Shares of STC Cut to ‘Reduce’ From ‘Hold’

JEDDAH, 25 April 2006 — Kuwait-based Global Investment House (Global) has downgraded the shares of Saudi Telecom Co. (STC), the Kingdom’s second-largest listed firm, to “reduce” from “hold”.

The combination of the revised financial projections and WACC (weighted average cost of capital) have now led to the DCF (discounted cash flow) value of SR122.7 per share. Based on the GCC Telecom sector P/E multiple of 15.7x, the peer valuation method results in a valuation of SR114.8 per share. The combined effect of these two has led to a revision in the weighted average share value of STC to SR121.1. At the current market price of SR139.75, the STC share is quoting at a premium of 13.3 percent to its intrinsic value. Though the fundamentals of STC remain strong, according to Global, valuation lags behind the current market price of the stock. Global, therefore, downgraded earlier recommendation of “hold” to “reduce” on the STC stock.

STC shares, however, rose 5.60 percent to SR132 yesterday.

STC reported net income of SR12.4 billion in 2005, an increase of 33.6 percent over the previous year. The net income exceeded Global expectation, up by 5 percent compared to forecasted net income of SR11.8 billion for 2005. The primary reason for the out-performance can be attributed to the higher sales reported in second half of 2005 and lower depreciation charges in 2005. The company reported an EPS of SR41.5 in 2005 as compared to SR31.05 reported in the previous year. The return on equity of STC increased from 30.1 percent in 2004 to 37.9 percent in 2005.

The Global report said sales revenue increased by 6.7 percent in 2005 aggregating to SR32.5 billion. However, the wire-line and wireless services reported diverse trends. The wire-line services reported an yearly decline of 5.9 percent (SR9.02 billion in 2005), while the revenue from wireless services increased by 12.4 percent aggregating to SR23.5 billion in 2005.

STC assets reported an yearly growth of 6.2 percent amounting to SR44.7 billion at the end of 2005. The return on assets increased to 27.8 percent in 2005 as compared to 22.1 percent in the previous year. STC incurred capital expenditure of SR4.4 billion in 2005 as compared to SR3.7 billion in the previous year.

The Global report added STC increased its share capital from SR15 billion to SR20 billion through stock dividends of one bonus share for each three outstanding shares, with a total value of SR5 billion transferred from the retained earnings.