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  • April, 2009

    Hold

    Etihad Etisalat Company - Mobily

    Etihad Etisalat Company - Mobily 1

    Global Research - Saudi Arabia

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    Faisal Hasan, CFA Head of Research fhasan@global.com.kw Phone No:(965) 22951270

    Abir G. Ahmed Senior Manager agouda@global.com.kw Phone No:(965) 22951272

    Vinod Shenoy Financial Analyst vshenoy@global.com.kw Phone No:(965) 22951274

    Tickers: 7020.SE (Reuters) EEC AB (Bloomberg)

    Listing: Tadawul Stock Exchange

    Current Price: SR37.5 (As on April 11th, 2009)

    Investment Update

    Investment Summary

    - Etihad Etisalat Company (Mobily), Saudi’s second mobile operator, was able to withstand the effects of the global financial crisis. Revenues grew by 28% to reach SR10.8bn in 2008 compared to SR8.4bn reported in 2007. The increase in revenues was mainly attributed to the growth in Mobily’s subscribers which stood at 14.8mn subscribers by the end of 2008 compared to 11.0mn subscribers in 2007, coupled with increasing demand for broadband services. The company’s net income grew by 51.6% to SR2.1bn in 2008 compared to SR1.4bn in 2007.

    - With the entry of Zain, the third mobile operator, in August 2008, all operators have been competing in offering the lowest rates for their customers putting pressure on ARPUs. However, Mobily has been expanding its broadband internet services. The company currently owns 66% of the Kingdom’s fiber-optic network, thus enabling it to broaden its data transfer, internet and broadband services and offer new WiMAX-based services.

    - Key growth areas for the company going forward would be broadband and 3.75G services, especially with lower broadband penetration in Saudi Arabia which is lagging behind many developed countries. Mobily has been aggressively expanding broadband services. Recently, it launched HSUPA (high speed uplink packet access) on its network, after bringing its network up to 3.75G status. We believe that Saudi Arabia’s demographics present a huge opportunity for the broadband market. The Kingdom is one of the highly populated countries in the region. In addition, 32% of the population is in the age group of 10 to 24, which bodes well for the broadband segment.

    - We believe that Mobily will maintain its position as a leader in the broadband segment in Saudi Arabia through the introduction of new and innovative products. We expect revenues to grow at CAGR of 7.9% during our four year forecast period (2009-2012F).

    - The company reported an EBITDA of SR3.8bn, increasing by 28.7% from 2007 EBITDA of SR2.9bn. EBITDA margin improved slightly from 34.9% in 2007 to 35.1% in 2008. Going forward, we expect more improvement in margins as the company completes the fiber optic and E-Cable projects which will allow for more cost-effective rates for regional and international calling. We expect EBITDA to grow at CAGR of 10.2% during our four year forecast period (2009-2012F).

  • Global Research - Saudi Arabia Global Investment House

    � Etihad Etisalat Company - Mobily

    - Capex stood at SR2.9bn in 2008, increasing by 44.5% from SR2.0bn in 2007. Capex to sales ratio increased from 24.2% in 2007 to 27.4% in 2008. The company announced that it has allocated SR1.0bn to develop its enhanced third generation (3.75G) network. We expect a gradual decline in capex to sales ratio to reach 15.6% by 2012.

    - We expect that Mobily’s latest acquisition of “Bayanat Al Oula” and “Zajil” will strengthen its position in the wireless broadband internet segment. The company’s capital increase which added SR2.0bn to Mobily’s current SR5.0bn capital should also support the company’s future investments and expansions.

    - We have valued Mobily using the combination of Discounted Cash Flow Method and Peer Group Valuation Method, we have valued the company’s shares at an intrinsic value of SR38.6 per share, with a 3% premium over the current market price of SR37.5 per share. We, therefore, recommend a “Hold” on Mobily stock, at its prevailing price levels.

    Investment Indicators Price as on April 11, 2009

    (SR) Shares in issue

    (mn) Market Cap

    (SRbn) 52-week price

    range (SR)

    37.5 700.0 25.9 22.5 - 49.3

    Year EBITDA

    (SRbn) Net Profit

    (SR bn) EPS (SR)

    BVPS (SR)

    EV/EBITDA (%)

    P/E (x)

    P/BV (x)

    2010 F 4.9 2.7 3.9 19.6 6.7 9.6 1.9

    2009 F 4.5 2.4 3.5 16.7 7.5 10.8 2.3

    2008 3.8 2.1 3.0 13.9 8.0 10.4 2.2

    2007 2.9 1.4 2.0 8.4 16.6 29.4 6.9

    Source: Company Reports and Global Research

    Chart 01: Share Price Performance

    Source: Reuters, and Global Research

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    Mobily GCC Telecom Index

  • Global Research - Saudi Arabia Global Investment House

    Etihad Etisalat Company - Mobily �

    Financial Performance & Outlook

    Increase in subscribers and broadband services boost top-line… Revenues grew by 28% to reach SR10.8bn in 2008 compared to SR8.4bn reported in 2007. The increase in revenues was mainly attributed to the growth in Mobily’s subscribers which stood at 14.8mn subscribers by the end of 2008 compared to 11mn subscribers in 2007. In addition, we believe that the demand for broadband services was also one of the main revenue drivers for Mobily. It has been expanding its broadband services since 2007 when it doubled the broadband mobile Internet speed and introduced a 7.2 Mbps modem and data service SIM card based on HSDPA.

    In September 2008, Mobily started offering WiMAX services (broadband @ home) after taking over local data provider Bayanat Al-Oula in March 2008. The company announced that the first phase of the new service will cover four major cities: Riyadh, Jeddah, Dammam, and Khobar. The broadband market is now served by almost 1,700 3G sites with more than 83 cities, towns and villages covered by 3.5G. The company’s HSDPA subscribers rose to 300,000 users, representing more than 80% market share of the mobile broadband market in Saudi Arabia in 2008.

    In addition, Mobily have signed a “National roaming” agreement with the third mobile operator (Zain) in February 2008 whereby Mobily will lend its network infrastructure for the new GSM operator to use for a period of five years. According to the agreement, Zain will use Mobily’s microwave towers, and will utilize its network to plug any holes in its coverage. We believe that this agreement have also contributed to the increase in revenues.

    Chart 02: Revenues & ARPUs

    Source: Company Reports, Global Research

    Going forward, we expect Mobily to keep leading the broadband segment in Saudi Arabia through the introduction of new and innovative products. In March 2009, it launched HSUPA (high speed uplink packet access) on its network, after bringing its network up to 3.75G status. HSUPA offers higher uplink speeds. The new technology is available in the main areas of the Kingdom, with plans to expand to other areas shortly. The company has allocated SR1bn to develop its 3.75G network, which will make the company the first regional internet operator to provide broadband services utilizing a 3.75G network, using HSUPA. We expect revenues to grow at CAGR of 7.9% during our four year forecast period (2009-2012F).

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  • Global Research - Saudi Arabia Global Investment House

    � Etihad Etisalat Company - Mobily

    With the entry of Zain, the third mobile operator, in August 2008, all operators have been competing in offering the lowest rates for their customers putting pressure on ARPUs. However, we expect the entry of Zain to have a greater effect on the operator with the largest market share, STC, than on Mobily. Though, we expect further reduction in mobile tariffs with increased competition, we believe that the focus on higher quality value added services will be the main differentiator between the competitors.

    Mobily has been expanding its broadband internet services. The company currently owns 66% of the Kingdom’s fiber-optic network, thus enabling it to broaden its data transfer, internet and broadband services and offer new WiMAX-based services. Accordingly, we expect higher ARPUs from broadband services to offset the pressure on voice ARPUs. We expect the share of value added services in revenues to increase going forward considering the company’s planned infrastructure expansions with the completion of the fiber optic cable, and the E-cable project, which will allow the company to expand its broadband internet services and provide higher qual