Saudi telecom sector remains defensive; STC top pick: NCBC

Saudi telecom operators remain resilient, thanks to the sector’s defensive nature, despite oil price volatility and potential spending cuts, NCB Capital said in a report on Wednesday.

The data segment and cost optimization remain key drivers for the sector's future earnings growth.

NCBC said it expects the combined net profit of Saudi Telecom Co. (STC), Mobily, and Zain Saudi to grow by 48.6 percent in 2016, driven by cost optimization from STC and Mobily’s return to profitability.

It reaffirmed its “overweight” rating on STC, setting the stock target price at SAR 79. The telco remained its top pick, thanks to its strong fundamentals, clear dividend policy, and attractive yield of 6.1 percent.

STC's earnings per share is forecast to grow by 3.2 percent after closing the acquisition of Kuwait Telecommunication Co. (VIVA).

NCBC remained “neutral” on Zain, with a price target of SAR 10.7. Strong data growth and cost-cutting are the main positive factors. However, downside risks include the potential Zakat payment of SAR 619 million; negotiations with creditors over debt restructuring; and a potential negative outcome for its arbitration with Mobily.  

Though NCBC expects Mobily to turn profitable in 2016, the operator's rating was kept “under review,” as outlook remains unclear. Key risks for Saudi Arabia's second-largest telecom operator are: lower market share; higher operating expenses; the potential of unfavorable negotiations with lenders; or incurring more one-off losses.