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Broadband, corporate segments driving Saudi telecom growth

In its latest update on the Kingdom’s telecom sector, NCB Capital, the GCC’s major 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 SR 93.2 (18 percent upside) and STC (Saudi Telecom Co.) with a PT of SR 45.7 (upside of 15 percent)," noted Abdulelah Babgi, equity research analyst at NCB Capital. "We also upgraded Zain from neutral to overweight with a PT of SR 11.6 (upside of 16 percent)."

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," Babgi said. "Based on this, we have revised our estimates for Zain by 3-12 percent 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 SR 9 billion. This should be a major positive catalyst for the stock once completed," he added.

NCB Capital PT for Mobily has increased slightly off the back of a reduction in the equity risk premium by 0.5 percent. "However, our forecasts for Mobily remain broadly the same following the Q1 2013 results, which were in line with our estimates," added Babgi. "Our PT for STC is down by 0.4 percent off the back of lower than expected results in Q1, 2013, 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 smart phone 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.

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