JEDDAH, 15 September 2003 — After the entry of competition into the wireless market, selling and marketing expenses will increase. Wireless revenues growth will slow down and this will lead Saudi Telecommunication Company (STC) to a 7.5 percent drop in net income in the year 2005 which will then remain stable, according to a study released on Sept.11.
Speaking at a press conference on Thursday, Basil Al Ghalayini, president of BMG Financial Advisors, said the report analyzed STC’s wireline and wireless operations, forecast its financial performance till 2007 and set a valuation for its stock. “It is worth mentioning that STC is the most liquid stock in the Saudi stock market, generating 20 percent of the market turnover since the beginning of the year and representing 21.4 percent of market capitalization. Since its initial public offering in January 2003, STC’s shares have appreciated by a staggering 152 percent, said Ghalayini.
“Despite the tremendous growth in the wireless market over the last four years, the market remains under-penetrated at 21.7 percent of the population. BMG estimates the wireless addressable market at 56.8 percent of the population and expects wireless penetration to reach 51 percent of the population by 2007. With competition by the end of 2004, STC’s market share (based on subscribers) will gradually decline to stand at 79.5 percent of the wireless market in 2007. As for the wireline market, marginal growth is expected as the market has shown early signs of maturity at a low penetration rate of 14.4 percent of the population. It is expected that the penetration rate will reach 16.3 percent of the population in 2007,” said Amr Sultan, Chartered Financial analyst. He added that STC wireless Average Revenue Per User (ARPU) is the highest among a sample of 20 operators surveyed by BMG: STC’s ARPU is estimated at $75 in 2002 while the sample average is $32.5. This was justifiable given the fact that prepaid services were introduced in April 2002. Prepaid ARPU is usually significantly lower than postpaid ARPU: The average postpaid ARPU for 10 of the countries surveyed by BMG was 4.6x the average prepaid ARPU. Prepaid subscribers constituted 42 percent of STC total wireless subscribers in 2002 and we expect it to reach 60 percent in 2007. Also, the introduction of competition in 4Q04 will inevitably result in lower tariffs, putting more pressure on ARPU. “BMG does not expect STC wireline operations to change significantly. The marginal increase in wireline subscribers will be eaten up by the shift in some of the local, national and international traffic to wireless subscribers, leaving wireline revenue relatively stable, inching up from an expected SR8.9 billion in 2003 to SR9.5 billion in 2007,” he explained. Sultan said “STC net income will increase by 114.6 percent in 2003 to reach SR7,610 million in 2003. This is mainly due to a drop in commercial provisioning charges: STC was charged by the government at a rate of 27 percent of net revenues in 2002 and will be charged at 20 percent in 2003 onward. Also, 2002 net income was depressed by non-recurring expenses amounting to SR1,070 million. However, when we restate STC net income to exclude the temporary increase in commercial provisioning charges and non-recurring expenses during 2002, net income growth in 2003 would stand at 25.3 percent. Net income will reach its peak in 2004 at SAR9,718 million.”
“In the comparison-based valuation, two peer groups were used: European operators and MENA operators. According to BMG, there are several European operators that share STC’s size and scope (wireline and wireless), while few MENA operators fit STC’s profile. The European sample is comprised of 17 operators, most of whom are incumbent operators formerly government-owned companies operating as state service providers with virtually no competition. As for MENA operators, two of them are incumbent operators while the remaining are wireless operators. Using the European sample and based on 2003 and 2004 P/E multiples, a fair value of SR424.04/share was generated while the MENA sample resulted in fair value of SR423.95/share based on 2003 multiples. By taking the mean of the two fair values BMG arrived at a comparison-based valuation of SR424.00/share, which is slightly lower than the current market price,” he said.
BMG arrived at a target price per share of SR411.56, 4.0 percent lower than the current market price of SR428.50. Accordingly, BMG assigned STC a “reduce” recommendation, meaning investors should reduce the weight of STC in their portfolios lower than its weight in the market based on market capitalization.
