Securities & Investment Company (SICO) has released an extensive report initiating coverage of Saudi Telecom Company (STC), listed on the Saudi Exchange (Tadawul), with a Buy rating with a target price of SR76.35 per share.
The 37-page report aims to provide investors with a better understanding of the company and its future prospects against the backdrop of the region’s burgeoning telecommunications sector. The report is part of SICO’s aim at providing investors with in-depth information and analysis of leading companies in the GCC, in order to make better investment decisions.
The report, which has been disseminated by SICO’s research department to SICO customers, includes highlights of the region’s telecommunications sector and STC’s continued growth prospects.
SICO reaffirmed in the report that despite stiff competition, STC is expanding and leveraging its infrastructure and coverage and is expanding outside the Kingdom with an estimated 10% of total revenue being generated from outside KSA by 2010.
Specific to STC, the report underscored the company’s key strength of bundling services as its key competitive advantage. While STC’s market share is set to decline to 52%, SICO forecasts strong customer growth prospects for the company, which it expects will post a 7.4% compounded growth in earnings over the horizon.
Analysis of the Saudi Arabian telecommunications market, and its impact on STC, as well as other key highlights of the report are:
• STC’s attempts to expand outside Saudi finally seem to be paying off. We estimate STC could raise as much as $14 billion of debt to pursue its international acquisitions towards its objective of generating over 10% of revenues from outside KSA by 2010. STC’s recent SAR 11 billion (US$3 billion) acquisition of a 25% stake in Malaysia’s Maxis provides it with access to over 14 million customers in Malaysia, India and Indonesia. We estimate the deal will be value accretive and add approximately 5% to growth.
• Our analysis suggests that markets are being overly pessimistic with regards to STC’s earnings potential, and that downside potential on the stock is limited. We believe that scope for positive surprises are high and could come from change of perception about STC, improvements in core earnings as a result of cost optimization programs, better performance in domestic market, and incremental earnings from possible acquisitions.
• At current prices STC trades at a P/E ratio of 11.0x on 2007’s forecasted earnings – a steep discount to both Regional and Emerging market Telcos, as well as to Saudi equities (despite a significantly higher dividend yield and profitability).
• We initiate coverage of STC with a target of SAR 76.35 per share (12.7% upside potential) and a BUY recommendation. We believe that the possibilities of positive surprises and further upsides are high, with downsides limited by the attractive dividend yield.
Securities & Investment Company is an investment bank offering a selective range of services, including asset management, brokerage, corporate finance and market-making, on a regional basis and with a particular emphasis on Bahrain. SICO was incorporated in Bahrain in 1995 and holds an investment-banking license from the Central Bank of Bahrain.
