Is STC loosing fuel in Saudi Arabia?

Following to my last post related to STC’s situation in 2009, I wanted to publish some interesting insights of the Saudi telecom industry coming from Al Rajhi Capital. In their opinion, the Saudi telecoms market is still booming and they expect 3.5G data to help drive mobile penetration towards 220% within five years. According to them, there are risks, but it is too early to prepare for a slowdown. I fully agree with this opinion.

As written before in this blog, STC’s foreign investments seem a distraction, even if they may bear fruit in the long run. Mobily is preferred as the leader in mobile data and is delivering strong growth while Zain (although is performing well for a no.3 player) is hobbled by excessive debt.

Relevant highlights

1) Saudi telecoms market: attractive overall. From a top-down perspective, the Saudi telecoms market is attractive. The country benefits from a young and fast growing population and from high GDP/capita. The mobile market, which accounts for 74% of the total, is growing fast and is also relatively concentrated.

2) Mobile market: data can drive growth further. Mobile broadband is expected to help drive mobile penetration in Saudi Arabia towards 220% within five years. Mobile broadband will fuel incremental growth, rather than replace existing voice revenues; however, it may threaten fixed-line DSL. In a core scenario mobile ARPU only declines modestly, but with RPM high by the standards of emerging markets there is a risk of sharper price falls.

3) New opportunities: don’t be distracted. Comparisons with historical overseas investment plans in the telecoms sector cast doubt on several aspects of STC‘s expansion strategy. STC‘s investments may boost growth in the future, but right now it has lost its way at home. Mobily is proving the near-term winner in Saudi telecoms; Zain is growing fast but remains in clear third place.

4) Stock conclusions. STC is inexpensive and its financial stability and dividend yield of 6.5% offer support; however, it lacks catalysts for performance. Al Rajhi Capital rates STC Neutral and set a price target of SAR46.4. Mobily offers strong near-term growth in their opinion and is not expensive for a fast-growing operator on a PE of 9.3x. They rate Mobily Overweight and set a target price of SAR64.9, implying 39% upside potential. With net debt 2.4x 2010 sales, these guys think fair value for Zain is more than 20% below the current price and rate it Underweight.

Interesting. Enjoy the reading, CVA.