC to make market share gains. Mobile broadband subscribers for STC are
forecast to reach 3.6mn in 2013 and increase to 4.5mn by 2014. In the fixed broadband segment, we expect STC to
continue its dominance with an estimated 2.6mn subscribers in 2014, while ARPU‘s are expected fall 4% annually to
SAR 88 per month by 2014.
Broadband market – STC is well placed for growth, especially fixed broadband
Mobile broadband - Subscribers vs ARPU (2010-2017e)
Fixed broadband - Subscribers vs ARPU (2010-2017e)
Sources: Company reports, Saudi Fransi Capital analysis
Besides growth prospects within the Kingdom, we expect company‘s International markets to increase their contribution
to 40% by 2017 compared to 32% in 2012 (based on the current accounting method). In 2012, STC delivered a 40%
yoy growth revenue in its controlled subsidiaries (Viva Bahrain, Viva Kuwait and PT Axis - Indonesia) and added new
subscribers across post-paid, pre-paid and wireless broadband services.
24.2 25.1 24.925.9
27.0 28.029.1
30.1
50
60
70
80
90
100
110
120
130
140
150
0
5
10
15
20
25
30
35
AR
PU
(S
AR
pe
r m
on
th)
Su
bscrib
ers
(m
n)
STC Subscribers ARPU (RHS)
4.14.5
4.85.0
5.2 5.3 5.55.7
60
90
120
150
180
210
240
0
1
2
3
4
5
6
7
AR
PU
(S
AR
pe
r m
on
th)
Su
bscrib
ers
(mn
)STC Subscribers ARPU (RHS)
0.3
2.32.8
3.6
4.5
5.5
6.6
7.8
50
60
70
80
90
100
110
120
130
140
150
0
1
2
3
4
5
6
7
8
9
AR
PU
(S
AR
pe
r m
on
th)
Su
bscrib
ers
(m
n)
STC Subscribers ARPU (RHS)
1.71.9
2.22.4
2.62.8
3.03.2
50
60
70
80
90
100
110
120
130
140
150
0
0.5
1
1.5
2
2.5
3
3.5
AR
PU
(S
AR
pe
r m
on
th)
Fix
ed
bro
ad
ba
nd (
mn
)
STC Subcribers ARPU (RHS)
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 36
Increasing contribution of international revenues
Revenue Breakup – Geography (in SAR bn)
Revenue Breakup – Geography (%)
Sources: Company reports, Saudi Fransi Capital analysis
Note: Based on current accounting method
Due to increasing competition in the domestic telecom market, the company ventured internationally, chasing both
growth and business diversification. International operations contributed around 32% to STC‘s top line in 2012. The
company executed a strategy of adding a mix of both existing and green field operations. While stake purchase in Oger
(35%) and Maxis (65%) was into existing operations, STC won third mobile licenses in Kuwait (26% stake) and Bahrain
(100%) to commence green field operations.
International markets offer long-term growth for STC, but investor concerns exist
In anticipation of growing domestic competition, STC forayed into international markets as early as 2005 through its
stake purchases in Oger Telcom and Maxis in Southeast Asia. This was soon followed by regional expansions.
While GCC telecom companies had mixed fortunes with their expansions, barring Etisalat‘s successful venture in Saudi
Arabia (Mobily) and Q-tel operations in Oman and Kuwait, expansion by regional players has met significant
challenges. Zain had to exit Africa due to excessive leverage, while Etisalat could take impairment charges in PTCL
(Pakistan) and has recently announced stake sale in XL Asiata, Indonesia. Similar to other GCC telcos, STC leveraged
its balance sheet to chase international growth prospects for stakes in Maxis and Oger and licenses in Kuwait and
Bahrain.
What was a bumpy ride initially, has more recently begun to bring rewards to STC as some of these businesses start
gaining considerable traction and turn EBITDA positive (Bahrain & Kuwait). We also understand that both the Indian
and Indonesian operations are heading in the same direction in the next two years. Consequently, we see attractive
growth prospects for STC‘s international operations (which represented ~32% of total revenue in 2012) – Oger, Maxis,
Kuwait and Bahrain. However, these are currently under looked by investors due to the ongoing tension in the region,
limited disclosure and consequently ability to assess and value. We highlight that unlike its GCC peers, STC is
relatively less exposed to regions that are undergoing a political crisis. However, we note investor concerns exist for
STC‘s Viva operations in Bahrain and to a much lesser degree Kuwait. Yet we would like to stress that despite the
ongoing protests in Bahrain, Viva Bahrain saw revenues spike by some 155% and Viva Kuwait 121% during the two
years of 2011-2012 compared to 2010 and have turned EBITDA positive. With regards to increased disclosure, we
understand that efforts are being undertaken to facilitate a more accurate understanding of the international business
at STC.
35.3 38.1 40.4 40.6 41.0 41.9 42.7 43.6
11.111.2
10.4 10.6 10.9 11.5 12.2 13.0
3.83.9
4.2 4.4 4.64.8
5.15.3
0
10
20
30
40
50
60
70
80
2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Saudi Arabia STC Bahrain (Viva)
Gulf Digital Media Holding Kuwait Telecom (Viva)
Oger Telecom PT Axis
68% 68% 68% 67% 66% 64% 62% 61%
22% 20% 18% 17% 17% 18% 18% 18%
7% 7% 7% 7% 7% 7% 7% 7%
0%
20%
40%
60%
80%
100%
2010 2011 2012 2013E 2014E 2015E 2016E 2017ESaudi Arabia STC Bahrain (Viva)Gulf Digital Media Holding Kuwait Telecom (Viva)Oger Telecom PT Axis
Despite near-term concerns in Viva operations, STC’s international growth prospects remain attractive
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 37
STC relatively less exposed to conflict regions than GCC peers, but risks exist
STC has minimal exposure to Jordan through Cyberia (Oger Telecom)
Sources: Saudi Fransi Capital analysis
However, STC has a minority shareholder status in most of its international operations, providing an opportunity to
further raise its stake in select regions. It is no secret that STC remains highly interested in upping its stake in Oger
Telecom and the dialog is likely ongoing. Such a move, would boost international contribution and present additional
growth prospects for the company. We note that STC has the first right of refusal on Oger.
Overall STC group has more than 123mn subscribers in its international network with a target population of 1.6bn and
average penetration of 127%. STC‘s international revenues are generated, in order of contribution, from the following
subsidiaries – Oger Telecom (~18% of revenue, Turkey and South Africa), Binariang Holdings (~7% of revenue,
Malaysia and India), Viva operations (~5% of revenue, Kuwait and Bahrain) and PT Axis (~2% of revenue, Indonesia).
International market presence for STC
Market Summary Pop. (mn) Penetration (%) Operator Subscribers (mn) Market share
Turkey
Fixed 74.7 81% Turk Telekom 15.0 99%
Mobile 74.7 87% Avea 12.8 20%
South Africa 50.6 127% Cell C 12.8 20%
Malaysia 28.6 128% Maxis 13.0 35%
Indonesia 241.0 98% PT Axis 14.2 6%
Bahrain 1.1 150% Viva Bahrain 0.6 35%
Kuwait 3.7 135% Viva Kuwait 1.0 20%
India 1,206.9 74% Aircel 53.6 6%
STC Group 1,606.6 127%
123.0
Sources: Company reports, Saudi Fransi Capital analysis
Oger Telecom (35% stake) forms 18% of revenue
In 2007, STC purchased 35% stake in Oger Telecom for USD 2.6bn. Oger holds telecom assets in Turkey (55% of
Turk Telekom) and South Africa (75% of Cell C, South Africa‘s third largest mobile operator). In addition, the company
provides ISP services in Saudi Arabia, Lebanon and Jordan through Cyberia. Turk Telecom, through its 81.1% holding
in Avea, has diversified operations beyond traditional fixed line services (a market which is on the decline in Turkey).
Avea is the third largest mobile operator in Turkey with about 20% market share in 2011.
Company Algeria Egypt Sudan Bahrain Jordan Iraq Palestine Tunisia Yemen Pakistan Countries
STC Y 1
Batelco Y Y Y 3
Etisalat Y Y Y 3
Qtel Y Y Y Y 4
Zain Y Y Y Y 4
Presence in Turkey and South Africa through stake in Oger; making inroads in Mobile segment
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 38
Leadership in fixed line/broadband; Avea holds ~20% share in mobile
Turkey Market Summary/Forecast (%)
Turkey 2008A 2009A 2010A 2011A 2012E 2013E 2014E
Population (mn) 71.1 72.1 73.0 74.7 74.9 75.8 76.7
Fixed Line Subscribers (mn) 17.5 16.5 16.2 15.2 14.9 14.7 14.6
Penetration Levels (%) 98% 91% 88% 81% 79% 77% 75%
ARPU (TRY) 23.9 21.1 22.2 21.9 22.2 21.1 20.9
Turk Telecom Subscribers (mn) 17.5 16.6 16.0 15.0 13.6 13.3 12.9
Turk Telcom Market Share (%) 100% 100% 99% 99% 91% 90% 89%
Broadband Subscribers (mn) 5.7 6.5 7.1 7.6 8.8 10.2 11.6
Penetration Levels (%) 32% 36% 39% 40% 47% 53% 60%
ARPU (TRY) 26.2 31.1 32.7 36.3 37.4 36.9 36.8
Turk Telecom Subscribers (mn) 5.7 6.2 6.6 6.8 7.0 8.1 9.2
Turk Telecom Market Share (%) 99% 96% 93% 90% 79% 79% 80%
Mobile Subscribers (mn) 65.8 62.8 61.8 65.3 67.7 70.7 73.8
Penetration Levels (%) 93% 87% 85% 87% 90% 93% 96%
ARPU (TRY) 14.6 18.0 19.2 20.5 22.4 21.3 21.1
Avea Subscribers (mn) 12.2 11.8 11.6 12.8 13.5 14.4 15.3
Avea Market Share (%) 19% 19% 19% 20% 20% 20% 21%
Sources: IMF, ITU, company reports, Saudi Fransi Capital analysis
Cell C has made steady inroads into a market dominated by telco majors such as MTN and Vodacom (a subsidiary of
UK-based Vodafone Group). The company holds around 20% market share in South Africa, offering services to
~12.8mn subscribers in 2011. In addition, Cell C runs a successful MVNO, Virgin Mobile, in the country through its 50%
holding in the company. MVNO trends are gaining traction in GCC markets, and STC would look to leverage its
expertise of MVNO operations through Oger Telecom.
Cell C fast establishing presence in South Africa
South Africa Market Summary/Forecast (%)
South Africa - Cell C 2008A 2009A 2010A 2011A 2012E 2013E 2014E
Population (mn) 48.9 49.5 50.0 50.6 51.2 51.8 52.4
Mobile Subscribers (mn) 45.0 46.4 50.4 64.0 67.6 71.3 75.1
Penetration Levels (%) 92% 94% 101% 127% 132% 138% 143%
ARPU (USD) 18.0 18.0 18.0 18.0 17.9 17.7 17.6
Cell C Subscribers (mn) 3.6 5.6 8.1 12.8 13.5 14.9 16.3
Cell C Market Share (%) 8% 12% 16% 20% 20% 21% 22%
Sources: IMF, ITU, company reports, Saudi Fransi Capital analysis
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 39
Binariang (25% stake) contributes 7% to revenue
STC entered the Asia-Pacific market through a USD3.0bn deal for 25% minority stake in Binariang, which owned 100%
interest in Maxis Telecom (Maxis) at that time. Following Maxis‘ IPO, Binariang‘s stake came down to 65%. Maxis have
presence in Malaysia, Indonesia and India.
Malaysia – a growth market for STC
Malaysian Market Summary/Forecast (%)
Malaysia - Maxis 2008A 2009A 2010A 2011A 2012E 2013E 2014E
Population (mn) 27.5 27.9 28.3 28.6 29.0 29.5 30.0
Mobile Subscribers (mn) 27.7 30.1 33.9 36.7 37.8 39.1 40.3
Penetration Levels (%) 101% 108% 120% 128% 130% 132% 134%
ARPU (MYR) 56.0 56.0 50.0 52.0 49.9 45.1 44.2
Maxis Subscribers (mn) 9.8 10.7 12.0 13.0 13.5 14.0 14.6
Maxis Market Share (%) 35% 35% 35% 35% 36% 36% 36%
Sources: IMF, ITU, company reports, Saudi Fransi Capital analysis
Viva operations contribute ~5% to revenue; Kuwait (26% stake) and Bahrain (100%)
Through successful bids for third mobile licenses, STC entered the Kuwaiti and Bahraini markets in 2008 with its Viva
brand. Despite being well-penetrated mobile markets and dominated by regional majors such as Zain and Qtel (Kuwait)
and Batelco (Bahrain), Viva captured an estimated 20% share in Kuwait and 35% in Bahrain in 2011.
STC successfully penetrates GCC markets through Viva brand
Kuwaiti Market Summary/Forecast (%)
Kuwait - Viva 2008A 2009A 2010A 2011A 2012E 2013E 2014E
Population (mn) 3.4 3.5 3.6 3.7 3.8 3.9 4.0
Mobile Subscribers (mn) 2.8 2.9 3.9 5.0 5.2 5.4 5.6
Penetration Levels (%) 81% 83% 108% 135% 136% 138% 140%
ARPU (USD) 69.0 55.0 52.0 33.0 32.7 31.9 31.7
Viva Subscribers (mn) 0.1 0.4 0.7 1.0 1.3 1.4 1.5
Viva Market Share (%) 4% 13% 18% 20% 25% 26% 27%
Bahraini Market Summary/Forecast (%)
Bahrain - Viva 2008A 2009A 2010A 2011A 2012E 2013E 2014E
Population (mn) 0.8 1.0 1.1 1.1 1.2 1.2 1.2
Mobile Subscribers (mn) 1.4 1.4 1.6 1.7 1.8 1.9 2.0
Penetration Levels (%) 185% 135% 142% 150% 157% 163% 170%
ARPU (USD) - - 14.0 31.0 32.7 31.9 31.7
Viva Subscribers (mn) - - 0.5 0.6 0.6 0.7 0.8
Viva Market Share (%) 0% 0% 30% 35% 36% 37% 38%
Sources: IMF, ITU, company reports, Saudi Fransi Capital analysis
Viva Bahrain saw revenues spike by some 166% and Viva Kuwait 127% during the two years of 2010-2012 and have
turned EBITDA positive.
Viva brand well established in Kuwait and Bahrain
Increasing presence in Malaysia and Indonesia; high Muslim population provides synergies during Hajj
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 40
PT Axis (80.1% stake) accounts for less than 2% of revenue
Besides its presence in Asia through Binariang, STC made direct investments in the region and holds 80.1% stake in
PT Axis, an Indonesian mobile operator. PT Axis holds an estimated 5% market share in Indonesia, but offers
synergies to STC‘s operations in the form of the country‘s large Muslim population base (~230mn plus) that travels
regularly to Saudi Arabia for the Hajj. In addition, STC is looking at potential value unlocking in tower assets through a
USD200mn deal.
Small presence, but synergistic market for STC
Indonesian Market Summary/Forecast (%)
Indonesia - PT Axis 2008A 2009A 2010A 2011A 2012E 2013E 2014E
Population (mn) 231.0 234.3 237.6 241.0 244.5 248.0 251.5
Mobile Subscribers (mn) 140.6 163.7 211.3 236.8 249.0 261.6 274.4
Penetration Levels (%) 61% 70% 89% 98% 102% 105% 109%
ARPU (USD) - 4.0 4.0 4.0 4.0 4.0 4.0
PT Axis Subscribers (mn) - 3.3 9.5 14.2 16.6 19.2 22.0
PT Axis Market Share (%) 0% 2% 5% 6% 7% 7% 8%
Sources: IMF, ITU, company reports, Saudi Fransi Capital analysis
Change in reporting method starting 1Q 2013
STC is adopting a new accounting policy effective January 2013. Currently, STC treats joint-venture projects using the
proportionate consolidation method according to IAS 31. Following the introduction of the International Accounting
Standards Board‘s IFRS 11 in place of IAS 31, STC would change its accounting method from proportionate
consolidation to the equity method. Oger Telecom (35%) and Binariang Holdings (25%) would be the major assets
impacting the accounting change. While revenue accounting will change, we highlight that there will be no impact at
Net income level. We will update our numbers once the new standard is fully adopted. For now, we have included a
pro-forma estimate of the company‘s financials (both Pre-equity method and Post-equity method). (See following table).
Pro forma estimates - STC
In SARmn Pre-Equity
2012 Post-Equity
2012 Pre-Equity
2013e Post-Equity
2013e
Revenue 59,372 44,745 60,722 45,771
Net Income 7,350 7,350 8,875 8,875
Total Assets 117,912 82,557 127,512 89,278
Total Liabilities 58,943 31,314 62,969 33,453
Sources: Company reports, Saudi Fransi Capital analysis
New international opportunities for STC – Morocco, Algeria and Libya
Amid regional tension, there exist new opportunities, especially for STC. French group Vivendi announced plans to
offload its 53% stake in Maroc Telecom. Oman, Libya and Lebanon are considering new telecom licenses and Algeria
could potentially see the much delayed privatization of its incumbent Algerie Telecom. Considering the current low risk
appetite for the Middle East region among international investors, GCC-based telcos could well participate in these
opportunities with lesser risks of overpaying for assets. Outbidding for regional licenses and operator stakes has
negatively impacted operator returns in the past (including Zain KSA), and a similar scenario is less likely to be
repeated in the current geopolitical environment.
Strong balance sheet position of Saudi telcos; could be frontrunner in upcoming license/ stake opportunities.
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 41
Maroc Telecom: All major regional telcos – Qtel, Etisalat and MTN South Africa – could be serious competitors for this
stake. However, we highlight that STC has not indicated a recent interest in this stake. The company had showed
interest to enter into Meditel (Morocco‘s second-biggest player) back in 2009. The Maroc Telecom stake is estimated to
be worth USD 7.1bn (~SAR 26bn1).
Margin outlook positive
STC‘s EBITDA margins contracted significantly following its international foray amid competitive pressure in the
domestic market. We expect the company‘s ARPU to contact 3–4% over our forecast period (through to 2017e).
However, increasing contribution from data services, expected pricing power in FTTH and bundled services (InVision
and IP TV) coupled with improving returns for the international business should translate into higher EBITDA margins
for the company. STC‘s subscribers in bundled services increased 15% yoy during 4Q 2012. We expect margins to
recover to the 38% level by 2017.
Positive EBITDA outlook
EBITDA outlook 2008-14e (in SAR bn)
(excluding one-off‘s)
EBITDA margin outlook 2008-14e (%)
Sources: Company reports, Saudi Fransi Capital analysis
Improving core operating environment to drive earnings
Improving operating environment and a positive margin outlook are expected to translate into earnings growth of 19%
for STC in 2013. We forecast that the company‘s net income in 2013 would be SAR 8.8bn. This translates into an EPS
of SAR 4.4 (a conservative estimate, 2% below consensus). Foreign currency fluctuations have negatively impacted
earnings in the past, and we advise caution considering STC‘s increasing exposure to international markets. However,
we expect net income margins to expand to 15-16% levels over the long term (forecast period through 2017e). In fact,
excluding one-off items (Foreign exchange/ impairment charges)
1 Estimated value for 53% stake in Maroc Telecom as on December 26, 2012, based on South Korea based KT Corp‘s
bid.
21.720.6
19.6 20.020.9
22.123.0
0
5
10
15
20
25
2008 2009 2010 2011 2012 2013E 2014E
45.8%
40.6%
37.9%
36.0% 35.3%36.5% 36.9%
25%
30%
35%
40%
45%
50%
2008 2009 2010 2011 2012 2013E 2014E
Data services reverse downtrend in EBITDA margin
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 42
Positive outlook on earnings front
EPS outlook 2008-14e (in SAR)
Net income margin forecast 2008-14e (%)
Sources: Company reports, Saudi Fransi Capital analysis
Excluding one-off’s
Net Income outlook 2008-14e (in SAR bn)
Net income margin forecast 2008-14e (%)
Sources: Company reports, Saudi Fransi Capital analysis
5.5 5.4
4.7
3.93.7
4.4 4.5
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013E 2014E
23.3%
21.4%
18.2%
13.9%12.4%
14.5% 14.5%
0%
5%
10%
15%
20%
25%
2008 2009 2010 2011 2012 2013E 2014E
12.9
10.3
8.18.7
8.28.9 9.1
0
2
4
6
8
10
12
14
2008 2009 2010 2011 2012 2013E 2014E
27.1%
20.4%
15.7% 15.7%13.8% 14.6% 14.6%
0%
5%
10%
15%
20%
25%
30%
2008 2009 2010 2011 2012 2013E 2014E
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 43
Legacy PSTN a drag on STC’s returns
STC‘s legacy PSTN operations remain a drag on ROA. These operations contribute 14% to revenue, but are loss-
making with an ROA of -0.8% in 2012 versus 6.4% for the company. Nonetheless, we forecast STC‘s ROE to range in
the high teens until 2017 driven by a high mix of data services (ROA of 49.2% in 2012). Revenues from data services
are expected to account for nearly 30% of the total by 2017 compared with 17% in 2011.
PSTN network a drag on ROA’s; Rising share of Data to drive ROE’s
Segment wise ROA (%)
RoE Outlook 2008-14e(%)
Sources: Company reports, Saudi Fransi Capital analysis
22.6%
-1.3%
39.2%
10.4%8.7%
-0.8%
49.2%
6.4%
-10%
0%
10%
20%
30%
40%
50%
60%
GSM PSTN Data Total
2009 2010 2011 2012
30.5%
28.0%
23.1%
17.2% 16.3%17.8% 17.3%
0%
5%
10%
15%
20%
25%
30%
35%
2008 2009 2010 2011 2012 2013E 2014E
Strong balance sheet; potential to scout new market opportunities, especially Morocco
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 44
Capex program mostly behind for STC
STC has introduced 4G Long Term Evolution (LTE) mobile broadband services in over 38 cities and is targeting to
cover 95% of the population by 2014. Given the completion of a majority of network rollouts (fiber network in the
Kingdom), we expect the capex-sales ratio to be at 15-16% levels till 2014. This ratio is projected to decrease to 13%
over the long term.
Capex program to continue until 2014
Capex outlook 2008-14e (in SAR bn)
Capex-Sales 2008-14e (%)
Sources: Company reports, Saudi Fransi Capital analysis
With majority of STC‘s capex program behind, we expect STC to generate free cash flows of SAR10-14bn annually in
our forecast period. At current prices, STC offers a superior free cash flow yield of 12.8% on 2013 estimates.
Attractive free cash flow yield for STC
Free cash flow outlook 2013-17e (in SAR bn)
Free cash flow yield 2013-17e (%)
Sources: Company reports, Saudi Fransi Capital analysis
Strong balance sheet to support dividends
STC has a strong balance sheet with SAR 5.1bn in cash as of 4Q 2012 and SAR 8.7bn in Short term investments. The
company offers an attractive dividend yield of 4.8% at the current market price. At a DPS of SAR 2.0 per share, the
payout ratio of 45% for 2013e is currently lower than the average of 62% during 2008–10. Although neither the
management nor the Board of Directors have hinted at an increase, given the absence of new acquisitions or stake
increases, we believe that an increase in payout is bound to happen sooner or later. Cash has been piling up, and net
cash per share stood at SAR 6.9 at the end of 4Q 2012, a YoY increase of 53%.
16.315.6
11.4
7.88.8
9.7 9.4
0
2
4
6
8
10
12
14
16
18
2008 2009 2010 2011 2012 2013E 2014E
34.3%
30.8%
21.9%
14.1% 14.8%16.0%
15.0%
10%
15%
20%
25%
30%
35%
40%
2008 2009 2010 2011 2012 2013E 2014E
10.2
11.312.0
12.8
14.4
0
4
8
12
16
2013E 2014E 2015E 2016E 2017E
12.8%14.1%
15.1%16.0%
18.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2013E 2014E 2015E 2016E 2017E
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 45
Our forecast vs. consensus
Our forecasts are conservative compared to Bloomberg consensus estimates. For 2013, we forecast revenue of
SAR60.7bn, 3.2% lower to consensus while our earnings forecast is 2.0% lower. However, we see STC sustaining
higher EBITDA margins (than consensus) going forward reflecting our view of a higher business mix from data
services.
Conservative forecast compared to consensus
Forecast 2013e 2014e
Saudi
Fransi Capital
Consensus Difference
(%)
Saudi Fransi
Capital Consensus
Difference (%)
Revenue (SAR mn) 60,722 62,700 -3.2% 62,659 65,322 -4.1%
EBITDA ( SAR mn) 22,191 22,518 -1.5% 23,132 23,386 -1.1%
EBITDA margin (%) 36.5% 35.9% 63bps 36.9% 35.8% 112bps
EPS (SAR per share) 4.4 4.5 -2.0% 4.6 5.3 -14.3%
*Consensus forecast as of February 11, 2013
Sources: Bloomberg, Saudi Fransi Capital analysis
4Q 2012 results: One-off charges impact bottom line
STC‘s earnings surprisingly declined 80% in 4Q 2012. The company reported one-time non-recurring, non-cash
charges of SAR 1.2bn in its International operations. The bottom line was impacted by the SAR 641mn charge related
to the revaluation of investments fair value in Cell C (South Africa) and Aircel (India). In addition, STC shared a one-off
charge of SAR 544mn in Binariang Holdings which led to a deferred tax charge for its investments in Aircel, India.
However, excluding these charges, the company‘s net income grew 10.2% YoY in 2012.
Results snapshot 4Q and FY2012
In SAR mn 4Q 2011 4Q 2012 Difference
(%) 2011 2012
Difference (%)
Revenue 15,249 14,993 -1.7% 55,662 59,372 6.7%
Gross profit 7,935 8,144 2.6% 31,328 33,597 7.2%
Operating income 2,814 1,900 -32.5% 11,171 11,252 0.7%
EBITDA 5,021 4,307 -14.2% 20,025 20,305 1.4%
Net income 2,278 468 -79.5% 7,729 7,350 -4.9%
Sources: Company reports, Saudi Fransi Capital analysis
In a worst case scenario, STC could take upto 32% knock on earnings
Considering the uncertainty over one-off charges in STC‘s international operations, we look at potential scenario‘s to
assess the impairment risks attached to some of its key international assets – Binariang, Oger and PT Axis. Our
analysis indicates a potential 32% knock on 2013 earnings at a worse case scenario (100% impairment of the goodwill
recorded for these investments). On a per share basis this translates to SAR 1.4 per share negative impact for STC.
Scenario: Impact on earnings resulting from one-off impairment charges
Goodwill Impairment Charge (%)
Binariang
Holdings
Oger Telecom
PT Axis Total Impact
On 2013 Earnings
Per Share Impact (SAR)
100% -19.8% -7.2% -4.6% -31.5% 1.40
80% -15.8% -5.7% -3.7% -25.2% 1.12
60% -11.9% -4.3% -2.7% -18.9% 0.84
40% -7.9% -2.9% -1.8% -12.6% 0.56
20% -4.0% -1.4% -0.9% -6.3% 0.28
Sources: Saudi Fransi Capital analysis
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 46
We arrive at a fair value of SAR 51.1 per share for STC
We have valued STC using the Weighted Average approach. The methods used include Discounted Cash Flow (DCF)
Sum-of-the-parts and relative valuation. We assigned higher weight to DCF approach, and arrived at a target price of
SAR 51.1 per share for STC, indicating a 28% upside from current levels.
Valuation summary of STC
Fair Value Weights
DCF Valuation SAR 58.8 40.0%
EV/EBITDA SAR 47.6 20.0%
Fair P/E Multiple SAR 44.1 20.0%
Sum-of-the-parts (SOTP) SAR 45.9 20.0%
Weighted Average Fair Value SAR 51.1
Upside/(Downside) from current market price % 28.0%
Sources: Saudi Fransi Capital analysis
Valuation - Scenario Analysis
Fair Value estimate at different scenario‘s
Base Case Mobile penetration rate in Saudi Arabia
expected to reach 210% by 2017e
STC to retain 45% market share in mobile
and 90% in fixed line and fixed
broadband
Price-based competition to dent ARPU by
4% yoy
Capex-sale to moderate to 13% over the
long term
Bull Case Mobile penetration rate in Saudi Arabia to
reach 230% by 2017e
STC to increase market share in mobile
to 48% and retain 90% in fixed line and
fixed broadband
Operators to focus more on service
differentiation beyond price-based
competition; ARPU down 1% yoy
Capex-sale to moderate to 12% over the
long term
Initiating coverage with a BUY rating
Overall, we find STC shares attractive at current levels;
upside potential of 28%
STC shares offer a good margin of safety; limited
downside
Bear Case Little room for increase in mobile
penetration rate in Saudi Arabia; to touch
195% by 2017e
STC unable to maintain market position in
mobile and fixed line services ( down to
40%/ 85% respectively)
Aggressive price-based competition to
significantly hurt ARPU; down 5% yoy
Evolving technological changes push
STC to continue at higher capex levels
Sources: Bloomberg; Saudi Fransi Capital analysis
30
35
40
45
50
55
60
65
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13
SAR 46.7
SAR 59.3
SAR 50.8
Fair Value
Bull Case Base Case Bear Case
Valuation
Mispricing of STC’s stock; a buying opportunity
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 47
Discounted Cash Flow (DCF)
Our DCF model is based on a five-year explicit forecast period until 2017. We arrived at a WACC of 11.1% for STC,
slightly higher than what we used for Mobily. In terms of terminal growth, we applied a 2.5% terminal growth rate to
estimate the terminal value. With this terminal growth rate being in line with what we used for Mobily, we believe it to be
on the conservative side specifically given STC‘s presence in several potentially high growth international markets. Our
DCF approach yields a fair value of SAR 58.8/share.
STC: Discounted cash flow valuation summary
In SAR mn 2013e 2014e 2015e 2016e 2017e
EBIT * (1-t) 11,189 11,502 12,158 12,881 13,692
Add: Depreciation and Amortization 10,069 10,671 11,254 11,847 12,450
Less: Minority interests (699) (727) (756) (786) (817)
Changes in Working capital (642) (781) (1,142) (1,548) (1,615)
Capital expenditure (9,716) (9,399) (9,501) (9,597) (9,333)
Free Cash flow to Equity 10,201 11,267 12,014 12,798 14,376
Present Value of the free cash flow 9,305 9,263 8,902 8,544 8,651
Terminal Value
174,378
PV of future cash flows 44,666
PV of terminal value 104,936
Total Enterprise Value 149,601
Add: Cash & Equivalents 13,792
Less: Debt 34,823
Less: Minority Interest 7,575
Less: Other liabilities 3,449
Equity Value 117,547
Number of shares (mn) 2,000
Fair value per share SAR 58.8
Upside/(Downside) % 47.3%
Sources: Saudi Fransi Capital analysis
Fair Price-Earnings (P/E) multiple approach
We use a Fair P/E multiple approach using the formula (RoE-g)/(RoE*(Ke-g)), which in our view best captures the
risk/return and growth prospects of the company. We arrive at a Fair P/E multiple of 10x for STC, a 1% discount to
MEA 2013 median P/E multiple based on a ROE assumption of 15.9%, growth of 2.5% and a discount rate of 11%. Our
Fair value estimate using P/E approach is SAR 44.1 per share derived by applying a 10x P/E multiple to 2013 earnings
forecast of SAR 4.4 per share.
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 48
Relative valuation
For STC‘s market approach–based relative valuation, we used EV/EBITDA multiples, which we believe is the most
suited for valuing STC. We selected a peer group of telcos operating within the GCC region and operators based
outside of the GCC but with operations in the MENA region (MTN, Vodacom, and Maroc Telecom). Our comparative
valuation is summarized in the following table. We expect STC‘s multiples to trade in line with the median valuation
multiples of its peer group.
Relative Valuation
Market
Cap (USD mn)
Price/Earnings (x) EV/ EBITDA (x)
Company 2012e 2013e 2014e 2012e 2013e 2014e
Saudi Telecom 21,282 10.7 9.0 8.7 5.1 4.6 4.2
Etihad Etisalat 15,349 7.6 9.0 8.5 6.1 6.9 6.5
Etisalat 20,944 10.1 9.9 9.6 4.3 4.1 4.0
Du 4,493 9.9 9.5 9.5 4.1 3.6 3.3
Batelco 1,589 7.8 8.3 6.9 5.1 4.9 4.5
Omantel 2,770 8.9 8.5 8.3 4.8 4.7 4.6
Zain Kuwait 12,215 11.6 11.6 10.8 6.7 6.7 6.5
Qtel 10,153 11.4 9.0 8.4 4.6 4.4 4.2
Jordan Telecom 1,887 14.5 13.4 12.7 6.7 6.5 6.3
Turkcell 14,000 12.3 11.3 10.6 6.8 6.2 5.6
Vodacom 19,460 16.2 13.9 13.1 8.1 7.4 6.9
MTN 37,619 15.1 13.3 12.1 5.8 5.6 5.2
Maroc Telecom 10,961 12.7 12.5 12.7 6.5 6.6 6.6
Median Multiple for Saudi Arabia (Ex- Zain KSA)
9.1 9.0 8.6 5.6 5.8 5.3
Median Multiple for GCC 10.0 9.0 8.6 4.9 4.7 4.4
Median Multiple for MEA 11.4 9.9 9.6 5.8 5.6 5.2
Sources: Bloomberg, Saudi Fransi Capital analysis
Note: Relative valuation based on closing prices as of February 11, 2013
EV/EBITDA approach: We apply MEA peer EV/EBITDA to reflect the company‘s risk/return and growth prospects. This
however is conservative as STC offers international growth opportunity, especially in fast growing Asia region, while it
remains less exposed (relatively) to conflict regions in the Middle East. Our Fair value estimate using EV/EBITDA
approach is SAR 47.6 per share derived by applying a 5.6x EV/EBITDA to 2013 EBITDA forecast of SAR 22.2bn and
deducting net debt, minority interests and liabilities of SAR 32.1bn.
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 49
Sum-Of-The-Parts (SOTP)
We have also valued STC on a sum-of-the-parts (SOTP) basis. We considered each operation and arrived at an
EV/EBITDA-based approach value for individual assets. We applied EV/EBITDA multiples for each region into the
forecasted EBITDA (for unlisted entities – Cell C, Viva operations in Kuwait and Bahrain, Axis, Aircel and other assets
of STC) and on consensus estimates (for listed entities – Maxis and Turk Telecom). We arrived at an SOTP value of
SAR 45.9 per share for STC.
STC: Sum of the Parts Value
Entity
Effective interest (%)
of STC shareholder
Type EV/
EBITDA multiple
EBITDA 2013e
Curr-ency
Enterprise Value
(in SAR mn)
Share to
group (%)
STC - Saudi Arabia 100%
5.6 17,268 SAR 96,330 77.8%
Oger Telecom
Turk Telecom 19% Listed 5.6 5,308 TRY 11,930 9.6%
Cell C 26% Unlisted 6.5 227 USD 1,444 1.2%
Viva
Kuwait 26% Unlisted 4.7 137 USD 626 0.5%
Bahrain 100% Unlisted 4.7 69 USD 1,204 1.0%
Binariang
Maxis 16% Listed 7.6 4,526 MY 6,730 5.4%
Aircel 19% Unlisted 7.6 198 USD 1,046 0.8%
Axis Indonesia 84% Unlisted 7.6 139 USD 3,311 2.7%
Other Assets Unlisted 4.7 247 SAR 1,154 0.9%
Total
123,775 100%
Enterprise Value 123,775
Add: Cash 13,792
Less: Debt 34,823
Less: Minority Interests
7,575
Less: Other liabilities 3,449
Equity Value 91,721
Number of shares (mn)
2,000
Fair value per share SAR 45.9
Upside/(Downside) % 14.9%
Exchange rates used USD:SAR: 3.75 ; Turkish Lira TRY:SAR: 2.11; Malaysian Ringgit MYR:SAR:1.20
Sources: Bloomberg, Saudi Fransi Capital analysis
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 50
FINANCIALS – INCOME STATEMENT
Income Statement (in SAR mn) 2008 2009 2010 2011 2012 2013E 2014E
Revenue from services 47,469 50,780 51,787 55,662 59,372 60,722 62,659
Cost of services (17,837) (19,779) (21,464) (24,334) (25,775) (25,983) (26,578)
Gross Profit 29,633 31,001 30,323 31,328 33,597 34,739 36,080
Gross profit margin (%) 62.4% 61.0% 58.6% 56.3% 56.6% 57.2% 57.6%
Selling & marketing expenses (2,128) (6,866) (7,083) (7,424) (8,489) (8,290) (8,554)
General & administrative expenses (5,762) (3,522) (3,619) (3,879) (4,162) (4,258) (4,394)
Depreciation & amortization (6,408) (7,799) (8,642) (8,854) (9,053) (10,069) (10,671)
Impairment provisions - - - - (641) - -
Total Operating Expenses (14,297) (18,187) (19,344) (20,157) (22,345) (22,616) (23,619)
Operating Income 15,335 12,814 10,978 11,171 11,252 12,122 12,461
EBITDA ( Ex-One Off) 21,743 20,612 19,621 20,025 20,945 22,191 23,132
EBITDA margin (%) (Ex-One off) 45.8% 40.6% 37.9% 36.0% 35.3% 36.5% 36.9%
Cost of early retirement program (675) (811) (606) (414) (313) (319) (325)
Finance costs (1,432) (1,385) (1,781) (2,238) (2,503) (2,548) (2,599)
Commissions and interest 624 362 309 450 366 450 459
Other Income (1,809) 1,151 2,076 (481) 478 682 703
Other income and expenses, net (3,293) (683) (1) (2,683) (1,971) (1,736) (1,762)
Income before Zakat 12,042 12,130 10,977 8,488 9,281 10,387 10,699
Zakat (376) ( 335) (118) (118) (247) (286) (294)
Provision for tax (457) ( 642) (820) (479) (1,011) (527) (543)
Net Income 11,210 11,154 10,039 7,891 8,023 9,574 9,862
Non-controlling interests (172) (290) (602) (163) (672) (699) (727)
Net Income for the year 11,038 10,863 9,436 7,729 7,351 8,875 9,135
Basic EPS on net income 5.5 5.4 4.7 3.9 3.7 4.4 4.6
DPS 3.8 3.0 3.0 2.0 2.0 2.0 2.5
No: of shares 2,000 2,000 2,000 2,000 2,000 2,000 2,000
Sources: Company reports, Saudi Fransi Capital analysis
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 51
FINANCIALS - BALANCE SHEET
Balance sheet (in SAR mn) 2008 2009 2010 2011 2012 2013E 2014E
Cash and cash equivalents 8,061 7,710 6,051 6,589 5,115 13,936 21,819
Short term investments - - 385 2,446 8,677 8,677 8,677
Accounts receivable, net 8,120 11,461 8,707 8,755 9,890 10,624 10,128
Prepayment and other current assets 2,765 3,492 3,561 4,177 5,101 5,333 5,503
Total Current Assets 18,946 22,663 18,704 21,967 28,783 38,570 46,128
Investments in equity & others 2,452 2,533 2,540 2,682 2,732 2,786 2,842
Property, plant and equipment, net 44,382 52,737 55,127 55,085 56,005 56,972 56,957
Intangible assets, net 31,695 29,222 31,837 29,318 28,162 26,843 25,585
Other non-current assets 2,287 2,433 2,572 2,349 2,230 2,341 2,458
Total Non Current Assets 80,816 86,924 92,077 89,435 89,128 88,942 87,842
Total Assets 99,762 109,587 110,781 111,402 117,912 127,512 133,970
LIABILITIES & EQUITY
Accounts payable 6,649 7,657 7,036 5,190 6,569 6,868 7,087
Other credit balances - current 4,335 4,819 3,509 3,667 3,987 4,149 4,315
Accrued expenses 5,762 6,205 6,058 8,576 7,785 8,139 8,412
Deferred revenues - current portion 2,248 2,081 1,568 1,858 2,185 2,229 2,273
Murabahas and loans - current portion 3,905 8,579 8,447 5,972 4,712 5,100 5,202
Total Current liabilities 22,899 29,341 26,618 25,263 25,237 26,485 27,289
Murabaha and loans - non current portion
28,081 22,711 21,741 23,960 26,124 28,277 28,843
Provisions for end of service benefits 2,738 2,844 2,995 3,062 3,449 3,733 3,808
Other payables - non current portion 3,482 3,859 5,962 5,035 4,133 4,474 4,563
Total Non Current Liabilities 34,301 29,414 30,698 32,056 33,706 36,484 37,214
Share capital 20,000 20,000 20,000 20,000 20,000 20,000 20,000
Statutory reserve 8,233 9,299 10,000 10,000 10,000 10,000 10,000
Retained earnings 9,783 13,552 16,287 19,516 22,866 27,742 31,940
Other reserves - - (1,269) (1,133) (671) (671) (671)
Financial statements' translation differences
(378) (816) (22) (1,474) (801) (801) (801)
Total Shareholders' equity 37,638 42,035 44,996 46,908 51,394 56,269 60,467
Non-controlling interests 4,924 8,798 8,468 7,174 7,575 8,274 9,000
Total liabilities and equity 99,762 109,587 110,781 111,402 117,912 127,512 133,970
Sources: Company reports, Saudi Fransi Capital analysis
SAUDI TELECOM COMPANY Telecom | Equity Research | 12 February 2013
Saudi Fransi Capital Page 52
FINANCIALS – CASH FLOW
Cash flow statement (in SAR mn) 2008 2009 2010 2011 2012 2013E 2014E
Net cash provided by operating activities 21,149 15,956 21,185 16,488 12,106 23,682 23,749
Net cash flows from investing activities (35,468) (13,542) (13,175) (8,264) (9,301) (9,321) (8,996)
Net cash generated from financing activities
14,763 (2,765) (9,669) (7,686) (4,278) (4,006) (6,869)
Net increase/ decrease in cash and cash equivalents
443 (351) (1,659) 538 (1,473) 10,356 7,883
Cash & cash equivalents at the beginning of the period
7,618 8,061 7,710 6,051 6,589 5,115 13,936
Cash & cash equivalents at the end of the period
8,061 7,710 6,051 6,589 5,115 13,936 21,819
Sources: Company reports, Saudi Fransi Capital analysis
Refer to important terms or use, disclaimers and disclosures on back page. Saudi Fransi Capital
ETIHAD ETISALAT COMPANY Telecom | Equity Research | 12 February 2013
Mobily: Investment Highlights
We initiate coverage on Mobily (7020/ EEC AB) with a HOLD rating and a TP of SAR 80.6,
implying an upside of 7.8% to the last close of SAR 74.8 per share. At 6.9x EV/EBITDA on 2013
estimates, Mobily is trading at a premium to GCC and MEA peers. Mobily has created strong
market presence in Saudi Arabia, and it is poised to benefit from the growing demand for
broadband in the Kingdom. It has aggressively rolled out mobile networks across Saudi Arabia
and is gaining on market leader STC. We forecast EPS 2013 of SAR 8.3, an earnings growth of
6.4% YoY. Assuming maintained DPS (at SAR 1.15 per share), the implied dividend yield of
6.2% makes the counter attractive to hold.
Mobily leads fast-growing mobile broadband market in Saudi Arabia: Mobily
currently holds an estimated 40% share in Saudi Arabia‘s mobile market in terms of
subscribers; additionally, it is the leader in the mobile broadband market with more
than 8.7mn subscribers (estimated ~70% market share). Apart from tapping the mobile
broadband opportunity, Mobily is positioning itself as a provider of fixed broadband
services through the purchase of Bayanat. This would enable the company to compete
more effectively with STC‘s bundled service offerings. Revenues from the fiber optic
and 4G networks grew more than 70% YoY. Overall, we expect Mobily‘s revenue to
grow at a CAGR of 5.4% during 2012–17. We forecast 2013e top-line of SAR25.6bn,
8.1% higher YoY.
Increasing contribution from data services; EBITDA outlook positive: Mobily is
capitalizing on the rising broadband penetration trend in the Kingdom. High ARPU
data services accounted for 30% of the company‘s revenues in 4Q 2012 which is
expected to reach 34% by 2014. Increasing contribution from data services and
anticipated pricing power through 4G services could translate into higher EBITDA
margins for Mobily. We expect a 7.9% yoy growth in Mobily‘s EBITDA in 2013 to reach
SAR 9.3bn. CAGR for our forecast period is 6.7%.
Management’s track record and superior ROE warrant sector premium: Mobily
operates at an industry leading ROE (~30% in 2011), second only to Maroc/Vodacom
from among the leading Middle East and Africa (MEA) telcos. Considering the
greenfield operations of the company (unlike the ―incumbent‖ advantage enjoyed by
Maroc/Vodacom), the management‘s track record of delivering profitable growth at
high ROE‘s is notable. Mobily warrants a premium to its peers, in our view. We
forecast Mobily‘s ROE to average 25.4% in our forecast period till 2017.
Shares fully priced with limited upside potential: While the ongoing business
momentum is a positive for Mobily, we see Mobily‘s shares fully priced at current
levels. Mobily is rewarding its shareholders through a bonus issue (1:10), which was
recently approved by the board. Mobily also announced a dividend of SAR 1.15 per
share in 4Q 2012, taking its total dividend distribution in 2012 to SAR 2.99bn. Mobily‘s
shares have outperformed TASI owing to the former‘s ongoing business momentum
and are expected to command a premium valuation.
Rating Summary
MOBILY HOLD
TARGET PRICE (SAR) 80.6
Upside/(Downside) 7.8%
Stock Details
Current Price* SAR 74.8
Market Capitalization SAR Mn 57, 580
Shares Outstanding Mn 770
52-Week High SAR 75.5
52-Week Low SAR 53.0
Price Change (YTD) % 8.2
EPS (2013e) SAR 8.3
Beta (1 Year Adj.) 0.80
Reuters Code / Bloomberg Symbol
7020.SE EEC AB
*Price as of February 11, 2013
Key Shareholders
Etisalat 27.5%
GOSI 11.4%
Other Saudi Investors and Public 61.1%
Sources: Company reports, Zawya
Price Multiples
Current 2013e
P/E(x) 9.6 9.0
EV/EBIDTA (x) 7.5 6.9
Dividend Yield (%) 5.2 6.2
Sources: Bloomberg, Saudi Fransi Capital analysis
Mobily vs. TASI
Source: Tadawul
Sector Coverage
Roy Cherry
+966-1-2826844
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Page 54 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
FINANCIALS & RATIOS
Key Financials ( in SAR mn) 2008 2009 2010 2011 2012 2013E 2014E
Revenue 10,795 13,058 16,013 20,052 23,642 25,553 26,461
EBITDA 3,794 4,837 6,165 7,454 8,591 9,267 9,660
EBIT 2,099 3,045 4,279 5,138 6,088 6,497 6,893
Net Profit 2,092 3,014 4,211 5,083 6,018 6,406 6,797
Balance Sheet (in SAR mn)
Current Assets 6,621 8,577 9,415 9,893 10,427 12,608 14,868
Property Plant and Equipment 8,117 10,370 12,457 16,412 17,255 19,646 21,818
Net intangible assets 10,923 10,450 10,028 9,665 9,412 8,833 8,252
Total Assets 27,192 30,926 33,430 37,501 38,623 42,617 46,468
Total Debt 9,790 8,595 7,972 7,073 8,258 9,039 9,468
Total Equity 9,754 12,243 15,580 18,388 20,906 23,769 26,808
Total Liabilities 27,192 30,926 33,430 37,501 38,623 42,617 46,468
Cash Flow Statement
Net cash provided by operating activities 3,546 4,246 5,470 6,673 7,037 8,833 9,332
Cash flows from Investing Activities (5,571) (2,889) (3,227) (3,408) (5,086) (4,465) (4,234)
Cash flows from Financing Activities 2,586 (1,687) (1,516) (3,237) (2,338) (2,761) (3,329)
Key Ratio 2008 2009 2010 2011 2012 2013E 2014E
Gross margin (%) 55.8% 57.8% 54.9% 51.5% 50.9% 50.9% 51.1%
EBITDA margin (%) 35.1% 37.0% 38.5% 37.2% 36.3% 36.3% 36.5%
Revenue growth (%) 27.9% 21.0% 22.6% 25.2% 17.9% 8.1% 3.6%
Growth in EBITDA (%) 28.7% 27.5% 27.5% 20.9% 15.2% 7.9% 4.2%
Growth in earnings (%) 51.6% 44.1% 39.7% 20.7% 18.4% 6.4% 6.1%
Debt/ Equity (x) 1.0 0.7 0.5 0.4 0.4 0.4 0.4
Capex/ Sales 27.4% 25.2% 20.5% 18.5% 20.6% 17.5% 16.0%
ROAA (%) 8.9% 10.4% 13.1% 14.3% 15.8% 15.8% 15.3%
ROAE(%) 26.7% 27.4% 30.3% 29.9% 30.6% 28.7% 26.9%
Cash Flow Yield (%) 1.0% 1.7% 3.8% 5.2% 3.8% 7.3% 8.6%
Per Share Ratios
Earnings per share 2.7 3.9 5.5 6.6 7.8 8.3 8.8
Dividend per share 0.7 1.1 1.8 3.0 3.9 4.6 4.9
Valuation Ratios
P/Earnings 27.5 19.1 13.7 11.3 9.6 9.0 8.5
P/Book 5.9 4.7 3.7 3.1 2.8 2.4 2.1
EV/ EBITDA 17.4 13.5 10.4 8.4 7.5 6.9 6.5
P/Sales 5.3 4.4 3.6 2.9 2.4 2.3 2.2
Sources: Bloomberg, Company reports, Saudi Fransi Capital analysis
Note: Per share data for Mobily based on 770mn shares;
Historical multiples based on closing prices as of February 11, 2013
Page 55 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Mobily establishing itself as market leader from being market challenger
Etihad Etisalat Company (Mobily) was established in 2004 in the monopolistic Saudi Telecom market, and it launched
commercial services in May 2005. Backed by the UAE-based Etisalat, which paid USD 3.5bn for the mobile licenses
(2G and 3G) in 2004, Mobily currently has a mobile subscriber base of over 11.1mn.
It holds an estimated 40% share of the mobile market and nearly 77% share in the mobile broadband space. Mobily
has been in the forefront of introducing new technologies in the Kingdom; it recently became the first operator to
launch TDD-LTE (4G) services in the Middle East and North Africa region through its subsidiary Bayanat Al Oula.
We forecast Mobily‘s revenue to reach SAR 25.6bn in 2013 and increase to SAR 26.1bn by 2014, a growth of 8.1%
yoy. We expect company‘s data revenues to increase their contribution to SAR 8.3bn or ~31% by 2014 compared to
SAR 6.5bn or ~27% in 2012 while the contribution from Mobile / Others (which include product distribution /
Smartphones) is expected to decline to 69% by 2014 from 73% in 2012.
Increasing contribution from data services for Mobily
Revenue trend – Mobily (2008-14e) in SARbn
Mobily revenue mix (2008 -14e)
Sources: Company reports, Saudi Fransi Capital analysis
Solid mobile infrastructure; but behind in fixed broadband
We expect Mobily to continue its leadership position in the mobile broadband market; additionally, Mobily is
positioning itself in the fixed broadband market through key acquisitions. The SAR 2.9bn acquisition of Bayanat Al
Oula, a regional WiMax broadband player, in 2010 was a step in this direction. Mobily thus introduced broadband
services, branded as broadband@home, to compete with STC in the household market. Similarly, through the SAR
80mn acquisition of Zajil, a local internet service provider Mobily strengthened its presence in Saudi Arabia‘s
broadband market. However, we highlight that Mobily (30,000 km of fiber) is significantly behind STC (300,000km of
fiber) in the fixed broadband space.
Mobily has more than 8.7mn mobile broadband subscribers and an estimated ~77% market share in Saudi Arabia in
2011. Although STC is expected to make inroads into the mobile broadband space, we see Mobily continuing its
leadership position in Saudi Arabia. The company has completed the deployment of its 4G LTE network across the
Kingdom, and it is poised to compete with STC. Mobily intends to cover more than 32 cities and 85% of the
population in Saudi Arabia under its 4G network.
Furthermore, the favorable broadband penetration trends in the Kingdom are advantageous for Mobily. The company
is increasingly shifting its business mix toward high-ARPU data services. From accounting for only 9% of the
company‘s total income in 2008, data revenues are expected to reach 33% by 2017. In fact during 4Q 2012, Mobily‘s
data revenue grew 41% year over year with data traffic volumes of 750 Tb per day as against 163 Tb in 2011. We
expect Mobily‘s market share in mobile broadband to reach ~71% by 2014 and 65% by 2017.
1.0 1.8 2.94.4
6.5 7.7 8.39.8
11.2
13.1
15.6
17.117.8 18.1
0
5
10
15
20
25
30
2008 2009 2010 2011 2012e 2013e 2014e
Broadband / Data Mobile/ Others
10.8
25.623.6
20.0
16.0
13.1
26.5
9% 14% 18% 22%27% 30% 31%
91% 86% 82% 78%73% 70% 69%
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011 2012e 2013e 2014e
Broadband / Data Mobile/ Others
Investment Thesis
Mobily is increasingly tilting its business mix towards high-ARPU data services, a positive for margins
Mobily is the second-largest telco in the Kingdom
The strategic Bayanat Al Oula acquisition offers Mobily entry into the mobile-fixed data convergence market
Page 56 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Mobile and broadband segment forecast
Mobile segment – Subscribers vs ARPU (2010-2017e)
Mobile broadband - Subscribers vs ARPU (2010-2017e)
Sources: Saudi Fransi Capital analysis
We forecast Mobily‘s mobile subscribers in Saudi Arabia to reach 22.1mn in 2013 and increase to 23.2mn by 2014,
while mobile ARPU is expected to contract marginally by 1% annually to SAR 67 per month by 2014. In the broadband
market, we expect Mobily to lose some of its market share, mostly to STC and Zain KSA. Mobile broadband
subscribers for Mobily are forecast to reach 10.4mn in 2013 and increase to 12.5mn by 2014, while ARPU is expected
fall 1% annually to SAR 60 per month by 2014. For the fixed broadband segment, we expect the company to make
steady inroads as it completes its FTTH roll-out over the next five years. We forecast Mobily to have a 10% share of
the market by 2017 with an estimated 0.3-0.5mn subscribers by 2017.
Data services the key margin driver, EBITDA outlook positive
While we see Mobily‘s ARPU contract 1% over our forecast period, increasing contribution from data services and the
expected pricing power through 4G services should translate into higher EBITDA margins for the company. Mobily is
expected to benefit from fiber-optic and 4G data service revenues, which increased by more than 70% in 4Q 2012. The
company invested in the advanced 4G network through Bayanat; this network covers more than 4,500 sites across the
Kingdom. In addition, it is rapidly establishing its presence in the Enterprise segment, the revenues of which grew 71%
yoy in 4Q 2012. Overall, we expect long term operational gearing, data business growth, impact of lower government
royalties (8% versus 15% for mobile) to boost EBITDA margins by 200–220 bps over our forecast period (2017e).
Positive EBITDA outlook
EBITDA Margin Outlook 2008-14e (in SAR bn)
EBITDA Margin Outlook 2008-14e (%)
Sources: Company reports, Saudi Fransi Capital analysis
19.0
21.0 21.022.1
23.224.4
25.626.8
50
55
60
65
70
75
80
0
5
10
15
20
25
30
2010 2011 2012e 2013e 2014e 2015e 2016e 2017e
AR
PU
(S
AR
pe
r m
on
th)
Su
bscrib
ers
(m
n)
Mobily Subscribers ARPU (RHS)
19.0
21.0 21.022.1
23.224.4
25.626.8
50
55
60
65
70
75
80
0
5
10
15
20
25
30
2010 2011 2012e 2013e 2014e 2015e 2016e 2017e
AR
PU
(S
AR
pe
r m
on
th)
Su
bscrib
ers
(m
n)
Mobily Subscribers ARPU (RHS)
3.8
4.8
6.2
7.5
8.69.3
9.7
0
2
4
6
8
10
12
2008 2009 2010 2011 2012 2013E 2014E
35.1%
37.0%
38.5%
37.2%36.3% 36.3% 36.5%
25%
27%
29%
31%
33%
35%
37%
39%
41%
2008 2009 2010 2011 2012 2013E 2014E
Mobily expected to sustain EBITDA margin levels in the high 30’s over our forecast period.
Page 57 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Earnings outlook is positive
We expect Mobily‘s earnings to grow 6.4% in 2013 and forecast its 2013 net income to touch SAR 6.4bn. This
translates into an EPS of SAR 8.3 (on 770mn shares outstanding). The net profit margin is expected to remain around
the ~25% level during the forecast period (2017e).
Earnings outlook positive
Earnings per share* outlook 2008-14e (in SAR)
*EPS adjusted for 770mn shares
Net Income margin 2008-14e (%)
Sources: Company reports, Saudi Fransi Capital analysis
2.7
3.9
5.5
6.6
7.88.3
8.8
2
4
6
8
10
2008 2009 2010 2011 2012 2013E 2014E
19.4%
23.1%
26.3%25.4% 25.5% 25.1% 25.7%
0%
5%
10%
15%
20%
25%
30%
2008 2009 2010 2011 2012 2013E 2014E
Page 58 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Management track record and superior ROE are positives for Mobily
In 2011, Mobily extended its management agreement with Etisalat (UAE) for five years. This irons out any
management-related concerns, unlike the case with STC. The company management has also laid down a stretched
T-Strategy framework that focuses on growth, efficiency, and differentiation (GED). (See Appendices A & B for details
of Executive Management/Corporate Strategy)
Mobily operates at a superior 30%+ RoE (MEA average of 22%), which in our view is a key positive for this name. Its
policy of quarterly dividend distribution as against half-yearly is also a positive for the stock. We forecast Mobily ROE to
average 25.1% in our forecast period (2017e).
Mobily’s return profile is industry-leading; ROE outlook positive
Mobily vs select MEA peers - ROE 2011 (%)
Mobily- ROE Outlook (%)
Sources: Bloomberg, Company reports, Saudi Fransi Capital analysis
STC
Mobily
Etisalat
Du
Batelco
Omantel
Zain Kuwait
Qtel
Jordan Telecom
Turkcell
Vodacom
MTN
Maroc Telecom
0
10
20
30
40
50
60
70
0 5 10 15 20 25
RO
E (%
) 2
01
1
ROA (%) 2011
Size of bubble indicates market cap
26.7%
27.4%
30.3%29.9%
30.6%
28.7%
26.9%
24%
25%
26%
27%
28%
29%
30%
31%
2008 2009 2010 2011 2012 2013E 2014E
Mobily enjoys industry-leading ROE; management track record is a positive
Page 59 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Mobily to continue its ambitious capex program
According to management, the company plans to invest around SAR 22.0bn in network infrastructure development
over the next five years. Mobily recently awarded contracts worth SAR 963mn (USD 256mn) to Huawei and Ericsson
for upgrading its 3G and 4G networks. Besides investing in the mobile broadband space, Mobily aims to strengthen its
fiber optic network to cover 500,000 residential units by 2013. In light of the capex program, the company‘s capex-
sales ratio is expected to remain ~16% in our forecast period.
Aggressive Capex plan at Mobily
Capex outlook 2008-14e (in SAR bn)
Capex-Sales 2008-14e (%)
Sources: Company reports, Saudi Fransi Capital analysis
Mobily‘s high capex program is expected to dent free cash flows for the near term. We forecast Mobily to generate
SAR4-6bn annually in our forecast period. Mobily offers a free cash flow yield of 7.3% on 2013 estimates.
Capex plans to dent free cash flows in the near term
Free cash flow outlook 2013-17e (in SAR bn)
Free cash flow yield 2013-17e (%)
Sources: Company reports, Saudi Fransi Capital analysis
3.03.3 3.2
3.7
4.94.5
4.2
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013E 2014E
27.4%
25.2%
19.8%
18.5%
20.6%
17.5%
16.0%
15%
17%
19%
21%
23%
25%
27%
29%
2008 2009 2010 2011 2012 2013E 2014E
4.2
5.05.5
5.96.3
0
1
2
3
4
5
6
7
2013E 2014E 2015E 2016E 2017E
7.3%
8.6%9.5%
10.2%11.0%
0%
2%
4%
6%
8%
10%
12%
14%
2013E 2014E 2015E 2016E 2017E
Page 60 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Mobily is a key asset for Etisalat; a case for future stake increase exists
With the growth outlook for Mobily being positive, we look at the business case for Etisalat to consider increasing its
stake in Mobily beyond 27.5%. We expect the following factors as being favorable from Etisalat‘s perspective:
a) Mobily is a high-ROE operation in a low–risk, high-growth market;
b) High degree of competition in the domestic market UAE – Du has successfully penetrated the market – is pushing
the company to chase growth outside the UAE;
c) Etisalat‘s other international operations are at high risk in the current geopolitical climate, for example Egypt
(Etisalat Misr), Pakistan (PTCL) and Sudan
Mobily expected to continue with the shareholder-friendly policy
The recent Board approval for a bonus share (1:10) indicates management‘s focus on rewarding shareholders. Despite
the resultant increase in its capital base (770mn shares), we expect the company to raise the payout ratio (55% over
the forecast period). Mobily‘s shares offer an attractive dividend yield of 6.4% at the current market price. The company
is paying a dividend of SAR 1.15 per share each quarter and is expected to increase its full year dividend to SAR 5.0
per share in 2013. This translates into a post-bonus payout ratio of 55%. Mobily has a strong balance sheet with SAR
5.1bn in cash as of 4Q 2012 and SAR 8.7bn in Short term investments.
Our forecast vs. consensus
Our forecasts for Mobily are broadly in line with the Bloomberg consensus estimates. For 2013, we forecast revenue of
SAR 25.6bn and EPS of SAR 8.3, in line with consensus. However, we expect a lower EBITDA margins (than
consensus) going forward reflecting our more conservative view on the pace of margin improvement and increasing
competition in the mobile broadband space (Mobily expected to lose market share).
Broadly in line with consensus
Forecast 2013e 2014e
Saudi
Fransi Capital
Consensus Difference
(%)
Saudi Fransi
Capital Consensus
Difference (%)
Revenue (SAR mn) 25,553 25,608 -0.2% 26,461 27,333 -3.2%
EBITDA ( SAR mn) 9,267 9,411 -1.5% 9,660 10,042 -3.8%
EBITDA margin (%) 36.3% 36.8% -48bps 36.5% 36.7% -23bps
EPS (SAR per share)
8.3 8.4 -0.5% 8.8 8.9 -0.3%
*Consensus forecast as of February 11, 2013
Sources: Bloomberg, Saudi Fransi Capital analysis
Etisalat could look to expand its participation in Saudi Arabia beyond its current 27.5% interest.
Page 61 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
4Q 2012 results: Continuous business momentum
Mobily continued to witness strong business momentum and reported a solid set of numbers for 4Q 2012. Leveraging
on Hajj season activities, the company‘s top line grew 16.7% yoy to SAR 6.8bn, while EBITDA increased 10.3%. Data
revenue (up 40%) continued its double-digit trajectory and accounted for 30% of total revenue in 4Q 2012. Earnings
were up 10.7% yoy for the quarter to reach SAR 1.7bn.
Results snapshot 4Q and FY2012
In SAR mn 4Q 2011 4Q 2012 Difference
(%) 2011 2012
Difference (%)
Revenue 5,802 6,772 16.7% 20,052 23,642 17.9%
Gross profit 3,087 3,479 12.7% 10,326 12,034 16.5%
Operating Income 1,754 1,902 8.4% 5,305 6,192 16.7%
EBITDA 2,305 2,541 10.3% 7,454 8,591 15.3%
Net Income 1,697 1,878 10.7% 5,083 6,018 18.4%
Sources: Company, Saudi Fransi Capital analysis
Page 62 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
We arrive at a fair value of SAR 80.6 per share for Mobily
We valued Mobily using the Weighted Average approach. The methods used include discounted cash flow, Fair P/E
and EV/ EBITDA multiple. We assigned higher weight to DCF approach, and arrived at a fair value a fair value of
SAR 80.6 per share for Mobily, indicating a 7.8% upside from current levels.
Valuation summary of Mobily
Fair Value Weights
DCF Valuation 79.2 40%
EV/ EBITDA 71.4 30%
P/E Multiple 91.8 30%
Weighted Average Fair Value 80.6
Upside/(Downside) from current market price % 7.8%
Sources: Saudi Fransi Capital analysis
Valuation - Scenario Analysis
Fair Value estimate at different scenario‘s
Base
Case
Mobile penetration rate in Saudi Arabia
expected to reach 210% by 2017e.
Mobily to retain 40% market share in
mobile services and 65% share in mobile
broadband.
Price-based competition to affect ARPU,
expected to decline of 1% yoy.
Capex-sales to moderate to 16% over the
long term.
Bull
Case
Mobile penetration rate in Saudi Arabia
expected to reach 230% by 2017e.
Mobily to emerge market leader in Mobile
service with 45% market share; to hold
70% market share in mobile broadband.
Operators to focus more on service
differentiation beyond price-based
competition; ARPU expected to decline of
remain flat yoy.
Capex-sales to moderate to 14% over the
long term.
Overall, we find Mobily shares to be almost fully priced
at current levels; 7.8% upside potential seen.
We would wait and observe Mobily’s progress in
penetrating Saudi Arabia’s fixed broadband market.
Initiating coverage with a HOLD rating
Bear
Case
Penetration rates in Saudi Arabia expected
to reach only 195% by 2017e.
Mobily is unable to maintain market
position and loses out to competition –
STC and Zain KSA.
Aggressive price-based competition to
deteriorate ARPUs considerably; decline of
2% yoy.
Cost overruns in Fiber rollout to increase
capex; deployment of emerging
technological changes.
Sources: Bloomberg; Saudi Fransi Capital analysis
40
50
60
70
80
90
100
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13
SAR 71.0
SAR 92.4
SAR 80.6
Fair Value
Bull Case Base Case Bear Case
Valuation
Mobily looks fully priced at current levels, limited upside seen.
Page 63 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Discounted Cash Flow (DCF)
Our DCF model is based on a five-year explicit forecast period until 2017. We arrived at a WACC of 10.7% for Mobily,
slightly lower than what we used for STC. In terms of terminal growth, we applied a 2.5% terminal growth rate to
estimate the terminal value. Our DCF approach yields a fair value of SAR 79.2/share.
Mobily: Discounted cash flow valuation summary
In SAR mn 2013e 2014e 2015e 2016e 2017e
EBIT * (1-t) 6,550 6,950 7,388 7,718 8,038
Add: Depreciation and Amortization 2,653 2,643 3,015 3,368 3,740
Changes in Working capital (514) (389) (469) (506) (543)
Capital expenditure (4,465) (4,234) (4,468) (4,698) (4,926)
Free Cash flow to Equity 4,224 4,970 5,465 5,882 6,309
Present Value of the free cash flow 3,862 4,105 4,079 3,965 3,843
Terminal Value
79,113
PV of future cash flows 19,854
PV of terminal value 48,190
Total Enterprise Value 68,045
Add: Cash 1,302
Less: Debt 8,258
Less: Other liabilities 137
Equity Value 60,951
Number of shares (mn) 770
Fair value per share SAR 79.2
Upside/(Downside) % 5.9%
Sources: Saudi Fransi Capital analysis
Page 64 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Fair Price-Earnings (P/E) multiple approach
We use a Fair P/E multiple approach using the formula (RoE-g)/((RoE*(Ke-g)), which in our view best captures the
risk/return and growth prospects of the company. We arrive at a Fair P/E multiple of 11x for Mobily, a moderate
premium to MEA 2013 median P/E multiple (reflecting the company‘s superior ROE) based on a ROE assumption of
25.4%, growth of 2.5% and a discount rate of 10.7%. Our Fair value estimate using P/E approach is SAR 91.8 per
share derived by applying 11x P/E multiple to 2013 earnings forecast of SAR 8.3 per share.
Relative valuation
For Mobily‘s market approach–based relative valuation, we used the EV/EBITDA multiple, which we believe are the
most-suited for valuing Mobily. We selected a peer group of telcos operating within the GCC region as well as those
based outside of the GCC but with operations in the MEA region (MTN, Vodacom, Maroc Telecom). Our comparative
valuation is summarized in the following table. We expect Mobily to continue commanding a premium over GCC peers
and trade in line with the median valuation multiples of its MEA peer group.
Relative Valuation
Market
Cap Price/Earnings (x) EV/ EBITDA (x)
Company (USD) 2012e 2013e 2014e 2012e 2013e 2014e
Saudi Telecom 21,282 10.7 9.0 8.7 5.1 4.6 4.2
Etihad Etisalat 15,349 7.6 9.0 8.5 6.1 6.9 6.5
Etisalat 20,944 10.1 9.9 9.6 4.3 4.1 4.0
Du 4,493 9.9 9.5 9.5 4.1 3.6 3.3
Batelco 1,589 7.8 8.3 6.9 5.1 4.9 4.5
Omantel 2,770 8.9 8.5 8.3 4.8 4.7 4.6
Zain Kuwait 12,215 11.6 11.6 10.8 6.7 6.7 6.5
Qtel 10,153 11.4 9.0 8.4 4.6 4.4 4.2
Jordan Telecom 1,887 14.5 13.4 12.7 6.7 6.5 6.3
Turkcell 14,000 12.3 11.3 10.6 6.8 6.2 5.6
Vodacom 19,460 16.2 13.9 13.1 8.1 7.4 6.9
MTN 37,619 15.1 13.3 12.1 5.8 5.6 5.2
Maroc Telecom 10,961 12.7 12.5 12.7 6.5 6.6 6.6
Median Multiple for Saudi Arabia (Ex- Zain KSA)
9.1 9.0 8.6 5.6 5.8 5.3
Median Multiple for GCC 10.0 9.0 8.6 4.9 4.7 4.4
Median Multiple for MEA 11.4 9.9 9.6 5.8 5.6 5.2
Sources: Bloomberg, Saudi Fransi Capital Analysis
Note: Relative valuation based on closing prices as of February 11, 2013
EV/ EBITDA approach: We apply a 20% premium to MEA peers‘ EV/EBITDA to reflect the company‘s risk/return and
growth prospects of Mobily and our applied EV/ EBITDA multiple of 6.7x. We justify this premium with the fact that
Mobily offers a significantly above average ROE. Our Fair value estimate using the EV/EBITDA approach is SAR 71.4
per share; this was arrived at by applying a 6.7x EV/EBITDA to the 2013 EBITDA forecast of SAR 9.3bn and deducting
net debt and liabilities of SAR 7.1bn.
Page 65 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Income Statement (in SAR mn) 2008 2009 2010 2011 2012 2013E 2014E
Revenues 10,795 13,058 16,013 20,052 23,642 25,553 26,461
Cost of Services and sales (4,768) (5,512) (7,230) (9,726) (11,608) (12,547) (12,928)
Gross Profit 6,026 7,547 8,783 10,326 12,034 13,006 13,533
Gross margin (%) 55.8% 57.8% 54.9% 51.5% 50.9% 50.9% 51.1%
Selling & Marketing Expenses (815) (1,093) (1,059) (1,173) (1,397) (1,518) (1,572)
General & Administrative Expenses (1,417) (1,617) (1,559) (1,699) (2,046) (2,221) (2,300)
Depreciation & Amortization (1,299) (1,629) (1,810) (2,149) (2,399) (2,653) (2,643)
Total Operating Expenses (3,531) (4,339) (4,429) (5,021) (5,842) (6,392) (6,515)
Operating Income 2,495 3,208 4,355 5,305 6,192 6,614 7,018
EBITDA 3,794 4,837 6,165 7,454 8,591 9,267 9,660
EBITDA margin (%) 35.1% 37.0% 38.5% 37.2% 36.3% 36.3% 36.5%
Finance expenses (437) (204) (146) (213) (169) (183) (192)
Other Income 41 41 70 46 65 66 67
Income before Zakat 2,099 3,045 4,279 5,138 6,088 6,497 6,893
Zakat (7) (31) (67) (54) (70) (91) (96)
Net Income 2,092 3,014 4,211 5,083 6,018 6,406 6,797
Basic EPS (SAR) 2.7 3.9 5.5 6.6 7.8 8.3 8.8
DPS (SAR) 0.7 1.1 1.8 3.0 3.9 4.6 4.9
No: of shares 770 770 770 770 770 770 770
Sources: Company reports, Saudi Fransi Capital analysis
Note: Per share data for Mobily based on 770mn shares;
FINANCIALS – INCOME STATEMENT
Page 66 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Balance sheet (in SAR mn) 2008 2009 2010 2011 2012 2013E 2014E
Cash and cash equivalents 1,264 933 1,661 1,690 1,302 2,715 4,483
Short Term Investments 1,050 600 450 - - - -
Accounts Receivable, net 3,098 5,481 5,748 6,323 5,904 6,445 6,815
Due from Related Parties, net 38 69 23 11 6 6 6
Inventories, net 108 132 297 470 721 772 800
Prepaid Expenses & Other assets 1,063 1,361 1,237 1,399 2,493 2,669 2,764
Total Current Assets 6,621 8,577 9,415 9,893 10,427 12,608 14,868
Property, plant and equipment, net 8,117 10,370 12,457 16,412 17,255 19,646 21,818
Licenses, Acquisition fees, net 10,923 10,450 10,028 9,665 9,412 8,833 8,252
Goodwill 1,530 1,530 1,530 1,530 1,530 1,530 1,530
Total Non Current Assets 20,570 22,349 24,015 27,607 28,197 30,009 31,600
Total Assets 27,192 30,926 33,430 37,501 38,623 42,617 46,468
Short-term loans 1,862 371 599 1,201 - - -
Current portion of long term debt 1,286 1,777 1,843 4,895 753 915 938
Accounts Payable 4,367 6,167 6,225 7,808 5,580 5,639 5,872
Due to related parties 78 211 281 194 132 138 143
Accrued expenses and other liabilities 3,155 3,663 3,307 3,949 3,609 3,865 4,002
Total Current liabilities 10,749 12,189 12,256 18,047 10,075 10,556 10,955
Long term loans 6,642 6,448 5,529 977 7,506 8,124 8,530
Provisions for end of service benefits 46 47 66 89 137 167 175
Total Non Current Liabilities 6,688 6,495 5,595 1,066 7,643 8,291 8,705
Authorized, issued and outstanding share capital
7,000 7,000 7,000 7,000 7,000 7,700 7,700
Statutory reserve 347 649 1,070 1,578 2,180 2,820 3,500
Retained earnings 2,407 4,595 7,510 9,810 11,726 13,249 15,608
Total Shareholders’ equity 9,754 12,243 15,580 18,388 20,906 23,769 26,808
Total liabilities and equity 27,192 30,926 33,430 37,501 38,623 42,617 46,468
Sources: Company reports, Saudi Fransi Capital analysis
FINANCIALS - BALANCE SHEET
Page 67 Saudi Fransi Capital
ETIHAD ETISALAT Telecom | Equity Research | 12 February 2013
Cash flow statement (in SAR mn) 2008 2009 2010 2011 2012 2013E 2014E
Net cash provided by operating activities 3,546 4,246 5,470 6,673 7,037 8,833 9,332
Net cash flows from investing activities (5,571) (2,889) (3,227) (3,408) (5,086) (4,465) (4,234)
Net cash generated from financing activities
2,586 (1,687) (1,516) (3,237) (2,338) (2,761) (3,329)
Net increase/ decrease in cash and cash equivalents
561 (331) 728 28 (387) 1,606 1,769
Cash & cash equivalents at the beginning of the period
703 1,264 933 1,661 1,690 1,302 2,715
Cash & cash equivalents at the end of the period
1,264 933 1,661 1,690 1,302 2,715 4,483
Sources: Company reports, Saudi Fransi Capital analysis
FINANCIALS – CASH FLOW STATEMENT
Page 68 Saudi Fransi Capital
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Appendix A – Telecom sector snapshot
Key parameters 2007 2008 2009 2010 2011 2012e 2017e
Mobile subscribers (mn) 28.4 36.0 44.8 51.6 53.7 53.5 66.9
Mobile penetration (%) 114% 140% 168% 187% 191% 192% 210%
Fixed line subscribers (mn) 4.0 4.1 4.2 4.1 4.6 4.9 6.4
Fixed line penetration* (%) 65% 65% 63% 63% 66% 67% 70%
Fixed broadband subscribers (mn)
0.6 1.0 1.4 1.7 2.0 2.3 3.5
Fixed Broadband penetration* (%)
14% 23% 30% 35% 39% 45% 60%
Market share – Mobile (%)
STC 61% 53% 48% 47% 47% 46% 40%
Mobily 39% 41% 41% 37% 39% 40% 45%
Zain KSA 0% 6% 12% 16% 14% 14% 15%
Mobile broadband subscribers (mn)
0.1 0.3 1.4 2.7 11.3 12.4 22.3
Mobile Broadband penetration (%)
0.3% 1.3% 5.4% 9.8% 40.3% 43.0% 70.0%
* as a % of households
Sources: CITC, ITU, Saudi Fransi Capital analysis
Appendix B – Telecom Infrastructure STC/ Mobily
STC
Technology Generation Platform Frequency Launch
2G GSM 900 1996
2.5G GSM 900 2004
2.5G GSM 900 2005
3G W-CDMA 2100 2006
3.5G W-CDMA 2100 2006
3.5G W-CDMA 2100 2009
3.5G W-CDMA 2100 2009
4G LTE - 2011
Sources: Company reports, Saudi Fransi Capital analysis
Mobily
Year Technology introduced by Mobily
Aug-2006 UMTS
May-2007 UMTS/ HSDPA
Dec-2008 HSDPA Trial
Mar-2009 HSPA Launch
Feb-2009 HSPA+ Trial
Apr-2009 LTE Trial
Dec-2009 HSPA+ Launch
Sep-2012 TDD LTE Launch
Sources: Company reports, Saudi Fransi Capital analysis
Appendix: Telecom sector
Page 69 Saudi Fransi Capital
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Appendix C –Fixed/ Mobile Technologies
Fixed Network Download Speed Mobile Network Download Speed
Technology Technology
ADSL 1 Mbps GPRS 80 Kbps
ADSL+ 24 Mbps EDGE 384 Kbps
VDSL 52 Mbps UMTS 2 Mbps
FTTH I00 Mbps LTE 30 Mbps
FTTx GPON I0 Gbps IMT Advanced I Gbps
Sources: Telefonica, Saudi Fransi Capital analysis
Page 70 Saudi Fransi Capital
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Appendix: Saudi Telecom Company
Appendix A: Executive Management
Executive Title
Eng. Abdulaziz A. Alsugair Chairman of The Board
Dr. Khaled Abdulaziz Al Ghoneim Chief Executive Officer (CEO) of STC Group
Jameel Bin Abdullah Al Molhem* CEO of STC Saudi Arabia*
Krishnan Ravi Kumar Group Chief Financial Officer (CFO)
Dr. Fahad Hussain Mushyat Vice President (VP) of Strategy Affairs
Eng. Mohammad Bin Nasser Al Jasser VP of Enterprise Services
Eng. Ibrahim Bin Abdulrahman Al Omar VP of Personal Services
Eng. Mazid Bin Nasser Al Harbi VP of Home Services
Ameen Bin Fahed Al Shiddi VP of Finance
Dr. Mahmoud Abdulkarim Al Khatib VP of Regulatory Affairs
Dr. Homoud Mohammed Al Kusayer VP of Wholesale
Eng. Bandar Mohammad Al Gafari VP of Network Sector
Eng. Omar Abdullah Al Nomany VP of Information Technology
Sources: Company reports, Zawya
* CEO of STC Saudi Arabia Jameel Bin Abdullah Al Molhem resigned recently
Appendix B: Timeline – STC
Year Development
1998 Established in Saudi Arabia
2002 Goes public via IPO
2003 DSL services launched in Saudi Arabia
2005 Introduces 3/3.5G services
2007 Purchases stake in Maxis Communications
2007 Wins third mobile license in Kuwait
2008 Acquires 35% stake in Oger Telecom
2008 Launches operations in Indonesia – PT Axis
2009 Wins third mobile license in Bahrain
2010 Launches IP TV and triple play services in Saudi Arabia
2011 Increases stake in Indonesia to 80.1%
Sources: Company reports, Zawya
Page 71 Saudi Fransi Capital
Saudi Arabia – Telecom Telecom | Equity Research | 12 February 2013
Appendix: Etihad Etisalat Company (Mobily)
Appendix A: Executive Management
Executive Title
Abdulaziz Saleh Al Saghyir Chairman
Khaled Omar Alkaf Chief Executive Officer and Managing Director
Abdulaziz Al Tamami Chief Operating Officer
Thamer Al Hosani Chief Financial Officer
Abdulrahman Ghaleb Chief Contracts and Administrative Officer
Marwan Al Ahmadi Chief Business Officer
Hamed Al Kharji Chief HR Officer
Ahmed Al Hashimi Chief Marketing Officer (Acting)
Mohammed Saad Beseiso Chief Sales & Customer Relations Officer
Medhat S Amer Chief Information Officer
Mohammed Basafi Chief Technical Officer (Fixed and Broadband Network)
Nasser Al Nasser Chief Technical Officer (Mobile Radio Network)
Taher Bin Ammar Bin Taher Al Dabbagh Senior Vice President, Partnership Strategy and Development
Fadi G Kawar Senior Vice President, Finance Strategy
Dr Fahed Moussa Al Zahrani Senior Vice President, Human Resources
Sami Nashwan Senior Vice President, Consumer Marketing
Nader Nuwayhid Vice President, Investor Relations and Corporate Governance
Sources: Company reports, Zawya
Appendix B: GED strategy framework - Mobily
Strategic Frame Development Action
Growth (G)
Mobily plans to tap the broadband market opportunity in the Kingdom and focus on developing international wholesale. Mobily seeks to leverage on its existing base of both consumer and corporate businesses.
Efficiency (E)
Optimizing Capex/Opex through network outsourcing and infrastructure sharing and aims to realize synergies by process optimization.
Differentiation (D)
Differentiation aspect revolves around a focus on improving customer experience, drive innovation, service standardization across product offerings and focus on developing skilled staff.
Sources: Investor Presentation December 2012, Mobily, Saudi Fransi Capital analysis
Page 72 Saudi Fransi Capital
Recommendation Framework Telecom | Equity Research | 12 February 2013
BUY: The analyst recommends a BUY when our fair value estimate is at least 10% higher than the current share price.
HOLD: The analyst recommends a HOLD when our fair value estimate ranges within ±10% of the current share price.
SELL: The analyst recommends a SELL when our fair value estimate is lower by more than 10% from the current
share price.
Recommendation Framework
Page 73 Saudi Fransi Capital
Research & Advisory Department Telecom | Equity Research | 12 February 2013
Head of Research & Advisory
Roy Cherry
+966-1-2826844
Saudi Fransi Capital
Call centre
800-124-3232
Website: www.sfc.sa
Research & Advisory Department
Page 74 Saudi Fransi Capital
Disclaimer Telecom | Equity Research | 12 February 2013
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