Saudi telecom sector growth focused on broadband and corporate segments [CPI Financial]
(CPI Financial Via Acquire Media NewsEdge) In its latest report analysing the Saudi telecom sector, NCB Capital notes that growth in the sector is mainly focused on the broadband and corporate segments. While pricing competition remains high and margins could be pressured as a result, valuations remain attractive with the sector trading at 8.6x 2013E P/E.
NCB Capital continues to be Overweight on STC, with a PT of SAR 50.8 (upside of 19 per cent), and Mobily with a PT of SAR 88.6 (upside of 17 per cent), while remaining Neutral on Zain KSA, with a PT of SAR 8.4 (upside of five per cent).
"Although the outlook for STC and Mobily remains positive, we prefer the latter due to strong fundamentals, good dividends and its Saudi focused business," said Farouk Miah, Head of Equity Research at NCB Capital. "We have raised our price target for Mobily by 8.2 per cent due to the strong outlook of the broadband and corporate segment. On the other hand, our PT of STC is down by 1.9 per cent due to weaker than expected 3Q12 numbers and limited change in terms of outlook. STC has benefited from improved local operations; however, FX volatility remains a concern given around 31 per cent of 2012 revenues are expected to be from abroad."
The report notes that Zain KSA PT is down by 26 per cent to SAR 8.4. This is primarily, due to the very weak 3Q12 results (net losses increased YoY for the first time in two years), as well as ongoing concerns of how it will deal with its high interest costs and compete with STC and Mobily.
NCB Capital continues to believe the sector has a strong growth potential. The outlook on broadband remains strong with lower cost handsets expected to increase penetration rates. The report considers that profit growth will be driven by growth in Data, costs efficiencies, and international operations for STC, while Mobily's recent MOU with Atheeb coupled with its JV with IBM positions it strongly to take market share in the corporate segment and drive its bottom-line.
Miah said, "We believe the sector's main concern remains price-led competition in the main growth segments i.e. data and corporate. Additionally, with increasing penetration rates across all segments, additional areas of growth may become difficult to source."
The Saudi telecom sector trades at a 2013e P/E of 8.6x, 10 per cent below regional peers. A relatively stronger macro environment in the Kingdom is likely to support faster growth in the sector than in other regional countries.
Saudi Telecom Company: NCB Capital retains its Overweight call on STC with the PT down 1.9 per cent to of SAR 50.8. Growth will come from both its domestic and international operations with a focus on broadband. Margin pressures in key growth segments as well as the volatility of FX are the stock's main concerns. Use of excess cash is a key catalyst; any increase in dividends will be seen as a positive, continued international expansion may be put pressure on the stock.
Mobily: NCB Capital remains Overweight on Mobily, with the PT increasing by 8.2 per cent to SAR 88.6. The recent JV with IBM as well as the success of the MOU with Atheeb will strongly position Mobily for growth in the corporate segment. Mobily remains well positioned to benefit from increased broadband penetration. The bonus share should be a short term catalyst with the strong dividend outlook also supporting the stock.
Zain KSA: NCB Capital remains Neutral on Zain KSA, with its PT falling significantly to SAR 8.4. Currently, the company's main concern is refinancing its debt under improved terms; however the long-term concern remains its ability to effectively compete with STC and Mobily. Due to its weak balance sheet, capex investment remains behind what is required to compete effectively. A significant restructuring of its business model is needed to improve the outlook of Zain KSA.
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