Download pdf - Global Research - Saudi Arabia Investment Update Saudi Arabia · Global Research - Saudi Arabia Global Investment House Etihad Etisalat Company - Mobily - Capex stood at SR2.9bn in

April, 2009

Hold

Etihad Etisalat Company - Mobily

Etihad Etisalat Company - Mobily 1

Global Research - Saudi Arabia

Saud

i Ara

bia

Faisal Hasan, CFAHead of [email protected] No:(965) 22951270

Abir G. AhmedSenior [email protected] No:(965) 22951272

Vinod ShenoyFinancial [email protected] 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 IndicatorsPrice 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

YearEBITDA

(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


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).

0246810121416

2006 2007 2008 2009F 2010F 2011F 2012F

SR

bn

0102030405060708090

SR

Revenues ARPU



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 quality services at higher speed.

Improving margins…Cost of services stood at SR4.7bn in 2008, increasing by 26.3% over 2007 total costs of SR3.7bn. Interconnection, roaming and international costs formed 51.1% of total costs, and increased by 17.2% on a y-o-y basis, while government fees formed 25.3% of total costs, and increased by 27.3% on a y-o-y basis. Going forward, we expect a decline in transmission and international gateway costs as Mobily completes the fiber optic and E-Cable projects which will allow for more cost-effective rates for regional and international calling. In January 2008, Mobily signed a memorandum of understanding with U.A.E-based Etisalat and Egypt’s Etisalat Misr to set up a high-capacity fiber optics cable (E-Cable) at a total cost of SR562.5mn (US$150mn). The cable will run from Fujairah in the UAE, across Saudi Arabia, passing through Jeddah, and through the Suez Canal and Alexandria in Egypt, by Italy in the Mediterranean and entering Europe through France. The completion of the fiber optic and E-Cable projects will allow for more cost-effective rates for regional and international calling. Similarly, we expect a decline in rental fees as the company develops its own fiber optic network.

Chart 03: Operating Efficiency


Costs to revenues ratio declined from 44.8% in 2007 to 44.2% in 2008, leading to an improvement in gross margin from 55.2% in 2007 to 55.8% in 2008. Selling and marketing expenses stood at SR816.0mn in 2008, increasing by 27.3% on a y-o-y basis, while general and administrative expenses (G&A) increased by 31.4% to reach SR1.4bn. Staff expenses

54.1%55.2% 55.8%

57.8%59.0%

62.0%60.9%

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50%

2006 2007 2008 2009F 2010F 2011F 2012F50%

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54%

56%

58%

60%

62%

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Cost to Revenues Ratio Gross Profit Margin



formed 39.0% of G&A expenses in 2008, and increased by 40.4% on a y-o-y basis. Given the expected increase in competition and the expansion in the company’s services, we expect further increases in selling, marketing, and G&A expenses.

Chart 04: EBITDA Margin


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 with the expected decline in international gateway costs and rental fees, along with achieving economies of scale as the company is still in its growth phase. We expect EBITDA to grow at CAGR of 10.2% during our four year forecast period (2009-2012F).

Improving Profitability…The company reported net income of SR2.1bn in 2008 compared to SR1.4bn in 2007, growing by 51.6% on a y-o-y basis. Net profit margin improved from 16.3% in 2007 to 19.4% in 2008. Return on average equity (ROAE) witnessed only a slight improvement from 26.4% in 2007 to 26.7% in 2008, as the company increased its capital base by 40% from SR5.0bn to SR7.0bn. We expect Net profit to grow at CAGR of 11.7% during our four year forecast period (2009-2012F).

Chart 05: Profitability


Total assets jump by 37% in 2008 …Beginning with 2008, Mobily started to consolidate its subsidiaries; Mobily Info Tech in India (99.9%), Bayanat Al-Oula (99.0%), Zajil International Network for Telecommunication

34.3%34.9% 35.1%

36.1% 36.8%37.7% 38.3%

-1.02.03.04.05.06.0

2006 2007 2008 2009F 2010F 2011F 2012F

SR

bn

32.0%

34.0%

36.0%

38.0%

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EBITDA EBITDA margin

12.0%

16.3%

19.4% 19.5% 20.5%21.7% 22.3%

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Net Profit NPM



(96.0%), and Etihad Etisalat for Commercial Investment Company (95.0%). In November 2008, Mobily finalized the acquisition of a 96.0% stake in Zajil International Telecom Network Co., specialized in providing internet services in Saudi Arabia for SR80.0mn (U$21.3mn). Total assets of the consolidated subsidiaries stood at SR589.4mn for the year ended December 31, 2008. Mobily’s total assets stood at SR27.2bn in 2008, and grew by 36.8% on a y-o-y basis. The company reported a good will of SR1.5bn resulting from the acquisition of Bayant Al Oula, and Zajil. Net license acquisition fees contribution to total assets declined from 56.8% in 2007 to 40.2% in 2008. License acquisition fees are amortized over the license period of 25 years. Net property and equipment formed 30% of total assets in 2008 and grew by 48% to reach SR8bn. We expect total assets to grow at CAGR of 5.3% during our four year forecast period (2009-2012E).

Chart 06: Asset Structure


Capex stood at SR2.9bn in 2008, increasing by 44% from SR2bn 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.

Chart 07: Capex


Declining debt to equity ratio…Debt to equity ratio declined from 1.5x in 2007, to 1.0x in 2008. The company’s total debt amounted to SR9.8bn in 2008 compared to SR8.9bn in 2007. In April 2008, Mobily raised SR1.5bn one-year Islamic financing facility, from Samba Financial Group, the Saudi British Bank and National Commercial Bank to finance Bayanat Al Oula acquisition.

11.8 11.3 10.9 10.4 9.9 9.32 8.78

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-

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SR b

n

Net License Fees Property & Equipment Others

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Capex Capex to Sales



Chart 08: Debt to equity


Total shareholders’ equity increased from SR5.9bn in 2007 to SR9.7bn in 2008. In November 2008, Mobily increased its capital by 40% to SR7.0bn through a rights issue of 200 mn shares at a par value per share of SR10.0. The issue over-subscribed by 2.3 times. Mobily distributed cash dividends of SR525mn, translating into a dividend per share of SR0.75 for 2008 compared to a dividend of SR0.5 per share for 2007.

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Debt Equity



Valuation and Recommendation

Two valuation methods have been used to arrive at the fair value of Mobily, the Discounted Cash Flow (DCF) – discounting the company Free Cash Flow to Firm (FCFF) - along with the Price to Earnings (P/E) relative valuation method. We have assigned an 80% weight to the DCF valuation and 20% to the P/E valuation.

A) DCF Valuation – The DCF model is based on a 4-year (FY2009-FY2012) explicit forecast period for the Free Cash Flow to Firm (FCFF). The terminal value is estimated using the constant growth Gordon Growth Model (GGM). The forecasted cash flow and the terminal value is then discounted at the company Weighted Average Cost of Capital (WACC). In our DCF valuation, we have used the following assumptions:

1. Risk Free Rate (RFR) of 5.5% as per yield on the 10-year bond. 2. Equity risk premium of 5.5%.3. Beta of 1. 4. An EV/EBITDA multiple of 7 for the terminal value.5. A target cost of debt of 7%.

Using the above assumptions, we have derived a cost of equity for the company under the Capital Assets Pricing Model of 11%, and a WACC of 8.9%, resulting in fair value of SR40.5 per share.

Table 01: DCF (SR’000) 2009 F 2010 F 2011 F 2012 F

EBITDA 4,511,502 4,900,345 5,300,264 5,602,343

Change in Working Capital 123,199 (221,241) (370,810) (757,756)

Capex (3,116,972) (2,629,452) (2,273,703) (2,194,932)

FCFF 1,517,729 2,049,651 2,655,751 2,649,656

WACC 8.9%

Discounted Cash Flow 1,428,666 1,771,491 2,107,505 1,930,603

Terminal Value 39,216,401

Primary Value 7,238,264

Terminal Value (discounted) 28,574,008

Total Enterprise Value 35,812,272

Debt (9,790,214) Dec-08

Investments & cash equivalents 2,313,994 Dec-08

Total Equity Value 28,336,052

Shares Outstanding 700,000

Fair Value Per Share (SR) 40.5

Source: Global Research

Sensitivity Analysis

We provide below a sensitivity analysis table, which shows the probable value given different growth rate assumption and WACC. The shaded area represents the most probable outcomes.



Table 02: Sensitivity Analysis EV/EBITDA

WACC

6.0 6.5 7.0 7.5 8.0

7.9% 36.1 39.1 42.1 45.1 48.2

8.4% 35.4 38.3 41.3 44.3 47.2

8.9% 34.6 37.6 40.5 43.4 46.3

9.4% 33.9 36.8 39.7 42.5 45.4

9.9% 33.3 36.1 38.9 41.7 44.5

Source: Global Research.

B) Valuations based on multiples – For relative valuation, we have used the valuation of selected telecom operators in the GCC region. We believe that the comparative valuation would be appropriately reflected through the earnings multiple i.e. P/E. The price-earnings multiple of a stock is a reflection of various factors, such as the expected profitability of the company, its growth potential as perceived by the market, predictability and sustainability of its revenues, the quality of its earnings and the quality of its management, among others. Based on an implied P/E of 9x, Mobily’s stock valuation comes to SR31.3 based on its forecasted earning for FY 2009.

As the earnings multiples vary with time and are dependent on several factors such as market sentiment and other qualitative factors, we have provided 20% weight to the P/E multiple and 80% to the DCF value calculation.

Table 03: Weighted Price

Valuation ApproachFair Value/Share

(SR) WeightWeighted Value

(SR)

DCF Valuation 40.5 80% 32.4

Peer Group Valuation 31.3 20% 6.2

Estimated Fair Price 38.6

Current Market Price (SR) 37.5

Premium / (Discount) 3.0%

Source: Global Research

The combination of both the methods suggests a fair value of around SR38.6 per share. The stock currently trades at around SR37.5, which implies that the value arrived by using above methods is 3.0% higher than the current market price. We, therefore, recommend a “Hold” on Mobily stock, at its prevailing price levels.


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Tot

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4,5

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17,

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17,

689,

179

19,

880,

559

27,

191,

549

29,

900,

483

30,

845,

404

32,

066,

213

33,

387,

927

Sour

ce :

Com

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Rep

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, Glo

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Etihad Etisalat Company - Mobily 11

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1� Etihad Etisalat Company - Mobily

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year

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547

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Etihad Etisalat Company - Mobily 1�

Fact SheetEtihad Etisalat Company - Mobily

2006 2007 2008 2009 F 2010 F 2011 F 2012 F

LIQUIDITY RATIOS

Current ratio (times) 0.18 0.52 0.62 0.65 0.62 0.66 0.73

Quick ratio (times) 0.17 0.50 0.61 0.64 0.61 0.66 0.72

Cash ratio (times) 0.05 0.12 0.12 0.16 0.11 0.14 0.17

PROFITABILITY RATIOS

Gross Margin 54.1% 55.2% 55.8% 57.8% 59.0% 60.9% 62.0%

EBITDA Margin 34.3% 34.9% 35.1% 36.1% 36.8% 37.7% 38.3%

Net Profit Margin 12.0% 16.3% 19.4% 19.5% 20.5% 21.7% 22.3%

ROAE 16.7% 26.4% 26.7% 20.9% 19.9% 19.2% 18.2%

ROAA 4.1% 7.3% 8.9% 8.5% 9.0% 9.7% 10.0%

ACTIVITY RATIOS

A/R Turnover (times) 12.97 7.69 4.74 3.95 4.08 4.32 4.51

Inventory Turnover (times) 76.45 70.48 54.01 49.51 50.92 50.16 50.27

A/P Turnover (times) 1.58 1.35 1.28 1.16 1.13 1.11 1.12

LEVERAGE RATIOS

Debt to equity (times) 2.08 1.51 1.00 0.82 0.57 0.41 0.30

Debt to total assets 53.4% 44.9% 36.0% 31.9% 25.5% 20.2% 16.2%

GROWTH RATES

Revenue growth rate 251% 45% 28% 16% 7% 6% 4%

Net income growth rate -160% 97% 52% 16% 12% 12% 7%

Equity growth rate 18% 30% 65% 20% 17% 16% 13%

Total assets growth rate 9% 12% 37% 10% 3% 4% 4%

RATIOS USED FOR VALUATION

Number of shares (in 000) 700,000 700,000 700,000 700,000 700,000 700,000 700,000

Par Value per share (SR) 10 10 10 10 10 10 10

BV per share (SR) 6.5 8.4 13.9 16.7 19.6 22.7 25.6

EPS (SR) 1.0 2.0 3.0 3.5 3.9 4.4 4.7

Market price share (SR)* 41.1 58.0 31.0 37.5 37.5 37.5 37.5

Market capitalization (SR mn) 28,735.0 40,621.0 21,700.0 26,250.0 26,250.0 26,250.0 26,250.0

Enterprise Value (EV SR mn) 37,627.4 48,840.7 30,226.2 33,943.5 32,700.2 30,915.2 29,371.4

EV / EBITDA 18.8 16.6 8.0 7.5 6.7 5.8 5.2

P/E ratio 41.0 29.4 10.4 10.8 9.6 8.6 8.1

P/BV ratio 6.3 6.9 2.2 2.3 1.9 1.7 1.5

Source : Company Reports, Global Research*Market price for 2009 and subsequent years as on April 11, 2009

This Page is Intentionally Left Blank

This Page is Intentionally Left Blank


1� Etihad Etisalat Company - Mobily

The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure.

1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report.

2. The company being researched holds more than 5% stake in Global Investment House.3. Global Investment House makes a market in securities issued by this company.4. Global Investment House acts as a corporate broker or sponsor to this company.5. The author of or an individual who assisted in the preparation of this report (or a member of his/her

household) has a direct ownership position in securities issued by this company.6. An employee of Global Investment House serves on the board of directors of this company.7. Within the past year , Global Investment House has managed or co-managed a public offering for

this company, for which it received fees.8. Global Investment House has received compensation from this company for the provision of

investment banking or financial advisory services within the past year.9. Global Investment House expects to receive or intends to seek compensation for investment banking

services from this company in the next three month.10. Please see special footnote below for other relevant disclosures.

This material was produced by Global Investment House KSCC (‘Global’),a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time,to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities (‘securities’), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients.Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgement. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or ommission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document.Opinions and estimates constitute our judgment and are subject to change without prior notice.Past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person.Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations.

Disclosure Checklist

Etihad Etisalat Company - Mobily

Company Recommendation

Hold

Ticker

7020.SE (Reuters)EEC AB (Bloomberg)

Price Disclosure

1, 10SR37.5

Global Research: Equity Ratings Definitions

Buy

Hold

Reduce

Sell

Global Rating Definition

Fair value of the stock is >10% from the current market price

Fair value of the stock is between +10% and -10% from the current market price

Fair value of the stock is between -10% and -20% from the current market price

Fair value of the stock is < -20% from the current market price