al rajhi capital - saudi telecom sector - aug 2013.pdf

Saudi Telecom Sector Telecom –Industrial Saudi Arabia

August 2013

January 18, 2010

US$ 43.2 bn 32.8% US$69.5mn Market cap Free float Avg. daily volume

Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform

Target mkt cap SAR179.3bn 10.7%over current Consensus mkt cap. SAR172.4bn 6.4% over current Current mkt cap. SAR162.0bn as at 19/08/2013

Key themes & Implications

Saudi telecom sector remains exciting on the back of rising smartphone penetration and the consequent growth in data consumption. Mobily continues to strengthen its position in the Saudi market, while STC’s international business has suffered various write downs in the past few quarters. We remain Neutral on Zain KSA, despite its recent positive announcements as we believe the company requires strong top-line growth to turn itself around over the near term.

Our Ratings

Stock Rating Price Target

STC Neutral SAR45.0

Mobily Overweight SAR102.0

Zain KSA Neutral SAR10.0

Key Financial Parameters

Stock 3 year EPS CAGR 2014PE

STC 3.0% 13.0x

Mobily 9.0% 8.9x

Zain KSA 43.0% n/a

Positives

- Healthy and young population; 50% below 26 years

- Low smartphone penetration providing

opportunities for growth

- Data penetration still remains modest at 40%.

Negatives

- High voice penetation rate at 185%; showing signs

of maturity

- Continuous monitoring by regulator threatening to

arrest growth

- Arrival of new players - MVNOs to intensify

competition

Research Department Mazhar Khan,

Tel +966 11 211 9248, [email protected]

Saudi Telecoms Sector: Mobily remains the preferred stock Saudi Telecom market looks highly saturated with penetration inching

towards 200%. Nevertheless, data segment still offer growth opportunities and

remain the key driver for local players. Focus on data and corporate

segments, and capex deployment should enable companies to attain above

average growth. We reiterate our Overweight rating on Mobily with a higher

price target, while we downgrade STC to Neutral after its disappointing results

over the last three quarters, and losses in its international assets. We remain

Neutral on Zain as we believe that the company still needs to sort out its

financial problems before it can turn into a profitable entity.

Broadband growth still has some steam left. Data penetration still remains at

a low 40% and with smart-phone penetration estimated to reach 50% by 2016,

there is significant potential for data usage over the coming years. Data growth

and opportunities in the corporate segment should remain the two key drivers

for Saudi telecom companies. Having said that, CITC’s decision to ban certain

smart-phone applications has become a concern for data usage growth in the

Kingdom.

Cut in Umrah and Haj visas could affect H2 earnings. The Saudi

government’s decision to limit the number of pilgrims to the Muslim holy sites

this year (by 20% for foreigners and 50% domestic), citing the grand mosque

construction work, could have an adverse impact on the telecom companies’

second half earnings. The Hajj period is a lucrative season for companies due to

international and domestic pilgrims resulting in an increase in the long distance

and roaming call traffic. However, with the reduced visitors this year, the

earnings could be affected by around 5-7%, though it is difficult to ascertain the

exact impact.

STC – international business remains a concern. We have cut our near-term

earnings forecasts for STC after reporting poor results for three consecutive

quarters. STC’s international business remains a key concern after SAR3.0bn

worth of impairments. STC’s announcement of its intention to sell its

Indonesian arm raises doubt about its strategy of expanding into tough and

competitive markets such as India and Malaysia.

Mobily – strong plans for growth. Mobily remains our preferred stock in the

sector due to its strong domestic focus, high Capex deployment and healthy

dividends payout, which has impressed investors. We have increased our

revenue forecasts by around 5% for the next couple of years, which will trickle

down to the bottom-line. The company announced a SAR1.25 per share dividend

(above our estimate of SAR1.15) for 2Q13, reflecting management’s confidence

on its ability to sustain earnings.

Zain – still has a long way to go. Zain has received a SAR5.6bn temporary

reprieve from the MoF, which could help repay its debt and improve its medium

term cash flow. The company has also managed to devise a long-term repayment

schedule for its existing loans. Zain with its recent focus on 4G data segment has

been launching various innovative offers. Nevertheless, the company needs to

achieve above average top-line growth consistently, in order to see a turnaround.

Saudi Telecom Sector Telecom –Industrial

August 2013

Disclosures Please refer to the important disclosures at the back of this report. 2

Saudi telecoms sector

Penetration rate moving steadily According to the CITC’s Q3 2012 report, the total mobile subscriptions in KSA reached around 53.1mn implying a penetration rate of 181%. Meanwhile, the total broadband subscriptions (fixed and mobile) stood roughly at 13.98mn at the end of Q32012 (11.73mn for mobile and 2.25mn for fixed line). Mobile subscription growth has been mostly flat in the past couple of years, growing at a modest 1% and with penetration reaching 181%, we feel that the competition will intensify more. Going ahead, service providers will have to increase their marketing expenses and lower tariffs in a bid to maintain their subscriber base. Recently, companies have shifted their focus towards sales of smartphones and tablets, which rely on various online applications and require constant internet connectivity.

Focus remains on data With voice and fixed line growth maturing fast, data remains the key growth catalyst for companies. Our discussions with operators indicate that the current demand for high end smart-phones would eventually pave way for entry and mid-level phone demand in the Kingdom. Smartphone penetration is estimated to reach 50% by 2016, from the current range of 30-35%, which indicates a huge potential for data usage in the years to come.

Broadband usage in Saudi Arabia has surged over the past few years. Fixed-line broadband has increased by around 10 times from 0.22mn subscribers in 2006 to 2.25mn by the end of Q3 2012. Mobile broadband too has risen from 1.31mn in 2009 to 11.73mn by the end of Q3 2012, taking the penetration level to 40%, which is still quite low compared to the US (76.1%), and the UK (53.0%) (Source: OECD).

With voice penetration reaching 181% in Saudi Arabia, we maintain our view that the broadband data is the main growth driver for the maturing telecom sector. Operators continue to invest heavily in latest technologies (4G) to remain ahead of the pack. We expect data revenues will continue to form a larger portion of the telecom companies’ total revenues over the coming years. Currently, Mobily earns about 28% of its revenues from data services, which we expect to increase to 32% by 2017. STC generated about 18% of its revenues from data services during the first half of 2013, up from about 13% in 2012. This figure is likely to increase steadily over the next few quarters. Zain, on the other hand, could lead in data revenue contribution, as the share is forecasted to reach 26% of the total revenues by 2017 from 15% currently.

However, with increasing competition among operators fueled by the introduction of MVNOs in the market, we believe data tariffs could fall and margins may come under pressure over the near term.

Figure 1 Various services provided by telecom operators

STC Mobily Zain

Mobile voice & data Mobile voice & data Mobile voice & data

Dedicated mobile data Dedicated mobile data Dedicated mobile data

Wireless broadband Wireless broadband Wireless broadband

Fixed line broadband internet

Fixed Line voice

IPTV Source: Company data, Al Rajhi Capital

Arrival of MVNOs makes the market competitive In June 2013, CITC awarded three MVNO licenses to companies namely – Virgin Mobile (tie-up with STC), Axiom Telecom (Zain) and Jawraa Lebara (Mobily). These MVNOs will purchase data and voice traffic in bundles from operators, and resell them to customers under their own brand. MVNOs typically target a particular segment based on lower costs for a service (voice, data etc.), or a particular customer segment (young college goers, expat community, etc.) for a customized service offering. No doubt, the advent of MVNOs will intensify competition and reduce the blended tariff in the country. However, we believe that the local market need more players in order to reduce the level of market concentration

Voice penetration inching towards 200%

With data penetration at 40%, there is still wide room for growth

Launch of MVNOs set to increase competition


August 2013


among existing players (high HHI index of 4,063 in the market indicating 0ver 90% of the market captured by STC and Mobily).

All the three operators seem to be positive about tying up with a MVNO partner. We believe STC is best placed to benefit from the entry of MVNOs in the market. The operator has the widest network coverage in the country, which will enable its partner to address a wider subscriber base. On the other hand, we believe Zain stands to lose the most from increasing competition, as the company mostly targets the low cost and price sensitive segment. MVNOs will lure subscribers by competing on price, thus directly competing with Zain. Mobily with its diversification strategy, can have an edge over the competition from the new players. However, we think the MVNOs will start operating only by the end of 2014 , so there will be no direct impact on the existing telecom operators till then.

CITC decision to ban certain apps will affect data demand CITC has begun scrutinizing certain smart-phone applications that are not in compliance with the country’s security. In June 2013, CITC banned a free call app named Viber, while issuing a warning to other free calling/messaging tools such as Skype and Whatsapp. We believe this could negatively affect data usage as these applications drive demand for broadband packages.

Financial Analysis Revenue market share shows Mobily leading Mobily has been steadily gaining market share both in terms of subscribers as well as revenue. The company’s revenue market share has increased from an estimated 26% in 2010 to about 35% in 2013. Zain, on the other hand, after gaining revenue market share in 2011, had started to lose the same in 2012. Zain’s revenue market share increased from 8.2% in Q1 2010 to 10.2% in Q1 2011 and then fell to 9.2% in Q1 2012, and is now hovering around 10%. STC has lost both revenue as well as subscriber market shares over the past few quarters, which is understandable due to the increased competition in the sector. The company’s revenue market share has come down from about 65% in 2010 to an estimated 56% by end of 2013.

Figure 2 Revenue market share – 2010 Figure 3 Revenue market share – 2013E

Title:

Source:

Please fill in the values above to have them entered in your report

65%

26%

9%

STC Mobily Zain

Title:

Source:


56%35%

10%

STC Mobily Zain

Source: Company data, Al Rajhi Capital Source: Company data, Al Rajhi Capital

Mobily remains consistent in Capex deployment In terms of capital expenditure, Mobily has been consistently deploying close to 20% of its revenues every year on network related costs. Zain’s capex contribution has been muted due to its high losses, whereas STC’s capex has been mostly skewed towards inorganic opportunities. Lack of opportunities creates volatility in the company’s capex requirements. The below chart depicts the capex/sales figures for Saudi telecom companies:

Mobily has managed to increase its market share; and has


August 2013


Figure 4 Capex/Sales – Telecom Companies

Title:

Source:


28%

13%

24% 22%

21%

18%

20%17%

16%

11%

9%

10%

0%

10%

20%

30%

40%

50%

60%

70%

2010 2011 2012 2013E

STC Mobily Zain

Source: Company data, Al Rajhi Capital

Changes to our estimates Raising our forecasts for Mobily, while making some adjustment for STC

We have increased our revenue and net profit estimates for Mobily, following its better-than-expected Q2 2013 results. We have raised our revenue estimate for the company by about 3.1% and 306% for 2013 and 2014 respectively, taking into account the company’s strong performance in H1 2013 and the positive management guidance for next year. For STC, we have streamlined our revenue estimates based on the change in accounting treatment of subsidiaries. We have also reduced our net profit estimate on account of the proposed sale of its Indonesian subsidiary and provisions on currency fluctuations. On the other hand, we have trimmed our revenue estimates for Zain by about 1.0% and 5.7% for 2013 and 2014 respectively, on account of a potential decline in its market share and threat from the advent of MVNOs.

Figure 5 Saudi Telecoms Sector: Changes to our near term estimates

In SAR mn 2013E 2013E % chng. 2014E 2014E % chng.

Old New Old New

STC

Revenues 58,950 46,459 -21.2% 59,280 48,811 -17.7%

Net Profit 8,036 5,987 -25.5% 8,681 6,500 -25.1%

Mobily

Revenues 24,771 25,546 3.1% 26,568 27,533 3.6%

Net Profit 6,220 6,732 8.2% 6,800 7,515 10.5%

Zain

Revenues 7,119 7,048 -1.0% 8,070 7,612 -5.7%

Net Profit (1,361) (1,440) 5.8% (946) (982) 3.8% Source: Company data, Al Rajhi Capital

We have increased our near-term forecasts for Mobily...

...while adjusting our estimates for STC after the change in accounting treatment

We have also altered Zain forecasts a bit


August 2013


Valuation

Increased TP for Mobily while cutting target for STC

We have used DCF valuation to calculate the fair value of the telecom companies under our coverage.

To calculate the cost of equity (CAPM model), we have used the last 10-year average of the US 10-year bond yield (at 3.6%), and the country default premium of 0.7% based on Moody’s sovereign rating, to arrive at a risk free rate of 4.3%. We have then added a country risk premium of 1.05% (default premium of 0.7% multiplied by an average equity-to-debt market volatility of 1.5x). Our equity market risk premium of 5.2% is based on the historical US market premium of 4.2% and an additional 1% premium for the local market.

Our WACC calculations have been mostly dependent on the companies’ leverage ratios and estimated interest cost for 2013. Our WACC ranges between 9.4-11.2% with STC on the higher band due to its high beta on account of its international business.

Mobily Mobily remains our preferred stock in Saudi Arabia’s telecom sector. Based on our new methodology, the company’s WACC has declined from 10.2% to 9.9%. Moreover, we have revised our forecasts to take into account Mobily’s strong performance over the last couple of quarters as well as the management guidance. Mobily is currently trading at a PE of 9.9x and a dividend yield of about 5.8% based on our 2013 estimates. Based on our assumptions, we arrive at a fair value of SAR102.0 for the stock, which provides a potential upside of 17% from the current market price of SAR87.

STC We have valued STC using DCF method arriving at a fair value of SAR45.0, implying a potential upside of 7% from the current market price. Hence, we downgrade our rating on the stock to Neutral. We opine that STC’s financial prospects remain modest for the next couple of years given its risky international exposure and its debt restructuring.

Zain KSA Zain KSA continues to reel under its high debt levels. The company recently got a waiver from the Ministry of Finance, which will enable it to generate medium term cash flows in the business. In addition, the cash constrained firm also got a long-term refinancing for its SAR11bn debt. Despite the positive news, the company needs a revenue growth push, which will help it to turn around its business. With MVNOs planning to enter the market and the competition intensifying further, we think Zain would only break even by 2016.

We have valued Zain based on DCF, with a WACC of 9.4%. Based on our estimates, we arrive at a fair value target price of SAR10. We thus maintain our Neutral rating on Zain KSA’s stock, given the extremely high volatility and significant risks.

Our WACC for Mobily has reduced after adopting the new calculation method

We have cut our target price for STC from SAR47.2 to SAR45.0

Zain’s revenue growth is too meager to generate enough cash flows and turn itself around before 2016

Saudi Telecom Telecom – Industrial STC AB: Saudi Arabia

August 2013

Rating NEUTRAL

Target price SAR45.0 (7.4% upside)

Current

price SAR41.9

Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform 6

Key themes & implications

STC is a one-stop telecom solutions provider in the KSA. The company also provides diversification benefits through its exposure to international markets. However, fluctuation in foreign currency rates poses a risk to STC. We downgrade STC to Neutral after the poor performance of its international business.

Share information

Market cap (SAR/US$) 84.20bn / 22.45bn

52-week range 38.60 - 46.10

Daily avg volume (US$) 12mn

Shares outstanding 2,000mn

Free float (est) 16%

Performance 1M 3M 12M

Absolute 2.7% 6% 8.5%

Relative to index -2.9% -7.8% -7.6%

Major Shareholder:

Public Investment Fund 70.0%

Gen. Organisation for Social Insce. 7.0%

Valuation

12/12A 12/13E 12/14E 12/15E

P/E (x) 11.7 13.3 13.0 13.0

P/B (x) 1.6 1.6 1.5 1.5

EV/EBITDA (x) 5.2 4.3 4.6 4.4

Dividend Yield 4.8% 4.8% 4.8% 4.8% Source: Company data, Al Rajhi Capital

Performance

87919498101105108112115119122

37

39

41

43

45

47

Price Close Relative to TADAWUL FF (RHS)

-10

30

70

08/12 11/12 02/13 05/13

RS

I10

Source: Bloomberg, Company data, Al Rajhi Capital

Company summary

STC is the largest telecom operator in the GCC region with a market value of US$22.9bn. STC completely dominates the Saudi fixed-line telecom market and retains the highest share in the mobile market by revenues. STC is committed to expansion by investing abroad and has made several major investments in Turkey, Malaysia, South Africa and elsewhere. These investments account for around one-third of the company’s value.

STC International business key concern We have downgraded our rating on STC to Neutral following its poor

performance in the last two quarters and bleak prospects for the second half of

2013. The company’s international business has come under spotlight after

continuous impairments and write downs. STC has written down SAR3bn

worth of investments in the last nine months, and also plans to sell its

Indonesian assets due to poor performance. This reflects poorly on STC’s

ability to invest in high competitive markets, and accordingly, we think STC

needs to concentrate more on its domestic operations to maintain its market

share.

Domestic operations remain robust: STC has fared well domestically with a

strong presence in all the business segments. Domestic revenues grew at around

5% during the last two years, which is understandable since STC is a mature

company.

International operations have become a concern: STC’s international

businesses has become a major concern due to increasing impairments. The

company has written down SAR3bn worth of assets in the past three quarters.

Moreover, it is now willing to sell its Indonesian assets after it failed to

turnaround Axis (80% stake). This reflects poorly on STC’s strategy as it had

raised its stake in Axis from 51% to 80% in 2011. Moreover, STC had arranged a

loan worth US$1.2bn for Axis, which now faces restructuring and could inflict a

potential US$600mn loss for the bankers who arranged the deal, if agreed. This

could further fuel negative sentiment for STC in the short run.

Cut in target price due to falling cash flows: STC’s cash flows could be

adversely impacted due to its proposed stake sale in Axis, and the poor

performance of its South-east Asian assets. Further, STC’s international business

now accounts for close to 10% of its revenues (30% earlier) post restating of

accounts, which indicates that the company could suffer a decline in its

valuation.

Conclusion: We have cut our target price and rating on STC after its poor

bottom-line performance in H1 2013. We believe that the company needs to

focus on its domestic operations and find better growth avenues. STC could

concentrate on its Middle East assets (such as Bahrain and Kuwait) to stimulate

the overall profitability, while remaining low on its Southeast Asian assets.

Period End (SAR) 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue (mn) 56,220 55,751 46,459 48,811 50,920

Revenue Growth 8.6% -0.8% -16.7% 5.1% 4.3%

Gross profit margin

EBITDA margin 35.8% 35.3% 38.9% 35.0% 34.9%

Net profit margin 13.6% 12.9% 13.6% 13.3% 12.8%

EPS 3.84 3.61 3.16 3.25 3.25

EPS Growth -18.7% -5.9% -12.5% 2.9% -0.1%

ROE 16.7% 14.7% 12.1% 12.0% 11.4%

ROCE 13.6% 12.8% 17.9% 13.9% 13.2%

Capex/Sales 13.1% 15.2% 16.2% 22.6% 20.4% Source: Company data, Al Rajhi Capital



Saudi Telecom Telecom – Industrial August 2013


Income Statement (SARmn) 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue 56,220 55,751 46,459 48,811 50,920

Access Charges (9,773) (9,897) (8,136) (8,884) (9,420)

Employee Costs (6,683) (2,778) (3,737) (6,053) (6,263)

Government Charges (6,271) (5,333) (4,233) (4,539) (4,710)

S.G. & A. Costs (7,343) (11,786) (6,737) (6,580) (6,925)

Repairs & Maintenance Costs (6,031) (6,260) (5,534) (5,662) (5,856)

Operating EBIT 11,266 11,303 10,877 8,736 8,603

Cash Operating Costs (36,101) (36,053) (28,377) (31,718) (33,174)

EBITDA 20,119 19,698 18,082 17,094 17,746

Depreciation and Amortisation (8,853) (8,394) (7,204) (8,357) (9,142)

Operating Profit 11,266 11,303 10,877 8,736 8,603

Net financing income/(costs) (1,768) (1,813) (2,073) (438) (299)

Forex and Related Gains (1,105) (431) (127) (168) (168)

Provisions (414) (640) (1,388) (425) (425)

Other Income 516 260 768 - -

Other Expenses

Net Profit Before Taxes 8,495 8,722 7,504 7,705 7,711

Taxes (685) (1,094) (972) (956) (803)

Minority Interests (141) (408) (217) (249) (415)

Net profit available to shareholders 7,670 7,219 6,315 6,500 6,494

Dividends (4,000) (4,000) (4,000) (4,000) (4,000)

Transfer to Capital Reserve - - - - -

12/11A 12/12A 12/13E 12/14E 12/15E

Adjusted Shares Out (mn) 2,000 2,000 2,000 2,000 2,000

CFPS (SAR) 8.33 8.01 6.87 7.55 8.03

EPS (SAR) 3.835 3.610 3.158 3.250 3.247

DPS (SAR) 2.000 2.000 2.000 2.000 2.000

Growth 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue Growth 8.6% -0.8% -16.7% 5.1% 4.3%

EBITDA Growth 2.5% -2.1% -8.2% -5.5% 3.8%

Operating Profit Growth 2.6% 0.3% -3.8% -19.7% -1.5%

Net Profit Growth -18.7% -5.9% -12.5% 2.9% -0.1%

EPS Growth -18.7% -5.9% -12.5% 2.9% -0.1%

Margins 12/11A 12/12A 12/13E 12/14E 12/15E

EBITDA margin 35.8% 35.3% 38.9% 35.0% 34.9%

Operating Margin 20.0% 20.3% 23.4% 17.9% 16.9%

Pretax profit margin 15.1% 15.6% 16.2% 15.8% 15.1%


Other Ratios 12/11A 12/12A 12/13E 12/14E 12/15E

ROCE 13.6% 12.8% 17.9% 13.9% 13.2%

ROIC 13.8% 13.7% 12.9% 22.5% 20.6%

ROE 16.7% 14.7% 12.1% 12.0% 11.4%

Effective Tax Rate 8.1% 12.5% 12.9% 12.4% 10.4%

Capex/Sales 13.1% 15.2% 16.2% 22.6% 20.4%

Dividend Payout Ratio 52.2% 55.4% 63.3% 61.5% 61.6%

Valuation Measures 12/11A 12/12A 12/13E 12/14E 12/15E

P/E (x) 11.0 11.7 13.3 13.0 13.0

P/CF (x) 5.1 5.3 6.1 5.6 5.2

P/B (x) 1.8 1.6 1.6 1.5 1.5

EV/Sales (x) 1.8 1.8 1.7 1.6 1.5

EV/EBITDA (x) 5.1 5.2 4.3 4.6 4.4

EV/EBIT (x) 9.1 9.0 7.2 9.1 9.1

EV/IC (x) 1.4 1.4 2.3 2.1 2.0

Dividend Yield 4.8% 4.8% 4.8% 4.8% 4.8% Source: Company data, Al Rajhi Capital

Saudi Telecom Telecom – Industrial August 2013


Balance Sheet (SARmn) 12/11A 12/12A 12/13E 12/14E 12/15E

Cash and Cash Equivalents 6,589 13,791 14,276 12,754 13,396

Current Receivables 11,201 10,772 8,757 9,258 10,082

Inventories - 1,155 - - -

Other current assets 6,623 1,902 6,474 6,474 6,474

Total Current Assets 21,967 28,793 29,506 28,486 29,952

Fixed Assets 55,085 55,995 37,628 40,468 41,898

Investments 2,682 2,762 12,874 12,874 12,874

Goodwill - - - - -

Other Intangible Assets 29,318 28,140 4,252 4,065 3,877

Total Other Assets 2,349 2,214 1,001 1,001 1,001

Total Non-current Assets 89,435 89,112 55,755 58,408 59,651

Total Assets 111,402 117,904 85,262 86,894 89,603

Short Term Debt 5,972 4,717 1,425 1,425 1,425

Trade Payables 15,624 14,375 11,478 11,160 11,406

Dividends Payable - - - - -

Other Current Liabilities 3,667 2,189 6,576 6,576 6,576

Total Current Liabilities 25,263 21,282 19,479 19,160 19,407

Long-Term Debt 23,960 26,321 7,003 6,454 6,008

Other LT Payables 5,035 2,995 1,139 1,139 1,139

Provisions 3,062 8,412 4,891 4,891 4,891

Total Non-current Liabilities 32,056 37,727 13,033 12,484 12,037

Minority interests 7,174 7,558 (230) (230) 185

Paid-up share capital 20,000 20,000 20,000 20,000 20,000

Total Reserves 26,908 31,337 32,980 35,480 37,974

Total Shareholders' Equity 46,908 51,337 52,980 55,480 57,974

Total Equity 54,082 58,895 52,750 55,250 58,159

Total Liabilities & Shareholders' Equity 111,402 117,904 85,262 86,894 89,603

Ratios 12/11A 12/12A 12/13E 12/14E 12/15E

Net Debt (SARmn) 20,897 17,247 (5,848) (4,875) (5,963)

Net Debt/EBITDA (x) 1.04 0.88 (0.32) (0.29) (0.34)

Net Debt to Equity 38.6% 29.3% -11.1% -8.8% -10.3%

EBITDA Interest Cover (x) 11.4 10.9 8.7 39.0 59.3

BVPS (SAR) 23.45 25.67 26.49 27.74 28.99

Cashflow Statement (SARmn) 12/11A 12/12A 12/13E 12/14E 12/15E

Net Income before Tax & Minority Interest 8,495 8,722 7,504 7,705 7,711

Depreciation & Amortisation 8,853 8,394 7,204 8,357 9,142

Decrease in Working Capital (4,811) (7,248) 2,118 (820) (578)

Other Operating Cashflow 4,373 1,211 (859) (956) (803)

Cashflow from Operations 16,911 11,079 15,967 14,286 15,473

Capital Expenditure (7,346) (8,484) (7,508) (11,010) (10,385)

New Investments (29) 256 (2,811) - -

Others (855) (1,015) (103) - -

Cashflow from investing activities (8,230) (9,243) (10,422) (11,010) (10,385)

Net Operating Cashflow 8,681 1,836 5,544 3,276 5,088

Dividends paid to ordinary shareholders (4,432) (4,002) (3,998) (4,000) (4,000)

Proceeds from issue of shares - - - - -

Effects of Exchange Rates on Cash - - - - -

Other Financing Cashflow (3,307) 384 (403) (249) -

Cashflow from financing activities (7,997) (4,252) (4,960) (4,798) (4,446)

Total cash generated 684 (2,416) 585 (1,522) 642

Cash at beginning of period 5,904 6,589 13,791 14,276 12,754

Implied cash at end of year 6,589 4,173 14,376 12,754 13,396

Ratios 12/11A 12/12A 12/13E 12/14E 12/15E


Etihad Etisalat Company Telecom – Industrial EEC AB: Saudi Arabia

August 2013

Rating OVERWEIGHT

Target price SAR102.0 (16.6% upside)

Current

price SAR87.5



We expect the data segment to remain in focus over the next few years due to the advent of latest smart-phones in the market. Mobily is focusing on increasing its market share in the corporate segment by providing bundled services. Mobily trades at a nominal PE of 9.9 and with a dividend yield of 5.8% (based on our 2013 estimates), making it one of the most attractive stocks in the Saudi market.

Share information


52-week range 61.36 - 89.00

Daily avg volume (US$) 16.5mn

Shares outstanding 770.0mn



Absolute 4.5% 9.1% 42.4%

Relative to index 0.1% -4.2% 26.4%

Major Shareholder:

Emirates Telecoms Corp. 27.5%

Gen. Organisation for Social Insce. 11.2%

Valuation

12/12A 12/13E 12/14E 12/15E

P/E (x) 11.1 9.9 8.9 8.2

P/B (x) 3.2 2.8 2.4 2.1

EV/EBITDA (x) 7.8 7.0 6.2 5.8


Performance

96

102

107

113

119

125

130

136

58

63

68

73

78

83

88

93


-10

30

70

08/12 11/12 02/13 05/13

RS

I10


Company summary

Etihad Etisalat (Mobily) is the second largest telecom operator in Saudi Arabia, with a market value of US$17bn. Mobily has a market share of more than 40% in mobile accounts, although its revenue share is lower at about 35%. Mobily has at least 42% share in mobile broadband subscriptions, which is the fastest growing segment in the Saudi telecom market.

Mobily remains top pick with an increased target price We remain Overweight on Mobily and has increased our target price to

SAR102 per share. Focus on the lucrative corporate segment and a high share

of broadband accounts will drive the company’s growth story going forward,

while the healthy dividend payout makes it an attractive proposition.

Revenue market share remains impressive: Mobily remains a key player in

the Saudi market with its revenue market share increasing from 26% in 2010 to

an estimated 35% by the end of 2013. With its focus on revenue generation from

broadband and handset sales, we believe Mobily will be able to sustain an above

average industry growth rate.

Focus on corporate segment to yield results: Mobily has been focusing on

increasing its presence in the corporate segment by offering various innovative

solutions to mid and large businesses in Saudi Arabia. On the back of its tie-ups

with IBM, Nokia, and Go Telecom, Mobily has been channelizing its capex to

this high growth segment. Capex deployment remains impressive at an average

of 20% of its annual sales during the last four years.

Dividend payout is a key catalyst: With a view to attract retail shareholders,

Mobily has been doling out attractive dividend payouts over the last three years.

In fact, the past one year rally witnessed in its stock price was largely driven by

the company’s decision to initiate paying dividends. For Q2 2013, Mobily

disbursed a higher than expected dividend of SAR1.25 per share (above our

estimate of SAR1.15), which shows the management’s confidence. With an

impressive dividend yield of 5.8% for 2013, we believe that the stock still has the

potential for further upside over the next few quarters.

Fundamentals remain impressive: Mobily has been able to sustain its high

margins and profitability ratios without compromising on its bottom-line

growth. With a net margin of 26% and ROE close to 30%, we believe margins

will decline gradually with falling handset prices and call tariffs, despite focus on

optimizing operating costs.

Valuation – increased target: We have used DCF valuation method for valuing

Mobily. Based on the new approach, our price target for Mobily is SAR102.0 per

share, which is 27% above our previous target of SAR80.7. This is mainly due to

a lower WACC of 9.86% compared to 10.5% earlier, and increase in our near-

term estimates.


Revenue (mn) 20,052 23,642 25,546 27,533 29,620

Revenue Growth 25.2% 17.9% 8.1% 7.8% 7.6%

Gross profit margin 51.5% 50.9% 49.9% 50.9% 50.8%

EBITDA margin 37.2% 36.3% 37.4% 38.9% 38.9%


EPS 6.60 7.82 8.74 9.76 10.58

EPS Growth 20.7% 18.4% 11.9% 11.6% 8.5%

ROE 29.9% 30.6% 30.0% 29.3% 27.7%

ROCE 27.4% 21.8% 20.4% 20.6% 20.6%



Tel +966 11 2119248, [email protected]

Etihad Etisalat Company Telecom – Industrial August 2013



Revenue 20,052 23,642 25,546 27,533 29,620

Cost of Goods Sold (9,728) (11,608) (12,810) (13,529) (14,573)

Gross Profit 10,324 12,034 12,735 14,003 15,047

Government Charges

S.G. & A. Costs (2,870) (3,443) (3,187) (3,294) (3,540)

Operating EBIT 5,305 6,192 6,917 7,809 8,427


EBITDA 7,454 8,591 9,548 10,709 11,507


Operating Profit 5,305 6,192 6,917 7,809 8,427

Net financing income/(costs) (213) (169) (201) (225) (242)

Forex and Related Gains - - - - -

Provisions - - - - -

Other Income 46 65 140 83 89

Other Expenses - - - - -

Net Profit Before Taxes 5,138 6,088 6,856 7,667 8,274

Taxes (54) (70) (124) (152) (124)

Minority Interests - - - - -

Net profit available to shareholders 5,083 6,018 6,732 7,515 8,150

Dividends (2,275) (2,905) (3,850) (4,043) (4,235)


12/11A 12/12A 12/13E 12/14E 12/15E

Adjusted Shares Out (mn) 770.0 770.0 770.0 770.0 770.0

CFPS (SAR) 9.39 10.93 12.16 13.52 14.58

EPS (SAR) 6.60 7.82 8.74 9.76 10.58

DPS (SAR) 2.95 3.77 5.00 5.25 5.50

Growth 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue Growth 25.2% 17.9% 8.1% 7.8% 7.6%

Gross Profit Growth 17.5% 16.6% 5.8% 10.0% 7.5%

EBITDA Growth 20.9% 15.2% 11.1% 12.2% 7.5%

Operating Profit Growth 21.8% 16.7% 11.7% 12.9% 7.9%

Net Profit Growth 20.7% 18.4% 11.9% 11.6% 8.5%

EPS Growth 20.7% 18.4% 11.9% 11.6% 8.5%

Margins 12/11A 12/12A 12/13E 12/14E 12/15E


EBITDA margin 37.2% 36.3% 37.4% 38.9% 38.9%

Operating Margin 26.5% 26.2% 27.1% 28.4% 28.5%

Pretax profit margin 25.6% 25.7% 26.8% 27.8% 27.9%



ROCE 27.4% 21.8% 20.4% 20.6% 20.6%

ROIC 24.5% 25.7% 24.4% 24.7% 24.5%

ROE 29.9% 30.6% 30.0% 29.3% 27.7%


Capex/Sales 18.4% 20.2% 17.2% 19.9% 20.0%



P/E (x) 13.1 11.1 9.9 8.9 8.2

P/CF (x) 9.2 7.9 7.1 6.4 5.9

P/B (x) 3.6 3.2 2.8 2.4 2.1

EV/Sales (x) 3.3 2.8 2.6 2.4 2.3

EV/EBITDA (x) 9.0 7.8 7.0 6.2 5.8

EV/EBIT (x) 12.6 10.8 9.7 8.6 7.9

EV/IC (x) 2.8 2.4 2.2 2.0 1.8


We estimate a revenue growth of about 8% for 2013; powered by handset sales and broadband growth

We expect Mobily to pay a dividend of about SAR5 this year. This does not include the bonus shares announced

We expect gross margin to stabilize around 50%, due to sales of low margin cell phones

Mobily’s ROIC is well above its WACC

Mobily still trades on a cheap 2013 PE of 9.9x and EV/EBITDA of 7.0x

Etihad Etisalat Company Telecom – Industrial August 2013



Cash and Cash Equivalents 1,690 1,302 3,910 5,057 4,826


Inventories 470 721 766 890 681

Other current assets 1,411 2,499 2,516 2,516 2,516


Fixed Assets 16,412 17,255 20,819 23,986 27,404

Investments - - - - -

Goodwill 1,530 1,530 1,530 1,530 1,530


Total Other Assets - - - - -


Total Assets 37,501 38,623 46,402 49,732 51,939

Short Term Debt 6,096 753 1,007 1,072 922

Trade Payables 11,757 9,190 11,347 10,584 9,952


Other Current Liabilities 194 132 43 43 43


Long-Term Debt 977 7,506 9,903 10,460 9,341

Other LT Payables - - - - -

Provisions 89 137 160 160 160


Minority interests - - - - -


Total Reserves 11,388 13,906 16,242 19,714 23,821


Total Equity 18,388 20,906 23,942 27,414 31,521


Ratios 12/11A 12/12A 12/13E 12/14E 12/15E

Net Debt (SARmn) 5,383 6,956 6,999 6,474 5,436

Net Debt/EBITDA (x) 0.72 0.81 0.73 0.60 0.47

Net Debt to Equity 29.3% 33.3% 29.2% 23.6% 17.2%


BVPS (SAR) 23.88 27.15 31.09 35.60 40.94


Net Income before Tax & Minority Interest 5,138 6,088 6,856 7,667 8,274


Decrease in Working Capital (792) (1,703) (1,503) (354) (225)

Other Operating Cashflow 179 254 64 (152) (124)

Cashflow from Operations 6,673 7,037 8,049 10,060 11,005

Capital Expenditure (3,690) (4,777) (4,393) (5,493) (5,924)

New Investments 450 - - - -

Others (168) (310) - - -

Cashflow from investing activities (3,408) (5,086) (4,393) (5,493) (5,924)

Net Operating Cashflow 3,265 1,950 3,655 4,567 5,081

Dividends paid to ordinary shareholders (2,275) (3,500) (3,696) (3,850) (4,043)


Effects of Exchange Rates on Cash - - - - -

Other Financing Cashflow - - - - -

Cashflow from financing activities (3,237) (2,338) (1,047) (3,229) (5,311)

Total cash generated 28 (387) 2,608 1,339 (230)

Cash at beginning of period 1,661 1,690 1,302 3,910 5,057

Implied cash at end of year 1,690 1,302 3,910 5,249 4,826

Ratios 12/11A 12/12A 12/13E 12/14E 12/15E


We expect cash balance to reach about SAR4.8bn by 2015

Net debt/EBITDA is below 1.0x; which is a very comfortable number

We expect a Capex of SAR4.4bn for 2013

Zain KSA Telecom – Industrial ZAINKSA AB: Saudi Arabia

August 2013

Rating NEUTRAL

Target price SAR10.0 (-3.4% upside)

Current

price SAR10.35



The refinancing of the SAR11bn loan, suggests that the company is finding it difficult to repay to its creditors. Moreover, the company is losing revenue and its subscriber market share due to slowing growth. Frequent changes in the management have also dented investor confidence in the stock. We have cut our estimates slightly for Zain, while maintain our target price at SAR10 per share.

Share information


52-week range 7.60 - 12.65

Daily avg volume (US$) 41mn

Shares outstanding 1,080mn



Absolute 3.6% 23.6% -15.4%

Relative to index -0.8% 10.3% -31.4%

Major Shareholder:

Mobile Telecommunications Co. (Kuwait) 25.0%

Faden Trading and Contracting 6.8%

Valuation

12/12A 12/13E 12/14E 12/15E

P/E (x) na na na na

P/B (x) 1.7 1.6 1.8 2.1

EV/EBITDA (x) 16.2 13.0 8.6 7.1


Performance

60

68

77

85

93

102

110

7.0

8.0

9.0

10.0

11.0

12.0

13.0


-10

30

70

08/12 11/12 02/13 05/13

RS

I10


Company summary

Zain KSA is the third largest telecom operator in Saudi Arabia, with a market cap of US$2.9bn. The company launched its services in Q3 2008. We estimate that Zain enjoys a 11-12% market share in mobile accounts, although its revenue share is lower at 8-9%. The company has no presence in the fixed-line market. Zain KSA is an affiliate of the Zain Group of Kuwait. Zain Kuwait is an emerging telecom player operating in various markets in the Middle East and Africa.

Zain KSA still a long way to go Zain has been in the news for past few months for its license fees deferment and

loan refinancing efforts, which certainly will provide a boost to its medium-

term cash flows. However, we believe that the company needs a few quarters of

strong top and bottom-line growth to turn itself around from its net loss

position. We have trimmed our estimates for the company, and have

maintained our rating and price target.

Government deferring fees is a positive catalyst: The Ministry of Finance’s

decision to defer annual license fees will no doubt have a positive impact on

Zain’s medium term fortunes. With close to SAR6bn cash flows left in the

business over the next seven years, and paving way for a long-term repayment

plan of its financial obligations, the company can now concentrate on increasing

its capex.

Debt restructuring will create positive sentiments: By restructuring its debt

worth SAR11bn, we believe Zain will be able to improve its cash position and

thus achieve break-even in terms of profitability within a few years. In the short

run, this restructuring will be a positive trigger for the stock. However, the

company needs to report consistent revenue growth in order to come out its

current tough situation.

Low Capex hurting growth: Zain continues to report negative free cash flows

even after five years of operations. The modest cash that the company generates

combined with its huge debt, has restricted the company’s ability to spend on

developing its infrastructure. Zain’s capex fell from 16% of its revenues in 2010

to a modest 9% during 2012, and is likely to remain around the same level in

2013. Thus, Zain is stuck in a vicious cycle, where its ability to generate revenues

is hampered by low capex, which the company is unable to increase due to its

high debt obligations.

A lot more needs to be done: With lower capex, lack of ability to raise finances

and increasing competition, we believe Zain still needs to be aggressive with its

marketing strategies in order to counter competition. With MVNOs waiting to

enter the market, competition is bound to intensify further and margins will take

a hit, making Zain’s fortunes uncertain. We see only limited upside, unless fresh

capital is injected either through a rights issue or direct financing by owners. We

thus reiterate our Neutral rating on the stock and a target price of SAR10.0 per

share.


Revenue (mn) 6,699 6,404 7,048 7,612 8,213

Revenue Growth 12.9% -4.4% 10.1% 8.0% 7.9%


EBITDA margin 13.4% 13.7% 13.8% 16.9% 19.0%

Net profit margin -28.7% -27.3% -20.4% -12.9% -8.5%

EPS (1.38) (1.25) (1.16) (0.91) (0.65)

EPS Growth -18.4% -9.1% -7.1% -21.7% -29.0%

ROE -36.9% -27.5% -18.6% -15.1% -12.3%

ROCE -7.2% -7.5% -6.0% -2.8% -0.4%




Zain KSA Telecom – Industrial August 2013



Revenue 6,699 6,404 7,048 7,612 8,213

Cost of Goods Sold (3,499) (3,544) (3,794) (3,890) (4,106)

Gross Profit 3,200 2,860 3,255 3,722 4,106

Government Charges

S.G. & A. Costs (2,301) (1,981) (2,285) (2,436) (2,546)

Operating EBIT (811) (932) (768) (335) (46)


EBITDA 899 879 970 1,286 1,560


Operating Profit (811) (932) (768) (335) (46)

Net financing income/(costs) (1,114) (818) (672) (647) (651)

Forex and Related Gains - - - - -

Provisions - - - - -

Other Income - - - - -

Other Expenses - - - - -

Net Profit Before Taxes (1,925) (1,749) (1,440) (982) (697)

Taxes - - - - -

Minority Interests - - - - -

Net profit available to shareholders (1,925) (1,749) (1,440) (982) (697)

Dividends - - - - -


12/11A 12/12A 12/13E 12/14E 12/15E

Adjusted Shares Out (mn) 1,400 1,400 1,080 1,080 1,080

CFPS (SAR) (0.153) 0.044 0.240 0.592 0.842

EPS (SAR) (1.375) (1.250) (1.161) (0.909) (0.646)

DPS (SAR) 0 0 0 0 0

Growth 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue Growth 12.9% -4.4% 10.1% 8.0% 7.9%

Gross Profit Growth 26.5% -10.6% 13.8% 14.4% 10.3%

EBITDA Growth 171.9% -2.2% 10.4% 32.6% 21.3%

Operating Profit Growth -30.3% 14.8% -17.5% -56.4% -86.2%

Net Profit Growth -18.4% -9.1% -17.7% -31.8% -29.0%

EPS Growth -18.4% -9.1% -7.1% -21.7% -29.0%

Margins 12/11A 12/12A 12/13E 12/14E 12/15E


EBITDA margin 13.4% 13.7% 13.8% 16.9% 19.0%

Operating Margin -12.1% -14.5% -10.9% -4.4% -0.6%

Pretax profit margin -28.7% -27.3% -20.4% -12.9% -8.5%

Net profit margin -28.7% -27.3% -20.4% -12.9% -8.5%


ROCE -7.2% -7.5% -6.0% -2.8% -0.4%

ROIC -3.9% -4.8% -3.7% -1.7% -0.3%

ROE -36.9% -27.5% -18.6% -15.1% -12.3%


Capex/Sales 10.6% 8.8% 10.1% 8.0% 6.5%



P/E (x) na na na na na

P/CF (x) na 234.2 42.4 17.2 12.1

P/B (x) 3.3 1.7 1.6 1.8 2.1

EV/Sales (x) 2.1 2.2 1.8 1.4 1.3

EV/EBITDA (x) 15.9 16.2 13.0 8.6 7.1

EV/EBIT (x) na na na na na

EV/IC (x) 0.7 0.7 0.6 0.6 0.6


We do not expect net profits or a dividend till 2017; unless the company achieve above average top-line growth

We expect a respectable EBITDA growth over 2013-15

EBITDA margin should continue to improve over the next two years, though the growth will be capped by marketing expenses

Zain is not cheap on EV/sales, which is the one of the simplest valuation measures for a loss-making company

Zain KSA Telecom – Industrial August 2013



Cash and Cash Equivalents 780 2,385 2,055 1,184 223


Inventories 44 50 72 98 140

Other current assets 602 626 688 688 688


Fixed Assets 4,059 4,285 4,238 4,128 3,957

Investments - - - - -

Goodwill - - - - -


Total Other Assets - - - - -


Total Assets 26,744 27,950 26,790 24,992 22,629

Short Term Debt 9,748 11,413 9,332 8,432 7,622

Trade Payables 5,691 4,077 4,543 4,626 4,529


Other Current Liabilities 72 47 42 42 42


Long-Term Debt 6,242 3,207 5,101 5,101 4,343

Other LT Payables 675 728 729 729 729

Provisions 23 26 32 32 32


Minority interests - - - - -


Total Reserves (9,707) (2,349) (3,789) (4,771) (5,468)


Total Equity 4,293 8,452 7,012 6,030 5,333


Ratios 12/11A 12/12A 12/13E 12/14E 12/15E

Net Debt (SARmn) 15,209 12,235 12,378 12,349 11,742

Net Debt/EBITDA (x) 16.92 13.92 12.76 9.60 7.52

Net Debt to Equity 354.3% 144.8% 176.5% 204.8% 220.2%


BVPS (SAR) 3.07 6.04 6.49 5.58 4.94


Net Income before Tax & Minority Interest (1,925) (1,749) (1,440) (982) (697)


Decrease in Working Capital 43 (1,595) 524 (1) 232

Other Operating Cashflow 85 385 112 (0) -

Cashflow from Operations (88) (1,150) 934 638 1,141

Capital Expenditure (711) (562) (710) (609) (534)

New Investments - - - - -

Others (9) - (19) - -

Cashflow from investing activities (720) (562) (729) (609) (534)

Net Operating Cashflow (807) (1,711) 205 29 607

Dividends paid to ordinary shareholders - - - - -


Effects of Exchange Rates on Cash - 3,316 - - -

Other Financing Cashflow - - (103) - -

Cashflow from financing activities 885 3,316 (535) (900) (1,568)

Total cash generated 78 1,605 (330) (871) (960)

Cash at beginning of period 702 780 2,385 2,055 1,184

Implied cash at end of year 780 2,385 2,055 1,184 223

Ratios 12/11A 12/12A 12/13E 12/14E 12/15E


Net debt for 2013e stands at 1.76x sales; it has come down sharply post-restructuring

Capex/sales ratio is meager due to shrinking cash balances and high accumulated losses

Saudi Telecoms Sector Telecoms –Industrial

August 2013


Disclaimer and additional disclosures for Equity Research

Disclaimer

This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document.

Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document.

This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction.

Additional disclosures

1. Explanation of Al Rajhi Capital’s rating system

Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law:

"Overweight": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.

"Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 6-9 month time horizon.

"Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.

2. Definitions

"Time horizon": Our analysts make recommendations on a 6-9 month time horizon. In other words, they expect a given stock to reach their target price within that time.

"Fair value": We estimate fair value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis.

"Target price": This may be identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from estimated fair value per share, and explain our reasons for doing so.

Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.

Contact us

Jithesh Gopi, CFA Head of Research Tel: +966 11 211 9332 [email protected] Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh 11432 Kingdom of Saudi Arabia Email: [email protected] Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.

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al rajhi capital - saudi telecom sector - aug 2013.pdf

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