Saudi Telecom Sector - Al Rajhi Capital
Saudi Telecom Sector Telecom –Industrial Saudi Arabia 12 June 2014 January 18, 2010
Pritish K. Devassy, CFA Senior Research Analyst Tel +966 11 2119370, [email protected]
Key themes With the mobile telecom market gradually becoming saturated, companies are moving from growth to value territories. As a result, given the increase in capex requirements, cash flow generation for paying dividends becomes critical. STC holds a significant advantage given its strong free cash flow generation, while Mobily might have to continue to partly rely on borrowings to pay out its dividends in the future, if conditions do not improve. We expect ZainKSA to continue facing operational challenges due to the impending entry of MVNOs. What do we think? Stock STC
Rating
Price Target
Overweight
SAR77
Mobily
Neutral
SAR92
ZainKSA
Neutral
SAR10
Saudi Telecom Sector In search of new growth avenues With the rapid growth in mobile data past its heydays, telecom companies are transforming their business models in pursuit of growth in the ICT (integrated communication technology) market. However, the growth levels will not be as high as before. The capex requirements would be higher in the initial years and companies are likely to witness gradually declining margins. As capex increases and companies move from growth territories to value territories, free cash flows become all the more critical to sustain/increase dividends. We believe this is an area where STC holds a significant advantage over Mobily with its superior cash flow generation. Mobily, on the other hand, will have to continue to rely partly on debt to pay dividends, if conditions do not improve. Slowing growth: With the telecom market gradually getting saturated, the days of heady growth have remained elusive for the domestic telecom players. Mobily, which reported a top-line growth of c.22% y-o-y CAGR over 2010-12, has seen its annual growth decline to c.7% in 2013 and is expected to see even lower growth in 2014e. STC, on the other hand, reported a 6% decline in revenues in Q1 2014, albeit the strong margin improvement which led to strong bottom-line growth. ICT opportunities: Both Mobily and STC, in pursuit of growth, have started to look for opportunities in the burgeoning ICT market, backed by the Saudi government’s spending on projects that are intensifying demand for high-quality ICT services. As per Mobily, the size of the business sector (B2B) is expected to reach SAR38bn by 2017, growing by 7% annually. High investment needs and lower margins: We believe the companies would need to spend higher amounts of capex given the increasing congestion of networks due to the introduction of unlimited usage data packages, growing focus on capital intensive fixed-line broadband and ICT investments. For Mobily, we expect a capex/sales ratio of 22.8% vs. STC’s 17% in 2014e. We also expect margins to gradually decline over a period of time as exposure to the relatively lower-margin ICT business increases. Superior cash generation for STC: Given the fact that the capital investments are bound to increase, the free cash flow generation becomes critical. This is an area where STC beats Mobily by a significant margin. STC generated a cash flow of about SAR20bn from its operations in 2013 and spent about SAR8bn on capex, while Mobily generated cSAR5.5bn of cash flow from its operations while spent SAR4bn on capex. Mobily’s FCF has been declining steadily over the past three years. In terms of cash balance on books, STC boasts of a net cash position of SAR14bn, far superior to Mobily’s net debt position of cSAR11bn. Revise target prices - Prefer STC (OW): We have raised STC’s target price to SAR77 per share and maintain our Overweight rating, while we have reduced our target price for Mobily to SAR92 per share and maintain our Neutral rating. Our target price for ZainKSA is at SAR10 per share with a Neutral rating.
Disclosures Please refer to the important disclosures at the back of this report. Powered by EFA Platform
Saudi Telecom Sector Telecom –Industrial 12 June 2014
In Pursuit of growth With the telecom market gradually getting saturated, the days of heady growth have become a fading memory for the domestic telecom players. Mobily, which reported a top-line growth of c.22% y-o-y CAGR over 2010-12, has seen its annual growth decline to c.7% in 2013 and had previously guided for a c.5% growth in 2014. STC, on the other hand, also reported a 6% decline in revenues in Q1 2014, albeit the strong margin improvement that led to robust bottom-line growth.
Both top-line and bottom-line growth have declined in the past few years…
Thus, in pursuit of growth, both Mobily and STC have started to look for opportunities in the ICT market, helped by the government’s spending on projects that are intensifying demand for high-quality ICT services. Despite this, the overall top-line growth will continue to remain moderate for the players as the contribution from ICT is not sizable yet. ICT businesses are also relatively lower margin businesses and require high capex initially. Figure 1 Declining top-line growth for Mobily and STC* 30%
45% 25.2%
25%
Figure 2 Declining bottom-line growth for Mobily
40%
Title: Source: 39.7% Please fill in the values above to have them entered in your report
22.6% 35%
20%
30%
17.6%
25%
15%
20.7% 18.4%
20%
10% 10% 6.8%
6%
15% 5.1%
10.9%
4%
5%
2%
5%
0% 2010 -5%
10%
2011
2012 Mobily
2013 -1%
2.1%
2014e 0% 2010
STC
Source: Company data, Al Rajhi Capital* STC includes only domestic business
2011
2012
2013
2014e
Source: Company data, Al Rajhi Capital
Reasons for slowing growth …as mobile voice stagnates and data growth declines
Apart from the gradual saturation of the overall mobile market in the Kingdom, the other sector-specific concerns that are responsible for the slowing growth are: a) Mobile data revenues, which ramped up in the past few years and was primarily the reason for the high growth in the past few years, is slowing. Data prices have considerably fallen in the past three years. b) Cannibalization of voice by data has been a structural issue for telecom players worldwide. While this has caused an overall revenue decline in almost all the other GCC countries, the relatively tighter regulations in Saudi Arabia have been able to help prevent any major slide in voice revenues. c) Other country-specific concerns are the changes at the macro level, pertaining to the crackdown on illegal immigrant workers, which has led to loss of subscribers, especially for Zain KSA. On the positive side, fixed data usage still continues to clock high growth. The slower growth of smartphones/equipment sales could also ironically lead to lower subsidies, thereby paving the way for margin improvement.
Disclosures Please refer to the important disclosures at the back of this report.
2
Saudi Telecom Sector Telecom –Industrial 12 June 2014
Growing ICT opportunities According to Mobily, the business segment (B2B) is expected to grow to SAR38bn by 2017, when it expects the business segment’s revenues to contribute roughly 20% to the company’s top-line. We estimate the current market size to be SAR29bn, growing at 7% annually. To put these numbers in perspective, the total market size would be more than 1.5times the current annual revenues of Mobily. For the next four years, assuming a flattish growth for voice revenues, the current run-rate for data revenues (c.10-11% y-o-y), and a 17% market share of the estimated business segment by 2017 for Mobily, we expect a top-line CAGR growth of c.56% y-o-y over 2014-16e for Mobily. Overall, we expect a top-line growth of 5.1% y-o-y for 2014e.
Companies are hoping for growth opportunities from the ICT business segment
With regard to STC, although the company has not given any specific guidance, we assume a lesser near-term growth impact from ICT services given the size of its operations. The management remained positive about the size of ICT opportunities, though it declined to give any estimates. We expect STC to win more sizable contracts related to government projects over the longterm. The company’s enterprise segment saw a 5% y-o-y growth in Q1 2014. Overall, we expect STC to report a top-line growth of c.2.7% in 2014 backed by its growth in the business enterprise division.
High investment needs and lower margins Over a period of time, we think that telecom companies would be required to spend higher amounts of capex given the:
Thus, capital requirements are on the rise and margins are expected to decline in the long term…
a) Increasing congestion of networks due to the introduction of unlimited download packages. b) Growing focus on capital intensive fixed-line broadband. c) Focus on ICT investments. For Mobily, we expect capex/sales of 22.8% for 2014 compared to STC’s 17%. Since the company has been increasing exposure to the low-margin ICT business, its margins are expected to contract. While it is not easy to estimate the margin from the ICT business, the ballpark estimates by Mobily put it lower than the current running margins of c.36%. Companies in recent times are focusing on enhancing their efficiencies in a bid to improve their margins, which are driving part of their bottom-line growth.
As growth declines, companies move from growth to value territories by paying out higher dividends and cash flow generation becomes crucial
Growth to Value – Dividends to grow in 2014 Companies are moving further away from the growth territories to the value territories by distributing higher dividends. In fact, this is one of the reasons why despite a decline in growth, the 1-yr forward PE multiples have remained mostly higher as compared to historical trends. Figure 4 …responsible for increasing Price Earnings multiplies despite declining growth rates
Figure 3 Increasing dividends are…
6.00
Title: Source:
16 5.2
14
4.8
5.00
Please fill in the values above to have them entered in your report
12 3.8
4.00
3.00
10 3.0
3.0
6
2.3 2.0
8
2.0
2.00
4 2
1.00
Mobily DPS
STC DPS
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
Mobily
Feb14
Oct13
Dec13
Aug13
Apr13
Jun13
Feb13
Oct12
Dec12
Aug12
Apr12
Jun12
Feb12
Oct11
Dec11
Aug11
2014e
Apr11
2013
Jun11
2012
Feb11
2011
Dec10
0 -
STC
Source: Company data, Al Rajhi Capital
3
Saudi Telecom Sector Telecom –Industrial 12 June 2014
We expect Mobily to continue its progressive dividend policy with payouts of more than 50% for 2014 at least, despite the capex increase, since we expect an improvement in its accounts receivables. We believe that STC’s EBITDA margins are bound to improve gradually given its renewed focus on domestic operations, leading to higher efficiencies. In addition, its cost restructuring program is beginning to fructify, evident from the 4% EBITDA margin improvement in 2013 over 2012. All of these factors, along with the surplus cash on balance sheet and strong cash flow generation could translate into higher dividends.
STC’s superior free cash flow generation As capex increases and companies move from growth territories to value territories, cash flows become all the more important. The figures 5 and 6 below reveal that STC has superior cash flow generation and possess a huge capacity to increase dividends unlike Mobily, which will have to rely on debt partly for increasing its dividends based on its progressive dividend policy, unless it improves its working capital/receivable position.
STC has superior cash flow generation and a high cash position of 7/share on its books
Figure 5 STC’s superior cash flow vs
Figure 6 Mobily’s reliance on debt to pay dividends
14
4.5 12.0 10.9 9.1
Please fill in the values above to have them entered in your report 3.3
3.0
8
2.5
6
2.0 4.4
3.6
3.5
3.5 9.4
3.9
4.0
12 10
Title: Source:
4.0
2.2 2.0
1.6
4.5
4.0
2.3
1.5
4 1.0 2
0.5
0
0.0 2011
2012 FCF
2013
2014e
2011
Dividends
2012 Reported FCF
Source: Company data, Al Rajhi Capital. (units in SARbn)
2013
2014e
Dividends paid
Source: Company data, Al Rajhi Capital (units in SARbn)
Figure 7 Comparing Cash flows Mobily
2011
2012
2013
Operation Cash flow
6.7
7.0
5.5
8.2
Capex
-3.4
-5.1
-4.0
-6.1
Reported FCF
3.3
2.0
1.6
2.2
Dividends paid
2.3
3.5
3.6
3.9
STC
2014e
2011
2012
2013
2014e
Operation Cash flow
16.8
15.7
19.6
18.9
Capex
-7.3
-6.6
-7.6
-8.0
FCF
9.4
9.1
12.0
10.9
Dividends
4.4
4.0
4.0
4.5
Source: Company data, Al Rajhi Capital
Accounts receivable on the rise, especially for Mobily
Accounts receivable on the rise Mobily’s working capital increased by about SAR4bn (mainly due to higher receivables) in 2013, which implies that a lot of cash is yet to be received for its services (assuming no bad debts). The trend has continued in 1Q14 as well, and we believe this is primarily due to rising sale of devices. This was the case with STC as well, although the scale was much lower at SAR1.5bn in 2013.
Disclosures Please refer to the important disclosures at the back of this report.
4
Saudi Telecom Sector Telecom –Industrial 12 June 2014
Figure 8 Increase in accounts receivables for Mobily over the years… 10 8.6
9 8 6.6
7
6
5.6
6.0 5.6
5 4 3 2 1 0 2009
2010
2011
2012
2013
Accounts receivable
Source: Company data, Al Rajhi Capital
Conclusion – STC preferred sector pick Overall, we believe STC is much better positioned in terms of net cash position and cash flow generation potential. Based on the revised estimates, we have increased our target price of STC to SAR77 per share and are Overweight on the stock. We remain Neutral on Mobily (TP of SAR92 per share) and Zain (TP of SAR10 per share).
Disclosures Please refer to the important disclosures at the back of this report.
5
Saudi Telecom Telecom – Industrial STC AB: Saudi Arabia 12 June 2014
Rating
OVERWEIGHT
Target price
SAR77.00 (14.9% upside)
Current price
SAR67.00
Pritish K. Devassy, CFA Senior Research Analyst Tel +966 11 2119370, [email protected] Key themes With strong cash flow generation, we expect dividends to increase to SAR3/share. The cleaner reporting standards have helped the stock to regain investor confidence; however, we think there is scope for more disclosures. STC remains our top pick in the Saudi Telecom sector. Share information Market cap (SAR/US$)
134.0bn / 35.73bn
52-week range
39.30 - 72.70
Daily avg volume (US$)
mn
Shares outstanding
2,000mn
Free float (est)
16%
Performance Absolute Relative to index
1M
3M
12M
-0.9%
2.3%
61.8%
-2%
-3.5%
32.4%
Major Shareholder: Public Investment Fund
70.0%
Gen. Organisation for Social Insce.
7.0%
Valuation 12/12A
12/13A
12/14E
12/15E
P/E (x)
17.9
12.2
11.7
11.6
P/B (x)
2.7
2.4
2.2
2.0
EV/EBITDA (x)
7.5
6.2
5.8
5.5
Dividend Yield
3.0%
3.4%
4.5%
4.5%
Source: Company data, Al Rajhi Capital
Performance Price Close
RSI10
157 148 140 131 122 113 105 96 87
09/13
We believe that the stock is trading at a discount to its fair value of SAR77 per share in spite of its strong free cash flow generation and net cash position. Even if the 2013 top-line is extrapolated into the future with no growth, similar margins and capex, the EV/share alone amounts to as much as SAR60/share based on the DCF valuation. The cleaner reporting standards have helped the stock to regain investor confidence; however, we think there is further scope for more disclosures, which should act as a catalyst. We believe that the dividend will increase to SAR3 per share in 2014, implying a 4.5% dividend yield on the current market price. Higher dividends in 2014: STC’s solid cash flows and reduced appetite for international expansions could possibly lead to higher future dividends. Based on our estimates, the operating cash flows in 2014e are expected to be SAR19bn (SAR9.5/share) and with a net capex of around SAR7bn (3.5/share), the FCF comes at SAR 6/share (vs. 2013 dividend of 2.25/share). This gives significant room to pay out higher dividends given its net cash position of SAR7/share. Interestingly, even with no FCF growth and a WACC of 9.8%, the EV of domestic operations comes to about SAR 60/share. For 2014e, we expect the company to pay a dividend of SAR3 per share. Margin improvement: While STC’s top-line declined by 6% y-o-y in 1Q 2014, primarily owing to a decline in the domestic segment which constitutes about 90% of its revenues, the margin improved substantially. We believe that the decline in revenue could be on account of STC’s new roaming policy agreements, which came into effect in 2Q 2013, and therefore we expect a y-o-y impact on revenue in 2Q 2014 as well. However, we expect margins to be further positively impacted by these roaming agreements as well as cost-cutting and efficiency improvement measures undertaken as was evident in the 2013 annual margin, which showed a c.4% improvement over 2012.
Relative to TADAWUL FF (RHS)
75 70 65 60 55 50 45 40 35 70 30 -10 06/13
Saudi Telecom Company
12/13
03/14
Source: Bloomberg, Company data, Al Rajhi Capital
Gain from land sale likely: STC announced yesterday (10th June) that the Ministry of Finance has taken the decision to expropriate its land located in the neighborhood of Al Faisaliah in Riyadh City with an area of about 1m square meter. According to the company, the book value of this land is only SAR105m (about SAR 100 per square meter). Although the company did not announce the compensation to be received from the Government, we see a very high possibility for STC to book a major one-off gain from this given the prevailing prices. The company said that it will receive the value of the compensation only at a later date.
Period End (SAR)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue (mn)
56,220
44,745
45,605
46,820
48,079
Revenue Growth Gross profit margin EBITDA margin Net profit margin EPS EPS Growth ROE ROCE Capex/Sales
8.6%
-20.4%
1.9%
2.7%
2.7%
35.8%
36.4%
40.5%
39.9%
39.5%
14.7% 4.12 -12.7% 17.9% 14.4% 13.1%
16.7% 3.73 -9.3% 15.6% 17.0% 14.8%
24.1% 5.50 47.3% 20.9% 19.1% 16.7%
24.5% 5.73 4.2% 19.5% 17.8% 17.0%
24.0% 5.77 0.7% 18.0% 16.4% 16.0%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. Closing Prices as of 9 June 2014 Powered by EFA Platform
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Saudi Telecom Telecom – Industrial 12 June 2014
International segment: The international segment, mainly VIVA Kuwait and VIVA Bahrain, which contributes less than c.10% of its top-line, grew strongly in 1Q 2014 enabling STC to report a 11% y-o-y growth in its international revenues. Viva Kuwait is mainly focusing on data and has been the beneficiary of strong data uptake in the country, without being much impacted by cannibalization of voice, thereby witnessing market share gains (33% in 2013 from 29% in 2012). Viva Kuwait reported a 33% y-o-y top-line increase in 2013, and a six-fold increase in net income. STC’s cleaner reporting standards and reduction of international expansion plans have been received well by the investors. While not accounting Aircel into STC’s books by the equity method is a step in the right direction, we think there is some more clarity required on its associate accounting. Good growth in fixed-line services: On the domestic front, STC continues to see robust growth in broadband subscribers, especially in the fixed-line segment. The company has 830k households connected via the fiber network and is expected to reach 1.5m by 2014-end, implying an incremental SAR1bn to its top-line (based on an estimate of ARPU of SAR133 for quad play services). Fiber and fixed broadband are more significant to STC than voice given the higher ARPU associated with quad play services over voice. STC expects this to be one of the major growth drivers given the growing demand for high bandwidth services. As per STC’s management, they will continue to invest heavily in this space, where it enjoys a competitive edge over its peers. We believe the company could make smaller acquisitions to beef up its content-related services, which will spur more fixed broadband demand. Agreement with Atheeb: Etihad Atheeb announced on June 4, 2014 that it signed an Indefeasible Rights of Use (IRU) agreement with STC. With this, STC has granted Atheeb the right to use 30k ports on its fiber network for an initial phase for 15 years. The agreement gives Atheeb the right to acquire up to 100 thousands ports in the future. These ports will be used to provide broadband internet services and fixed voice services to both residential and small businesses. First tranche of Sukuk issue closed: The company had received regulatory approval for a SAR5bn private placement sukuk program, and it successfully closed a SAR2bn sukuk on June 9 as the first tranche of the program. We see it more as a sukuk-raising exercise in line with the current market trends and a benchmarking exercise given STC’s strong balance sheet. The SAR2bn sukuk has a tenor of 10 years (maturing in June 2024) and has a floating profit rate of 70bps over 3M SIBOR. Thus, the total cost of debt (sukuk) at the current rates comes close to c.1.5%. As per the Tadawul announcement, the debut sukuk issuance was almost two times oversubscribed and the investor base comprised a mix of government investors, banks, asset managers and insurance companies. Increase fair value to SAR77. Maintain Overweight: We have revised our revenue estimates slightly lower and have raised the margin estimates to similar to the 2013 levels. We value the stock using an average of relative valuation (3 year historical average PE multiple of 11.3x, applied on the 2014 earnings) and DCF valuation (explicit forecasts for 5 years and a terminal growth rate of 2% beyond the explicit period). We have arrived at a fair value of SAR 77 per share for STC, implying a 15% upside from current stock price. The downside risks remain in terms of deterioration of international businesses, domestic pricing war, and higher-than-expected capex spending for the ICT business.
Disclosures Please refer to the important disclosures at the back of this report.
7
Saudi Telecom Telecom – Industrial 12 June 2014
Income Statement (SARmn)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue
56,220
44,745
45,605
46,820
48,079
Access Charges
(9,773)
(8,162)
(7,620)
(8,433)
(8,654)
Employee Costs
(6,683)
(5,291)
(5,515)
(5,693)
(5,846)
Government Charges
(6,271)
(4,571)
(4,275)
(4,369)
(4,486)
S.G. & A. Costs
(7,343)
(10,448)
(9,724)
(9,628)
(10,097)
Repairs & Maintenance Costs
(6,031)
-
-
-
-
Operating EBIT
11,266
9,937
12,092
12,262
12,274
Cash Operating Costs
(36,101)
(28,472)
(27,134)
(28,123)
(29,083)
EBITDA
20,119
16,273
18,471
18,697
18,996
Depreciation and Amortisation
(8,853)
(6,337)
(6,378)
(6,435)
(6,721)
Operating Profit
11,266
9,937
12,092
12,262
12,274
Net financing income/(costs)
(1,768)
(2,566)
Forex and Related Gains
(1,105)
-
Provisions Other Income
(893) -
(414)
(313)
(598)
516
511
8,495
7,569
(254) -
(162) -
-
-
950
390
195
11,552
12,399
12,307
Other Expenses Net Profit Before Taxes Taxes
(118)
(215)
(230)
(515)
Minority Interests
(141)
113
(321)
(426)
Net profit available to shareholders
(296) (472)
8,237
7,467
11,001
11,458
11,539
(4,000)
(4,000)
(4,500)
(6,000)
(6,000)
12/11A
12/12A
12/13A
12/14E
12/15E
2,000
2,000
2,000
2,000
2,000
CFPS (SAR)
8.62
6.85
8.85
9.16
9.37
EPS (SAR)
4.12
3.73
5.50
5.73
5.77
DPS (SAR)
2.000
2.000
2.250
3.000
3.000
Dividends Transfer to Capital Reserve
Adjusted Shares Out (mn)
Growth
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue Growth
8.6%
-20.4%
1.9%
2.7%
2.7%
EBITDA Growth
2.5%
-19.1%
13.5%
1.2%
1.6%
Operating Profit Growth
2.6%
-11.8%
21.7%
1.4%
0.1%
Net Profit Growth
-12.7%
-9.3%
47.3%
4.2%
0.7%
EPS Growth
-12.7%
-9.3%
47.3%
4.2%
0.7%
Margins
12/11A
12/12A
12/13A
12/14E
12/15E
EBITDA margin
35.8%
36.4%
40.5%
39.9%
39.5%
Operating Margin
20.0%
22.2%
26.5%
26.2%
25.5%
Pretax profit margin
15.1%
16.9%
25.3%
26.5%
25.6%
Net profit margin
14.7%
16.7%
24.1%
24.5%
24.0%
Other Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
ROCE
14.4%
17.0%
19.1%
17.8%
16.4%
ROIC
14.8%
13.8%
35.1%
33.8%
34.5%
ROE
17.9%
15.6%
20.9%
19.5%
18.0%
1.4%
2.8%
2.0%
4.2%
2.4%
Capex/Sales
13.1%
14.8%
16.7%
17.0%
16.0%
Dividend Payout Ratio
48.6%
53.6%
40.9%
52.4%
52.0%
Valuation Measures
12/11A
12/12A
12/13A
12/14E
12/15E
16.3
17.9
12.2
11.7
11.6
P/CF (x)
7.8
9.8
7.6
7.3
7.2
P/B (x)
2.9
2.7
2.4
2.2
2.0
EV/Sales (x)
2.8
2.7
2.5
2.3
2.2
EV/EBITDA (x)
7.7
7.5
6.2
5.8
5.5
13.7
12.2
9.5
8.9
8.5
2.2
3.6
3.3
3.1
2.9
3.0%
3.0%
3.4%
4.5%
4.5%
Effective Tax Rate
P/E (x)
EV/EBIT (x) EV/IC (x) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
8
Saudi Telecom Telecom – Industrial 12 June 2014
Balance Sheet (SARmn)
12/11A
12/12A
12/14E
12/15E
6,589
3,508
960
8,322
13,401
11,201
12,257
24,402
25,105
25,048
-
-
-
-
-
6,623
8,098
23,831
19,605
19,544
Total Current Assets
21,967
18,593
32,364
37,094
42,055
Fixed Assets
55,085
38,821
38,406
40,710
42,296
5,032
17,991
12,256
11,650
11,340
29,318
5,216
4,608
4,162
3,547
-
-
-
-
-
89,435
62,028
55,270
56,522
57,183 99,237
Cash and Cash Equivalents Current Receivables Inventories Other current assets
Investments
12/13A
Goodwill Other Intangible Assets Total Other Assets Total Non-current Assets Total Assets
111,402
80,621
87,633
93,616
Short Term Debt
5,972
2,075
1,561
1,672
1,672
Trade Payables
19,291
15,224
18,251
18,344
17,954
Dividends Payable Other Current Liabilities
0
(0)
-
(0)
(0)
Total Current Liabilities
25,263
17,298
19,811
20,015
19,626
Long-Term Debt
23,960
9,396
6,976
6,771
6,771
-
-
-
-
-
8,097
4,880
4,570
4,592
4,592
32,056
14,276
11,547
11,363
11,363
921
1,393
Other LT Payables Provisions Total Non-current Liabilities Minority interests
7,174
(6)
(45)
Paid-up share capital Total Reserves
46,908
49,053
56,320
61,316
66,856
Total Shareholders' Equity
46,908
49,053
56,320
61,316
66,856
Total Equity
54,082
49,047
56,275
62,237
68,248
111,402
80,621
87,633
93,616
99,237
Total Liabilities & Shareholders' Equity Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
Net Debt (SARmn)
20,897
2,692
(9,252)
(15,817)
(20,896)
1.04
0.17
(0.50)
(0.85)
(1.10)
38.6%
5.5%
-16.4%
-25.4%
-30.6%
Net Debt/EBITDA (x) Net Debt to Equity EBITDA Interest Cover (x) BVPS (SAR)
Cashflow Statement (SARmn) Net Income before Tax & Minority Interest
11.4
6.3
20.7
73.7
117.0
23.45
24.53
28.16
30.66
33.43
12/11A
12/12A
12/13A
12/14E
12/15E
8,495
7,569
11,552
12,399
12,307
6,435
6,721
Depreciation & Amortisation
8,853
6,337
6,378
Decrease in Working Capital
(4,811)
(2,718)
(1,428)
118
4,226
4,727
4,128
(88)
Cashflow from Operations
16,765
15,914
20,631
18,863
18,462
Capital Expenditure
(7,346)
(6,624)
(7,630)
(7,966)
(7,693)
(29)
(6,273)
(8,249)
Other Operating Cashflow
New Investments Others Cashflow from investing activities Net Operating Cashflow
(855) (8,230)
95 (12,802)
190
988 65
(271) (296)
-
(15,689)
(6,913)
(7,693)
8,534
3,111
4,942
11,950
10,769
(4,432)
(4,002)
(3,998)
(4,502)
(6,000)
Proceeds from issue of shares
-
-
-
-
-
Effects of Exchange Rates on Cash
-
-
(200)
-
-
Dividends paid to ordinary shareholders
Other Financing Cashflow
(3,307)
(207)
(240)
(33)
Cashflow from financing activities
(7,997)
(4,989)
(4,806)
(4,629)
(6,000) 4,769
Total cash generated
137
7,322
Cash at beginning of period
5,904
6,589
3,508
960
8,322
Implied cash at end of year
6,442
4,711
3,645
8,282
13,091
12/11A
12/12A
12/13A
12/14E
12/15E
13.1%
14.8%
16.7%
17.0%
16.0%
Ratios Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
538
(1,877)
-
9
Etihad Etisalat Company Telecom – Industrial EEC AB: Saudi Arabia 12 June 2014
Rating
NEUTRAL
Target price
SAR92.00 (8.4% upside)
Current price
SAR84.86
Pritish K. Devassy, CFA, Senior Research Analyst Tel +966 11 2119370, [email protected] Key themes We expect average top-line growth to be c.5-6% in the coming years from the high 20s in the past. Capex levels are likely to increase given its exposure to the ICT business. Working capital is a key factor to look at in 2014. We expect a dividend yield of 6.2% in 2014. Share information Market cap (SAR/US$)
65.34bn / 17.42bn
52-week range
77.00 - 98.04
Daily avg volume (US$)
mn
Shares outstanding
770.0mn
Free float (est)
61%
Performance
1M
3M
12M
Absolute
-12.3%
-9.3%
5.4%
Relative to index
-13.4%
-15.1%
-24%
Major Shareholder: Emirates Telecoms Corp.
27.4%
Gen. Organisation for Social Insce.
11.8%
Valuation 12/14E
12/15E
P/E (x)
12/12A 10.9
12/13A 9.8
9.6
9.2
P/B (x)
3.1
2.7
2.4
2.2
EV/EBITDA (x)
8.5
8.1
7.8
6.9
Dividend Yield
4.4%
5.7%
6.2%
6.5%
Source: Company data, Al Rajhi Capital
Performance
RSI10
Price Close
Relative to TADAWUL FF (RHS)
104
107
99
101
94
95
89
90
84
84
79
78
74
72
70 30 -10 06/13
09/13
12/13
03/14
Source: Bloomberg, Company data, Al Rajhi Capital
Etihad Etisalat (Mobily) Given the saturation in mobile subscriber penetration and gradually slowing mobile data growth, Mobily is seeking growth in the ICT business segment. However, we believe this will not help the company to achieve high growth as experienced in the past. Given the higher capex requirement (including the cost of new building of SAR2bn), improvement in working capital will be a key factor to look out for in 2014. Without this reversal, Mobily will continue to rely on debt for paying its dividends, which is not sustainable in our view. Voice revenues are expected to remain flat in 2014, while data revenues are expected to grow by c.10% y-o-y. Slowing core business: Although the company’s top-line grew by c.7% in 2013, its service usage revenues declined by 7% y-o-y. As a result of this ongoing decline in its core business, Mobily is seeking newer growth avenues. The company is set to transform itself into an integrated ICT company from a pureplay mobile voice & data services company. While the ICT business presents a good opportunity, it would not help the company regain the growth seen during the mobile data boom period of 2010-12. High capex requirements: We expect capex to increase as a result of this business transformation. The company’s capital expenditure for the five-year period (2013-17) is budgeted at more than SAR22bn, implying an average capex/sales ratio of 16-17% over the next few years, which highlights the scale of Mobily’s ambitions. The company plans to increase the number of data centers from 38 to 56 over the next 3-5 years. As per Mobily, the margins are also expected to be lower for the ICT business than the current c.35% for Mobily. The company has already forged tie-ups with leading companies such as IBM, Nokia and Virtustream to provide a host of managed services. Mobily also continues to invest in expanding and increasing its network capacity in congested areas, which also require additional investments. Voice revenues to remain flat; data to grow by c10%: Segment-wise, we expect voice revenues to remain mostly flat in the coming years given the saturated state of the mobile market, coupled with the macro changes pertaining to labor law and the impending entry of MVNOs. As for data revenues, we expect 10% y-o-y growth in 2014e, implying a c.30% contribution to the company’s topline (vs. guided 32%). In terms of fixed broadband, Mobily has around 530,000 fiber connections and expects to reach 1.2m by 2014-end, implying more than doubling of its data subscribers.
Period End (SAR)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue (mn)
20,052
23,585
25,191
26,480
28,310
Revenue Growth Gross profit margin EBITDA margin
25.2% 51.5% 37.2%
17.6% 50.8% 36.2%
6.8% 51.4% 36.5%
5.1% 51.1% 36.7%
6.9% 50.2% 37.3%
Net profit margin EPS EPS Growth ROE ROCE Capex/Sales
25.4% 6.60 20.7% 29.9% 27.4% 18.4%
25.5% 7.82 18.4% 30.6% 21.6% 20.3%
26.5% 8.67 10.9% 29.8% 19.7% 15.4%
25.7% 8.85 2.1% 26.9% 18.2% 22.8%
25.1% 9.23 4.3% 25.2% 18.0% 17.0%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. Closing Prices as of 9 June 2014 Powered by EFA Platform
10
Etihad Etisalat Company Telecom – Industrial 12 June 2014
End of talks with Atheeb: Mobily announced on June 2, 2014 that its subsidiary, Bayanat has stopped discussions to acquire the proposed 20% stake in Atheeb. This was shortly followed by the company announcing a SAR338m write-off in its Q2 2014 net income due to the cancellation of an IRU agreement Bayanat had signed with Atheeb. Mobily had recognized this in their 1Q2014 financials. The market has reacted quite negatively to this with the stock c.5% down since the announcement. We believe the market has overreacted to this news as this is only a one-off impact on Mobily, although it raises questions about Mobily’s 1Q performance, excluding the contribution of this contract. Without this, Mobily’s top-line for Q1 2014 would have seen a growth of 5% y-o-y. ICT opportunities: According to Mobily, the size of ICT market is expected to be SAR38bn by 2017, when it expects the business segment to contribute roughly 20% to its top-line. We estimate the current market size to be SAR29bn, growing by 7% annually. To put these numbers in perspective, the total market size would be more than 1.5 times the current annual revenue of Mobily. For the next four years, assuming a flattish growth for voice revenues, the current run rate for data revenues (c10-11% y-o-y), and a 17% market share of the ICT businesses by 2017 by Mobily, we expect the company’s top-line to grow at a CAGR of c.5-6% y-o-y over 2014-16e. Expect dividend increase, working capital holds the key: The company’s working capital increased by about SAR4.2bn in 2013, due to a significant increase in accounts receivables. The increasing trend in receivables continued in 1Q14 as well. In view of the higher than usual capex expected in 2014 as a result of the new building cost of SAR2bn, we believe the reversal of this trend would be important from a cash flow perspective. Overall, the company is expected to increase dividends in 2014 to SAR5.2/share from SAR4.8/share in 2013. Although Mobily has the ability to issue more debt because of its low gearing and low cost of debt, we think that an increase in dividends will not be sustainable if the current conditions continue. Maintain Neutral at fair value of SAR92: We value the stock using an average of relative valuation (3-year historical average PE multiple of 10x, applied on 2014 earnings) and DCF valuation (explicit forecasts for 5 years and a terminal growth rate of 2% beyond the explicit period). The stock continues to trade attractively at 9.6x forward PE, supported by good dividend yields. Based on our revised estimates, we value the stock at SAR92 per share and are Neutral on the stock. The upside risks would involve strong working capital reversal in the coming years, higher-than-expected margin improvement for the company and higherthan-expected growth in the operating segments. The downside risks would be higher-thanexpected margin deterioration due to a higher exposure to the ICT business, loss of market share or worsening working capital requirements.
Disclosures Please refer to the important disclosures at the back of this report.
11
Etihad Etisalat Company Telecom – Industrial 12 June 2014
Income Statement (SARmn)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue
20,052
23,585
25,191
26,480
28,310
Cost of Goods Sold
(9,728)
(11,608)
(12,243)
(12,954)
(14,099)
Gross Profit
10,324
11,977
12,948
13,526
14,212
S.G. & A. Costs
(2,870)
(3,443)
(3,758)
(3,797)
(3,652)
Operating EBIT
5,305
6,135
6,688
7,003
7,430
(12,598)
(15,051)
(16,001)
(16,751)
(17,751)
7,454
8,534
9,190
9,729
10,560
(2,149)
(2,399)
(2,502)
(2,727)
(3,129)
5,305
6,135
6,688
7,003
7,430
Government Charges
Cash Operating Costs EBITDA Depreciation and Amortisation Operating Profit Net financing income/(costs)
(213)
Forex and Related Gains
-
Provisions
-
Other Income Other Expenses Net Profit Before Taxes
46
(169)
(191)
(190) -
(263)
-
-
122
257
81
86
6,088
6,755
6,894
7,254
5,138
Taxes
(54)
(70)
(78)
(78)
Minority Interests
-
-
-
-
-
5,083
6,018
6,677
6,815
7,109
(2,275)
(2,905)
(3,696)
(4,021)
(4,265)
-
-
-
-
-
12/11A
12/12A
12/13A
12/14E
12/15E
770.0
770.0
770.0
770.0
770.0
CFPS (SAR)
9.39
10.93
11.92
12.39
13.30
EPS (SAR)
6.60
7.82
8.67
8.85
9.23
DPS (SAR)
2.95
3.77
4.80
5.22
5.54
Net profit available to shareholders Dividends Transfer to Capital Reserve
Adjusted Shares Out (mn)
Growth
(145)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue Growth
25.2%
17.6%
6.8%
5.1%
6.9%
Gross Profit Growth
17.5%
16.0%
8.1%
4.5%
5.1%
EBITDA Growth
20.9%
14.5%
7.7%
5.9%
8.5%
Operating Profit Growth
21.8%
15.6%
9.0%
4.7%
6.1%
Net Profit Growth
20.7%
18.4%
10.9%
2.1%
4.3%
EPS Growth
20.7%
18.4%
10.9%
2.1%
4.3%
Margins
12/11A
12/12A
12/13A
12/14E
12/15E
Gross profit margin
51.5%
50.8%
51.4%
51.1%
50.2%
EBITDA margin
37.2%
36.2%
36.5%
36.7%
37.3%
Operating Margin
26.5%
26.0%
26.6%
26.4%
26.2%
Pretax profit margin
25.6%
25.8%
26.8%
26.0%
25.6%
Net profit margin
25.4%
25.5%
26.5%
25.7%
25.1%
Other Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
ROCE
27.4%
21.6%
19.7%
18.2%
18.0%
ROIC
24.5%
25.5%
23.7%
20.9%
19.3%
ROE
29.9%
30.6%
29.8%
26.9%
25.2%
1.1%
1.1%
1.2%
1.1%
2.0%
Capex/Sales
18.4%
20.3%
15.4%
22.8%
17.0%
Dividend Payout Ratio
44.8%
48.3%
55.4%
59.0%
60.0%
Valuation Measures
12/11A
12/12A
12/13A
12/14E
12/15E
12.9
10.9
9.8
9.6
9.2
P/CF (x)
9.0
7.8
7.1
6.8
6.4
P/B (x)
3.6
3.1
2.7
2.4
2.2
EV/Sales (x)
3.5
3.1
3.0
2.9
2.6
EV/EBITDA (x)
9.5
8.5
8.1
7.8
6.9
13.3
11.8
11.1
10.9
9.9
3.0
2.6
2.2
2.0
1.9
3.5%
4.4%
5.7%
6.2%
6.5%
Effective Tax Rate
P/E (x)
EV/EBIT (x) EV/IC (x) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
12
Etihad Etisalat Company Telecom – Industrial 12 June 2014
Balance Sheet (SARmn)
12/11A
12/12A
12/13A
12/14E
12/15E
Cash and Cash Equivalents
1,690
1,302
1,570
1,570
4,475
Current Receivables
6,323
5,910
8,654
9,880
9,733
470
721
915
989
891
1,411
2,499
4,228
4,330
3,722
Inventories Other current assets Total Current Assets
9,893
10,427
15,334
16,756
18,807
16,412
17,255
20,733
24,044
26,309
-
-
6
6
6
Goodwill
1,530
1,530
1,530
1,530
1,530
Other Intangible Assets
9,665
9,412
8,913
8,354
7,773
-
-
-
-
-
Total Non-current Assets
27,607
28,197
31,181
33,934
35,617
Total Assets
54,424
Fixed Assets Investments
Total Other Assets
37,501
38,623
46,515
50,690
Short Term Debt
6,096
753
782
857
857
Trade Payables
11,757
9,190
11,529
11,133
11,780
Dividends Payable
-
Other Current Liabilities
194
132
112
31
31
18,047
10,075
12,424
12,021
12,667
Long-Term Debt
977
7,506
9,970
11,663
11,663
Other LT Payables
-
-
-
-
-
89
137
158
247
491
1,066
7,643
10,128
11,910
12,154
-
-
-
2
2
Total Current Liabilities
Provisions Total Non-current Liabilities Minority interests Paid-up share capital
7,000
Total Reserves
11,388
20,906
23,963
26,758
29,601
Total Shareholders' Equity
18,388
20,906
23,963
26,758
29,601
Total Equity
18,388
20,906
23,963
26,759
29,603
Total Liabilities & Shareholders' Equity
37,501
38,623
46,515
50,690
54,424
Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
5,383
6,956
9,182
10,950
8,045
0.72
0.82
1.00
1.13
0.76
29.3%
33.3%
38.3%
40.9%
27.2%
Net Debt (SARmn) Net Debt/EBITDA (x) Net Debt to Equity EBITDA Interest Cover (x) BVPS (SAR)
Cashflow Statement (SARmn)
34.9
50.4
48.2
51.2
40.2
23.88
27.15
31.12
34.75
38.44
12/11A
12/12A
12/13A
12/14E
12/15E
Net Income before Tax & Minority Interest
5,138
6,088
6,755
6,894
7,254
Depreciation & Amortisation
2,149
2,399
2,502
2,727
3,129
(1,703)
(4,190)
(1,395)
1,500
Decrease in Working Capital Other Operating Cashflow Cashflow from Operations Capital Expenditure New Investments Others Cashflow from investing activities Net Operating Cashflow
(792) 179
254
546
136
99
6,673
7,037
5,613
8,361
11,983
(3,690)
(4,777)
(3,871)
(6,029)
(4,813)
-
-
450
-
(6)
(168)
(310)
(75)
(22)
(3,408)
(5,086)
(3,951)
(6,051)
(4,813)
3,265
1,950
1,662
2,310
7,170
(2,275)
(3,500)
(3,619)
(3,942)
(4,021)
Proceeds from issue of shares
-
-
-
-
-
Effects of Exchange Rates on Cash
-
-
-
-
-
Other Financing Cashflow
-
-
(3,237)
(2,338)
Dividends paid to ordinary shareholders
Cashflow from financing activities Total cash generated
(1,315)
(2,232)
(4,021)
347
78
3,149
1,661
1,690
1,302
1,570
1,570
Implied cash at end of year
1,690
1,302
1,649
1,649
4,719
12/11A
12/12A
12/13A
12/14E
12/15E
18.4%
20.3%
15.4%
22.8%
17.0%
Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
(387)
(53)
Cash at beginning of period
Ratios
28
(189)
13
Zain KSA
Telecom – Industrial ZAINKSA AB: Saudi Arabia 12 June 2014
Rating
NEUTRAL
Target price
SAR10.00 (-1.7% upside)
Current price
SAR10.18
Pritish K. Devassy, CFA Senior Research Analyst Tel +966 11 2119370, [email protected] Key themes The company has been negatively impacted by the Saudization program and we expect the weakness to continue given the impending entry of MVNOs later this year. Zain is yet to break-even and we believe there is some way to go before we view it as a favorable pick. Share information Market cap (SAR/US$)
11.00bn / 2.932bn
52-week range
8.85 - 10.89
Daily avg volume (US$)
mn
Shares outstanding
|mn
Free float (est)
48%
Performance Absolute Relative to index
1M
3M
12M
0.9%
7.7%
4.9%
-0.3%
0.1%
-24.6%
Zain KSA Zain KSA reported a weak top-line, but strong EBITDA growth in 1Q 2014. We attribute the weakness in the company’s top-line partly to the departure of over a million illegal foreign workers, which we believe has impacted Zain the most. Zain is currently focusing on mobile data given the increasing congestion in the networks of its competitors. The company reported a 68% y-o-y growth in data revenues and a 56% y-o-y subscriber growth in 1Q 2014. Revenues continue to remain weak: Zain continues to report losses, although it has performed considerably well in 1Q 2014 in terms of EBITDA despite the decline in revenues. Revenues declined by 10% y-o-y to SAR1.54bn in 1Q 2014, taking Zain back to the revenue levels achieved in 1Q 2012. This revenue decline is partly attributed to the departure of over a million illegal foreign workers, which we believe has impacted Zain the most. The positives have been the growth in data revenues (68% y-o-y) and growth in subscribers (56% y-o-y).
Major Shareholder: Mobile Telecommunications Co. (Kuwait)
25.0%
Faden Trading and Contracting
6.8%
Valuation 12/12A
12/13A
12/14E
12/15E
P/E (x)
na
na
na
na
P/B (x)
1.7
1.6
2.1
2.5
EV/EBITDA (x)
30.1
27.3
22.1
14.9
Dividend Yield
0.0%
0.0%
0.0%
0.0%
Source: Company data, Al Rajhi Capital
Performance
RSI10
Price Close
Relative to TADAWUL FF (RHS)
11.1
110
10.6
102
10.1
94
9.6
86
9.1
78
8.6
70
70 30 -10 06/13
09/13
12/13
Long way to go: Given the extent of losses and performance, the stock is more of a trading idea than a pick based on the fundamentals, in our view, as there is a long way to go before it starts seeing profits and generating free cash flow. The company has been given some cushion by the Saudi government, allowing it to defer license fee payments for seven years. Zain was also successful in lowering its cost of funds recently through a debt restructuring program. However, its underinvestment in branding, network and also the impending entry of MVNOs are negative catalysts for the company. Valuation and risks: We have kept our estimates mostly unchanged and continue to remain Neutral on the stock based on our fair value of SAR 10 per share for the stock. We expect a revenue decline of -6% in 2Q 2014, while forecasting a +3% y-o-y growth for 2014. We expect a break-even at the operating profit level by 2016 and at the net profit level by 2018. The upside potential for the company are its continued growth in data subscribers and users preferring Zain for mobile broadband due to growing congestion in the networks of its competitors. The downside risks are lower-than-expected subscriber growth as a result of the expected entry of MVNOs in 2014.
03/14
Source: Bloomberg, Company data, Al Rajhi Capital
Period End (SAR)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue (mn)
6,699
6,171
6,523
6,700
7,358
Revenue Growth Gross profit margin EBITDA margin
12.9% 47.8% 13.4%
-7.9% 46.3% 14.2%
5.7% 48.1% 13.7%
2.7% 51.0% 16.4%
9.8% 53.0% 22.0%
Net profit margin
-28.7%
-28.4%
-25.3%
-21.1%
-11.8%
EPS EPS Growth ROE
(1.38) -18.4% -36.9%
(1.25) -9.1% -27.5%
(1.53) 22.4% -21.7%
(1.31) -14.4% -23.4%
(0.80) -38.8% -17.7%
ROCE Capex/Sales
-7.2% 10.6%
-7.5% 9.1%
-4.2% 12.0%
-3.2% 10.8%
-0.7% 10.0%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. Closing Prices as of 7 June 2014 Powered by EFA Platform
14
Zain KSA
Telecom – Industrial 12 June 2014
Income Statement (SARmn) Revenue Cost of Goods Sold Gross Profit
12/11A
12/12A
12/13A
12/14E
6,699
6,171
6,523
6,700
12/15E 7,358
(3,499)
(3,311)
(3,388)
(3,283)
(3,458)
3,200
2,860
3,135
3,417
3,900
(2,301)
(1,981)
(2,244)
(2,321)
(2,281)
(811)
(932)
(949)
(677)
(144)
(5,800)
(5,292)
(5,632)
(5,604)
(5,739)
Government Charges S.G. & A. Costs Operating EBIT Cash Operating Costs EBITDA Depreciation and Amortisation Operating Profit Net financing income/(costs)
899
879
890
1,096
1,619
(1,710)
(1,810)
(1,840)
(1,773)
(1,763)
(811)
(932)
(949)
(677)
(144)
(1,114)
(818)
(702)
(737)
(721)
Forex and Related Gains
-
-
-
-
-
Provisions
-
-
-
-
-
Other Income
-
-
-
-
-
Other Expenses
-
-
-
-
(1,925)
(1,749)
(1,651)
(1,414)
Taxes
-
-
-
-
Minority Interests
-
-
-
-
(1,925)
(1,749)
(1,651)
(1,414)
Dividends
-
-
-
-
-
Transfer to Capital Reserve
-
-
-
-
-
12/11A
12/12A
12/13A
12/14E
12/15E
1,400
1,400
1,080
1,080
1,080
CFPS (SAR)
(0.153)
0.044
0.174
0.332
0.831
EPS (SAR)
(1.375)
(1.250)
(1.529)
(1.310)
(0.801)
Net Profit Before Taxes
Net profit available to shareholders
Adjusted Shares Out (mn)
DPS (SAR)
Growth
0
0
0
(865) (865)
0
0
12/11A
12/12A
12/13A
12/14E
Revenue Growth
12.9%
-7.9%
5.7%
2.7%
12/15E 9.8%
Gross Profit Growth
26.5%
-10.6%
9.6%
9.0%
14.1%
EBITDA Growth
171.9%
-2.2%
1.3%
23.1%
47.7%
Operating Profit Growth
-30.3%
14.8%
1.9%
-28.7%
-78.7%
Net Profit Growth
-18.4%
-9.1%
-5.6%
-14.4%
-38.8%
EPS Growth
-18.4%
-9.1%
22.4%
-14.4%
-38.8%
Margins
12/11A
12/12A
12/13A
12/14E
12/15E
Gross profit margin
47.8%
46.3%
48.1%
51.0%
53.0%
EBITDA margin
13.4%
14.2%
13.7%
16.4%
22.0%
Operating Margin
-12.1%
-15.1%
-14.6%
-10.1%
-2.0%
Pretax profit margin
-28.7%
-28.4%
-25.3%
-21.1%
-11.8%
Net profit margin
-28.7%
-28.4%
-25.3%
-21.1%
-11.8%
Other Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
ROCE
-7.2%
-7.5%
-4.2%
-3.2%
-0.7%
ROIC
-3.9%
-4.8%
-4.6%
-3.4%
-0.8%
ROE
-36.9%
-27.5%
-21.7%
-23.4%
-17.7%
Effective Tax Rate Capex/Sales Dividend Payout Ratio Valuation Measures
0.0%
0.0%
0.0%
0.0%
0.0%
10.6%
9.1%
12.0%
10.8%
10.0%
0.0%
0.0%
0.0%
0.0%
0.0%
12/11A
12/12A
12/13A
12/14E
12/15E
P/E (x)
na
na
na
na
na
P/CF (x)
na
233.7
58.4
30.6
12.3
P/B (x)
3.3
1.7
1.6
2.1
2.5
EV/Sales (x)
4.4
4.3
3.7
3.6
3.3
32.8
30.1
27.3
22.1
14.9
EV/EBITDA (x) EV/EBIT (x) EV/IC (x) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
na
na
na
na
na
1.5
1.3
1.2
1.3
1.4
0.0%
0.0%
0.0%
0.0%
0.0%
15
Zain KSA
Telecom – Industrial 12 June 2014
Balance Sheet (SARmn)
12/12A
12/13A
12/14E
12/15E
780
2,385
1,293
1,413
1,574
1,007
1,330
1,221
1,516
1,516
44
50
141
151
151
602
626
660
708
708
Total Current Assets
2,432
4,391
3,315
3,788
3,950
Fixed Assets
Cash and Cash Equivalents Current Receivables Inventories Other current assets
12/11A
4,059
4,285
4,293
4,133
4,008
Investments
-
-
-
-
-
Goodwill
-
-
-
-
-
20,253
19,274
18,351
17,468
16,566
Other Intangible Assets Total Other Assets
-
-
283
265
265
Total Non-current Assets
24,312
23,559
22,927
21,866
20,839
Total Assets
24,789
26,744
27,950
26,242
25,654
Short Term Debt
9,748
11,413
200
200
200
Trade Payables
5,691
4,077
3,552
4,186
4,186
-
-
-
-
-
Dividends Payable Other Current Liabilities Total Current Liabilities Long-Term Debt Other LT Payables Provisions Total Non-current Liabilities Minority interests
72
47
74
52
52
15,511
15,537
3,826
4,438
4,438
6,242
3,207
14,421
14,494
14,494
675
728
1,197
1,348
1,348
23
26
39
41
41
6,940
3,961
15,657
15,883
15,883
-
-
-
-
-
Paid-up share capital
14,000
10,801
10,801
10,801
10,801
Total Reserves
(9,707)
(2,349)
(4,042)
(5,468)
(6,333)
Total Shareholders' Equity
4,293
8,452
6,759
5,333
4,468
Total Equity
4,293
8,452
6,759
5,333
4,468
26,744
27,950
26,242
25,654
24,789
Total Liabilities & Shareholders' Equity Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
Net Debt (SARmn)
15,209
12,235
13,328
13,281
13,119
Net Debt/EBITDA (x) Net Debt to Equity EBITDA Interest Cover (x)
16.92
13.92
14.97
12.11
354.3%
144.8%
197.2%
249.0%
8.10 293.7%
0.8
1.1
1.3
1.5
2.2
3.07
6.04
6.26
4.94
4.14
Cashflow Statement (SARmn)
12/11A
12/12A
12/13A
12/14E
12/15E
Net Income before Tax & Minority Interest
(1,925)
(1,749)
(1,651)
(1,414)
Depreciation & Amortisation
1,710
1,810
1,840
1,773
Decrease in Working Capital
43
Other Operating Cashflow
85
BVPS (SAR)
Cashflow from Operations Capital Expenditure New Investments
(1,595) 385
(88)
(1,150)
(711)
(562)
-
Others
(9)
(865) 1,763
(220)
501
260
76
229
936
897
(784)
(721)
(736)
-
-
(36)
-
(19)
-
-
-
Cashflow from investing activities
(720)
(562)
(803)
(756)
(736)
Net Operating Cashflow
(807)
(1,711)
(574)
180
162
Dividends paid to ordinary shareholders
-
-
-
-
-
Proceeds from issue of shares
-
-
230
-
-
Effects of Exchange Rates on Cash
-
3,316
-
-
-
Other Financing Cashflow
-
-
(200)
40
Cashflow from financing activities
885
3,316
(517)
(60)
-
78
1,605
(1,092)
120
162
Total cash generated
-
Cash at beginning of period
702
780
2,385
1,293
1,413
Implied cash at end of year
780
2,385
1,293
1,413
1,574
12/11A
12/12A
12/13A
12/14E
12/15E
10.6%
9.1%
12.0%
10.8%
10.0%
Ratios Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
16
Zain KSA
Telecom – Industrial 12 June 2014
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 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.
Disclosures Please refer to the important disclosures at the back of this report.
17
Pritish K. Devassy, CFA Senior Research Analyst Tel +966 11 2119370, [email protected]
Key themes With the mobile telecom market gradually becoming saturated, companies are moving from growth to value territories. As a result, given the increase in capex requirements, cash flow generation for paying dividends becomes critical. STC holds a significant advantage given its strong free cash flow generation, while Mobily might have to continue to partly rely on borrowings to pay out its dividends in the future, if conditions do not improve. We expect ZainKSA to continue facing operational challenges due to the impending entry of MVNOs. What do we think? Stock STC
Rating
Price Target
Overweight
SAR77
Mobily
Neutral
SAR92
ZainKSA
Neutral
SAR10
Saudi Telecom Sector In search of new growth avenues With the rapid growth in mobile data past its heydays, telecom companies are transforming their business models in pursuit of growth in the ICT (integrated communication technology) market. However, the growth levels will not be as high as before. The capex requirements would be higher in the initial years and companies are likely to witness gradually declining margins. As capex increases and companies move from growth territories to value territories, free cash flows become all the more critical to sustain/increase dividends. We believe this is an area where STC holds a significant advantage over Mobily with its superior cash flow generation. Mobily, on the other hand, will have to continue to rely partly on debt to pay dividends, if conditions do not improve. Slowing growth: With the telecom market gradually getting saturated, the days of heady growth have remained elusive for the domestic telecom players. Mobily, which reported a top-line growth of c.22% y-o-y CAGR over 2010-12, has seen its annual growth decline to c.7% in 2013 and is expected to see even lower growth in 2014e. STC, on the other hand, reported a 6% decline in revenues in Q1 2014, albeit the strong margin improvement which led to strong bottom-line growth. ICT opportunities: Both Mobily and STC, in pursuit of growth, have started to look for opportunities in the burgeoning ICT market, backed by the Saudi government’s spending on projects that are intensifying demand for high-quality ICT services. As per Mobily, the size of the business sector (B2B) is expected to reach SAR38bn by 2017, growing by 7% annually. High investment needs and lower margins: We believe the companies would need to spend higher amounts of capex given the increasing congestion of networks due to the introduction of unlimited usage data packages, growing focus on capital intensive fixed-line broadband and ICT investments. For Mobily, we expect a capex/sales ratio of 22.8% vs. STC’s 17% in 2014e. We also expect margins to gradually decline over a period of time as exposure to the relatively lower-margin ICT business increases. Superior cash generation for STC: Given the fact that the capital investments are bound to increase, the free cash flow generation becomes critical. This is an area where STC beats Mobily by a significant margin. STC generated a cash flow of about SAR20bn from its operations in 2013 and spent about SAR8bn on capex, while Mobily generated cSAR5.5bn of cash flow from its operations while spent SAR4bn on capex. Mobily’s FCF has been declining steadily over the past three years. In terms of cash balance on books, STC boasts of a net cash position of SAR14bn, far superior to Mobily’s net debt position of cSAR11bn. Revise target prices - Prefer STC (OW): We have raised STC’s target price to SAR77 per share and maintain our Overweight rating, while we have reduced our target price for Mobily to SAR92 per share and maintain our Neutral rating. Our target price for ZainKSA is at SAR10 per share with a Neutral rating.
Disclosures Please refer to the important disclosures at the back of this report. Powered by EFA Platform
Saudi Telecom Sector Telecom –Industrial 12 June 2014
In Pursuit of growth With the telecom market gradually getting saturated, the days of heady growth have become a fading memory for the domestic telecom players. Mobily, which reported a top-line growth of c.22% y-o-y CAGR over 2010-12, has seen its annual growth decline to c.7% in 2013 and had previously guided for a c.5% growth in 2014. STC, on the other hand, also reported a 6% decline in revenues in Q1 2014, albeit the strong margin improvement that led to robust bottom-line growth.
Both top-line and bottom-line growth have declined in the past few years…
Thus, in pursuit of growth, both Mobily and STC have started to look for opportunities in the ICT market, helped by the government’s spending on projects that are intensifying demand for high-quality ICT services. Despite this, the overall top-line growth will continue to remain moderate for the players as the contribution from ICT is not sizable yet. ICT businesses are also relatively lower margin businesses and require high capex initially. Figure 1 Declining top-line growth for Mobily and STC* 30%
45% 25.2%
25%
Figure 2 Declining bottom-line growth for Mobily
40%
Title: Source: 39.7% Please fill in the values above to have them entered in your report
22.6% 35%
20%
30%
17.6%
25%
15%
20.7% 18.4%
20%
10% 10% 6.8%
6%
15% 5.1%
10.9%
4%
5%
2%
5%
0% 2010 -5%
10%
2011
2012 Mobily
2013 -1%
2.1%
2014e 0% 2010
STC
Source: Company data, Al Rajhi Capital* STC includes only domestic business
2011
2012
2013
2014e
Source: Company data, Al Rajhi Capital
Reasons for slowing growth …as mobile voice stagnates and data growth declines
Apart from the gradual saturation of the overall mobile market in the Kingdom, the other sector-specific concerns that are responsible for the slowing growth are: a) Mobile data revenues, which ramped up in the past few years and was primarily the reason for the high growth in the past few years, is slowing. Data prices have considerably fallen in the past three years. b) Cannibalization of voice by data has been a structural issue for telecom players worldwide. While this has caused an overall revenue decline in almost all the other GCC countries, the relatively tighter regulations in Saudi Arabia have been able to help prevent any major slide in voice revenues. c) Other country-specific concerns are the changes at the macro level, pertaining to the crackdown on illegal immigrant workers, which has led to loss of subscribers, especially for Zain KSA. On the positive side, fixed data usage still continues to clock high growth. The slower growth of smartphones/equipment sales could also ironically lead to lower subsidies, thereby paving the way for margin improvement.
Disclosures Please refer to the important disclosures at the back of this report.
2
Saudi Telecom Sector Telecom –Industrial 12 June 2014
Growing ICT opportunities According to Mobily, the business segment (B2B) is expected to grow to SAR38bn by 2017, when it expects the business segment’s revenues to contribute roughly 20% to the company’s top-line. We estimate the current market size to be SAR29bn, growing at 7% annually. To put these numbers in perspective, the total market size would be more than 1.5times the current annual revenues of Mobily. For the next four years, assuming a flattish growth for voice revenues, the current run-rate for data revenues (c.10-11% y-o-y), and a 17% market share of the estimated business segment by 2017 for Mobily, we expect a top-line CAGR growth of c.56% y-o-y over 2014-16e for Mobily. Overall, we expect a top-line growth of 5.1% y-o-y for 2014e.
Companies are hoping for growth opportunities from the ICT business segment
With regard to STC, although the company has not given any specific guidance, we assume a lesser near-term growth impact from ICT services given the size of its operations. The management remained positive about the size of ICT opportunities, though it declined to give any estimates. We expect STC to win more sizable contracts related to government projects over the longterm. The company’s enterprise segment saw a 5% y-o-y growth in Q1 2014. Overall, we expect STC to report a top-line growth of c.2.7% in 2014 backed by its growth in the business enterprise division.
High investment needs and lower margins Over a period of time, we think that telecom companies would be required to spend higher amounts of capex given the:
Thus, capital requirements are on the rise and margins are expected to decline in the long term…
a) Increasing congestion of networks due to the introduction of unlimited download packages. b) Growing focus on capital intensive fixed-line broadband. c) Focus on ICT investments. For Mobily, we expect capex/sales of 22.8% for 2014 compared to STC’s 17%. Since the company has been increasing exposure to the low-margin ICT business, its margins are expected to contract. While it is not easy to estimate the margin from the ICT business, the ballpark estimates by Mobily put it lower than the current running margins of c.36%. Companies in recent times are focusing on enhancing their efficiencies in a bid to improve their margins, which are driving part of their bottom-line growth.
As growth declines, companies move from growth to value territories by paying out higher dividends and cash flow generation becomes crucial
Growth to Value – Dividends to grow in 2014 Companies are moving further away from the growth territories to the value territories by distributing higher dividends. In fact, this is one of the reasons why despite a decline in growth, the 1-yr forward PE multiples have remained mostly higher as compared to historical trends. Figure 4 …responsible for increasing Price Earnings multiplies despite declining growth rates
Figure 3 Increasing dividends are…
6.00
Title: Source:
16 5.2
14
4.8
5.00
Please fill in the values above to have them entered in your report
12 3.8
4.00
3.00
10 3.0
3.0
6
2.3 2.0
8
2.0
2.00
4 2
1.00
Mobily DPS
STC DPS
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
Mobily
Feb14
Oct13
Dec13
Aug13
Apr13
Jun13
Feb13
Oct12
Dec12
Aug12
Apr12
Jun12
Feb12
Oct11
Dec11
Aug11
2014e
Apr11
2013
Jun11
2012
Feb11
2011
Dec10
0 -
STC
Source: Company data, Al Rajhi Capital
3
Saudi Telecom Sector Telecom –Industrial 12 June 2014
We expect Mobily to continue its progressive dividend policy with payouts of more than 50% for 2014 at least, despite the capex increase, since we expect an improvement in its accounts receivables. We believe that STC’s EBITDA margins are bound to improve gradually given its renewed focus on domestic operations, leading to higher efficiencies. In addition, its cost restructuring program is beginning to fructify, evident from the 4% EBITDA margin improvement in 2013 over 2012. All of these factors, along with the surplus cash on balance sheet and strong cash flow generation could translate into higher dividends.
STC’s superior free cash flow generation As capex increases and companies move from growth territories to value territories, cash flows become all the more important. The figures 5 and 6 below reveal that STC has superior cash flow generation and possess a huge capacity to increase dividends unlike Mobily, which will have to rely on debt partly for increasing its dividends based on its progressive dividend policy, unless it improves its working capital/receivable position.
STC has superior cash flow generation and a high cash position of 7/share on its books
Figure 5 STC’s superior cash flow vs
Figure 6 Mobily’s reliance on debt to pay dividends
14
4.5 12.0 10.9 9.1
Please fill in the values above to have them entered in your report 3.3
3.0
8
2.5
6
2.0 4.4
3.6
3.5
3.5 9.4
3.9
4.0
12 10
Title: Source:
4.0
2.2 2.0
1.6
4.5
4.0
2.3
1.5
4 1.0 2
0.5
0
0.0 2011
2012 FCF
2013
2014e
2011
Dividends
2012 Reported FCF
Source: Company data, Al Rajhi Capital. (units in SARbn)
2013
2014e
Dividends paid
Source: Company data, Al Rajhi Capital (units in SARbn)
Figure 7 Comparing Cash flows Mobily
2011
2012
2013
Operation Cash flow
6.7
7.0
5.5
8.2
Capex
-3.4
-5.1
-4.0
-6.1
Reported FCF
3.3
2.0
1.6
2.2
Dividends paid
2.3
3.5
3.6
3.9
STC
2014e
2011
2012
2013
2014e
Operation Cash flow
16.8
15.7
19.6
18.9
Capex
-7.3
-6.6
-7.6
-8.0
FCF
9.4
9.1
12.0
10.9
Dividends
4.4
4.0
4.0
4.5
Source: Company data, Al Rajhi Capital
Accounts receivable on the rise, especially for Mobily
Accounts receivable on the rise Mobily’s working capital increased by about SAR4bn (mainly due to higher receivables) in 2013, which implies that a lot of cash is yet to be received for its services (assuming no bad debts). The trend has continued in 1Q14 as well, and we believe this is primarily due to rising sale of devices. This was the case with STC as well, although the scale was much lower at SAR1.5bn in 2013.
Disclosures Please refer to the important disclosures at the back of this report.
4
Saudi Telecom Sector Telecom –Industrial 12 June 2014
Figure 8 Increase in accounts receivables for Mobily over the years… 10 8.6
9 8 6.6
7
6
5.6
6.0 5.6
5 4 3 2 1 0 2009
2010
2011
2012
2013
Accounts receivable
Source: Company data, Al Rajhi Capital
Conclusion – STC preferred sector pick Overall, we believe STC is much better positioned in terms of net cash position and cash flow generation potential. Based on the revised estimates, we have increased our target price of STC to SAR77 per share and are Overweight on the stock. We remain Neutral on Mobily (TP of SAR92 per share) and Zain (TP of SAR10 per share).
Disclosures Please refer to the important disclosures at the back of this report.
5
Saudi Telecom Telecom – Industrial STC AB: Saudi Arabia 12 June 2014
Rating
OVERWEIGHT
Target price
SAR77.00 (14.9% upside)
Current price
SAR67.00
Pritish K. Devassy, CFA Senior Research Analyst Tel +966 11 2119370, [email protected] Key themes With strong cash flow generation, we expect dividends to increase to SAR3/share. The cleaner reporting standards have helped the stock to regain investor confidence; however, we think there is scope for more disclosures. STC remains our top pick in the Saudi Telecom sector. Share information Market cap (SAR/US$)
134.0bn / 35.73bn
52-week range
39.30 - 72.70
Daily avg volume (US$)
mn
Shares outstanding
2,000mn
Free float (est)
16%
Performance Absolute Relative to index
1M
3M
12M
-0.9%
2.3%
61.8%
-2%
-3.5%
32.4%
Major Shareholder: Public Investment Fund
70.0%
Gen. Organisation for Social Insce.
7.0%
Valuation 12/12A
12/13A
12/14E
12/15E
P/E (x)
17.9
12.2
11.7
11.6
P/B (x)
2.7
2.4
2.2
2.0
EV/EBITDA (x)
7.5
6.2
5.8
5.5
Dividend Yield
3.0%
3.4%
4.5%
4.5%
Source: Company data, Al Rajhi Capital
Performance Price Close
RSI10
157 148 140 131 122 113 105 96 87
09/13
We believe that the stock is trading at a discount to its fair value of SAR77 per share in spite of its strong free cash flow generation and net cash position. Even if the 2013 top-line is extrapolated into the future with no growth, similar margins and capex, the EV/share alone amounts to as much as SAR60/share based on the DCF valuation. The cleaner reporting standards have helped the stock to regain investor confidence; however, we think there is further scope for more disclosures, which should act as a catalyst. We believe that the dividend will increase to SAR3 per share in 2014, implying a 4.5% dividend yield on the current market price. Higher dividends in 2014: STC’s solid cash flows and reduced appetite for international expansions could possibly lead to higher future dividends. Based on our estimates, the operating cash flows in 2014e are expected to be SAR19bn (SAR9.5/share) and with a net capex of around SAR7bn (3.5/share), the FCF comes at SAR 6/share (vs. 2013 dividend of 2.25/share). This gives significant room to pay out higher dividends given its net cash position of SAR7/share. Interestingly, even with no FCF growth and a WACC of 9.8%, the EV of domestic operations comes to about SAR 60/share. For 2014e, we expect the company to pay a dividend of SAR3 per share. Margin improvement: While STC’s top-line declined by 6% y-o-y in 1Q 2014, primarily owing to a decline in the domestic segment which constitutes about 90% of its revenues, the margin improved substantially. We believe that the decline in revenue could be on account of STC’s new roaming policy agreements, which came into effect in 2Q 2013, and therefore we expect a y-o-y impact on revenue in 2Q 2014 as well. However, we expect margins to be further positively impacted by these roaming agreements as well as cost-cutting and efficiency improvement measures undertaken as was evident in the 2013 annual margin, which showed a c.4% improvement over 2012.
Relative to TADAWUL FF (RHS)
75 70 65 60 55 50 45 40 35 70 30 -10 06/13
Saudi Telecom Company
12/13
03/14
Source: Bloomberg, Company data, Al Rajhi Capital
Gain from land sale likely: STC announced yesterday (10th June) that the Ministry of Finance has taken the decision to expropriate its land located in the neighborhood of Al Faisaliah in Riyadh City with an area of about 1m square meter. According to the company, the book value of this land is only SAR105m (about SAR 100 per square meter). Although the company did not announce the compensation to be received from the Government, we see a very high possibility for STC to book a major one-off gain from this given the prevailing prices. The company said that it will receive the value of the compensation only at a later date.
Period End (SAR)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue (mn)
56,220
44,745
45,605
46,820
48,079
Revenue Growth Gross profit margin EBITDA margin Net profit margin EPS EPS Growth ROE ROCE Capex/Sales
8.6%
-20.4%
1.9%
2.7%
2.7%
35.8%
36.4%
40.5%
39.9%
39.5%
14.7% 4.12 -12.7% 17.9% 14.4% 13.1%
16.7% 3.73 -9.3% 15.6% 17.0% 14.8%
24.1% 5.50 47.3% 20.9% 19.1% 16.7%
24.5% 5.73 4.2% 19.5% 17.8% 17.0%
24.0% 5.77 0.7% 18.0% 16.4% 16.0%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. Closing Prices as of 9 June 2014 Powered by EFA Platform
6
Saudi Telecom Telecom – Industrial 12 June 2014
International segment: The international segment, mainly VIVA Kuwait and VIVA Bahrain, which contributes less than c.10% of its top-line, grew strongly in 1Q 2014 enabling STC to report a 11% y-o-y growth in its international revenues. Viva Kuwait is mainly focusing on data and has been the beneficiary of strong data uptake in the country, without being much impacted by cannibalization of voice, thereby witnessing market share gains (33% in 2013 from 29% in 2012). Viva Kuwait reported a 33% y-o-y top-line increase in 2013, and a six-fold increase in net income. STC’s cleaner reporting standards and reduction of international expansion plans have been received well by the investors. While not accounting Aircel into STC’s books by the equity method is a step in the right direction, we think there is some more clarity required on its associate accounting. Good growth in fixed-line services: On the domestic front, STC continues to see robust growth in broadband subscribers, especially in the fixed-line segment. The company has 830k households connected via the fiber network and is expected to reach 1.5m by 2014-end, implying an incremental SAR1bn to its top-line (based on an estimate of ARPU of SAR133 for quad play services). Fiber and fixed broadband are more significant to STC than voice given the higher ARPU associated with quad play services over voice. STC expects this to be one of the major growth drivers given the growing demand for high bandwidth services. As per STC’s management, they will continue to invest heavily in this space, where it enjoys a competitive edge over its peers. We believe the company could make smaller acquisitions to beef up its content-related services, which will spur more fixed broadband demand. Agreement with Atheeb: Etihad Atheeb announced on June 4, 2014 that it signed an Indefeasible Rights of Use (IRU) agreement with STC. With this, STC has granted Atheeb the right to use 30k ports on its fiber network for an initial phase for 15 years. The agreement gives Atheeb the right to acquire up to 100 thousands ports in the future. These ports will be used to provide broadband internet services and fixed voice services to both residential and small businesses. First tranche of Sukuk issue closed: The company had received regulatory approval for a SAR5bn private placement sukuk program, and it successfully closed a SAR2bn sukuk on June 9 as the first tranche of the program. We see it more as a sukuk-raising exercise in line with the current market trends and a benchmarking exercise given STC’s strong balance sheet. The SAR2bn sukuk has a tenor of 10 years (maturing in June 2024) and has a floating profit rate of 70bps over 3M SIBOR. Thus, the total cost of debt (sukuk) at the current rates comes close to c.1.5%. As per the Tadawul announcement, the debut sukuk issuance was almost two times oversubscribed and the investor base comprised a mix of government investors, banks, asset managers and insurance companies. Increase fair value to SAR77. Maintain Overweight: We have revised our revenue estimates slightly lower and have raised the margin estimates to similar to the 2013 levels. We value the stock using an average of relative valuation (3 year historical average PE multiple of 11.3x, applied on the 2014 earnings) and DCF valuation (explicit forecasts for 5 years and a terminal growth rate of 2% beyond the explicit period). We have arrived at a fair value of SAR 77 per share for STC, implying a 15% upside from current stock price. The downside risks remain in terms of deterioration of international businesses, domestic pricing war, and higher-than-expected capex spending for the ICT business.
Disclosures Please refer to the important disclosures at the back of this report.
7
Saudi Telecom Telecom – Industrial 12 June 2014
Income Statement (SARmn)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue
56,220
44,745
45,605
46,820
48,079
Access Charges
(9,773)
(8,162)
(7,620)
(8,433)
(8,654)
Employee Costs
(6,683)
(5,291)
(5,515)
(5,693)
(5,846)
Government Charges
(6,271)
(4,571)
(4,275)
(4,369)
(4,486)
S.G. & A. Costs
(7,343)
(10,448)
(9,724)
(9,628)
(10,097)
Repairs & Maintenance Costs
(6,031)
-
-
-
-
Operating EBIT
11,266
9,937
12,092
12,262
12,274
Cash Operating Costs
(36,101)
(28,472)
(27,134)
(28,123)
(29,083)
EBITDA
20,119
16,273
18,471
18,697
18,996
Depreciation and Amortisation
(8,853)
(6,337)
(6,378)
(6,435)
(6,721)
Operating Profit
11,266
9,937
12,092
12,262
12,274
Net financing income/(costs)
(1,768)
(2,566)
Forex and Related Gains
(1,105)
-
Provisions Other Income
(893) -
(414)
(313)
(598)
516
511
8,495
7,569
(254) -
(162) -
-
-
950
390
195
11,552
12,399
12,307
Other Expenses Net Profit Before Taxes Taxes
(118)
(215)
(230)
(515)
Minority Interests
(141)
113
(321)
(426)
Net profit available to shareholders
(296) (472)
8,237
7,467
11,001
11,458
11,539
(4,000)
(4,000)
(4,500)
(6,000)
(6,000)
12/11A
12/12A
12/13A
12/14E
12/15E
2,000
2,000
2,000
2,000
2,000
CFPS (SAR)
8.62
6.85
8.85
9.16
9.37
EPS (SAR)
4.12
3.73
5.50
5.73
5.77
DPS (SAR)
2.000
2.000
2.250
3.000
3.000
Dividends Transfer to Capital Reserve
Adjusted Shares Out (mn)
Growth
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue Growth
8.6%
-20.4%
1.9%
2.7%
2.7%
EBITDA Growth
2.5%
-19.1%
13.5%
1.2%
1.6%
Operating Profit Growth
2.6%
-11.8%
21.7%
1.4%
0.1%
Net Profit Growth
-12.7%
-9.3%
47.3%
4.2%
0.7%
EPS Growth
-12.7%
-9.3%
47.3%
4.2%
0.7%
Margins
12/11A
12/12A
12/13A
12/14E
12/15E
EBITDA margin
35.8%
36.4%
40.5%
39.9%
39.5%
Operating Margin
20.0%
22.2%
26.5%
26.2%
25.5%
Pretax profit margin
15.1%
16.9%
25.3%
26.5%
25.6%
Net profit margin
14.7%
16.7%
24.1%
24.5%
24.0%
Other Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
ROCE
14.4%
17.0%
19.1%
17.8%
16.4%
ROIC
14.8%
13.8%
35.1%
33.8%
34.5%
ROE
17.9%
15.6%
20.9%
19.5%
18.0%
1.4%
2.8%
2.0%
4.2%
2.4%
Capex/Sales
13.1%
14.8%
16.7%
17.0%
16.0%
Dividend Payout Ratio
48.6%
53.6%
40.9%
52.4%
52.0%
Valuation Measures
12/11A
12/12A
12/13A
12/14E
12/15E
16.3
17.9
12.2
11.7
11.6
P/CF (x)
7.8
9.8
7.6
7.3
7.2
P/B (x)
2.9
2.7
2.4
2.2
2.0
EV/Sales (x)
2.8
2.7
2.5
2.3
2.2
EV/EBITDA (x)
7.7
7.5
6.2
5.8
5.5
13.7
12.2
9.5
8.9
8.5
2.2
3.6
3.3
3.1
2.9
3.0%
3.0%
3.4%
4.5%
4.5%
Effective Tax Rate
P/E (x)
EV/EBIT (x) EV/IC (x) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
8
Saudi Telecom Telecom – Industrial 12 June 2014
Balance Sheet (SARmn)
12/11A
12/12A
12/14E
12/15E
6,589
3,508
960
8,322
13,401
11,201
12,257
24,402
25,105
25,048
-
-
-
-
-
6,623
8,098
23,831
19,605
19,544
Total Current Assets
21,967
18,593
32,364
37,094
42,055
Fixed Assets
55,085
38,821
38,406
40,710
42,296
5,032
17,991
12,256
11,650
11,340
29,318
5,216
4,608
4,162
3,547
-
-
-
-
-
89,435
62,028
55,270
56,522
57,183 99,237
Cash and Cash Equivalents Current Receivables Inventories Other current assets
Investments
12/13A
Goodwill Other Intangible Assets Total Other Assets Total Non-current Assets Total Assets
111,402
80,621
87,633
93,616
Short Term Debt
5,972
2,075
1,561
1,672
1,672
Trade Payables
19,291
15,224
18,251
18,344
17,954
Dividends Payable Other Current Liabilities
0
(0)
-
(0)
(0)
Total Current Liabilities
25,263
17,298
19,811
20,015
19,626
Long-Term Debt
23,960
9,396
6,976
6,771
6,771
-
-
-
-
-
8,097
4,880
4,570
4,592
4,592
32,056
14,276
11,547
11,363
11,363
921
1,393
Other LT Payables Provisions Total Non-current Liabilities Minority interests
7,174
(6)
(45)
Paid-up share capital Total Reserves
46,908
49,053
56,320
61,316
66,856
Total Shareholders' Equity
46,908
49,053
56,320
61,316
66,856
Total Equity
54,082
49,047
56,275
62,237
68,248
111,402
80,621
87,633
93,616
99,237
Total Liabilities & Shareholders' Equity Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
Net Debt (SARmn)
20,897
2,692
(9,252)
(15,817)
(20,896)
1.04
0.17
(0.50)
(0.85)
(1.10)
38.6%
5.5%
-16.4%
-25.4%
-30.6%
Net Debt/EBITDA (x) Net Debt to Equity EBITDA Interest Cover (x) BVPS (SAR)
Cashflow Statement (SARmn) Net Income before Tax & Minority Interest
11.4
6.3
20.7
73.7
117.0
23.45
24.53
28.16
30.66
33.43
12/11A
12/12A
12/13A
12/14E
12/15E
8,495
7,569
11,552
12,399
12,307
6,435
6,721
Depreciation & Amortisation
8,853
6,337
6,378
Decrease in Working Capital
(4,811)
(2,718)
(1,428)
118
4,226
4,727
4,128
(88)
Cashflow from Operations
16,765
15,914
20,631
18,863
18,462
Capital Expenditure
(7,346)
(6,624)
(7,630)
(7,966)
(7,693)
(29)
(6,273)
(8,249)
Other Operating Cashflow
New Investments Others Cashflow from investing activities Net Operating Cashflow
(855) (8,230)
95 (12,802)
190
988 65
(271) (296)
-
(15,689)
(6,913)
(7,693)
8,534
3,111
4,942
11,950
10,769
(4,432)
(4,002)
(3,998)
(4,502)
(6,000)
Proceeds from issue of shares
-
-
-
-
-
Effects of Exchange Rates on Cash
-
-
(200)
-
-
Dividends paid to ordinary shareholders
Other Financing Cashflow
(3,307)
(207)
(240)
(33)
Cashflow from financing activities
(7,997)
(4,989)
(4,806)
(4,629)
(6,000) 4,769
Total cash generated
137
7,322
Cash at beginning of period
5,904
6,589
3,508
960
8,322
Implied cash at end of year
6,442
4,711
3,645
8,282
13,091
12/11A
12/12A
12/13A
12/14E
12/15E
13.1%
14.8%
16.7%
17.0%
16.0%
Ratios Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
538
(1,877)
-
9
Etihad Etisalat Company Telecom – Industrial EEC AB: Saudi Arabia 12 June 2014
Rating
NEUTRAL
Target price
SAR92.00 (8.4% upside)
Current price
SAR84.86
Pritish K. Devassy, CFA, Senior Research Analyst Tel +966 11 2119370, [email protected] Key themes We expect average top-line growth to be c.5-6% in the coming years from the high 20s in the past. Capex levels are likely to increase given its exposure to the ICT business. Working capital is a key factor to look at in 2014. We expect a dividend yield of 6.2% in 2014. Share information Market cap (SAR/US$)
65.34bn / 17.42bn
52-week range
77.00 - 98.04
Daily avg volume (US$)
mn
Shares outstanding
770.0mn
Free float (est)
61%
Performance
1M
3M
12M
Absolute
-12.3%
-9.3%
5.4%
Relative to index
-13.4%
-15.1%
-24%
Major Shareholder: Emirates Telecoms Corp.
27.4%
Gen. Organisation for Social Insce.
11.8%
Valuation 12/14E
12/15E
P/E (x)
12/12A 10.9
12/13A 9.8
9.6
9.2
P/B (x)
3.1
2.7
2.4
2.2
EV/EBITDA (x)
8.5
8.1
7.8
6.9
Dividend Yield
4.4%
5.7%
6.2%
6.5%
Source: Company data, Al Rajhi Capital
Performance
RSI10
Price Close
Relative to TADAWUL FF (RHS)
104
107
99
101
94
95
89
90
84
84
79
78
74
72
70 30 -10 06/13
09/13
12/13
03/14
Source: Bloomberg, Company data, Al Rajhi Capital
Etihad Etisalat (Mobily) Given the saturation in mobile subscriber penetration and gradually slowing mobile data growth, Mobily is seeking growth in the ICT business segment. However, we believe this will not help the company to achieve high growth as experienced in the past. Given the higher capex requirement (including the cost of new building of SAR2bn), improvement in working capital will be a key factor to look out for in 2014. Without this reversal, Mobily will continue to rely on debt for paying its dividends, which is not sustainable in our view. Voice revenues are expected to remain flat in 2014, while data revenues are expected to grow by c.10% y-o-y. Slowing core business: Although the company’s top-line grew by c.7% in 2013, its service usage revenues declined by 7% y-o-y. As a result of this ongoing decline in its core business, Mobily is seeking newer growth avenues. The company is set to transform itself into an integrated ICT company from a pureplay mobile voice & data services company. While the ICT business presents a good opportunity, it would not help the company regain the growth seen during the mobile data boom period of 2010-12. High capex requirements: We expect capex to increase as a result of this business transformation. The company’s capital expenditure for the five-year period (2013-17) is budgeted at more than SAR22bn, implying an average capex/sales ratio of 16-17% over the next few years, which highlights the scale of Mobily’s ambitions. The company plans to increase the number of data centers from 38 to 56 over the next 3-5 years. As per Mobily, the margins are also expected to be lower for the ICT business than the current c.35% for Mobily. The company has already forged tie-ups with leading companies such as IBM, Nokia and Virtustream to provide a host of managed services. Mobily also continues to invest in expanding and increasing its network capacity in congested areas, which also require additional investments. Voice revenues to remain flat; data to grow by c10%: Segment-wise, we expect voice revenues to remain mostly flat in the coming years given the saturated state of the mobile market, coupled with the macro changes pertaining to labor law and the impending entry of MVNOs. As for data revenues, we expect 10% y-o-y growth in 2014e, implying a c.30% contribution to the company’s topline (vs. guided 32%). In terms of fixed broadband, Mobily has around 530,000 fiber connections and expects to reach 1.2m by 2014-end, implying more than doubling of its data subscribers.
Period End (SAR)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue (mn)
20,052
23,585
25,191
26,480
28,310
Revenue Growth Gross profit margin EBITDA margin
25.2% 51.5% 37.2%
17.6% 50.8% 36.2%
6.8% 51.4% 36.5%
5.1% 51.1% 36.7%
6.9% 50.2% 37.3%
Net profit margin EPS EPS Growth ROE ROCE Capex/Sales
25.4% 6.60 20.7% 29.9% 27.4% 18.4%
25.5% 7.82 18.4% 30.6% 21.6% 20.3%
26.5% 8.67 10.9% 29.8% 19.7% 15.4%
25.7% 8.85 2.1% 26.9% 18.2% 22.8%
25.1% 9.23 4.3% 25.2% 18.0% 17.0%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. Closing Prices as of 9 June 2014 Powered by EFA Platform
10
Etihad Etisalat Company Telecom – Industrial 12 June 2014
End of talks with Atheeb: Mobily announced on June 2, 2014 that its subsidiary, Bayanat has stopped discussions to acquire the proposed 20% stake in Atheeb. This was shortly followed by the company announcing a SAR338m write-off in its Q2 2014 net income due to the cancellation of an IRU agreement Bayanat had signed with Atheeb. Mobily had recognized this in their 1Q2014 financials. The market has reacted quite negatively to this with the stock c.5% down since the announcement. We believe the market has overreacted to this news as this is only a one-off impact on Mobily, although it raises questions about Mobily’s 1Q performance, excluding the contribution of this contract. Without this, Mobily’s top-line for Q1 2014 would have seen a growth of 5% y-o-y. ICT opportunities: According to Mobily, the size of ICT market is expected to be SAR38bn by 2017, when it expects the business segment to contribute roughly 20% to its top-line. We estimate the current market size to be SAR29bn, growing by 7% annually. To put these numbers in perspective, the total market size would be more than 1.5 times the current annual revenue of Mobily. For the next four years, assuming a flattish growth for voice revenues, the current run rate for data revenues (c10-11% y-o-y), and a 17% market share of the ICT businesses by 2017 by Mobily, we expect the company’s top-line to grow at a CAGR of c.5-6% y-o-y over 2014-16e. Expect dividend increase, working capital holds the key: The company’s working capital increased by about SAR4.2bn in 2013, due to a significant increase in accounts receivables. The increasing trend in receivables continued in 1Q14 as well. In view of the higher than usual capex expected in 2014 as a result of the new building cost of SAR2bn, we believe the reversal of this trend would be important from a cash flow perspective. Overall, the company is expected to increase dividends in 2014 to SAR5.2/share from SAR4.8/share in 2013. Although Mobily has the ability to issue more debt because of its low gearing and low cost of debt, we think that an increase in dividends will not be sustainable if the current conditions continue. Maintain Neutral at fair value of SAR92: We value the stock using an average of relative valuation (3-year historical average PE multiple of 10x, applied on 2014 earnings) and DCF valuation (explicit forecasts for 5 years and a terminal growth rate of 2% beyond the explicit period). The stock continues to trade attractively at 9.6x forward PE, supported by good dividend yields. Based on our revised estimates, we value the stock at SAR92 per share and are Neutral on the stock. The upside risks would involve strong working capital reversal in the coming years, higher-than-expected margin improvement for the company and higherthan-expected growth in the operating segments. The downside risks would be higher-thanexpected margin deterioration due to a higher exposure to the ICT business, loss of market share or worsening working capital requirements.
Disclosures Please refer to the important disclosures at the back of this report.
11
Etihad Etisalat Company Telecom – Industrial 12 June 2014
Income Statement (SARmn)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue
20,052
23,585
25,191
26,480
28,310
Cost of Goods Sold
(9,728)
(11,608)
(12,243)
(12,954)
(14,099)
Gross Profit
10,324
11,977
12,948
13,526
14,212
S.G. & A. Costs
(2,870)
(3,443)
(3,758)
(3,797)
(3,652)
Operating EBIT
5,305
6,135
6,688
7,003
7,430
(12,598)
(15,051)
(16,001)
(16,751)
(17,751)
7,454
8,534
9,190
9,729
10,560
(2,149)
(2,399)
(2,502)
(2,727)
(3,129)
5,305
6,135
6,688
7,003
7,430
Government Charges
Cash Operating Costs EBITDA Depreciation and Amortisation Operating Profit Net financing income/(costs)
(213)
Forex and Related Gains
-
Provisions
-
Other Income Other Expenses Net Profit Before Taxes
46
(169)
(191)
(190) -
(263)
-
-
122
257
81
86
6,088
6,755
6,894
7,254
5,138
Taxes
(54)
(70)
(78)
(78)
Minority Interests
-
-
-
-
-
5,083
6,018
6,677
6,815
7,109
(2,275)
(2,905)
(3,696)
(4,021)
(4,265)
-
-
-
-
-
12/11A
12/12A
12/13A
12/14E
12/15E
770.0
770.0
770.0
770.0
770.0
CFPS (SAR)
9.39
10.93
11.92
12.39
13.30
EPS (SAR)
6.60
7.82
8.67
8.85
9.23
DPS (SAR)
2.95
3.77
4.80
5.22
5.54
Net profit available to shareholders Dividends Transfer to Capital Reserve
Adjusted Shares Out (mn)
Growth
(145)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue Growth
25.2%
17.6%
6.8%
5.1%
6.9%
Gross Profit Growth
17.5%
16.0%
8.1%
4.5%
5.1%
EBITDA Growth
20.9%
14.5%
7.7%
5.9%
8.5%
Operating Profit Growth
21.8%
15.6%
9.0%
4.7%
6.1%
Net Profit Growth
20.7%
18.4%
10.9%
2.1%
4.3%
EPS Growth
20.7%
18.4%
10.9%
2.1%
4.3%
Margins
12/11A
12/12A
12/13A
12/14E
12/15E
Gross profit margin
51.5%
50.8%
51.4%
51.1%
50.2%
EBITDA margin
37.2%
36.2%
36.5%
36.7%
37.3%
Operating Margin
26.5%
26.0%
26.6%
26.4%
26.2%
Pretax profit margin
25.6%
25.8%
26.8%
26.0%
25.6%
Net profit margin
25.4%
25.5%
26.5%
25.7%
25.1%
Other Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
ROCE
27.4%
21.6%
19.7%
18.2%
18.0%
ROIC
24.5%
25.5%
23.7%
20.9%
19.3%
ROE
29.9%
30.6%
29.8%
26.9%
25.2%
1.1%
1.1%
1.2%
1.1%
2.0%
Capex/Sales
18.4%
20.3%
15.4%
22.8%
17.0%
Dividend Payout Ratio
44.8%
48.3%
55.4%
59.0%
60.0%
Valuation Measures
12/11A
12/12A
12/13A
12/14E
12/15E
12.9
10.9
9.8
9.6
9.2
P/CF (x)
9.0
7.8
7.1
6.8
6.4
P/B (x)
3.6
3.1
2.7
2.4
2.2
EV/Sales (x)
3.5
3.1
3.0
2.9
2.6
EV/EBITDA (x)
9.5
8.5
8.1
7.8
6.9
13.3
11.8
11.1
10.9
9.9
3.0
2.6
2.2
2.0
1.9
3.5%
4.4%
5.7%
6.2%
6.5%
Effective Tax Rate
P/E (x)
EV/EBIT (x) EV/IC (x) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
12
Etihad Etisalat Company Telecom – Industrial 12 June 2014
Balance Sheet (SARmn)
12/11A
12/12A
12/13A
12/14E
12/15E
Cash and Cash Equivalents
1,690
1,302
1,570
1,570
4,475
Current Receivables
6,323
5,910
8,654
9,880
9,733
470
721
915
989
891
1,411
2,499
4,228
4,330
3,722
Inventories Other current assets Total Current Assets
9,893
10,427
15,334
16,756
18,807
16,412
17,255
20,733
24,044
26,309
-
-
6
6
6
Goodwill
1,530
1,530
1,530
1,530
1,530
Other Intangible Assets
9,665
9,412
8,913
8,354
7,773
-
-
-
-
-
Total Non-current Assets
27,607
28,197
31,181
33,934
35,617
Total Assets
54,424
Fixed Assets Investments
Total Other Assets
37,501
38,623
46,515
50,690
Short Term Debt
6,096
753
782
857
857
Trade Payables
11,757
9,190
11,529
11,133
11,780
Dividends Payable
-
Other Current Liabilities
194
132
112
31
31
18,047
10,075
12,424
12,021
12,667
Long-Term Debt
977
7,506
9,970
11,663
11,663
Other LT Payables
-
-
-
-
-
89
137
158
247
491
1,066
7,643
10,128
11,910
12,154
-
-
-
2
2
Total Current Liabilities
Provisions Total Non-current Liabilities Minority interests Paid-up share capital
7,000
Total Reserves
11,388
20,906
23,963
26,758
29,601
Total Shareholders' Equity
18,388
20,906
23,963
26,758
29,601
Total Equity
18,388
20,906
23,963
26,759
29,603
Total Liabilities & Shareholders' Equity
37,501
38,623
46,515
50,690
54,424
Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
5,383
6,956
9,182
10,950
8,045
0.72
0.82
1.00
1.13
0.76
29.3%
33.3%
38.3%
40.9%
27.2%
Net Debt (SARmn) Net Debt/EBITDA (x) Net Debt to Equity EBITDA Interest Cover (x) BVPS (SAR)
Cashflow Statement (SARmn)
34.9
50.4
48.2
51.2
40.2
23.88
27.15
31.12
34.75
38.44
12/11A
12/12A
12/13A
12/14E
12/15E
Net Income before Tax & Minority Interest
5,138
6,088
6,755
6,894
7,254
Depreciation & Amortisation
2,149
2,399
2,502
2,727
3,129
(1,703)
(4,190)
(1,395)
1,500
Decrease in Working Capital Other Operating Cashflow Cashflow from Operations Capital Expenditure New Investments Others Cashflow from investing activities Net Operating Cashflow
(792) 179
254
546
136
99
6,673
7,037
5,613
8,361
11,983
(3,690)
(4,777)
(3,871)
(6,029)
(4,813)
-
-
450
-
(6)
(168)
(310)
(75)
(22)
(3,408)
(5,086)
(3,951)
(6,051)
(4,813)
3,265
1,950
1,662
2,310
7,170
(2,275)
(3,500)
(3,619)
(3,942)
(4,021)
Proceeds from issue of shares
-
-
-
-
-
Effects of Exchange Rates on Cash
-
-
-
-
-
Other Financing Cashflow
-
-
(3,237)
(2,338)
Dividends paid to ordinary shareholders
Cashflow from financing activities Total cash generated
(1,315)
(2,232)
(4,021)
347
78
3,149
1,661
1,690
1,302
1,570
1,570
Implied cash at end of year
1,690
1,302
1,649
1,649
4,719
12/11A
12/12A
12/13A
12/14E
12/15E
18.4%
20.3%
15.4%
22.8%
17.0%
Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
(387)
(53)
Cash at beginning of period
Ratios
28
(189)
13
Zain KSA
Telecom – Industrial ZAINKSA AB: Saudi Arabia 12 June 2014
Rating
NEUTRAL
Target price
SAR10.00 (-1.7% upside)
Current price
SAR10.18
Pritish K. Devassy, CFA Senior Research Analyst Tel +966 11 2119370, [email protected] Key themes The company has been negatively impacted by the Saudization program and we expect the weakness to continue given the impending entry of MVNOs later this year. Zain is yet to break-even and we believe there is some way to go before we view it as a favorable pick. Share information Market cap (SAR/US$)
11.00bn / 2.932bn
52-week range
8.85 - 10.89
Daily avg volume (US$)
mn
Shares outstanding
|mn
Free float (est)
48%
Performance Absolute Relative to index
1M
3M
12M
0.9%
7.7%
4.9%
-0.3%
0.1%
-24.6%
Zain KSA Zain KSA reported a weak top-line, but strong EBITDA growth in 1Q 2014. We attribute the weakness in the company’s top-line partly to the departure of over a million illegal foreign workers, which we believe has impacted Zain the most. Zain is currently focusing on mobile data given the increasing congestion in the networks of its competitors. The company reported a 68% y-o-y growth in data revenues and a 56% y-o-y subscriber growth in 1Q 2014. Revenues continue to remain weak: Zain continues to report losses, although it has performed considerably well in 1Q 2014 in terms of EBITDA despite the decline in revenues. Revenues declined by 10% y-o-y to SAR1.54bn in 1Q 2014, taking Zain back to the revenue levels achieved in 1Q 2012. This revenue decline is partly attributed to the departure of over a million illegal foreign workers, which we believe has impacted Zain the most. The positives have been the growth in data revenues (68% y-o-y) and growth in subscribers (56% y-o-y).
Major Shareholder: Mobile Telecommunications Co. (Kuwait)
25.0%
Faden Trading and Contracting
6.8%
Valuation 12/12A
12/13A
12/14E
12/15E
P/E (x)
na
na
na
na
P/B (x)
1.7
1.6
2.1
2.5
EV/EBITDA (x)
30.1
27.3
22.1
14.9
Dividend Yield
0.0%
0.0%
0.0%
0.0%
Source: Company data, Al Rajhi Capital
Performance
RSI10
Price Close
Relative to TADAWUL FF (RHS)
11.1
110
10.6
102
10.1
94
9.6
86
9.1
78
8.6
70
70 30 -10 06/13
09/13
12/13
Long way to go: Given the extent of losses and performance, the stock is more of a trading idea than a pick based on the fundamentals, in our view, as there is a long way to go before it starts seeing profits and generating free cash flow. The company has been given some cushion by the Saudi government, allowing it to defer license fee payments for seven years. Zain was also successful in lowering its cost of funds recently through a debt restructuring program. However, its underinvestment in branding, network and also the impending entry of MVNOs are negative catalysts for the company. Valuation and risks: We have kept our estimates mostly unchanged and continue to remain Neutral on the stock based on our fair value of SAR 10 per share for the stock. We expect a revenue decline of -6% in 2Q 2014, while forecasting a +3% y-o-y growth for 2014. We expect a break-even at the operating profit level by 2016 and at the net profit level by 2018. The upside potential for the company are its continued growth in data subscribers and users preferring Zain for mobile broadband due to growing congestion in the networks of its competitors. The downside risks are lower-than-expected subscriber growth as a result of the expected entry of MVNOs in 2014.
03/14
Source: Bloomberg, Company data, Al Rajhi Capital
Period End (SAR)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue (mn)
6,699
6,171
6,523
6,700
7,358
Revenue Growth Gross profit margin EBITDA margin
12.9% 47.8% 13.4%
-7.9% 46.3% 14.2%
5.7% 48.1% 13.7%
2.7% 51.0% 16.4%
9.8% 53.0% 22.0%
Net profit margin
-28.7%
-28.4%
-25.3%
-21.1%
-11.8%
EPS EPS Growth ROE
(1.38) -18.4% -36.9%
(1.25) -9.1% -27.5%
(1.53) 22.4% -21.7%
(1.31) -14.4% -23.4%
(0.80) -38.8% -17.7%
ROCE Capex/Sales
-7.2% 10.6%
-7.5% 9.1%
-4.2% 12.0%
-3.2% 10.8%
-0.7% 10.0%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. Closing Prices as of 7 June 2014 Powered by EFA Platform
14
Zain KSA
Telecom – Industrial 12 June 2014
Income Statement (SARmn) Revenue Cost of Goods Sold Gross Profit
12/11A
12/12A
12/13A
12/14E
6,699
6,171
6,523
6,700
12/15E 7,358
(3,499)
(3,311)
(3,388)
(3,283)
(3,458)
3,200
2,860
3,135
3,417
3,900
(2,301)
(1,981)
(2,244)
(2,321)
(2,281)
(811)
(932)
(949)
(677)
(144)
(5,800)
(5,292)
(5,632)
(5,604)
(5,739)
Government Charges S.G. & A. Costs Operating EBIT Cash Operating Costs EBITDA Depreciation and Amortisation Operating Profit Net financing income/(costs)
899
879
890
1,096
1,619
(1,710)
(1,810)
(1,840)
(1,773)
(1,763)
(811)
(932)
(949)
(677)
(144)
(1,114)
(818)
(702)
(737)
(721)
Forex and Related Gains
-
-
-
-
-
Provisions
-
-
-
-
-
Other Income
-
-
-
-
-
Other Expenses
-
-
-
-
(1,925)
(1,749)
(1,651)
(1,414)
Taxes
-
-
-
-
Minority Interests
-
-
-
-
(1,925)
(1,749)
(1,651)
(1,414)
Dividends
-
-
-
-
-
Transfer to Capital Reserve
-
-
-
-
-
12/11A
12/12A
12/13A
12/14E
12/15E
1,400
1,400
1,080
1,080
1,080
CFPS (SAR)
(0.153)
0.044
0.174
0.332
0.831
EPS (SAR)
(1.375)
(1.250)
(1.529)
(1.310)
(0.801)
Net Profit Before Taxes
Net profit available to shareholders
Adjusted Shares Out (mn)
DPS (SAR)
Growth
0
0
0
(865) (865)
0
0
12/11A
12/12A
12/13A
12/14E
Revenue Growth
12.9%
-7.9%
5.7%
2.7%
12/15E 9.8%
Gross Profit Growth
26.5%
-10.6%
9.6%
9.0%
14.1%
EBITDA Growth
171.9%
-2.2%
1.3%
23.1%
47.7%
Operating Profit Growth
-30.3%
14.8%
1.9%
-28.7%
-78.7%
Net Profit Growth
-18.4%
-9.1%
-5.6%
-14.4%
-38.8%
EPS Growth
-18.4%
-9.1%
22.4%
-14.4%
-38.8%
Margins
12/11A
12/12A
12/13A
12/14E
12/15E
Gross profit margin
47.8%
46.3%
48.1%
51.0%
53.0%
EBITDA margin
13.4%
14.2%
13.7%
16.4%
22.0%
Operating Margin
-12.1%
-15.1%
-14.6%
-10.1%
-2.0%
Pretax profit margin
-28.7%
-28.4%
-25.3%
-21.1%
-11.8%
Net profit margin
-28.7%
-28.4%
-25.3%
-21.1%
-11.8%
Other Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
ROCE
-7.2%
-7.5%
-4.2%
-3.2%
-0.7%
ROIC
-3.9%
-4.8%
-4.6%
-3.4%
-0.8%
ROE
-36.9%
-27.5%
-21.7%
-23.4%
-17.7%
Effective Tax Rate Capex/Sales Dividend Payout Ratio Valuation Measures
0.0%
0.0%
0.0%
0.0%
0.0%
10.6%
9.1%
12.0%
10.8%
10.0%
0.0%
0.0%
0.0%
0.0%
0.0%
12/11A
12/12A
12/13A
12/14E
12/15E
P/E (x)
na
na
na
na
na
P/CF (x)
na
233.7
58.4
30.6
12.3
P/B (x)
3.3
1.7
1.6
2.1
2.5
EV/Sales (x)
4.4
4.3
3.7
3.6
3.3
32.8
30.1
27.3
22.1
14.9
EV/EBITDA (x) EV/EBIT (x) EV/IC (x) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
na
na
na
na
na
1.5
1.3
1.2
1.3
1.4
0.0%
0.0%
0.0%
0.0%
0.0%
15
Zain KSA
Telecom – Industrial 12 June 2014
Balance Sheet (SARmn)
12/12A
12/13A
12/14E
12/15E
780
2,385
1,293
1,413
1,574
1,007
1,330
1,221
1,516
1,516
44
50
141
151
151
602
626
660
708
708
Total Current Assets
2,432
4,391
3,315
3,788
3,950
Fixed Assets
Cash and Cash Equivalents Current Receivables Inventories Other current assets
12/11A
4,059
4,285
4,293
4,133
4,008
Investments
-
-
-
-
-
Goodwill
-
-
-
-
-
20,253
19,274
18,351
17,468
16,566
Other Intangible Assets Total Other Assets
-
-
283
265
265
Total Non-current Assets
24,312
23,559
22,927
21,866
20,839
Total Assets
24,789
26,744
27,950
26,242
25,654
Short Term Debt
9,748
11,413
200
200
200
Trade Payables
5,691
4,077
3,552
4,186
4,186
-
-
-
-
-
Dividends Payable Other Current Liabilities Total Current Liabilities Long-Term Debt Other LT Payables Provisions Total Non-current Liabilities Minority interests
72
47
74
52
52
15,511
15,537
3,826
4,438
4,438
6,242
3,207
14,421
14,494
14,494
675
728
1,197
1,348
1,348
23
26
39
41
41
6,940
3,961
15,657
15,883
15,883
-
-
-
-
-
Paid-up share capital
14,000
10,801
10,801
10,801
10,801
Total Reserves
(9,707)
(2,349)
(4,042)
(5,468)
(6,333)
Total Shareholders' Equity
4,293
8,452
6,759
5,333
4,468
Total Equity
4,293
8,452
6,759
5,333
4,468
26,744
27,950
26,242
25,654
24,789
Total Liabilities & Shareholders' Equity Ratios
12/11A
12/12A
12/13A
12/14E
12/15E
Net Debt (SARmn)
15,209
12,235
13,328
13,281
13,119
Net Debt/EBITDA (x) Net Debt to Equity EBITDA Interest Cover (x)
16.92
13.92
14.97
12.11
354.3%
144.8%
197.2%
249.0%
8.10 293.7%
0.8
1.1
1.3
1.5
2.2
3.07
6.04
6.26
4.94
4.14
Cashflow Statement (SARmn)
12/11A
12/12A
12/13A
12/14E
12/15E
Net Income before Tax & Minority Interest
(1,925)
(1,749)
(1,651)
(1,414)
Depreciation & Amortisation
1,710
1,810
1,840
1,773
Decrease in Working Capital
43
Other Operating Cashflow
85
BVPS (SAR)
Cashflow from Operations Capital Expenditure New Investments
(1,595) 385
(88)
(1,150)
(711)
(562)
-
Others
(9)
(865) 1,763
(220)
501
260
76
229
936
897
(784)
(721)
(736)
-
-
(36)
-
(19)
-
-
-
Cashflow from investing activities
(720)
(562)
(803)
(756)
(736)
Net Operating Cashflow
(807)
(1,711)
(574)
180
162
Dividends paid to ordinary shareholders
-
-
-
-
-
Proceeds from issue of shares
-
-
230
-
-
Effects of Exchange Rates on Cash
-
3,316
-
-
-
Other Financing Cashflow
-
-
(200)
40
Cashflow from financing activities
885
3,316
(517)
(60)
-
78
1,605
(1,092)
120
162
Total cash generated
-
Cash at beginning of period
702
780
2,385
1,293
1,413
Implied cash at end of year
780
2,385
1,293
1,413
1,574
12/11A
12/12A
12/13A
12/14E
12/15E
10.6%
9.1%
12.0%
10.8%
10.0%
Ratios Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
16
Zain KSA
Telecom – Industrial 12 June 2014
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.
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Disclosures Please refer to the important disclosures at the back of this report.
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