equity research general update - gulfbase.comof growth for the company. we forecast ksa’s...
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Equity Research General Update
• WecontinuetofavorMobilyasapureplayonSaudiArabia’stelecommarket,amorestableandresilienteconomyintheregion.WebelievethatMobily’smanagementisfocusedontheKSAopportunity,andwillnotpursueinternationalexpansioninthenearfuture.
• Mobilyisnolongerreliantonasinglelineofbusiness,havingestablishedthefoundationtotransitionfromapureplaymobileoperatortoanintegratedtelecomservicesprovider.Inlessthantwoyears,Mobilyhascapturedmorethan20%shareofthekingdom’sbroadbandsubscriberswith300,000usersin2008.Weestimatethatdatarevenuecontributedtoapproximately10%oftotalrevenuein2008.Broadbandserviceswillrepresentthenextlegofgrowthforthecompany.WeforecastKSA’sbroadbandsubscriberstomorethantriplefrom1.4mnin2008surpassingthe4mnmarkin2012.
• FollowingtheentryofZain,SaudiArabia’smobilesectorhasbecomemorecompetitive.Sofar,Mobilywithitsstrategicallycalculatedpromotionshasmanagedtolurenewmobilesubscribersaswellasmaintainitsexistingoneswithoutsacrificingmargins.WebelieveKSA’smobilemarkethasroomtogrowtowardsa145%activepenetrationrateby2010from124%in2008.
• WemaintainourBUYrecommendationandreviseourfairvaluetargettoSAR43.00–basedontheaverageoftwovaluationmethods:DCFandpeermultiples.Ourtargetpricesuggestsatotalreturnupsideof21.5%tothestock'smostrecentclosingprice,factoringinexpecteddividendofSAR1.00persharefor2009.OurupdatedDCFderivedfairvalueisSAR47.20.OurtargetpriceisatadiscounttoourDCFvaluation,andimpliesaP/Eof12.3xon2009Eearnings.TheappliedP/EisatapremiumtotheaveragemultiplesintheMENA/emergingmarketstelecomuniverse.WebelieveMobilywarrantsahighermultiplebecauseofitstrackrecordasagrowthcompanysincetheIPO.OurtargetP/Eisbackedbyourforecastof14.2%compoundannualgrowthinearningsforthenextthreeyears.
April 6th, 2009
Etihad Etisalat (Mobily) (7020.SE)Broadband opportunity materializing!
Current Price: SAR 36.20 Country: Saudi Arabia
Fair value Target: SAR 43.00 Sector: Telecom Services
Recommendation: BUY Exchange: Saudi Stock Exchange (Tadawul)
Year Net Profit (SAR mn)
EPS (SAR)
EBITDA reported (SAR mn)
BV (SAR mn)
EV/EBITDA adj. (X)
P/E (X)
P/BV (X)
Dec-11E 3,111 4.44 5,158 15,830 4.9 8.1 1.6
Dec-10E 2,801 4.00 4,890 13,768 5.1 9.0 1.8
Dec-09E 2,438 3.48 4,450 11,668 5.6 10.4 2.2
Dec-08 2,092 2.99 3,794 9,754 6.6 12.1 2.6
52-Week range (SAR) 22.55 - 49.14
Number of shares ('000) 700,000
Free Float (%) 48%
Market cap (SAR mn) 25,340
Market cap (USD mn) 6,756
Div Yld. 2009E (%) 2.8%
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Mobily (SAR) adjusted for corporate actions SC KSA index rebased
Mobily stock performance vs. SC KSA Index
Sector Coverage TeamSimon Simonian, CFA+9714 3199 [email protected]
Jessica Estefane+9714 3199 [email protected]
April6th,2009 2
Etihad Etisalat (Mobily)
Contents
INVESTMENT THESIS .................................................................3
SAUDI MOBILE MARKET UPDATE .................................................4
INTENSIVE PROMOTIONS SINCE AUGUST 2008 ................................................................................................ 4
MARKET SHARE UPDATE ..................................................................................................................................... 4
ROBUST GROWTH FOR KSA MOBILE SECTOR IN 2008 ..................................................................................... 5
IPHONE 3G: ANOTHER MARKETING INITIATIVE ................................................................................................ 6
BROADBAND OPPORTUNITY…MATERIALIZING! ..........................7
KSA BROADBAND MARKET UPDATE .................................................................................................................. 7
THE CASE FOR THE BROADBAND OPPORTUNITY IN SAUDI ARABIA............................................................... 8
MORE COMPETITION EXPECTED IN BROADBAND............................................................................................. 9
FINANCIAL ANALYSIS AND FORECAST ........................................11
CAN MOBILY MARGINS EXPAND IN AN INCREASINGLY COMPETITIVE ENVIRONMENT? ............................ 12
CAPEX UPDATE................................................................................................................................................... 13
FREE CASH FLOW ............................................................................................................................................... 14
DIVIDENDS ......................................................................................................................................................... 14
RIGHTS ISSUE STRENGTHENS BALANCE SHEET.............................................................................................. 14
VALUATION: TARGET FAIR VALUE REVISED TO SAR 43.00 .............15
UPDATE ON POTENTIAL CATALYSTS / DEVELOPMENTS ................................................................................. 16
APPENDIX ..............................................................................17
MOBILY: OWNERSHIP STRUCTURE UPDATE .................................................................................................... 17
FINANCIALS ...........................................................................18
April6th,2009 3
Etihad Etisalat (Mobily)
Investment thesisMobilyhasproventobeoneofthemostsuccessfulgreenfieldtelecomoperationsintheMENAregion.Inlessthanthreeyears,thecompanyhasbecomeasolidnumbertwoplayerinSaudiArabia’smobilemarket,commandingapproximately28%revenuesharein2008.Mobilyisbranchingoutfromapureplaymobileoperatortoanintegratedtelecomservicesproviderinthekingdom.Broadbandserviceswillrepresentthenextlegofgrowth,asbroadbandpenetration,at5.3%ofthepopulationin2008,remainslow.Mobilylaunchedthewirelessbroadbandservice(HSPA)inQ207,andinlessthantwoyearscapturedmorethan20%marketshareofthebroadbandsegmentwith300,000subscribersat2008-end.
CompetitionhasbecomemoreintensewiththeentryofZain,thethirdmobileoperator.Sofar,Mobilywithitsstrategicallycalculatedpromotionshasmanagedtolurenewmobilesubscribersaswellasmaintainitsexistingoneswithoutsacrificingmargins.
Net profit forecast: largely unchanged from a year agoWeincreasedourrevenueforecastsfor2009and2010by10%and14%respectivelyfactoringinhigherbroadbanddatacontribution.Overall,ournetprofitforecastsfor2009and2010remainlargelyunchanged.Toreflectmoreintensivepromotions,beyondourinitialexpectations,bythethreeplayerstogainormaintainmarketshare,werevisedlowerourlongtermEBITDAmarginassumptions.Thiscombinedwithfine-tuninginitemsbelowtheEBITDAline,notablyaccountingforhigherdepreciationandamortizationexpenses,leadsustorevisedownwardournetprofitestimatesfor2009and2010by1%and3%.
Valuation – new target price of SAR 43.00WerevisedourtargetpricetoSAR43.00frompreviouslySAR58.50(SAR78.00pre-rightsissue).Ournewtargetpriceisbasedona70%-30%weightforDCFandpeervaluation,respectively.
OurnewDCF-derivedfairvalueofSAR47.20reflectsprincipallyahigherdiscountrateappliedtoourDCF.WerevisedourWACCto10.8%frompreviously9.4%.
OurrevisedtargetpriceimpliesaP/Eof12.3xon2009Eearnings,whichrepresentsapremiumtotheaverageP/EmultiplesintheMENA/emergingmarketstelecomuniverse.WebelieveMobilywarrantsahighermultiplebecauseof1)itsestablishedtrackrecordasagrowthcompanysincetheIPOin2004,2)strongmanagementexecution,and3)ourtargetP/Eisbackedbyourforecastof14.2%compoundannualgrowthinearningsforthenextthreeyears.
April6th,2009 4
Etihad Etisalat (Mobily)
Saudi mobile market updateIntensive promotions since August 2008
TheSaudimobilemarkethasprovedtobeanythingbutabenigncompetitiveenvironmentsincetheentryofZain.FromthebeginninginAugust08,Zainlaunchedwithanaggressivecampaign,‘Onemonthonus,onemonthonyou’,offeringthefirst500,000subscriberstheequivalentof50%lifetimediscountcombinedwiththebenefitsofthe‘OneNetwork’concept.
MobilyreactedsoonafterwardswithaSeptemberpromotionofferingsubscribers60%discountafterthethirdminuteforon-netlocalcallsandallinternationalcalls.InOctober,MobilylaunchedTejwaliserviceasaresponsetoZain’s‘OneNetwork’,offeringfreeincomingcallsin56countries,includingUAE(mandatoryroamingwithEtisalatrequiredtoreceivefreeincomingcalls),Egypt(againmandatoryroamingwithEtisalatMisr),Bahrain,Jordan,Switzerland,andFrance–allkeydestinationsforSaudis.TejwalialsoincludesSudan,whichispartofZain’s‘OneNetwork’.Earlier,inAugust,STChadannouncedanalliancewith30globaltelecomoperatorstoofferdiscountsoninternationalroaming.BothMobilyandSTCretaliatedsothatthe‘OneNetwork’nolongerbecomesadifferentiatorforthenewentrant.
AtthebeginningofNovember,STCintroducedaone-monthpromotionofferingfreecallsafterthefifthminuteforon-netlocalcallandallinternationalcalls.InresponsetoSTC’soffer,Mobilyreplaced,inmid-November,the60%discountpromotionafterthethirdminutewithanewonebyoffering50%discountstartingthefirstsecondforon-netlocalcallsandallinternationalcalls.Thispromotionwasforthreeweeks,andendedatthestartoftheHajjseason.
Insummary,followingZain’saggressivecommerciallaunch,MobilyandSTCreactedquicklywithgenerouspromotionstosendamessagetothenewentrant.Bythesametoken,bothSTCandMobilysignalledtheirintentiontocontainZain’smarketshareprogression.
Webelievemorepromotionsareinstorefor2009,leadingtoARPUpressure.However,asdiscussedinourMarch30th2008reportonMobily(‘Revisiting the contender...still a growth story’),theminutesofuse(MoU)arerelativelylowinthekingdomcomparedtoneighbouringGCCcountries.Hence,weexpectapositiveelasticityeffecttosomewhatoffsetthedeclineinratesperminutewithanincreaseinminutesofuse.
Market share update
Giventhelackofdisclosure,ithasbeendifficulttotrackonaquarterlybasissubscribermarketshareevolutionfortheSaudimobilesector.SaudiTelecomreported19mnactivemobilesubscribersattheendof2008.STCswitchedtoactivemobilesubscriberreportingasoflastyear.Mobilyindicatedthatclosingmobilesubscriptionsincreasedto14.8mninDecember08,from11.1mnayearago.ZainSaudiArabiareported2.0mnsubscribersattheendof08.
Basedonourestimates,Mobilycaptured35%shareofSaudiactivemobilesubscribersattheendof2008.
April6th,2009 5
Etihad Etisalat (Mobily)
Active subscriber share of Saudi mobile market (Dec. 2008E)
Source: SHUAA Capital estimates
Althoughrevenuebreakdownpersegmentisnotavailable,weareabletogaugerevenuemarketshareforSTCandMobilyfromreportedrevenues.WeestimatethatSTCcapturedapproximately71%revenueshareoftheSaudimobilemarket.Mobilycontinuedtogainrevenueshareofthemobilemarket,reachingcloseto28%,upfrom26%revenuesharein2007–albeitataslowerpacethanpreviousyears.
Revenue share of Saudi mobile market
Source: SHUAA Capital estimates
Robust growth for KSA mobile sector in 2008
It’sworthmentioningthatSaudimobilesegment’sgrowthpickedup,accordingtoourestimates,to16%in2008from15%in2007.
Saudi Arabia mobile sector vs. Mobily: annual revenue growth 2002-2008E
% Annual revenue growth 2002 2003 2004 2005 2006 2007 2008E
KSA mobile sector 62% 37% 18% 20% 20% 15% 16%
Mobily 251% 45% 28%Source: Company reports, SHUAA Capital estimates
Zain6%
Mobily35%
STC59%
7%21% 26% 28%
93%79% 74% 71%
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Mobily STC Zain KSA
April6th,2009 6
Etihad Etisalat (Mobily)
Have we reached maturity?WeexpectSaudiArabia’smobilesectorrevenuegrowthtodeceleratein2009,whilestillachievinglowdoubledigitgrowth.
WeestimatethatSaudimobilepenetrationhasreachedapproximately124%in2008basedonactivesubscribers.NotethathumanpenetrationislowerduetomultipleSIMcardownership.Webelievethemarkethasroomtogrowtowardsa145%activemobilepenetrationrateby2010.
iPhone 3G: Another marketing initiative
MobilylaunchedtheiPhone3GinthekingdominFebruary09.Webelievethishastwopositiveimplicationsforthecompany:
1. Sustainsitsimageasaninnovativecompanyconstantlybringingnewproductstomarket.Asareminder,MobilywasfirsttolaunchtheBlackberryservice(Sep.06)andHSPA3.5Gmobilebroadband(Jun.07)inthekingdom.
2. iPhone3GshouldallowMobilytoattractnewhighARPUcustomersfromthecompetition.
April6th,2009 7
Etihad Etisalat (Mobily)
Broadband opportunity…materializing!KSA broadband market update
BroadbandInternetstartedtogaintractioninSaudiArabiaonlyasof2007.Sincethen,growthhasbeentremendous,withbroadbandpenetrationrisingfrom1%ofthepopulationin2006to3%in2007,and5.3%in2008.Totalbroadbandsubscribers(fixed+mobile)inthekingdomreached1.4mnattheendof2008.
Saudi Arabia: Broadband subscriber mix and penetration
Source: CITC, Company reports, SHUAA Capital estimates (LHS)
Intheresidentialsegment,accordingtoourestimates,broadbandpenetrationdoubledfrom10%in2007to20%ofhouseholdsin2008.
Saudi Arabia: Broadband penetration of households
Source: CITC, SHUAA Capital estimates
HSPA subscribers blow through the roof!2008wastheyearoftheboomofmobilebroadbandinthekingdom.Mobily’sprogressinthebroadbandsegmentlastyearwasaheadofourexpectations.Inourmodel,wewereforecastingmobilebroadbandsubscribers(HSPA)todoublefrom100,000in2007to200,000in2008.MobilyreportedthatHSPAsubscribersreached300,000attheendof2008.
From solid number two in mobile… to number two in broadbandLessthantwoyearsafterenteringthebroadbandsegment,inMay2007,Mobilyhascapturedmorethan20%shareoftotalbroadbandsubscribers(fixed+mobile)inthekingdom.Fromapureplaymobileoperator,MobilyisontracktobecomeasolidnumbertwoplayerinthebroadbanddatasegmentinSaudiArabia.Ontheotherhand,SaudiTelecomremainsthedominantplayer.AftertriplingitsDSLsubscribersin2007from200,000to600,000,STCaddedanother400,000subscribersin2008,matchingthenetadditionsofthepreviousyear.STCended2008withonemillionDSLsubscribers.
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Fixed broadband subscribers Mobile broadband subscribers (LHS)Broadband penetration % of population (RHS)
4%
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2006 2007 2008EBroadband penetration of households
April6th,2009 8
Etihad Etisalat (Mobily)
A comprehensive broadband strategyUptillnow,Mobily’ssuccessinbroadbanddatasegmenthasbeenthroughthe‘MobilyConnect’HSPAmobilebroadbandoffering.WiththeacquisitionofBayanatAl-OulaandZajilInternationalTelecomin2008,thecompanyisdevelopingamorecomprehensivebroadbandproductoffering:
Fixed WiMAX:followingtheacquisitionofBayanatAl-Oula,MobilyintegratedtoitsdistributionnetworkWiMAXbroadband,afixedhigh-speedInternetserviceforthehomeoratwork.Itispositionedasacomplimentaryofferingto‘MobilyConnect’–whichprovidestheadvantageofthemobilityfeature.TheresidentialWiMAXproductismarketedas‘broadband@home’offeringaspeedofupto2MbpsforamonthlyfeeofSAR200(USD53.3).
FTTP:Mobilyisselectivelydeployingfiber-to-the-premise(FTTP),extendingthenationalfiberbackboneinmetropolitanareas.WebelieveMobilywilltargetthebusinesssectorwithFTTP.
The case for the broadband opportunity in Saudi Arabia
Penetration remains relatively low.Asindicatedearlier,broadbandpenetrationhasreachedc.5%ofpopulationin2008–alevelstillwellbelowthatofOECDcountries.Residentialhigh-speedInternetpenetrationremainsrelativelylowat20%ofhouseholdsin2008.Assuch,weanticipatecontinuedstronggrowthinthebroadbandsegmentoverthenextfewyears.Weexpectthenumberofbroadbandsubscriberstomorethantriplefrom1.4mnin2008exceedingthe4mnmarkin2012.
A young population.SaudiArabiahasaveryfavourabledemographicprofile.51%ofthepopulationislessthan25yearsold,andapproximatelyone-thirdislessthan15yearsold.Thecountryhas5mnstudents,andhasrelativelylimitedentertainmentvenues(e.g.:nomovietheatres).Allthisbodeswellforbroadbandadoption.
High potential for corporate sector Internet service.In2007,theCommunicationandInformationTechnologyCommission(CITC)mandatedNielsontoconductasurveyoftheSaudiPCandInternetmarket.Accordingtothestudy,PCpenetrationwas76%andbroadbandpenetrationat36%amongprivatecorporationsinthekingdom.Itisworthmentioningthat66%ofsmallbusinesseswereusingcomputersin2007.Broadbandpenetrationwasthelowestamongsmallbusinessesat22%,withalargenumberrelyingonadial-upservicetoconnecttotheinternet.Wenotethatevenamongcorporationsusingbroadband,the256kb/secand512kb/secspeedconnectionswerethemostpopularatthattime.
Saudi private sector: PC and Broadband penetration (2007)
Source: CITC, Nielson survey, SHUAA Capital
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All companies Small business(50 < employees)
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PC penetration % Broadband penetration %
April6th,2009 9
Etihad Etisalat (Mobily)
PC affordability improving.Whatadifferenceayearcanmake?Historically,arelativelylowPCpenetrationinSaudiArabia,at21%ofthepopulationin2007,hasbeenconsideredabarrierforlongtermbroadbandadoption.Withtheriseofthelowpricednetbookssincelastyear,whosesalesaregainingtractioninthekingdom,thebarriersforPCownershiparefalling.Netbooks’retailpriceinSaudiArabiaisstartingfromSAR1,300(USD346).
More competition expected in broadband
MobilylaunchedinDec.08apromotiontargetedtostudentsbybundlinginapackagea‘Connect’USBmodem,aSIMcard,anASUS‘Eee’laptop,andadatasubscriptionplan.ThepromotioncoincidedwiththebacktoschoolseasoninSaudiArabia.Differentpackagesareavailable:1GB,5GB,andunlimiteddataplan,combinedwithaonemonth,6-month,or12-monthcontract.Forinstance,thebundle(USBmodem+SIMcard+ASUSnetbook)includingaonemonthunlimitedmobiledatasubscriptionisofferedatSAR1,985(USD529).
Mobily: mobile broadband subscription bundle with netbook
Source: Mobily
STC reactsWebelieveDSLremainsthepriorityinSTC’sbroadbandstrategy.ItsmarketingeffortshavebeenfocusedonpromotingtheDSLservice.However,theincumbentrecentlyreactedtoMobily’smobilebroadbandsuccess.OnFeb.17,STCannouncedajoint-promotionwithJarirBookstore,offeringafreeone-monthmobiledatasubscriptionandaSIMcardwiththepurchaseofalaptop.InMarch,STCalsoloweredthemonthlyfeefortheunlimitedmobilebroadbandsubscriptionfromSAR450toSAR350–matchingMobily’smonthlyrate.
STC: DSL packages pricing
Afaq DSL Shamil (Access+Internet Service)
Connection SpeedMonthly
Fee (SAR)March 08
MonthlyFee (USD)March 08
MonthlyFee (SAR)March 09
MonthlyFee (USD)March 09
% ChangeYoY
up to 256 Kbps 180 48 99 26 -45%
up to 512 Kbps 270 72 199 53 -26%
up to 1 Mbps 350 93 211 56 -40%
up to 2 Mbps 590 157 222 59 -62%
up to 4 Mbps 790 211 244 65 -69%
up to 8 Mbps 890 237 n/a n/a
up to 10 Mbps 960 256 n/a n/a
DSL Max (8 to 20 Mbps) n/a n/a 555 148
Installation fee 300 80 300 80Source: STC
Duringthesamemonth,STCalsoslashedthemonthlyfeefortheDSLservice,inouropinion,inorderto1)pricetheservicemorecompetitivelywithMobily’s‘Broadband@Home’WiMAXserviceaswellwiththe‘Connect’mobilebroadbandservice,and2)pre-emptthecommerciallaunchofthenewentrantAtheebTelecom.Havingsurpassedtheonemillionsubscribermark,STCisclearlyleveragingonitseconomiesofscale.
April6th,2009 10
Etihad Etisalat (Mobily)
STC: Evolution of monthly subscription fee for 1 Mbps DSL package
Source: Company reports
New entrants in broadband: time to market is key!Onanothernote,inFebruary08,threenewfixedlicenseswereawardedtoAtheebTelecom,IntegratedTelecom,andOpticalCommunications.InMarch08,ZainSaudiArabiacompletedanoversubscribedIPO.ThethreenewfixedlicensedcompanieswereexpectedtofollowsuitwiththeirrespectiveIPOspriortotheendof2008,withsomeofthemannouncingtheirplantocommerciallylaunchoperationsinQ408.Givenmarketconditions,theIPOprocesswasdelayedaswellasthecommerciallaunch.
AtheebTelecomtooktheleadbycompletingaSAR300mnIPOinFebruary09–thefirstIPOonTadawulsinceAugust2008–andintendstocommerciallylaunchitsoperationsinH109withWiMAXunderthe‘GO’brand.Accordingtothedecree,thenewfixedlicenseholdersmustlisttheirsharespriortocommencingoperations.InDecember08,anexecutiveofOpticalCommunicationsindicatedtothemediathatthecommerciallaunchhasbeenpostponeduntil2010.
Webelievetimetomarketiskeyandthemorethecommerciallaunchisdelayed,thelessattractivewillbethewindowofopportunitytothenewentrants.SaudiTelecomisaggressivelyupgradingitsnetworktoextendthecoverageofDSLservicesaswellasfibretothepremise(FTTP)inmajorcities.Asdiscussedearlier,Mobilyisalsoexpandinginthebroadbandsectorvia1)HSPA-basedwirelessbroadband,2)fixed-WiMAX,and3)FTTPinselectareas.
Execution riskWhenthecompanylaunched‘MobilyConnect’wirelessbroadbandserviceinmid-2007,itattractedalotofinterestnotonlyduetothemobilityfeatureoftheproduct,butalsobecauseofpent-updemandandalackofalternative,asSTC’sDSLservicewasnotavailableinallareasofthekingdom.Theoverwhelmingsuccessof‘Connect’inthefirstyearputpressureontheavailablebandwidth.Initialsubscriberswerewillingtotolerateathroughputsignificantlylowerthanthetheoretical7.2Mbpsinadditiontoperiodsofservicedowntime.However,withSTCaggressivelypursuingtheupgradeofitsfixedinfrastructure,andtheentryofathirdplayer(AtheebTelecom‘GO’),theconsumerwillincreasinglyhavealternativesinthenearfuture.
ExecutionbecomescriticalforMobily:henceitsambitiousCapexprogramin2008-2009.ThecompanyrecentlylaunchedHSUPA(HighSpeedUplinkPacketAccess)inmajorcitiesenhancingthespeedofdatauploadtoupto2Mbps.MobilyhasbeeninvestingtoensurethatitsHSPAnetworkcanmeetsubscriberdemand.Asareminder,Mobilylaunchedin2007theMiddleEast’sfirst‘allyoucaneat’unlimiteddatabroadbandpackage.Broadbandusagegrewby500%to20terabytes(20,000gigabyte)dailyattheendof2008from4terabytesin2007–anindicatorofSaudi’sthirstforinternetconnectivity.ThishasmadeMobily’s3Gnetworkoneofthebusiestnotonlyintheregion,butintheworld.
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Sep. 07 Oct. 07 Dec. 07 Feb. 08 Mar. 08 Jun. 08 Sep. 08 Dec. 08 Feb. 09 Mar. 09STC: Afaq DSL Shamil, 1 Mbps (Monthly Fee in USD)
April6th,2009 11
Etihad Etisalat (Mobily)
Financial analysis and forecast
FollowingthereleaseofMobily’sFY2008results,wearerevisitingourforecasts.
SinceQ208,thecompanyhasconsistentlybeatenourandconsensusestimateseveryquarter.MobilyachievedanetprofitofSAR2,092mnin2008,up52%YoY,and17%highertoouroriginalforecastof1,788mninMarch08.
Mobily: Summary P&L
Y/E Dec. 31 2005 2006 2007 2008A 2009E 2010E
Revenue 1,662 5,841 8,440 10,795 12,372 13,444
% growth 251% 45% 28% 15% 9%
EBITDA reported (113) 2,001 2,947 3,794 4,450 4,890
% margin -6.8% 34.3% 34.9% 35.1% 36.0% 36.4%
% growth 47% 29% 17% 10%
Adjusted EBITDA (pre-tax) (67) 2,445 3,895 5,001 5,827 6,379
% margin -4.0% 41.9% 46.1% 46.3% 47.1% 47.5%
% growth 59% 28% 17% 9%
Net Income (1,167) 700 1,380 2,092 2,438 2,801
% margin 12.0% 16.3% 19.4% 19.7% 20.8%
% growth 97% 52% 17% 15%Source: Company reports, SHUAA Capital estimates
Overall,ournetprofitforecastsfor2009and2010remainlargelyunchanged.Wefine-tunedourestimatesfor2009,2010andbeyondtoreflect:
Higher broadband data contribution.Weincreasedourrevenueforecastsfor2009and2010by10%and14%respectively.
Increased competition in the mobile sector was expected with the entry of Zain. Howevertoreflectmoreintensivepromotionsbythethreeplayerstogainormaintainmarketsharebeyondourinitialexpectations,werevisedlowerourlongtermEBITDAmarginassumptions.Thiscombinedwithfine-tuninginitemsbelowtheEBITDAline,notablyaccountingforhigherdepreciationandamortizationexpenses,leadsustorevisedownwardournetprofitestimatesfor2009and2010by1%and3%.
April6th,2009 12
Etihad Etisalat (Mobily)
Mobily: forecast update
SAR mn 2009E 2010E 2011E
New estimates:
Revenue 12,372 13,444 14,076
EBITDA reported 4,450 4,890 5,158
Net Income 2,438 2,801 3,111
Old estimates:
Revenue 11,219 11,829 12,341
EBITDA reported 4,203 4,483 4,714
Net Income 2,457 2,879 3,238
% Change (New vs. Old)
Revenue 10% 14% 14%
EBITDA reported 6% 9% 9%
Net Income -0.8% -2.7% -3.9%Source: SHUAA Capital estimates
SHUAA Capital estimates versus consensusSincethecompanyreportedoutstandingQ408andFY2008results,analystforecastshavebeenrevisedupwards.Thisbeingsaid,atthistime,ournetincomeprojectionsfor2009and2010arerespectively4%and5%aboveconsensus.
Mobily: SHUAA estimates vs. consensus
Revenue EBITDA Net Income
2009E 2010E 2009E 2010E 2009E 2010E
Consensus 12,003 12,862 4,312 4,750 2,349 2,662
SHUAA Capital 12,372 13,444 4,450 4,890 2,438 2,801
% difference 3% 5% 3% 3% 4% 5%Source: Reuters, Bloomberg, Zawya, SHUAA Capital estimates
Can Mobily margins expand in an increasingly competitive environment?
Asdiscussedabove,werevisedlowerourlongtermEBITDAmarginassumptionsforMobilytotakeintoaccountmoreintensivepromotionsbyalltelecomplayers.OurrevisedmodelcallsforanEBITDAmarginof36.6%in2011,upfrom35.1%realizedin2008.Weprefertobeconservativeatthistime.Previously,wewerefactoringmarginexpansionto38.2%in2011.Insummary,weexpectthecompanytoimproveitsEBITDAmargininthenextfewyears,however,ataslowerpace.Inparticular,weseeroomformarginenhancementin2009andthereafterforthefollowingreasons:1)savingsfrominternationalgateway,2)completionofnationalfiberbackbone,3)growingcontributionofhighermargindatasegment,4)enhancednetworkcapacityutilizationfromwholesaleagreementwithZainandAtheebTelecom.
April6th,2009 13
Etihad Etisalat (Mobily)
Factors that will have positive / negative impact on margins in 2009
Source: SHUAA Capital
Capex update
Timetomarketisimportant,andthecompanyhasbeeninvestingheavilytoseizetheopportunityparticularlyinthebroadbanddataarea.Currently,Mobily’s2GGSMnetworkcovers96%ofthekingdom’spopulation,andits3.5Gnetworkapproximately70%.ThisexplainsthewhoppingCapexofSAR3,061mnin2008or28%ofsales,upfromSAR2,148mnin2007.
In2009and2010,weexpecttheoperatorto:1)completetheupgrade/expansionofitsmobilenetwork;2)expandandenhanceHSPAcoverage;3)completetheconstructionofthenationalfiberbackbonea.k.a.theSaudiNationalFiberNetwork(SNFN)byQ209;4)investinWiMAXnetwork;5)selectivelyroll-outfiber-to-the-premise(FTTP)technologyinmetroareas;6)investinthe‘E-Cable’project,theinternationalsubmarine/terrestrialcable(UAE-KSA-Egypt-France)inpartnershipwithEtisalatUAEandEtisalatMisrEgypt.
Mobily: Capex forecast 2009-11E
SAR million 2007A 2008A 2009E 2010E 2011E
Capex 2,148 3,061 2,700 2,500 2,150
Capex as a % of sales 25.5% 28.4% 21.8% 18.6% 15.3%Source: Company reports, SHUAA Capital estimates
+
-
- Savings from International Gateway- Positive impact of completion of National Fiber Backbone
in H2 09 - Increasing contribution of (higher margin) broadband data to
revenue mix- Improved network capacity utilization from exclusive
national roaming agreement with Zain
2009EEBITDA margin
-Increased promotions to protect market share-Declining ARPU
April6th,2009 14
Etihad Etisalat (Mobily)
Free cash flow
Despiteheavycapexinvestments,weexpectamarkedimprovementinFCFgenerationasof2009.WeforecastMobily’sfreecashflowtojumpfromSAR485mnin2008toSAR1,500mnthisyear.BasedonourFCFforecastfor2009and2010,MobilysharesarecurrentlytradingataFCFyieldofrespectively5.9%and8.4%.
SAR million 2007A 2008A 2009E 2010E 2011E
FCF (21) 485 1,500 2,136 2,845
FCF / share (0.03) 0.69 2.14 3.05 4.06
FCF yield % (at today's price) neg. 1.9% 5.9% 8.4% 11.2%
Dividend 250 525 700 1,050 1,400
Dividend / share 0.36 0.75 1.00 1.50 2.00
Dividend yield % (at today's price) 1.0% 2.1% 2.8% 4.1% 5.5%
Net debt 8,220 7,476 6,501 5,065 3,270
Net debt / EBITDA reported 2.8x 2.0x 1.5x 1.0x 0.6x
Net debt / adjusted EBITDA (pre-tax) 2.1x 1.5x 1.1x 0.8x 0.5xSource: Company reports, SHUAA Capital estimates
Dividends
Mobilyinstitutedadividendasof2007.For2008,thedividendmorethandoubledfromSAR0.36/share(adjustedforrightsissue)to0.75pershare.Weassumedagradualincreaseinpayout.WeforecastthedividendtodoubletoSAR1.50/sharefor2010.WeexpectMobilytotransitionfromagrowthstorytohighdividendyieldstockinthenextfewyears.
Rights issue strengthens balance sheet
AsatDec.31,2008,MobilyhadatotaldebtofSAR9.8bnandcashof2.3bn.MobilystrengtheneditsbalancesheetwithaSAR2.0bnrightsissuecompletedinNovember2008.
Thecompany’slong-termdebtwasSAR7.9bnattheendof2008(includingacurrentportionof1.3bn).Thedebtisrepayableinsemi-annualinstalments.ThematurityisDecember2012,withafinalballoonpaymentof33%oftheloanatmaturity.Mobilyfinancedthisdebtin2007atanattractiverate.Managementisguidingforacostofdebtof5.5%.Wenotethatbasedonourcalculations,costofdebtwaslessthan5%in2008.
MobilyalsohadshorttermloansofSAR1.86bnonitsbalancesheetattheendof2008.Thisdebtincorporatesa12-monthloanofSAR1.5bnobtainedinmid-April2008tofinancetheacquisitionofBayanatAl-Oula,andisextendableforaperiodof6-month,i.e.untilOctober2009.Thecompanyannounceditsintentiontorefinancethisdebt.
Insummary,withthecashonhandandexpectedcashflowfromoperationthisyear,debtrefinancingisnotatrisk.Thebalancesheetisingoodshapeposttherightsissue.Netdebttopre-taxEBITDA2008is1.5x.Foranappletoapplecomparisonwithinternationalpeers,wearecalculatingnetdebttoEBITDAratiobyadjustingMobily’sreportedEBITDAbeforegovernmentroyalty,whichistheequivalenttoincometaxes.Notethatouradjustedpre-taxEBITDAexcludesonlygovernmentrevenueshare,butnotthelicensefees.
WeforecastMobily’snetdebtto(pre-tax)EBITDAratiotodeclinefrom1.5xin2008to1.1xand0.8xattheendof2009and2010,respectively.
April6th,2009 15
Etihad Etisalat (Mobily)
Valuation: Target fair value revised to SAR 43.00WereiterateourBUYrecommendationwitharevisedtargetpriceofSAR43.00frompreviouslySAR58.50(SAR78.00pre-rightsissue).Ourrevisedtargetfairvaluesuggestsa18.8%upsidefromthecurrentshareprice.TakingintoaccountSAR1.00persharedividendestimatefor2009,expectedtotalreturnis21.5%fromthecurrentprice.
Ournewtargetpriceisbasedona70%-30%weightforDCFandpeervaluation,respectively.Thetablebelowsummarizesournewtargetprice:
Valuation method SAR / share Weight SAR / share
DCF 47.2 70% 33.0
Relative valuation (P/E & EV/EBITDA) 33.1 30% 9.9
Weighted average target price 43.0 Source: SHUAA Capital
OurnewDCF-derivedfairvaluereflectsprincipallyahigherdiscountrateappliedtoourDCF.WerevisedourWACCto10.8%frompreviously9.4%.Wealsorevisedslightlydownwardournetprofit/cashflowforecasts(discussedearlier).Finally,werevisedupwardourCapexforecasts.
Current assumptions Previous assumptions
Risk free rate 6.0% 4.3%
Equity risk premium 5.0% 5.0%
Cost of equity 11.6% 10.3%
WACC 10.84% 9.4%
Terminal growth 2.5% 2.5%
What multiples does our new target fair value imply?WecrosschecktheimpliedmultiplesonournewtargetfairvalueofSAR43.00.OurrevisedtargetpriceimpliesaP/Eof12.3xonour2009EPSestimate,andanEV/EBITDAmultipleof6.4xonour2009(pre-tax)EBITDAforecast.Webelievethatthesemultiplesarereasonabledespitethattheyrepresentaslightpremiumtopeervaluationmetrics,asregional/emergingmarketsmobileplayersarecurrentlytradingat8xto11x2009EEPSand4xto6x2009EEBITDA.Howeverwebelievethatthispremiumisjustifiedgiventhefuturegrowthexpectations-ourmodelcallsforacompoundannualearningsgrowthof14.2%forthenextthreeyears(2008-2011E).
April6th,2009 16
Etihad Etisalat (Mobily)
Update on potential catalysts / developments
Mobily: A strategic asset for EtisalatMobilyisastrategicoperationforEtisalat.Whilenospecifictimetablehasbeendisclosed,EtisalathasindicatedinthepastthatitwouldbeinterestedtoincreaseitsstakeinMobily.However,undercurrentSaudiregulation,aminimum40%freefloatmustremainintact.Etisalatcanincreaseitssharebyacquiringapproximately8%onthefreemarket,neverthelessitcanonlyachieveacontrollingstakeof51%ifotherfoundingshareholdersofMobilyaresellers.
Potential royalty cut…most likely deferredGiventhecurrenteconomicsituationcombinedwiththesteepdeclineinoilprices,webelievethattheSaudigovernmentwilldeferanydecisionrelatedtorevisingtheroyaltyratechargedtotelecomoperators.Hence,apreviouslyanticipatedcutingovernmentrevenuesharefrom15%to10%formobileservices,followingtheentryofthethirdoperator,hasbeenpostponedto2010orlater.
Dismissing the prospect for a full fledged 4th mobile licenseContrarytorecentmediareports,wedon’texpectafourthfullfledgedmobilelicenseinSaudiArabia.Withactivemobilepenetrationalreadyhigh,estimatedat124%in2008,andheadingnorthof140%,wedon’tbelievetheCommunicationsandInformationTechnologyCommission(CITC),SaudiArabia’stelecomregulator,willawardafourthlicensetoafacilities-basedoperator.Theonlypossibility,inourview,istheissuanceofaMVNO(MobileVirtualNetworkOperator)license.However,webelievetheCITC,beforeconsideringawardingsuchlicense,willtakeitstimetowatchtheevolvingdynamicsofthe‘newthreeplayers’market.Asareminder,ZainSAonlyrecentlypaidUSD6.1bnforthethirdlicense.
April6th,2009 17
Etihad Etisalat (Mobily)
AppendixMobily: Ownership structure update
FollowingtheSAR2.0bnrightsissue,completedinNovember2008,Etisalat’sstakeinMobilyincreasedslightlyfrom26.25%to27.459%.Mobily’sfreefloatiscurrentlyestimatedat48%,upfrom40%asofApril2008,andfrom20%priortothat.
Mobily: Ownership structure post rights issue
Source: Tadawul, Shuaa Capital
Etisalat27.5%
Free Float48.0%
General Organization for
Social Insurance 11.2%
Saudi Investors 13.3%
April6th,2009 18
Etihad Etisalat (Mobily)
Financials
Consolidated Balance Sheet (SAR millions)
Year to December 2005 2006 2007 2008 2009E 2010E 2011E 2012E
Assets
Property and equipment, net 2,757 3,848 5,479 8,117 9,760 11,131 12,112 12,924
License acquisition fees 12,314 11,800 11,287 10,923 10,397 9,875 9,353 8,830
Goodwill 0 0 0 1,530 1,530 1,530 1,530 1,530
Investment 0 0 2 0 0 0 0 0
Total Non-Current Assets 15,071 15,648 16,767 20,570 21,687 22,535 22,995 23,284
Inventories 32 38 69 108 108 108 108 108
Accounts receivable, net 167 734 1,460 3,098 3,687 4,126 4,457 4,581
Other current assets / Prepaid exp. 783 717 810 1,063 1,063 1,063 1,063 1,063
Cash and bank balances 185 548 703 1,264 2,278 2,704 2,202 586
Short-term investments 0 0 0 1,050 0 0 0 0
Due from a related party 0 5 71 38 38 38 38 38
Total Current Assets 1,167 2,041 3,113 6,621 7,175 8,039 7,868 6,376
Total Assets 16,238 17,689 19,881 27,192 28,861 30,574 30,863 29,660
Capital and reserves
Total Equity 3,833 4,533 5,913 9,754 11,668 13,768 15,830 17,896
Liabilities
LT loan 0 0 7,912 6,642 7,769 5,472 1,878 1,878Provisions for employees' end of service benefits
3 13 26 46 67 90 114 139
Founding shareholder's loan 1,600 1,600 0 0 0 0 0 0
Total Non-Current Liabilities 1,603 1,613 7,939 6,688 7,836 5,562 1,992 2,017
Accounts payable 909 2,526 3,142 4,365 5,111 5,711 6,211 6,511
Short term borrowing 7,348 7,840 0 1,862 0 0 0 0
Due to related parties 193 179 111 78 78 78 78 78
Current portion of long-term loan 0 0 1,011 1,286 1,011 2,297 3,594 0
Other current Liabilities + Accrued expenses 2352 998 1,765 3,157 3,157 3,157 3,157 3,157
Total Current Liabilities 10,802 11,543 6,029 10,749 9,357 11,244 13,041 9,747
Total Liabilities 12,405 13,156 13,968 17,437 17,194 16,806 15,033 11,764
Total Equity and Liabilities 16,238 17,689 19,881 27,192 28,861 30,574 30,863 29,660
April6th,2009 19
Etihad Etisalat (Mobily)
Consolidated Income Statement (SAR millions)
Year to December 2005 2006 2007 2008 2009E 2010E 2011E 2012E
Total service revenue 1,662 5,841 8,440 10,795 12,372 13,444 14,076 14,673
Cost of providing services 967 2,680 3,779 4,773 5,409 5,848 6,106 6,351
Gross Margin 694 3,160 4,662 6,021 6,963 7,596 7,970 8,323
Selling & marketing expenses 274 365 641 816 935 1,016 1,050 1,080
General & administrative expenses 533 795 1,073 1,411 1,577 1,690 1,762 1,830
EBITDA reported (after tax) (113) 2,001 2,947 3,794 4,450 4,890 5,158 5,413
Depreciation & amortization 739 845 1,031 1,298 1,580 1,651 1,690 1,711
EBIT (852) 1,156 1,916 2,496 2,871 3,238 3,467 3,702
Financing costs & other income, net 315 455 513 397 395 380 291 160
Income before Zakat (1,167) 700 1,404 2,099 2,475 2,858 3,177 3,542
Zakat 0 0 24 7 37 57 65 76
Net profit (1,167) 700 1,380 2,092 2,438 2,801 3,111 3,466
EPS (1.67) 1.00 1.97 2.99 3.48 4.00 4.44 4.95
Avg shares O/S (000) 700 700 700 700 700 700 700 700
Key Ratios
Year to December 2006 2007 2008 2009E 2010E 2011E 2012E
Growth
Revenues 251% 45% 28% 15% 9% 5% 4%
EBITDA reported 1874% 47% 29% 17% 10% 5% 5%
Net profit 160% 97% 52% 17% 15% 11% 11%
Equity 18% 30% 65% 20% 18% 15% 13%
Total assets 9% 12% 37% 6% 6% 1% -4%
Leverage
Net interest coverage (x) 4.4 5.7 9.6 11.3 12.9 17.8 --
Debt / Equity (x) 1.7 1.5 1.0 0.8 0.6 0.3 0.1
Debt / Market Cap (x) 0.31 0.35 0.39 0.35 0.31 0.22 0.07
Net Debt / Market Cap (x) 0.29 0.32 0.30 0.26 0.20 -- --
Margins & Profitability
Gross margin 41.8% 55.2% 55.8% 56.3% 56.5% 56.6% 56.7%
Selling and marketing expenses/ Revenue 6.3% 7.6% 7.6% 7.6% 7.6% 7.5% 7.4%
G&A / Revenue 11.5% 12.7% 13.1% 12.8% 12.6% 12.5% 12.5%
EBITDA (after-tax) margin 34.3% 34.9% 35.1% 36.0% 36.4% 36.6% 36.9%
Net profit margin 12.0% 16.3% 19.4% 19.7% 20.8% 22.1% 23.6%
ROE 16.7% 26.4% 26.7% 22.8% 22.0% 21.0% 20.6%
ROA 4.1% 7.3% 8.9% 8.7% 9.4% 10.1% 11.5%
Valuation
Y/E Number of shares ('000) 700,000 700,000 700,000 700,000 700,000 700,000 700,000
EPS (SAR) 1.00 1.97 2.99 3.48 4.00 4.44 4.95
DPS (SAR) 0 0.36 0.75 1.00 1.50 2.00 2.50
BVPS (SAR) 6.48 8.45 13.93 16.67 19.67 22.61 25.57
Share price 36.20 36.20 36.20 36.20 36.20 36.20 36.20
P/E (x) 36.2 18.4 12.1 10.4 9.0 8.1 7.3
P/BV (x) 5.6 4.3 2.6 2.2 1.8 1.6 1.4
EV / EBITDA adj. pre-tax (x) 13.4 8.4 6.6 5.6 5.1 4.9 4.7
Dividend yield 0.0% 1.0% 2.1% 2.8% 4.1% 5.5% 6.9%
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April6th,2009 21
Etihad Etisalat (Mobily)
Research
Head of Research / Chief Economist
Mahdi H. Mattar, Ph.D.+9714 3199 [email protected]
Strategy and Economics
Ahmad M. Shahin+9714 3199 [email protected]
Jafar Shami+9714 3199 [email protected]
Commercial Banks and otherFinancial Services
Mahdi H. Mattar, Ph.D.+9714 3199 [email protected]
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Ghida Obeid+9714 4283 [email protected]
Data
Ahmad M. Shahin+9714 3199 [email protected]
Nicole Chamat+961 1 974 [email protected]
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Mahdi H. Mattar, Ph.D.+9714 3199 [email protected]
Hala Fares+9714 4283 [email protected]
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Simon Simonian, CFA+9714 3199 [email protected]
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Consumer, Retail and Pharma
Laurent-Patrick Gally+9714 4283 [email protected]
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Kareem Z. Murad+9714 3199 [email protected]
Real Estate, Construction andConstruction Materials
Roy Cherry+9714 3199 [email protected]
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Technical Analysis
Nabil Effat, CFTe, MSTA+9714 3651 [email protected]
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