JEDDAH, 27 August 2007 — With a booming domestic market, mobile telephone penetration in Saudi Arabia is expected to grow 130 percent in the next five years, HSBC said in its latest report on the performance of Etihad Etisalat (Mobily) in the Kingdom after two years in operation.
The country is regarded as one of the most attractive markets in the Gulf Cooperative Council (GCC) region with penetration rates among the lowest at 82 percent of the population for mobile as of of first half of 2006, and just 2 percent for broadband penetration, the report said.
As the largest and richest market in the region, its strong macroeconomic factors — such as high GDP per capita, rising income levels and a relatively young, fast-growing population — should guarantee relatively decent growth in communication spending, the report noted.
A reduction in handset prices and tariff rebalancing as a result of the ongoing liberalization of the telecoms markets should also further boost usage and demand for services, HSBC said.
With a GDP per capita of $14,500, coupled with a real GDP growth rate of 5 percent in 2006 (around $355 billion in absolute terms), a fast growing and relatively young population (in 2006, 40 percent of the population was in the 15-34 age group, while 38 percent of the population was between 0-14) and highly affluent users, the HSBC report said that Saudi Arabia is one of the most attractive markets in the region.
The Kingdom’s healthy investment climate is likewise supported by increased liquidity on the Saudi stock market, which has been characterized by significantly higher turnover.
The telecoms sector constitutes around 12 percent of the market capitalization of the Tadawul stock exchange, of which Mobily makes up around 2.5 percent of the Tadawul’s market capitalization, it said. Mobily, which began operations in mid-2005, had taken a market share in the low thirties within two years, enabling it to be net profit positive by the end of its second year of operations. Mobily’s innovative business model, coupled with its good quality of service, has helped it to sustain market share and create a reputable brand. HSBC forecast Mobily to have an 86 percent market share of net adds in 2007, which would allow it to command a mobile market share of 40 percent by end-2007.
A survey conducted by Arab Adviser Group in Saudi Arabia in 2006 indicated that around 40 percent of cellular users in the Kingdom had more than one SIM card.
HSBC in its report though said that only 30 percent of users have more than one SIM card.
The need for separate business and personal lines is one of the key reasons for multiple SIM cards, the report argued. Also, ongoing promotions in the Saudi market that include free credit, no connection fees and lengthy validity periods for prepaid numbers provide a further incentive for multiple SIM cards.
“In terms of mobile penetration, in the next five years we expect the Saudi market to catch up with other similar economies and to reach 130 percent,” HSBC said.
The report ruled out any further licence issuance by the Communication and Information Technology Commission (CITC) in Saudi Arabia, thereby fixing the number of mobile phone players in the market in the long term, with the Saudi Telephone Company (STC) being the dominant operator — having the advantage of triple play — with a 45 percent market share, Mobily second with a market share of 35-38 percent and MTC, third, with a market share of 18-20 percent.
Mobily’s ARPU (average revenue per user) is seen around 35 percent lower than STC’s.
At end-second quarter of 2007, Mobily’s blended ARPU stood at SR92, which is a 35 percent discount to STC’s mobile ARPU.
The key reason for such a great disparity, HSBC said, is the prepaid-post-paid mix for both companies. While STC boasts 34 percent of its subscriber base as post-paid, Mobily’s post-paid subscriber base stands at 6 percent.
Post-paid users are generally high ARPU customers for telcos. The difference also comes from the fact that they pay a monthly fee, which is not paid by prepaid customers.
Mobily’s exceptional start made it EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) positive and captured a market share of more than 30 percent in two years. Against this backdrop, 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.”
The report expected that Mobily’s EPS would grow at a compound annual growth rate (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 of the Kingdom’s third operator Mobile Telecommunication Company of Kuwait that is expected to enter the market in 2008. The new entrant is seen to lower the subscriber growth and lower-than- expected ARPU for the former.
“We expect MTC to start its operations in mid- 2008, taking a market share of 5 percent in the first year of its operation. For each percentage point gain in market share for MTC beginning in 2008, we estimate that STC will lose 75bp, while Mobily will lose 25bp in market share. This is mainly on account of STC’s higher base effect compared to Mobily.” HSBC said in the report.
However, 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,” the HSBC report said.
