JEDDAH – Saudi Arabia's strong macro outlook coupled with the government's increasing expenditures will continue to support growth in the telecom sector, its latest update on the Kingdom's telecom sector, NCB Capital said in a study Saturday. The Saudi telecom sector trades at an attractive 2013e P/E of 9.1x, 9 percent below peers in neighboring countries, it noted “The broadband and corporate segments remain the primary growth drivers for the sector,” said Abdulelah Babgi, Equity Research Analyst at NCB Capital. “Increasing competition and change in regulations are the main concerns while the impact of MVNOs is mixed.” NCB Capital maintains its Overweight call on STC and Mobily, and Neutral rating on Zain KSA. “We continue to prefer Mobily over STC due to its stronger outlook and fewer concerns given its domestic focus vs. international exposure at STC,” Babgi said. NCB Capital continues to be Overweight on STC, with a PT of SR45.8 (upside of 16.2 percent), and Mobily with a PT of SR92.2 (upside of 15.5 percent). and remains Neutral on Zain KSA, with a PT of SR8.6 (upside of 2 percent). “We have increased our price target for Mobily by 14.5 percent due to lowering our capex estimates for the period 2013-2017E by 8 percent following management's guidance, as well as the expansion in the valuation multiples and increased longer term financials. “Our PT of STC is down by 9.8 percent due to increased concerns regarding the outlook of its international operations and changes in projections. Despite improving local operations, we believe the concerns on the international business have the potential to derail the growth strategy of the firm. “Zain KSA's PT is up by 2 percent to SR8.6 off the back of improved financial performance in 2012 (net losses decreased YoY by 9 percent) in addition to potential further improvements once a refinancing deal is signed. However, we maintain our Neutral rating on Zain as we believe the company will remain loss-making for the foreseeable future.” From a sector perspective, NCB Capital continues to believe growth will be mainly driven by the data and corporate segments, supported by continued investments and increased low-cost smartphone penetration rates. However, the main concerns are increased price-led competition in growth segments (data and corporate), further changes in the CITC's regulations and fragmentation of the market due to the entrance of MVNOs. Data and corporate segments - main growth drivers: “We expect total revenue for the three stocks under coverage to increase by 7 percent YoY to SR95.9bn in 2013E,” said Babgi. “This growth is expected to be mainly driven by the data and corporate segments. We expect the increase in smart-phone penetration rates to support the growth in data, while growth in the corporate segment would be led by the increasing focus on providing business solutions to corporations. Moreover, the study expects STC to still focus on its international business and possibly increase its exposure in this segment as it is actively looking for expansion opportunities in the Middle East region. As for Mobily, the study believes “growth will come from the data and corporate segments with both expected to record double digit growth in 2013 and contribute 30 percent and 12 percent to its total revenue for the year.” For STC, “our 2013 and 2014 numbers have declined largely due to poor performance in 2012,” said Babgi. “From 2013 STC will report its investments in OTL and Binariang using the equity method as opposed to proportionate consolidation. However due to a lack of financial information on the impacts on historic numbers, for now, we continue with proportionate consolidation method. Once we have more clarity following 1Q13 results we will restate our projections as per the new method.” “Our PT for STC has decreased by 9.8 percent to SR45.8 due to an additional 100bps added to our equity risk premium which negatively impacts our DCF PT by 7.9 percent, as well as changes in our projections. We have increased our risk premium to compensate for the increased concerns on its international operations. This is off the back of SR1.2bn of provisions/one off costs from its international business.” “However, we still believe STC's domestic operations (68 percent to total revenues in 2012) will do well throughout our projection period, relative to its international operations. In 2012, STC KSA's revenues grew by 7.8 percent to reach SR40.4 billion driven by growth in the data segment.” In the case of Mobily, NCB Capital said “our 2013 and 2014 numbers have increased based on the strong outlook for data and corporate segment. Our PT has increased by 14.5 percent due to 1) 3-5 percent increase in our profit estimates 2) Lowering total capex for the years 2013-2017 by 8 percent following management's guidance which increased our PT by 3.1 percent and 3) P/E multiple expansion by 5.3 percent, increase in our PT by 1.8 percent.” For Zain KSA, Babgi said “our 2013 and 2014 numbers for Zain have increased by around 2 percent due to improved financials in 2012 which reflected positively on our projections. However, we continue to believe Zain will struggle in the medium term even after a potentially successful debt refinancing deal.” — SG
