Al Rajhi Capital revises estimates for Saudi telcos
The Saudi telecom sector has seen quite a few regulatory and accounting changes that have led to revisions of EBITDA and net profit numbers, Al Rajhi Capital said in a note.
"We have seen lower costs for Etihad Etisalat Co. (Mobily) while costs for Zain have come higher than expected," the brokerage stated, adding that “sector growth unlikely to revise upwards because of already high penetration and firm regulatory control over prices."
Post Q1 2019 results, Al Rajhi Capital revised estimates upward for Mobily and lower for Saudi Telecom Co. (STC). Al Rajhi also revised target prices of SAR 21.5 per share for Mobily and SAR 93 per share for STC.
Saudi Arabia's telecom operators reported healthy top-line growth rates coming from a low base with STC up 8.4 percent year-on-year (YoY) as compared to Mobily’s 13 percent and Zain’s 24.2 percent.
Weaker than expected results of Zain have likely spurred the company to go for another round of pricing promotion in this quarter and was followed by Mobily and could weaken earnings for the sector.
Unlike most telecom companies globally, working capital and other liabilities have been unusually high for those in Saudi. For example, apart from debt of SAR 12.9 billion, Mobily has A/R of SAR 2.9 billion and A/P of SAR 4.9 billion.
“While we expected Mobily to incur losses for Q1 2019 based on prior disclosure of annual impact of higher provisions of SAR 450 million- SAR 600 million, the company surprised the street by reporting profits,” Al Rajhi said.
"We had major concerns earlier on the level of liabilities which was actually not considered as debt, thereby leading to our not so favorable view on the stock," it added, expecting a 6 percent top-line growth estimate for 2019 (because of lower base and price increase by around mid-2018) and 3 percent growth for 2020 with a slight improvement in margins.
"We still do not expect dividends for the company for another two to three years. However, we note that in another two years’ debt could be reduced by SAR1.7-2.5bn depending on how much is used to pay off the current and other liabilities," the brokerage continued.
In Q1 2019, STC outperformed expectations with an 8 percent YoY growth in top-line (due to low base) which translated to a commensurate beat at the bottom-line. The company did not have a material impact of either reversal of royalty provisions or increase in royalty fee.
The key deviations from estimates were SAR 150 million increases in early retirement expenses and improvement in SG&A expenses, which was mostly offset by increased depreciation and finance costs as per our understanding.
"While we believe that the company has the ability to maintain high level of dividends (SAR5/share in 2019) given its cash position, the valuations are expensive currently," Al Rajhi said.
As for Zain KSA, Q1 2019 net profit of SAR 129 million missed estimates of SAR 194 million and consensus estimate of SAR 169 million. The miss in bottom line was mainly driven by lower than expected gross margins even as top-line growth was strong.
"We believe that the top-line growth was likely due to the positive impact from higher data prices and the low base effect in Q1 2018 where the pricing was low as a result of aggressive promotions," Al Rajhi Cap said.