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In itslatest update on the Kingdom’s telecom sector, NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, believes that growth in the sector will remain driven by the broadband and corporate segments. However, the increasing competition in broadband and the continuous changes in the sector’s regulations are the main concerns.
“We maintain our Overweight rating on Mobily with a PT of SR93.2 (18% upside) and STC with a PT of SR45.7 (upside of 15%),” noted Abdulelah Babgi, Equity Research Analyst at NCB Capital. “We also upgraded Zain from Neutral to Overweight with a PT of SR11.6 (upside of 16%).”
NCB Capital has upgraded its rating on Zain to Overweight following the recent positive developments on the company’s debt issues. “We believe the agreement with the Ministry of Finance and the refinancing of the junior debt will reduce financial charges and accordingly alleviate some of the pressure on the bottom-line,” highlighted Mr. Babgi. “Based on this, we have revised our estimates for Zain by 3-12% for the projection period between 2013 and 2020. We also believe that these agreements indicate a greater likelihood that Zain will secure a positive deal in refinancing its senior debt of SR9bn. This should be a major positive catalyst for the stock once completed.”
NCB Capital PT for Mobily has increased slightly off the back of a reduction in the equity risk premium by 0.5%. “However, our forecasts for Mobily remain broadly the same following the 1Q13 results which were in-line with our estimates,” explained Mr. Babgi. “Our PT for STC is down by 0.4% off the back of lower than expected results in 1Q13, although this was slightly offset by the reduction in the equity risk premium. Despite the strong local operations, some of STC’s international operations remain a significant concern.”
NCB Capital continues to believe growth in the sector will be mainly driven by the data and corporate segments, supported by continued investments and increased smartphone penetration rates. However, increasing competition in these segments and further changes in the CITC’s regulations are the main concerns.
The valuation of the sector remains attractive at 9.2x 2013e P/E, compared to regional peers at 10.5x. From the telecom stocks under coverage, Mobily remains NCB Capital’s top pick due to its strong financial prospects coupled with a strong dividend outlook.
Changes to NCB Capital’s estimates:
International operations holding back valuation:
NCB Capital remains Overweight on STC despite a decrease in our PT of 0.4% to SR45.7. The revised 2013E adjusted net income estimates have decreased by 1% off the back of a weaker-than-expected 1Q13 results (on an adjusted basis). However, NCB Capital’s estimates for the remaining projection period remain broadly the same. NCB Capital believes STC has strong domestic operations, however the stocks main drawback is its exposure to some of the international operations, namely Aircell.
Strong fundamental outlook; remains our top pick:
NCB Capital reiterates its Overweight call on Mobily, with a PT marginally increasing by 1% to SR93. The company’s focus on data and corporate segments will be supported by the recent partnerships and the continued network expansion. Mobily remains NCB Capital’s top pick in the telecoms sector due to its domestic focus, growth prospects and strong outlook on dividends.
Improved outlook, upgrade to Overweight:
NCB Capital upgrades its rating on Zain from Neutral to Overweight with a PT increasing by 35% to SR11.6. NCB Capital believes the recently signed agreement with the Ministry of Finance coupled with the successful refinancing of its junior debt should support a stronger financial outlook for the firm. Moreover, NCB Capital believes these announcements increase the likelihood of the refinancing of its senior debt which will be a major positive catalyst.