Morgan Stanley said it expects Saudi Telecom Co's (STC) earnings momentum to improve as domestic revenues stabilize, and upgraded the stock saying the company could boost dividend payout as early as next year.

Morgan Stanley upgraded STC, the Gulf's No.1 telecoms operator, to 'overweight' from 'equal-weight' and raised its price target on the stock to SR48 ($12.80) from SR39.

'The stock has two potential positive drivers: solid earnings momentum surprising the market, and room to increase the dividend payout as core free cash flow has improved', Morgan Stanley wrote in a note to clients.

Revenue at STC, which has operations across the Muslim world from Turkey to Indonesia but continues to earn the bulk of its revenue from its home market, could grow by 9 per cent in 2012, it said.

STC posted a 60-per cent increase in its first-quarter profit buoyed by soaring demand for broadband, and reported higher revenue at its mobile, fixed line, corporate and wholesale units.

Morgan Stanley retained Saudi Arabia's Etihad Etisalat (Mobily) as its top pick, citing a combination of growing yield, solid earnings and attractive valuation.

Shares of STC, which remains majority government-owned nearly a decade after its partial privatization, were trading slightly down at SR39.20 at 1010 GMT on Monday. – Reuters