Growth in Saudi Arabia's telecom sector will remain driven by the broadband and corporate segments, said a report.

Contraction in margins due to increasing competition from Zain and the entrance of MVNOs, besides reduction in Haj visas, are the sector’s main concerns, said the report published by NCB Capital, Saudi Arabia's largest wealth manager.

“We maintain our Overweight ratings on Mobily, Zain and STC, with Mobily remaining our top-pick due to its strong fundamentals and positive dividend outlook,” said Abdulelah Babgi, equity research analyst at NCB Capital.

“Our price target for Mobily has increased from SR93.2 ($24.8) to SR99.7 (17.3 per cent upside) due to the decline in our capex assumptions by 11 per cent, increase in our EBITDA margin estimate by 28-51bps and lower risk premium.

“We have also increased our price target for STC by 9.2 per cent to SR49.9 due to better clarity regarding its strategy for its international business. Thus, we have decreased our equity risk premium by 154bps to reflect the lower concerns. Key risks remain additional provisions from the international business and FX volatility.

“Our net loss estimates for Zain increased in 2013, while it reduced for the years thereafter. Our price target for Zain decreased slightly from SR11.6 to SR11.1.”

“Growth in the sector will be mainly driven by the broadband segment in the short term, although this is expected to slow down as data reaches maturity,” said Babgi.

The government’s shift to e-government, the increasing e-commerce activity and the growing number of SMEs should support the long-term growth in the corporate segment, he said.

“We estimate that the reduction in the Hajj and Umrah visas will negatively impact the telecom operators’ bottom-line in 2013 by approximately 3 to 5 per cent ,” stated Babgi.

“However, because the expansions of the holy sites will more than double visitor capacity, we believe the long term effect of this will be positive for telecoms as more pilgrims visit the country.” - TradeArabia News Service