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EQUITY REPORT
Expenses
Saudi Telecom and Tadawul All Share Index
Operating expenses advanced 10.2% to SAR 30,390 million from SAR 27,575 million.
Access charges jumped 17.0% to SAR 6,224 million, while Repair and maintenance
expenses scaled up 33.9% to SAR 1,615 million. Other charges were up 28.6% to SAR
1,650. Depreciation and amortisation charges increased 13.5% to SAR 6,428 million,
whereas employee costs dropped 4.5% to SAR 2,219 million. Administrative and
marketing expenses increased 5.9% to SAR 7,999 million from SAR 7,552 million. As a
result, the cost-to-income ratio expanded 622 bps to 79.3% from 73.0%.
Profitability
Net profit declined 9.3% to SAR 7,151 million from SAR 7,881 million due to capital investments required for the construction of new
grids and the expansion of existing ones. As a result, adjusted annualised earnings per share dropped to SAR 4.77 from SAR 5.25.
Peer Comparison
For a peer comparison of telecom companies in Saudi Arabia, we have considered Zain Saudi and Etihad Etisalat (Mobily).
Ratios:
Total Assets Turnover Ratio 0.11 0.20* 0.45 0.47* 0.49 0.46*
EBITDA Margin -35.7% 2.9% 37.0% 36.5% 40.6% 37.5%
Net Profit Margin -103.2% -43.7% 23.1% 23.8% 21.4% 18.6%
RoAE -30.5% -32.2%* 27.4% 27.8%* 27.3% 22.0%*
RoAA -11.4% -8.8%* 10.4% 11.2%* 10.4% 8.6%*
Market Indicators:
Adj. EPS (SAR) -2.21 -1.75* 4.31 5.24* 5.43 4.77*
P/E (x) -3.37 -4.26 12.54 10.30 7.46 8.50
Adj. BVPS (SAR) 6.16 4.70 17.49 20.17 21.02 22.34
P/BV (x) 1.21 1.58 3.09 2.68 1.93 1.81
Current Market Capitalisation (SAR Million) 10,430 10,430 37,800 37,800 81,000 81,000
* Annualised
TAIB RESEARCH
STC’s top-line growth is heavily dependent on its ability to position itself in a highly competitive Saudi telecom market. The
company has been losing market share following the entry of Zain Saudi, the third mobile operator in the country. However,
the company has been quite proactive in rolling out new products, implementing efficient customer-oriented value-added
services and expanding its customer base in order to retain its leadership position. Accordingly, our forecasts factor in the
earnings from expansion initiatives and innovative offerings. Any delay in implementing the initiatives or slowdown in
product innovation may affect our estimates.
Our estimates may need revision if ARPU declines at a faster than expected pace.
Valuation Methodology:
We have used the DCF valuation method to arrive at the fair value of STC, as discussed below:
Assumptions:
(i) Risk free Rate (Rf) of 3.21%, equivalent to 12-months average yield on 10-year US T-bill.
(ii) Levered Beta of 0.84
(iii) Terminal growth rate of 2.0%
Based on the above assumptions and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 9.71% and
a WACC of 8.48%.
TAIB RESEARCH
DCF Calculation
Sensitivity Analysis
The following tables present a sensitivity analysis, showing the probable nominal terminal value, discounted terminal value and
enterprise value, given different growth rate and WACC assumptions. The shaded area represents the most probable outcomes.
Investment Opinion
Saudi Telecom continues to be the main telecom operator in Saudi Arabia with presence across nine countries and a global
customer base of over 100 million. The company accounts for 70.9% of the total telecom sector revenue, as of September 30, 2010.
Furthermore, STC has the key advantage of a diversified portfolio of services and presence in the relatively less penetrated
broadband market. The company claims a 70% share of the country’s broadband and data services market. It is investing in network
infrastructure to provide enhanced services in terms of faster internet connectivity and multimedia interactive services. The company
is concentrating on boosting investment in the LTE technology. STC recently signed multi-million Euro frame contracts with Alcatel-
Lucent for expanding its broadband access network.
During August, STC announced the launch of new points-of-presence (PoPs) in eight countries. Through the internet-enabled PoPs,
STC will offer international Wholesale IP Transit Service using its extensive connectivity with internet access points and various
peering arrangements with major global carriers and backbone providers. Such a network expansion will enable STC’s domestic and
regional customers to enjoy global reach, in addition to further improving the overall quality of internet, data, and voice services.
During December, STC tendered the pre-qualification bid for Syria’s third mobile licence. Syria has a population of around 20 million
with a growth rate of 2.4% that is among the highest in the world. The country has 10.4 million mobile subscribers, including prepaid
cards, according to the Telecom Ministry. On the other hand, increased contributions from affiliate in Bahrain (Viva) will strengthen
STC’s position, while overseas acquisitions will provide sufficient head room for growth, going forward. Even though intense domestic
competition has affected growth, geographical expansion, technological improvements, innovative product offerings, and growth in
value-added services will sustain STC’s leadership.
We had updated STC on September 14, 2010 with an OVERWEIGHT recommendation (target price of SAR 51.59 indicating a 28.3%
upside). Currently, the company’s stock is trading at a P/E multiple of 8.19x and 8.56x on 2010E and 2011E earnings, and at a P/BV
multiple of 1.81x and 1.78x on 2010E and 2011E BVPS, respectively. The stock has underperformed the TASI index, losing 8.2%
since the beginning of this year as against the latter’s gain of 5.5%. Considering the above factors, we have arrived at a price target
of SAR 51.24, implying an upside of 26.5% over the closing price of SAR 40.50 (as of December 08, 2010). Accordingly, we
reiterate our earlier OVERWEIGHT rating on Saudi Telecom.
TAIB RESEARCH
Financial Statements
Operating Expenses
Government charges -5,542 -5,664 -4,227 -4,257 -5,790 -5,822 -5,914
Access charges -6,131 -7,494 -5,321 -6,224 -8,396 -8,747 -9,197
Employee costs -6,164 -6,772 -2,324 -2,219 -3,070 -3,101 -3,165
Depreciation and amortization -6,408 -7,799 -5,662 -6,428 -8,188 -8,447 -8,823
Administrative and marketing expenses -5,762 -7,614 -7,552 -7,999 -10,783 -10,972 -11,278
Repairs and maintenance -2,128 -2,623 -1,206 -1,615 -2,402 -2,480 -2,530
Total operating expenses -32,134 -37,967 -27,575 -30,390 -40,892 -41,855 -43,241
Operating Income 15,335 12,814 10,177 7,953 11,720 11,291 10,994
Non-Current Assets
Property, plant and equipment, net 44,382 52,737 52,021 54,142 54,291 57,397 60,307
Intangible assets, net 31,695 29,222 29,631 32,084 32,134 31,422 30,726
Equity method and other investments 2,452 2,533 2,534 2,482 2,589 2,669 2,764
Other non-current assets 2,287 2,433 2,129 2,372 2,454 2,439 2,433
Total Non-Current Assets 80,816 86,924 86,313 91,081 91,468 93,927 96,230
Total Assets 99,762 109,587 104,762 111,502 116,301 119,867 124,144
Non-Current Liabilities
Borrowings 28,081 22,711 24,204 21,960 22,939 23,403 23,990
Employees’ end of service benefits 2,738 2,844 2,881 3,109 3,181 3,559 3,981
Other payables 3,482 3,859 3,818 4,778 5,195 5,268 5,512
Total Non-Current Liabilities 34,301 29,414 30,903 29,847 31,316 32,229 33,483
Total Liabilities 57,200 58,755 57,121 58,118 61,910 62,455 63,778
Equity
Authorized, issued and outstanding shares 20,000 20,000 20,000 20,000 20,000 20,000 20,000
Statutory reserve 8,233 9,299 9,043 10,000 10,000 10,000 10,000
Retained earnings 10,526 13,552 12,357 15,352 16,187 18,570 20,898
Financial statements translation differences -1,121 -816 -773 21 21 21 21
Other reserves 0 0 0 -695 -695 -695 -695
Equity attributable to equity holders 37,638 42,035 40,626 44,679 45,514 47,896 50,225
Minority Interest 4,924 8,798 7,014 8,705 8,877 9,516 10,141
Total Liabilities and Equity 99,762 109,587 104,762 111,502 116,301 119,867 124,144
TAIB
TAIB RESEARCH
RESEARCH
Financial Ratios
Activity Ratios:
Debtors Turnover Ratio 7.25 5.19 5.77* 4.68* 4.32 4.06 3.99
Creditors' Turnover Ratio 2.84 2.21 2.48* 2.18* 2.20 2.28 2.31
Total Assets Turnover Ratio 0.56 0.49 0.49* 0.46* 0.47 0.45 0.44
Equity Turnover Ratio 1.29 1.27 1.29* 1.18* 1.20 1.14 1.11
Profitability Ratios:
EBITDA Margin (GPM) 45.8% 40.6% 42.0% 37.5% 37.8% 37.1% 36.5%
Operating Profit Margin (OPM) 32.3% 25.2% 27.0% 20.7% 22.3% 21.2% 20.3%
Net Profit Margin (NPM) 23.3% 21.4% 20.9% 18.6% 18.8% 17.8% 17.1%
Return on Average Equity (RoAE) 30.0% 27.3% 26.9%* 22.0%* 22.6% 20.3% 18.9%
Return on Average Assets (RoAA) 13.1% 10.4% 10.3%* 8.6%* 8.8% 8.0% 7.6%
Leverage Ratios:
Debt to Equity (D/E) Ratio 0.85 0.74 0.80 0.69 0.70 0.66 0.63
Shareholders' Equity to Total Assets Ratio 0.38 0.38 0.39 0.40 0.39 0.40 0.40
Total Liabilities to Total Assets Ratio 0.57 0.54 0.55 0.52 0.53 0.52 0.51
Current Liabilities to Equity Ratio 0.61 0.70 0.65 0.63 0.67 0.63 0.60
Operating Performance
YoY Growth in Revenue 37.8% 7.0% 7.4% 1.6% 3.6% 1.0% 2.0%
YoY Growth in Operating Profit 21.5% -16.4% -18.7% -21.8% -8.5% -3.7% -2.6%
YoY Growth in EBITDA 30.1% -5.2% -7.8% -9.2% -3.4% -0.9% 0.4%
YoY Growth in Net Profit -8.2% -1.6% -20.2% -9.3% -8.9% -4.3% -2.2%
YoY Growth in Total Assets 45.0% 9.8% 1.7% 6.4% 6.1% 3.1% 3.6%
YoY Growth in Shareholders' Equity 4.9% 11.7% 4.5% 10.0% 8.3% 5.2% 4.9%
Valuation Ratios
Adj. EPS (SAR) 5.52 5.43 5.25* 4.77* 4.95 4.73 4.63
Adj. BVPS (SAR) 18.82 21.02 20.31 22.34 22.76 23.95 25.11
P/E Ratio (x) 7.34 7.46 7.71 8.50 8.19 8.56 8.75
P/BV Ratio (x) 2.15 1.93 1.99 1.81 1.78 1.69 1.61
Current Market Price** (SAR) 40.50 40.50 40.50 40.50 40.50 40.50 40.50
* Annualised
**CMP as on December 08, 2010
TAIB RESEARCH
DISCLAIMER:
All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication,
but we make no representation as to its accuracy or completeness. All information is for the private use of the person to whom it is provided
without any liability whatsoever on the part of TAIB Securities WLL, any associated company or the employees thereof. Nothing contained
herein should be construed as an offer to buy or sell or a solicitation of an offer to buy or sell. The value of any investment may fall as well
as rise. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of the investment to
increase or diminish. Consequently, investors may not get back the full value of their original investment