Saudi Arabia’s strong macro outlook, coupled with the government’s increasing expenditures, will continue to support growth in the kingdom’s telecom sector, according to a report.

 

The Saudi telecom sector trades at an attractive 2013e P/E of 9.1x, 9 per cent below peers in neighbouring countries, the NCB Capital report said. 

 

“The broadband and corporate segments remain the primary growth drivers for the sector,” noted Abdulelah Babgi, equity research analyst at NCB Capital. “Increasing competition and change in regulations are the main concerns while the impact of MVNOs is mixed.” 

 

NCB Capital maintains its overweight call on STC and Mobily, and Neutral rating on Zain KSA. “We continue to prefer Mobily over STC due to its stronger outlook and fewer concerns given its domestic focus vs. international exposure at STC,” noted Babgi. 

 

NCB Capital continues to be overweight on STC, with a PT of SR45.8 (upside of 16.2 per cent), and Mobily with a PT of SR92.2 (upside of 15.5 per cent). and remains Neutral on Zain KSA, with a PT of SR8.6 (upside of 2 per cent), it said. 

 

“We have increased our price target for Mobily by 14.5% due to lowering our capex estimates for the period 2013-2017E by 8% following management’s guidance, as well as the expansion in the valuation multiples and increased longer term financials. 

 

“Our PT of STC is down by 9.8% due to increased concerns regarding the outlook of its international operations and changes in projections. Despite improving local operations, we believe the concerns on the international business have the potential to derail the growth strategy of the firm. 

 

“Zain KSA’s PT is up by 2% to SR8.6 off the back of improved financial performance in 2012 (net losses decreased YoY by 9%) in addition to potential further improvements once a refinancing deal is signed. However, we maintain our Neutral rating on Zain as we believe the company will remain loss making for the foreseeable future.” 

 

From a sector perspective, NCB Capital continues to believe growth will be mainly driven by the data and corporate segments, supported by continued investments and increased low-cost smartphone penetration rates. However, the main concerns are increased price-led competition in growth segments (data and corporate), further changes in the CITC’s regulations and fragmentation of the market due to the entrance of MVNOs. 

 

Data and corporate segments - main growth drivers

 

“We expect total revenue for the three stocks under coverage to increase by 7% YoY to SR95.9bn in 2013E,” said Babgi. “This growth is expected to be mainly driven by the data and corporate segments. We expect the increase in smart-phone penetration rates to support the growth in data, while growth in the corporate segment would be led by the increasing focus on providing business solutions to corporations. Moreover, we believe STC will still focus on its international business and possibly increase its exposure in this segment as it is actively looking for expansion opportunities in the Middle East region. As for Mobily, we believe growth will come from the data and corporate segments with both expected to record double digit growth in 2013E and contribute 30% and 12% to its total revenue for the year.”  - TradeArabia News Service