For 2012, Riyad Capital has revised up its topline estimate to SR22.67 billion (13 percent Y/Y) from SR20.71 billion as double-digit growth stretches another year.
Gross margins continued the slide in 2011 to 51.5 percent from 54.9 percent in 2010 and 57.8 percent in 2009 on higher hardware contribution.
Riyad Capital’s outlook for 2012 gross margins has been drastically revised down to 51.1 percent from 55.8 percent. Increasingly, operators will need to be more creative by diversifying product and service mix to sustain margins as low hanging fruit seems to be disappearing.
The report said overhead as a percentage of sales has dropped to 14 percent from 21 percent in 2009 on improving economies of scale. “We project further optimization can be squeezed from administration and other expenses and modestly revise up our EBITDA estimate to SR8.25 billion from SR8.16 million for 2012,” Riyad Capital said.
It has trimmed 2012 and 2013 EPS estimates to SR7.90 and SR8.47, respectively from SR8.00 and SR8.66. “On the heels of the 63 percent dividend hike for 2011, we have dramatically raised our DPS forecast to SR4.00 for 2012. We believe rising free cashflows and declining debt burden has cushioned Mobily to distribute more cash to shareholders,” Riyad Capital said.
The report said in a saturated mobile market, data has emerged as a sustainable substitute to catalyze revenues. The quality of revenue stream also improved as a result of 21 percent increase in post-paid revenues, now comprising 28 percent of the total. Q3, 2011 was a moderately slower period with 16 percent growth however Mobily came back strong in the final quarter registering an impressive 30 percentgain.
During the initial years of commencing operations, Mobily's admin expenses and other overhead costs consumed between 20 percent and 21 percent of revenues. Following 2009, the trend reversed on economies of scale with overhead comprising 16 percent and 14 percent of revenues in 2010 and 2011, respectively.
EBITDA margins managed to maintain a floor of 37 percent since 2009. “In our view gross margin pressure will result in 60 basis point drop in EBITDA margins in 2012, however rebound above 37 percent in expected in each of the subsequent years through 2016,” Riyad Capital said.
In 2011, EBITDA reached SR7.45 million (21 percent) ahead of our forecast SR7.17 billion. Since 2008 EBITDA recorded 25 percent CAGR, however that phase of rapid growth is winding down to single-digit gains post-2013.
The report said SR10 billion in fresh debt financing is expected to close in Q1, 2012 and will be used
to refinance existing debt in addition to working capital management. Total debt has steadily trended down since 2008 resulting in low gearing of 38 percent versus 64 percent for Saudi Telecom Co. (STC)
at end-2011. Interestingly borrowing costs increased to 3.0 percent in 2011 from 1.8 percent in
2010, despite the prevailing low rate environment. Cost containment may be another motivation for debt refinancing.
The report said rising free cashflows and dropping debt burden will position Mobily to distribute more cash to shareholders.
Riyad Capital said trends over the past two years prompted us to revise our outlook for 2012 and 2013. Namely, growth is slowing and margins will need to be sacrificed to drive topline. Second, savings in other areas such as overhead and financing costs can sustain net margins. And third, as Mobily matures more cash will be available to distribute to shareholders which will entice income-seeking investors. Our revisions have precluded the impact of 4G and tower divestiture announced earlier. Until concrete plans are announced to resolve spectrum issues, 4G will not make much of an impact. Further, talks to sale-and-leaseback towers in conjunction with STC may be protracted with limited prospects for conclusion in the near-term.
Riyad Capital sales estimates have been revised up by some 9 percent and 10 percent for 2012 and 2013,
respectively however gross margins were slashed drastically. EBITDA moves up modestly for 2012 to SR8.25 billion from SR8.16 billion. Conversely, EPS was trimmed to SR7.90 and SR8.47 from SR8.00 and SR8.66 for 2012 and 2013, respectively. In line with management guidance, Riyad Capital has raised its capex projections to SR 4 billion and SR 3.6 billion through 2013. Dividend outlook has dramatically
increased to SR 4 per share from SR 2.75 on the heels of the 63 percent dividend hike in 2011.
Riyad Capital valued Mobily using a target EV/EBITDA multiple of 7.0x on its 2012 estimates.
To arrive at a justified multiple, global M&A transactions in the telecoms industry over the past three years were considered. However, Riyad Capital has raised its 12-month target price for Mobily to SR74 from SR 62 and maintained its Buy rating.
