Mena april 2010_final2

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Mena april 2010_final2

  1. 1. MORGAN STANLEY RESEARCH MIDDLE EAST & NORTH AFRICA Morgan Stanley & Co International Sean Gardiner plc (DIFC Branch)+ Sean.Gardiner@morganstanley.com +971 4 709 7120 Madhvendra Singh Madhvendra.Singh@morganstanley.com +971 4 709 7122 OOO Morgan Stanley Bank+ Polina Ugryumova, CFA April 1, 2010 Industry View MENA - Telecoms In-Line Mobily Remains Our Top Pick Key Changes Following 2009 results, we have updated numbers Ratings for six of our MENA stocks. Our key changes include: Old New • Mobily remains our top pick; we lower our price Wataniya Equal-weight Overweight target to SAR64. Maroc Telecom Underweight Equal-weight • We upgrade Wataniya to Overweight, as we see a Telecom Egypt Equal-weight Underweight window of opportunity for the company to take market share in Algeria. EV/ • We upgrade Maroc Telecom to Equal-weight and Price Target P/E EBITDA raise the price target to MAD161, driven by our FX Old New 2010e 2010e change in price target methodology. Overweight • Our price target for STC drops 33%, driven by a Mobily SAR 67 64 9.8x 7.5x 15% cut to 2010 earnings and a lower target P/E Wataniya KWf 1,900 1,950 9.5x 4.2x of 9.3x. We maintain our Equal-weight, given low earnings visibility and lack of conviction. Equal-weight Maroc Telecom MAD 152 170 14.7x 8.1x • For mobinil, we re-introduce our price target of EGP219, as we now feel the probability of a mobinil EGP NA 219 11.0x 5.0x successful tender by France Telecom is low. STC SAR 61 43 10.3x 6.2x Telecom Egypt: Downgrade to Underweight on Underweight potential for lower dividend – new price target of Telecom Egypt EGP 22.5 15.4 9.9x 3.6x EGP15.4 suggests 9% downside. Despite the Source: Morgan Stanley Research estimates company’s strengths, we believe management’s new focus on becoming a total telecommunication provider in Egypt, through building a mobile business, means visibility on dividends will be low and execution risk high over the next 12-18 months. In addition, accelerating fixed to mobile substitution and risk of price pressure on wholesale business means we have cut our 2010 net income by 16% and 2011 by 24%. Risks we see to the upside include the company choosing to roll out a MVNO strategy, instead of pursuing its preferred choice of having its own mobile network, and a recovery in fixed line retail revenues. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As Change in price target methodology. Across our a result, investors should be aware that the firm may EEMEA Telecom coverage, we are transitioning to a have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors new target P/E approach – we now use a long run should consider Morgan Stanley Research as only a average 1-year forward P/E for the specific stock, based single factor in making their investment decision. on FactSet consensus estimates. We think this better For analyst certification and other important reflects the value the market is prepared to assign to disclosures, refer to the Disclosure Section, telecom stocks, whereas previously we had set our located at the end of this report. target P/E at a country level, which did not fully reflect the market’s view of telecom as a sector. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
  2. 2. MORGAN STANLEY RESEARCH April 1, 2010 MENA - Telecoms Exhibit 1 MENA-Telecoms: Mobily is our top pick 100.0 Overweights Equal-weights Underweights 80.0 60.0 40.0 27% 23% 20.0 7% 2% Current 0.0 Price -9% -9% (20.0) (40.0) (60.0) Mobily Wataniya Maroc Telecom STC mobinil Telecom Egypt Source: Morgan Stanley Research estimates Exhibit 2 MENA-Telecoms: Table of comparables 2010e-11e Share Rating Price % Up M Cap P/E EV/EBITDA Divd yield (%) FX Price Target Side USD 2010e 2011e 2010e 2011e 2010e 2011e Regional peers Du * AED 2.9 NA NA NA 3,126 27.1x 15.1x 11.5x 8.4x 0.2 0.7 Etisalat * AED 12.5 NA NA NA 24,460 9.5x 9.1x 6.4x 5.9x 5.4 5.9 Maroc Telecom MAD 159 EW 170 7 16,710 14.7x 13.8x 8.1x 8.0x 6.8 7.2 Mobily SAR 50.3 OW 64 27 9,380 9.8x 8.7x 7.5x 6.4x 4.0 5.2 mobinil EGP 215 EW 219 2 3,899 11.0x 10.0x 5.0x 4.5x 6.8 9.0 Oman Tel * OMR 1.3 NA NA NA 2,504 8.1x 8.4x 4.9x 5.1x 7.9 8.1 Orascom Telecom USD 5.1 EW NA NA 5,346 12.3x 10.0x 4.6x 4.1x 4.1 5.0 STC SAR 47.5 EW 43 -9 25,332 10.3x 10.2x 6.2x 6.0x 6.3 6.3 Telecom Egypt EGP 17.0 UW 15.4 -9 5,275 9.9x 10.0x 3.6x 3.2x 5.1 6.0 Wataniya KWf 1,580 OW 1,950 23 2,755 9.5x 8.6x 4.2x 3.6x 3.2 6.8 Average 12.2x 10.4x 6.2x 5.5x 5.0 6.0 Average exc Du 10.6x 9.9x 5.6x 5.2x 5.5 6.6 Source: Company data, Morgan Stanley Research estimates, * Based on FactSet Consensus estimates 2
  3. 3. MORGAN STANLEY RESEARCH April 1, 2010 MENA – Telecoms Mobily Remains Our Top Pick in the MENA Region; PT now SAR64 Exhibit 3 30% discount to our DCF fair value of SAR92; one catalyst to Mobily: Key financial summary 2009-12e narrow the discount gap in the coming years is a higher SAR million 2009 2010e 2011e 2012e dividend payout ratio from the 29% level in 2009. Revenues 13,058 14,939 15,813 16,481 % YoY change 21.0 14.4 5.8 4.2 Exhibit 4 EBITDA 4,837 5,576 6,251 6,567 Mobily: Deriving our price target of SAR64 margin % 37.0 37.3 39.5 39.8 Net Income 3,014 3,580 4,041 4,184 Target Multiple Bear case Base case Bull case margin % 23.1 24.0 25.6 25.4 EPS 4.31 5.11 5.77 5.98 NTM EPS SAR 7.9x 11.9x 13.8x % YoY change 7.6 18.8 12.9 3.5 Bear case 4.27 34 51 59 Capex 3,292 3,157 2,688 2,307 Base case 5.37 42 64 74 % of Sales 25.2 21.1 17.0 14.0 Bull case 6.41 50 76 88 Subscribers 18200 19536 20406 20610 Source: Company data, Morgan Stanley Research estimates % YoY change 22.9 7.3 4.5 1.0 Exhibit 5 ARPUs 65.9 66.0 66.0 67.0 % YoY change -5.4 0.1 0.0 1.5 Mobily 3-year average 1 year fwd P/E is 11.9x 20.0 18.0 Source: Company data, Morgan Stanley Research; E = Morgan Stanley Research estimates 16.0 +1 STD, 14.5x We remain Overweight and maintain Mobily as one of our 14.0 top picks in MENA; our price target moves to SAR64. A 12.0 1 yr fwd P/E 3 Yr Avg, 11.9x quick recap: We expect revenue growth of 14%, driven by 10.0 -1 STD, 9.4x 10.0x 8.0 HSPA and postpaid revenues. An improving revenue mix 6.0 (more data and postpaid), as well as cost efficiencies, should 4.0 help the EBITDA margin rise to 37.3% in 2010. Valuation is 2.0 attractive, in our view, with the stock trading at 9.8x 2010 EPS 0.0 (no tax means the EV/EBITDA multiple is high at 7.5x). Our Nov-07 Nov-08 Nov-09 May-07 May-08 May-09 Mar-07 Jul-07 Sep-07 Jan-08 Mar-08 Jul-08 Sep-08 Jan-09 Mar-09 Jul-09 Sep-09 Jan-10 price target for Mobily drops 4% due to a lower target P/E of 11.9x, from 13.5x previously. Source: FactSet, Morgan Stanley Research Fine-tuning our forecasts for 1Q10 and 2010. Mobily says Dividend story is becoming more attractive. We expect intense competition has continued into 1Q10 but added that it Mobily’s capex to stabilize from 2010 onwards as the would maintain its focus on growing revenues. As a result, we company completes its 3G and Wi-Max rollout. As a result, forecast EBITDA margins will remain at 34% in 1Q10, and we we estimate free cash flow will grow by a CAGR of 58% from estimate higher revenue growth – 20.4% YoY, compared to 2009 to 2012. For 2010, we expect FCF to more than double 13% earlier. Our net income forecasts increase by 3% to to SAR2 billion from SAR933 million in 2009. Since Mobily is SAR675 million, driven by lower depreciation and finance a subsidiary of Etisalat, we believe any expansion strategy costs expectations. For 2010, our revenue forecasts are now outside Saudi Arabia could be carried out by the parent. If so, 3% higher at SAR14.9 billion, growing by 14% YoY, and our we would expect higher dividends as Mobily upstreams cash net income forecast rises by 4% to SAR3.58 billion – 19% to fund this strategy. The dividend payout in 2009 was growth over 2009. SAR1.25/share, implying a payout of 29%. We estimate Mobily could pay around SAR2/share in 2010, implying 39% Changes to our price target methodology. We now derive payout and 4% dividend yield. The board is also exploring our target 2010 P/E for Mobily using its three-year average options for interim dividends, but has no concrete plans as of 1-year forward P/E of 11.9x, compared to 13.5x previously. now. We estimate the company’s free cash flow could easily We think this better reflects the value the market is prepared support a much higher dividend payout than its current to assign to telecom stocks, whereas previously we had set 1.25/sh. our target P/E at a country level, which did not fully reflect the market’s view of telecom as a sector. Our price target is a 3
  4. 4. MORGAN STANLEY RESEARCH April 1, 2010 MENA – Telecoms Exhibit 6 Exhibit 8 We expect Mobily’s revenue growth to remain …FCF to continue to grow strongly, giving further double-digit in 2010 room to increase dividend payout from current 29% 20,000 Revenues (SAR million) EBITDA Margin % 41.0 (SAR million) payout ratio 4,500 4,108 90 18,000 3,789 40.0 4,000 80 39.8 40.0 16,000 39.5 39.0 3,500 70 3,184 14,000 38.0 3,000 60 12,000 37.3 37.0 2,500 50 10,000 37.0 1,995 36.0 2,000 40 8,000 35.0 1,500 30 6,000 35.1 34.9 34.0 953 4,000 1,000 20 593 2,000 33.0 500 277 10 8,440 10,795 13,058 14,939 15,813 16,481 17,146 0 32.0 0 0 2007 2008 2009 2010e 2011e 2012e 2013e 2007 2008 2009 2010e 2011e 2012e 2013e Revenue EBITDA Margin Free cash flow Dividend Pay-out Ratio Source: Company data, Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research Exhibit 7 Exhibit 9 …margins improvement driven by lower cost of Mobily: 1Q10 preview sales and savings in G&A… SAR million 1Q09 4Q09 1Q10e 14,000 78.0 SAR million % of sales Revenues 2,810 3,537 3,383 D&A 12,000 12.9 77.0 % yoy change 21.8 13.8 20.4 13.0 12.3 12.6 EBITDA 908 1,520 1,150 10,000 76.0 G&A EBITDA margin 32.3 43.0 34.0 12.5 11.2 11.9 11.2 11.2 Net Income 480 1,052 675 8,000 12.0 12.4 8.0 8.0 75.0 Selling & Net margin 17.1 29.7 20.0 8.0 Mktg 13.1 8.3 EPS 0.69 1.50 0.96 6,000 12.2 8.4 74.0 7.6 % yoy change 10.0 1.0 40.6 11.2 Cost of 4,000 5.5 73.0 Sales Capex 908 906 575 40.9 42.2 42.5 41.3 41.0 % of Sales 32.3 25.6 17.0 44.2 Total 2,000 44.9 72.0 expense as % of Sales Subscribers 15561 18200 18359 0 71.0 % yoy change 21.9 22.9 18.0 2007 2008 2009 2010e 2011e 2012e 2013e ARPUs 61.7 66.9 61.7 % yoy change -4.7 -6.4 0.0 Source: Company data, Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research; E = Morgan Stanley Research estimates 4
  5. 5. MORGAN STANLEY RESEARCH April 1, 2010 MENA – Telecoms Wataniya: Window of Opportunity in Algeria; Upgrade to OW Exhibit 10 KWf1950 is based on an 11.1x NTM base case EPS of Wataniya: key financial summary 2009-12e KWf175. The stock trades on 9.5x 2010 EPS, a 15% discount KD ('000s) 2009 2010e 2011e 2012e to its peers. Revenue 475,421 538,174 582,939 604,609 % YoY Chg -0.1 13.2 8.3 3.7 Exhibit 11 EBITDA 190,200 219,586 247,478 256,555 Wataniya: Deriving our price target of KWf1950 EBITDA margin % 40.0 40.8 42.5 42.4 Net profit 108,291 83,409 92,429 101,571 Target Multiple Bear case Base case Bull case % YoY Chg 31.4 -23.0 10.8 9.9 NTM EPS KWf 7.3x 11.1x 12.9x Subscribers (000s) 15,151 17,956 18,803 19,453 % YoY Chg 38.6 18.5 4.7 3.5 Bear case 135 1,000 1,510 1,750 Base case 175 1,290 1,950 2,260 Kuwait Revenue 203,313 213,578 226,713 233,991 Bull case 194 1,430 2,160 2,500 % YoY Chg -10.3 5.0 6.1 3.2 EBITDA 95,800 101,450 108,148 110,450 Source: Company data, Morgan Stanley Research EBITDA margin % 47.1 47.5 47.7 47.2 Exhibit 12 Subscribers (000s) 1,538 1,683 1,739 1,753 Wataniya is trading at 20% below its consensus % YoY Chg 17.1 9.4 3.3 0.8 long-run average P/E of 11.1x 20.0 Tunisia Revenue 102,330 108,927 108,381 108,529 18.0 % YoY Chg 3.2 6.4 -0.5 0.1 16.0 +1 STD, 14.1x EBITDA 55,200 58,444 57,067 56,928 14.0 EBITDA margin % 53.9 53.7 52.7 52.5 12.0 1 yr fwd P/E Subscribers (000s) 5,211 5,452 5,669 5,859 10.0 3 Yr Avg, 11.1x % YoY Chg 22.4 4.6 4.0 3.4 8.0 8.9x -1 STD, 8.1x 6.0 Algeria 4.0 Revenues 141,443 180,821 206,689 215,955 % YoY Chg 8.4 27.8 14.3 4.5 2.0 EBITDA 46,500 62,142 76,475 79,903 0.0 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 % margin 32.9 34.4 37.0 37.0 Subscribers (000s) 8,003 10,300 10,704 11,063 % YoY Chg 56.5 28.7 3.9 3.4 Source: Company data, Morgan Stanley Research; E = Morgan Stanley Research estimates Source: FactSet, Morgan Stanley Research Exhibit 13 We upgrade Wataniya to Overweight and increase our Algeria: Wataniya’s revenues share gain to price target by 3% to KWf1950. We have reduced our 2010 accelerate in 2010 net income by 8% to KWD83 million, mostly driven by a lower 100% 2.5 EBITDA contribution from Kuwait and Algeria and higher 10.6 12.9 14.9 90% 16.1 20.0 21.7 21.3 income tax expenses. But 2011 looks very promising, in our 80% 2.0 view, as Wataniya benefits from a much higher subscriber 70% base gained during 4Q09-1Q10. We believe low EBITDA Mobile as % of GDP Revenue share (%) 60% 1.5 margins of 31% seen in Algeria during 4Q09 will rise to 37% 50% by 4Q10 and remain at 37% in 2011. As a result, we expect 40% 1.0 2011 net income to increase by 11% to KWD92 million. We 63.5 30% 60.6 62.2 62.7 58.3 55.6 expect the group’s effective income tax rate to rise – 54.6 20% 0.5 Management reported that Algeria has turned profitable at a 10% pre-tax level now, and Tunisia’s contribution to net profit is 0% 0.0 also increasing. Algeria has some deferred tax assets, so it 2006e 2007e 2008e 2009e 2010e 2011e will not affect the cash taxes for now, but it will still push up the Orascom Algiers Telecom Wataniya % of GDP group tax expense in the income statement. Our detailed calculations for income tax expenses indicate an increase of Source: Company data, Morgan Stanley Research estimates KWD7 million in total tax expenses. Our new price target of 5
  6. 6. MORGAN STANLEY RESEARCH April 1, 2010 MENA – Telecoms Algeria is the main driver of our higher revenue forecasts view, if mobile operators get their own international gateway, for the group. We estimate Nedjma (the Algerian operating which is currently under control of Kuwait’s ministry of company) will contribute 33.4% of the group revenues by communications. 2010, up from 29.7% in 2009. Nedjma added more than 2 million subscribers in 4Q09, benefitting mostly from Tunisiana is doing well, but the launch of a third mobile nationalistic sentiments after a controversial football match operator, France Telecom, in 2H10 will increase between Egypt and Algeria – Orascom Telecom, an Egyptian competitive pressure, in our view. However, we believe company, owns the number one operator in the Algerian France Telecom will gain market and revenue share mostly mobile market – Djezzy. Wataniya says it ran an aggressive from state-owned incumbent Tunisie Telecom and that the marketing campaign during the period, which helped it in impact on Tunisiana will be muted. Revenues in local consolidating its position against Djezzy. currency grew by 6% in 2009, compared to 3% in reported currency. The decline in ARPUs was much milder in 2009, The Algeria EBITDA margin should improve later in 2010, compared to a subscriber addition of almost a million. New in our view. The company’s aggressive marketing resulted in competition could disrupt the smooth sailing of Tunisiana, margins coming under pressure in 4Q09 – 31% compared to nonetheless; hence, we have assumed a conservative 6% the 35% we expected. Management has continued its growth in revenues in 2010. We expect ARPUs in Tunisia to marketing campaign in 1Q10, which should impact its margin decrease by 3% in 2010 and forecast an EBITDA margin of further – we expect 31%, the same as 4Q09. But this will also 53.7%, slightly lower than 2009, as competition only launches help high subscriber growth to continue – we expect net adds in 2H10. of 866K for 1Q10 and 2.3 million for 2010. This should help revenue growth in 2010 and 2011 – we expect 28% and 14%, Exhibit 14 respectively. Structural improvement in EBITDA margins – as Algeria becoming more important market, expected seen prior to 4Q09 – should return in the later quarters, 37% to contribute 33% of revenues in 2010 for 4Q10 and averaging 34.4% for 2010. As a result, we Algeria 33% expect 2011 EBITDA margins to be 37% and EBITDA to grow Maldives by 23% to KWD76.5 million. 2% Palestine In Kuwait, we expect Wataniya to benefit from easy 0.2% year-on-year comps after a tough 2009. Revenues were Tunisia Saudi Arabia 21% down 10% in 2009 due to the abolition of incoming call 4% charges from the fixed-line network in 4Q08. This also impacted EBTIDA margins, which fell to 47%, compared to 53% in 2008. We expect ARPU dilution to continue in 2010, declining by 7%, but revenues should benefit from easier Kuwait comps. We expect revenue growth to rebound to 5% and 40% EBITDA margins to stabilize at ~47% level. Our 2010 EBITDA Source: Company data, Morgan Stanley Research estimates in Kuwait is now 2% lower, mainly due to the structural shift in the margins. One leg up to the margins could happen, in our 6
  7. 7. MORGAN STANLEY RESEARCH April 1, 2010 MENA – Telecoms Maroc Telecom: New Price Target Methodology Suggests 7% Upside; Move to EW Exhibit 15 lower than its long-run average P/E of 15.2x (see Exhibit 17). Maroc Telecom: Key financial summary 2009-12e Our price target implies a 6.3% target dividend yield for 2010. Year to Dec - (MAD 'Millions) 2009e 2010e 2011e 2012e Revenues 30,339 31,234 32,158 32,938 Changes to our price target methodology. We now derive % YoY Chg 2.9 2.9 3.0 2.4 our target 2010 P/E for Maroc Telecom using its 5-year average 1-year forward P/E of 15.2x, compared to 14.0x EBITDA 18,201 18,183 18,773 19,164 EBITDA margin (%) 60.0 58.2 58.4 58.2 previously. We think this better reflects the value the market is EBIT 14,008 14,165 15,294 15,898 prepared to assign to telecom stocks, whereas previously we EBIT margin (%) 46.2 45.4 47.6 48.3 had set our target P/E at a country level, which did not fully Net income 9,403 9,440 10,185 10,522 reflect the market’s view of telecom as a sector. Our price EPS (MAD) 10.70 10.79 11.60 12.05 target is a 37% premium to our DCF fair value of MAD124. % YoY Chg -0.9 0.9 7.5 3.9 DPS (MAD) 10.31 10.79 11.60 12.05 Exhibit 16 Payout ratio (%) 96.4 100.0 100.0 100.0 Revenue drivers Maroc Telecom: Deriving our price target of MAD170 ARPUs 98 97 95 96 % YoY Chg (9.3) (1.9) (1.5) 0.6 Target Multiple Bear case Base case Bull case Subscribers 19,602 20,849 21,747 22,416 NTM EPS MAD 10.0x 15.2x 17.6x % YoY Chg 14.1 6.4 4.3 3.1 Source: Company data, Morgan Stanley Research; E = Morgan Stanley Research estimates Bear case 10.31 103 157 182 Base case 11.19 112 170 197 We upgrade Maroc Telecom to Equal-weight; our new price target of MAD170 is based on a target 15.2x NTM Bull case 11.54 116 175 204 EPS and suggests 7% upside. We now use the same Source: Company data, Morgan Stanley Research estimates valuation methodology as for other MENA peers, i.e., based on its long-run average 1-year forward P/E of 15.2x compared to earlier based on a country level target P/E of 14.0x. Results in Exhibit 17 2H09 were uninspiring after adjusting for the Sotelma Maroc Telecom is trading at 7% below its long-run acquisition. Organic revenues of MAD29.8 billion, up 1% YoY, average P/E of 15.2x were in-line with our estimates, and clean operating income of 25.0 MAD13.6 billion was 3% ahead, mainly driven by some cost savings on payroll expenses – 3% lower than our estimate. For 20.0 2010, management is guiding for moderate growth in revenues +1 STD, 17.0x and maintaining high profitability. We estimate revenue growth 15.0 1 yr fwd P/E of 3% in 2010 and organic revenues growth of ~1%. Our new 5 Yr Avg, 15.2x 14.1x -1 STD, 13.4x 2010 EBITDA estimate is 2.4% higher, mainly due to the 10.0 Sotelma acquisition, implying a margin of 58.2% for 2010. Our 2010 net income, however, is 1% lower, due to higher 5.0 depreciation expenses and an increase in the effective tax rate. 0.0 The stock is trading at a 2010 dividend yield of 7%, Nov-07 Nov-08 Nov-09 May-07 May-08 May-09 Jan-09 Jan-10 Mar-10 Mar-07 Jul-07 Sep-07 Jan-08 Mar-08 Jul-08 Sep-08 Mar-09 Jul-09 Sep-09 compared to 8% for the integrated peers. Maroc Telecom continues to pay out 100% of distributable net income. Our Source: FactSet consensus, Morgan Stanley Research 2010 DPS is 1% lower now, due to the lower EPS. It is currently trading at 1-year forward FactSet consensus P/E of 14.1x, 7% 7
  8. 8. MORGAN STANLEY RESEARCH April 1, 2010 MENA – Telecoms Saudi Telecom Co: Pressure on EPS Continues; Remain EW Exhibit 18 EBITDA, we expect depreciation to rise 15% as capex spend STC: Key financial summary 2009-12e from 2009 filters through. 2009 2010e 2011e 2012e Changing our target P/E approach Revenue 50,750 52,445 53,521 54,301 Our price target drops 33% to SAR43. There are two % YoY Chg 6.9 3.3 2.1 1.5 drivers to our lower target. 1) We have lowered our net EBITDA 20,607 21,420 21,859 22,446 EBITDA margin % 40.6 40.8 40.8 41.3 income for 2010 by 23% to SAR9.2 billion following a Net Income 10,822 9,180 9,283 9,891 disappointing 2H09 where EBITDA was 15% below our Net Margin 21.3 17.5 17.3 18.2 expectations. 2) We now derive our target 2010 P/E for STC EPS 5.41 4.59 4.64 4.95 using its five-year average 1-year forward P/E of 9.3x. We % YoY Chg -2.0 -15.2 1.1 6.6 think this better reflects the value the market is prepared to Source: Company data, Morgan Stanley Research; E = Morgan Stanley Research estimates assign to telecom stocks. Previously, we had set our target We maintain our Equal-weight rating on STC, as visibility P/E of 10.1x at a country level, which did not fully reflect the of earnings and our conviction remains low. We lower market’s view of telecom as a sector. Our price target is a our price target to SAR43. Following a weaker than 23% discount to our DCF fair value of SAR56. expected 2H09 – revenues were 3% and EBITDA 15% lower Exhibit 19 than our forecasts – we are cutting our 2010 EPS by 23%. We Deriving our price target of SAR43 calculate that in Saudi Arabia, STC lost 800bps of mobile Target Multiple Bear case Base case Bull case revenue share to both Zain KSA and Mobily. In addition, cost pressures for the group mounted, with the 2009 EBITDA NTM EPS SAR 6.1x 9.3x 10.8x margin falling to 40.6% vs. 45.2% in 2008. We continue to Bear case 3.09 19 29 33 prefer Mobily over STC, as STC trades at an 5% premium to Base case 4.62 28 43 50 Mobily, and our new target P/E of 9.3x (10.1x previously) is a Bull case 5.84 36 54 63 21% discount to Mobily’s, based on the long-run average. Although we maintain our EW, in the short term, we would Source: Morgan Stanley Research estimates look to take profits on any signs of strength. Exhibit 20 We expect Saudi Arabia revenues to be soft and that STC – 1-year forward average P/E was 9.3x over the international will see FX tailwinds in 2010. Backing out last three years reported and estimated revenues from STC’s key subsidiaries, 16.0 we calculate that Saudi Arabian mobile revenues grew just 1% 14.0 for the company in 2009. This compares to 21% growth for 12.0 +1 STD, 11.0x Mobily. We believe market share losses in the postpaid 10.0 market to Mobily are STC’s biggest headwind for now. For 1 yr fwd P/E 2010, we forecast another flat year of growth, implying 8.0 3 Yr Avg, 9.3x 8.9x -1 STD, 7.6x another 500bps of revenue share loss. Internationally, we 6.0 expect improved foreign exchange rates to flatter underlying 4.0 growth – reported revenues are forecast to grow 3.3% compared to constant currency growth of 2.7%. We also 2.0 expect both Turkey and South Africa to experience sizeable 0.0 Nov-07 Nov-08 Nov-09 May-07 May-08 May-09 Mar-07 Jul-07 Sep-07 Jan-08 Jan-09 Jan-10 Mar-08 Jul-08 Sep-08 Mar-09 Jul-09 Sep-09 interconnect rate cuts – 50% and 20%, respectively, at the end of 1Q10. Source: FactSet consensus, Morgan Stanley Research Only slight room for EBITDA margin improvement in 2010. Saudi revenues remain under pressure and STC’s Kuwaiti business, Viva, is still ramping up. We forecast a group EBITDA margin of 41%, compared to 40.6% in 2009. The 50% cut in interconnect should help improve Turk Telekom’s mobile EBITDA margin, which was 41.1% in 2009, but this business accounts for only 5% of group revenues. Below 8
  9. 9. MORGAN STANLEY RESEARCH April 1, 2010 MENA – Telecoms Exhibit 21 Exhibit 23 We expect dividends to remain flat into 2010, given We expect Forex tailwinds to benefit group pressure on net income… revenues in 2010… 8,000 80.0 54,000 7,000 70.0 53,000 334 52,000 6,000 60.0 1,975 1,357 3,038 51,000 5,000 50.0 50,000 4,000 40.0 49,000 2,219 3,000 30.0 52,441 48,000 50,750 2,000 20.0 47,000 46,000 1,000 10.0 47,469 45,000 0 0.0 2008 2009 2010e 2011e 2012e 44,000 2008 reported Organic Consolidation FX headwind 2009 reported Organic FX tailwind 2010 MS est Dividends % of Net income % of Face Value of shares effect Source: Company data, Morgan Stanley Research e = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research estimates Exhibit 24 …But see net income declining again in 2010 Exhibit 22 SAR million SAR2.6 billion drop …but STC’s mobile revenue share is declining 14,000 12,847 in EBIT from lower margin and higher D&A 100% 0.0 0.0 1.5 12,000 7.7 12.6 14.4 14.6 90% 20.5 26.1 9,670 10,000 32.0 9,073 Saudi Arabia mobile revenue share 80% 8,730 33.4 8,310 70% 33.6 33.4 8,000 33.4 60% 6,000 50% 4,000 40% 79.5 73.9 66.5 30% 58.9 2,000 53.8 52.3 52.0 20% 0 10% 2008 2009 2010e 2011e 2012e Clean net income 0% 2006 2007 2008 2009 2010e 2011e 2012e STC Mobily Zain Source: Company data, Morgan Stanley Research E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research E = Morgan Stanley Research estimates 9

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