JEDDAH, 21 August 2007 — The success of Etihad Etisalat (operating under the brand name Mobily) is an impressive growth story.
Since it began operations two years ago, Mobily has had an exceptional start. It has become EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) positive and captured a market share of more than 30 percent in two years of operations.
In a company report, Mobily said it is expecting “margin expansion through savings made on infrastructure sharing with STC once it builds its fiber-optic backbone by end-2007. This, coupled with strong subscriber growth, should lead to a surge in the company’s bottom line.”
Comparing Mobily’s growth profile with Bharti Airtel — an Indian wireless operator and Vimpelcom — a Russian mobile operator, where EPS is expected to grow at a compound annual growth rate (CAGR) 2006- 2009 of 57 percent and 35 percent, respectively, the report forecast that Mobily’s EPS would grow at a CAGR 2006-09 of 67 percent.
Mobily’s stock has run up by 40 percent in the last month and a half. However, it said “we believe that Mobily’s growth profile allows further upside potential on the stock. Our discounted cash flow (DCF) valuation gives us a target price of SR81.3.”
We initiate coverage on the stock with an overweight rating and potential return of 21.8 percent.”
The key potential risks to Mobily’s rating include the aggressive competitive stance by Mobile Telecommunication Company (MTC) of Kuwait leading to lower subscriber growth and lower than expected ARPU (average revenue per user) for the company.
Investment in technology is likely to pay off substantially for Mobily when it entered into a strategic partnership to build, deploy and operate the latest fiber-optic networks under the “Saudi National Fiber Network” name, with a 12,600km fiber-optic cable length around the country. The project ownership and SR1 billion cost is to be shared between Mobily and two other partners.
The partnership is deemed a strong cost saving for Mobily primarily on national roaming cost since once it has a fiber-optic backbone, it should save on the leased line capacity currently rented from STC and also enhance revenue on broadband because of the higher connection speed on the fiber-optic network.
The company expects the extended leased line capacity to be instrumental in boosting Mobily’s EBITDA margins by at least 500 basis points, through cost savings accrued using STC’s infrastructure.
Mobily said the Internet segment is key in 3.5G pickup in the country. “We believe Internet on 3.5G would help Mobily maintain blended ARPU, despite a fall in voice average revenue per user (ARPU).”