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11 DECEMBER 2011

KSA TELECOM SECTOR COST MANAGEMENT KEY FOR 2012
We maintain our cautiously optimistic view on the Saudi Telecom sector. We reiterate our Overweight rating on STC and Mobily and Neutral rating on Zain KSA. We believe managing costs whilst minimising ARPU pressure will be the key to profitability in 2012. Valuations remain attractive at 7.5x 2012 P/E. Mobily remains our top pick with growth combined with a good dividend key strengths.  In this report, we have updated our three covered telecom stocks based on
recent results (3Q11), conversations with company management and latest industry data (9M11) published by CITC in November 2011. We have also highlighted our revised estimates for 2011e and 2012e and new fair value estimates for each stock. All our ratings remain the same; we maintain our Overweight rating on STC with a PT of SR44.6 (upside of 34%) and Mobily with a PT of SR67 (upside of 31%). We also reiterate our Neutral rating on Zain KSA with a PT of SR5.6 (upside of 7%). Our price targets for STC and Mobily have decreased by 3% and 2% respectively on the back of weaker than expected 3Q11 results and slower than expected profit growth in 2012. Although both players are being negatively impacted by competition in the international call segment leading to higher COGS, on the EBIT level, Mobily continues to benefit from improved operational efficiency while STC is incurring higher SG&A expenses due to its international operations. Our PT for Zain falls by 15% due to the slow top-line growth in 3Q11, as well as costs which remain high. We continue to believe that the sector has good growth potential, particularly in the broadband segment. We believe profit growth will be driven by a higher focus on value-added services (particularly broadband), costs efficiencies, and benefits derived through international exposure (for STC). We believe pressure on ARPU levels (Average Revenue Per User), high Capex requirements and a saturated voice market (a major contributor to overall revenues) are the key risks to growth for the sector. We believe the telecoms sector in Saudi continues to remain attractive, trading at an average 2012e P/E of 7.5x. This is despite the relatively stronger macro environment in Saudi which should fuel faster growth in the telecom sector than in other regional countries.

 

Exhibit 1: Saudi telecom companies – Valuation matrix
Rati TP ng (SR) Saudi Telecom Co. Mobily Zain KSA OW 44.6 OW 67.0 N 5.6 MCap Stock perf (%) $mn Nov YTD 17,784 9,533 1,963 (1.2) (21.8) (2.9) (7.7) (5.3) (32.3) P/E EV/ P/BV (x) EBITDA (x) ’12 ‘12 ‘12 8.0 6.7 NM 3.1 4.9 3.8 1.3 1.7 2.1 DY (%) ‘12 ROE (%) ‘12 ROA (%) ‘12 6.8 15.0 (3.1)

6.0 16.2 8.2 27.4 0.0 (20.6)

Source: NCBC Research, All prices as of December 7, 2011 N: Neutral, UW: Underweight, OW: Overweight, NC: Not Covered

Farouk Miah, CFA
f.miah@ncbc.com +966 2 690 7717

Please refer to the last page for important disclaimer

www.ncbc.com

KSA TELECOM SECTOR 11 DECEMBER 2011

NCB CAPITAL

Outlook summary
 4Q11 to remain under pressure on YoY basis: We expect total revenue for the three stocks under coverage to increase by 10.5% YoY to SR21.7bn in 4Q11 driven largely by an increased broadband subscriber base, although partially offset by lower ARPU. We expect QoQ growth at 6% due to the impact of hajj. Although, increased COGS and SG&A expenses is expected to lead to only 4% YoY growth in EBITDA to SR7.7bn, higher non-operating income is expected to leave net income increasing by 10.4% YoY to SR3.6bn. YoY, margins will likely decline for Mobily and STC due to ongoing competition in the international call segment. High interest payments are expected to continue to hold back Zain’s move towards profitability.  Subscribers continue to increase in 2011, slowdown expected in 2012: According to CITC data, Saudi mobile penetration increased by 12% to 198% at the end of 3Q11 vs. our estimate of 202% by the end of 2011. We expect STC to continue to lose market share (down 0.5% to 45%), with Zain the main beneficiary (up 1% to 16.7%). With the penetration reaching towards 200%, we believe the focus for operators is moving away from acquiring new incremental subscribers (who are likely to be low revenue generators) and towards deriving more value from existing subscribers. Therefore, we expect the penetration rate to grow at a slower pace of 5% to reach 207% in 2012.  ARPU under pressure, expected to continue in 2012: We believe Zain has been aggressive in the past six months on pricing which has led to ARPU pressure for the whole sector in 3Q11. This was partially offset by converting users to postpaid (where average ARPU’s are higher) and the growth of the data segment. According to CITC data, during 9M11, 700k net additions were made to post-paid subscriber numbers as compared to just 200k during 2010. From our discussions with telecoms management, we believe ARPU pressure will remain but may subside in 2012 given a change in management and structure at the regulatory body (CITC) which has stated its intention of avoiding price wars as this will not encourage long term investment.  Profit margins revised lower; interconnections charges/OpEx is key: Our EBITDA and Net margin estimate for the stocks under coverage have declined from our previous estimates to 34.9% and 13.4% respectively in 2011 and thereafter to 35.8% and 14.7% in 2012. On the gross level, interconnection charges will remain important as in 2010, the international calls segment faced strong pricing competition, leading to lower margins. If repeated in 2012, we could see another year of gross margin pressure. On the EBIT level, unlike in 2011, we expect SG&A expenses as a % of sales to reduce across all three players in 2012.  Growth in broadband, mainly wireless, important for future growth:
On Data, the latest CITC information indicates that the broadband penetration rate reached 40.5% of the population by the end of 3Q11 (11.5mn users) against 9.7% (2.7mn users) at the end of 2010. However, we highlight that CITC has used a new method to calculate total subscribers from the beginning 2011 leading to the 9M11 subscriber numbers looking inflated. Nevertheless, the key point to note here is that wireless broadband users are largely responsible for the recent growth, currently accounting for 84% of all broadband users against around 61% at the end of 2010 as per CITC data. However, the speed at which this trend continues will have a significant impact on to what extent the operators will benefit from their investments in broadband.
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KSA TELECOM SECTOR 11 DECEMBER 2011

NCB CAPITAL

Change to estimates
In the table below we highlight the changes to our 2011 and 2012 numbers, as well as price targets, since our last update on the sector at the end of August 2011.
Exhibit 2: Changes to estimates
In SR mn, unless otherwise stated
Old 2011E New 2011E % Chg % Gr Old 2012E New 2012E % Chg % Gr

Saudi Telecom Co. Revenue Gross Profit EBITDA EBIT Net profit Price target Mobily Revenue Gross profit EBITDA EBIT Net profit Price target Zain KSA Revenue Gross profit EBITDA EBIT Net profit Price target
Source: NCBC Research estimates

54,460 31,727 20,515 11,452 8,606 SR 19,209 10,181 7,317 5,171 4,960 SR 7,310 3,984 1,347 (340) (1,485) SR

55,492 31,774 20,359 11,352 7,832

1.9 0.1 (0.8) (0.9) (9.0)

7.2 4.8 3.8 3.4 (17.0)

55,209 32,409 21,228 11,293 8,824 46.0 20,371 11,170 7,990 5,582 5,391 68.0 8,268 4,660 2,178 418 (536) 6.6

57,315 32,874 21,280 11,824 8,302 44.6 21,691 10,922 7,916 5,542 5,335 67.0 8,033 4,370 1,925 169 (801) 5.6

3.8 1.4 0.2 4.7 (5.9) (3.0) 6.5 (2.2) (0.9) (0.7) (1.0) (1.5) (2.8) (6.2) (11.6) (59.6) 49.4 (15.1)

3.3 3.5 4.5 4.2 6.0

19,406 9,944 7,215 5,061 4,871

1.0 (2.3) (1.4) (2.1) (1.8)

21.2 13.2 17.0 16.2 15.7

11.8 9.8 9.7 9.5 9.5

7,012 3,590 1,007 (679) (1,833)

(4.1) (9.9) (25.2) 99.4 23.4

18.2 41.9 204.5 (41.7) (22.3)

14.6 21.7 91.2 (124.9) (56.3)

3

TELECOM 11 DECEMBER 2011

SAUDI TELECOM COMPANY
COMPANY UPDATE

Progress on international profitability key
We remain Overweight on STC, although our PT falls slightly to SR44.6. We believe dominance in DSL and its ability to provide bundled packages are STC’s key strength. Looking ahead, progress in its international operations is vital for growth. Increasing domestic competition continues to pressurize ARPU with FX exposure a key risk.  Competition to impact 4Q11, lower OpEx should help 2012 numbers:
We expect revenue to grow 8% in 4Q11 driven by data and expansions abroad. Although competition in the international call segment and higher SG&A is expected to lead to a 4% fall in EBIT, improved non-operating performance should lead to a 7% increase in net income to SR2.4bn. We expect revenue and net income growth of 3% and 4% in 2012.

OVERWEIGHT
Target price (SR)
Current price (SR)

44.6
33.3

STOCK DETAILS
M52-week range H/L (SR) Market cap ($mn) Shares outstanding (mn) Listed on exchanges Price perform (%) Absolute Rel. to market 1M (0.3) (0.3) 44/33 17,784 2,000 TADAWUL 3M (2.3) (4.2) SR 23.6 34.2 12M (17.8) (14.6) US$ 6.3 9.1

 FX losses/provision dent profits in 3Q11: STC’s revenue grew 6% YoY in
3Q11 driven by broadband and operations abroad. However, higher COGS and SG&A expenses led to an 8% fall in EBIT. This was compounded by a SR780mn FX loss and a SR134mn provision to lead to a 53% YoY fall in net income. Based on management conversations, the exposure to the Turkish Lira (through Oger telecom) and the South African Rand (through C-cell) are the key reasons behind the FX loss.

Avg daily turnover (mn) 3M 12M Reuters code Bloomberg code

7010.SE STC AB www.stc.com.sa

 International expansion gaining traction: 34% of STC’s overall revenues
in 9M11 came from abroad, up from 29% at the end of 2009 and management expectations of 50% by 2015. Based on management conversations, STC remains open to acquisitions with a preference for a majority stake in a GCC operator. A meaningful bottom-line contribution, through a lower percentage of sales being spent on operating expenses, will be a key catalyst for the stock.

VALUATION MULTIPLES
10A Reported P/E (x) Adjusted P/E (x) P/B (x) EV/EBITDA (x) Div Yield (%) 7.1 7.6 1.5 3.4 9.2 11E 8.5 8.4 1.4 3.3 6.0 12E 8.0 8.0 1.3 3.1 6.0

Source: NCBC Research estimates

 Revenue estimates higher, but lower for profit lines: Based on higher
expected subscriber numbers our top-line estimates rises for 2011 and 2012. However, our net income estimate falls by 6-9% due mainly to lower gross margin estimates and lower other income.

SHARE PRICE PERFORMANCE
60 52 44 36 28 20 Dec-10 Jun-11
STC

7500 6800 6100 5400 4700 4000 Dec-11
Tadawul (RHS)

 Remain overweight, PT down by 3% to SR44.6: An attractive valuation, the
highest percentage of post-paid subscribers in KSA, dominance in DSL and the potential gain from its international business are key strengths of STC.
Summary Financials
SR mn Revenues Gross profit EBITDA EBITDA margin (%) Adjusted net income Adj. net margin (%) EPS (SR) DPS (SR)
Source: Company, NCBC Research

2010A 51,787 30,323 19,621 37.9 8,706 16.8 4.35 3.00

2011E 55,492 31,774 20,359 36.7 7,966 14.4 3.98 2.00

2012E 57,315 32,874 21,280 37.1 8,302 14.5 4.15 2.00

2013E 58,215 33,583 22,023 37.8 8,610 14.8 4.31 2.00

2014E CAGR (%) 58,809 3.2 34,063 3.0 22,478 3.5 38.2 8,749 0.1 14.9 4.37 0.1 2.00 (10.0)

Source: Reuters

Farouk Miah, CFA

+966 2 690 7717 f.miah@ncbc.com

Please refer to the last page for important disclaimer

www.ncbc.com

SAUDI TELECOM COMPANY 11 DECEMBER 2011

NCB CAPITAL

Financials
Exhibit 3: Income Statement
In SR millions, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

Revenues % change Cost of services Gross profit Gross margin (%) Operating expenses EBITDA EBITDA margin (%) Dep. & Amortization EBIT EBIT margin (%) Financing costs Other inc./expenses, net Pre-tax profit Tax (Zakat) Reported net income Adjusted net income % change Net margin (%) EPS (SR)
Source: NCBC Research estimates

50,780 7.0 (19,779) 31,001 61.0 (18,187) 20,612 40.6 (7,799) 12,814 25.2 (1,385) 702 12,130 (974) 10,866 10,182 (7.8) 20.1 5.09

51,787 2.0 (21,464) 30,323 58.6 (19,344) 19,621 37.9 (8,642) 10,978 21.2 (1,781) 1,779 10,977 (939) 9,434 8,706 (14.5) 16.8 4.35

55,492 7.2 (23,718) 31,774 57.3 (20,422) 20,359 36.7 (9,007) 11,352 20.5 (2,392) (315) 8,645 (774) 7,832 7,966 (8.5) 14.4 3.98

57,315 3.3 (24,441) 32,874 57.4 (21,050) 21,280 37.1 (9,456) 11,824 20.6 (2,430) 173 9,568 (875) 8,302 8,302 4.2 14.5 4.15

58,215 1.6 (24,631) 33,583 57.7 (21,494) 22,023 37.8 (9,933) 12,089 20.8 (2,373) 219 9,935 (919) 8,610 8,610 3.7 14.8 4.31

58,809 1.0 (24,745) 34,063 57.9 (21,985) 22,478 38.2 (10,400) 12,079 20.5 (2,201) 217 10,095 (934) 8,749 8,749 1.6 14.9 4.37

Exhibit 4: Balance Sheet
In SR millions, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

Cash & cash equivalent Other current assets Total current assets Net fixed assets Intangible assets, net Investments Other assets Total non-current assets Total assets Short-term loans Other current liabilities Total current liabilities Long-term loan Other liabilities Total non-current liabilities Total liabilities Share capital Reserves & surplus Shareholders' funds Total equity & liabilities
Source: NCBC Research estimates

7,710 12,190 19,900 52,737 29,222 2,533 2,433 86,924 106,824 8,579 17,998 26,577 22,711 6,703 29,414 55,991 20,000 12,736 42,035 106,824

6,051 12,654 18,704 55,127 31,837 2,540 2,572 92,077 110,781 8,447 18,171 26,618 21,741 8,957 30,698 57,317 20,000 16,265 44,996 110,781

11,897 13,580 25,478 56,725 31,837 2,568 2,918 94,048 119,525 7,546 20,514 28,060 25,912 8,163 34,075 62,135 20,000 20,231 48,962 119,525

13,143 14,586 27,728 58,772 31,837 2,618 3,015 96,242 123,970 8,028 21,431 29,459 24,809 8,401 33,210 62,669 20,000 24,533 53,263 123,970

13,546 15,130 28,676 60,589 31,837 2,691 3,060 98,178 126,854 7,223 21,747 28,970 23,802 8,577 32,378 61,348 20,000 29,143 57,874 126,854

13,714 15,320 29,034 62,064 31,837 2,789 3,080 99,770 128,804 6,824 21,764 28,588 21,576 8,797 30,373 58,961 20,000 33,892 62,623 128,804

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SAUDI TELECOM COMPANY 11 DECEMBER 2011

NCB CAPITAL

Exhibit 5: Cash flow Statement
In SR millions, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

Cash flow from op. (a) Cash flow from inv.(b) NOPLAT WC CAPEX Depreciation Free cash flow Cash flow from fin.(c) Net chg. in cash (a+b+c) Cash at start of the year Cash at end of the year
Source: NCBC Research estimates

15,956 (13,542) 10,978 (291) (10,001) 8,642 9,210 (2,764) (351) 8,061 7,710

18,988 (12,365) 11,352 1,416 (9,367) 9,007 12,241 (8,283) (1,659) 7,710 6,051

17,249 (10,632) 11,824 (89) (10,248) 9,456 10,745 (770) 5,847 6,051 11,897

17,809 (11,553) 12,089 (228) (10,479) 9,933 11,102 (5,011) 1,245 11,897 13,143

18,447 (11,824) 12,079 (173) (10,586) 10,400 11,505 (6,219) 404 13,143 13,546

19,176 (11,972) 11,957 (3,457) (10,688) 10,844 8,444 (7,036) 168 13,546 13,714

Exhibit 6: Key Ratios
Per share, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

EPS FCF per share Div per share Book value per share Valuation ratios (x) P/E P/FCF P/BV EV/sales EV/EBITDA Div yield (%) Profitability ratios (%) Gross margins Operating margin EBITDA margins Net profit margins ROE ROA Liquidity ratios Current ratio Quick Ratio Operating ratios (days) Inventory Receivables outstanding Payables outstanding Operating cycle Cash cycle
Source: NCBC Research estimates

5.4 4.6 3.0 21.0 6.1 7.2 1.6 1.3 3.2 6.3 61.0 25.2 40.6 20.1 25.6 9.9 0.7 0.7 5 63 92 68 (25)

4.7 6.1 3.0 22.5 7.1 5.4 1.5 1.3 3.4 9.2 58.6 21.2 37.9 16.8 20.0 8.0 0.7 0.7 5 61 120 67 (53)

3.9 5.4 2.0 24.5 8.5 6.2 1.4 1.2 3.3 6.0 57.3 20.5 36.7 14.4 17.0 6.9 0.9 0.9 6 68 112 74 (38)

4.2 5.6 2.0 26.6 8.0 6.0 1.3 1.2 3.1 6.0 57.4 20.6 37.1 14.5 16.2 6.8 0.9 0.9 6 72 115 77 (37)

4.3 5.8 2.0 28.9 7.7 5.8 1.2 1.1 3.0 6.0 57.7 20.8 37.8 14.8 15.5 6.9 1.0 1.0 6 74 117 80 (38)

4.4 4.2 2.0 31.3 7.6 7.9 1.1 1.1 3.0 6.0 57.9 20.5 38.2 14.9 14.5 6.8 1.0 1.0 6 74 117 80 (37)

6

TELECOM  11 DECEMBER 2011

MOBILY
COMPANY UPDATE

Growth in Broadband, dividend the key catalyst
We remain Overweight on Mobily with our PT of SR67. Although YoY profit growth will slow in 2012, we believe the company is well positioned to benefit from the broadband potential in KSA. With a dividend yield expected to reach above 9% by 2013, this is an additional key strength and downside support on the stock.  A repeat performance in 4Q11: We expect 4Q11 to be another quarter of
good top-line growth driven by broadband and stable ARPU, but weaker net income growth due to ongoing competition in the international call segment. We expect revenues of SR5.2bn, up 15% with Ebitda of SR2.1bn, up 6% and net income of SR1.5bn, up 2%.

OVERWEIGHT
Target price (SR)
Current price (SR)

67.0
51.0

STOCK DETAILS
M52-week range H/L (SR) Market cap ($mn) Shares outstanding (mn) Listed on exchanges Price perform (%) Absolute Rel. to market 1M (0.5) (0.5) 56/43 9,533 700 TADAWUL 3M (5.6) (7.4) SR 36.7 63.3 12M (5.6) (2.4) US$ 9.8 16.9

 Slowdown in growth expected in 2012: Off the back of a slowdown in
subscriber expansion, pressure on ARPU’s and ongoing costs, we believe YoY net income growth will slow to 9% in 2012 – we expect net income of SR5.3bn. Management expect growth in 2013 and beyond to be supported as their investments in their network capabilities pays off through increased corporate clients and sustained market share from a larger broadband market.

Avg daily turnover (mn) 3M 12M Reuters code Bloomberg code

 3Q11 shows slowdown in growth: Mobily reported a 16% YoY growth in
revenues in 3Q11 led mainly by broadband. However, the gross margin fell 4.6% YoY due to price based competition in the international segment. Improved operational efficiency restricted the margin decline to 214bps YoY to 26.4% at the net income level. Net income came in at SR1.2bn, up 8% YoY.

7020.SE EEC AB www.mobily.com.sa

VALUATION MULTIPLES
10A Reported P/E (x) Adjusted P/E (x) P/B (x) EV/EBITDA (x) Div Yield (%) 8.5 8.5 2.3 6.5 3.9 11E 7.3 7.3 2.0 5.4 6.1 12E 6.7 6.7 1.7 4.9 8.2

 Dividend outlook positive, remains a key catalyst: Off the back of
management discussions, we believe Mobily can comfortably pay SR3 in dividends in 2011 (we estimate SR3.13) followed by SR4.2 in 2012 and SR4.8 in 2013. This indicates a yield of 6% in 2011 going to 9% in 2013. Given the retail nature of the Saudi market and the demand for high yielding stocks, we believe this could be a trigger for retail investors to move into Mobily.

Source: NCBC Research estimates

SHARE PRICE PERFORMANCE
70 62 54 46 38 30 Dec-10
Mobily

7,500 6,800 6,100 5,400 4,700 Jun-11 4,000 Dec-11
Tadawul (RHS)

 Good fundamentals, rising yield, remain Overweight: Mobily’s strong
fundamentals and excellent execution capabilities place it ahead of peers in the KSA telecom sector. Increasing dividend yields are another key attraction and provide downside support.
Summary Financials
SR mn Revenues Gross profit EBITDA EBITDA margin (%) Net income Net margin (%) EPS (SR) DPS (SR)
Source: Company, NCBC Research

Source: Reuters

2010A 16,013 8,783 6,165 38.5 4,211 26.3 6.02 2.00

2011E 19,406 9,944 7,215 37.2 4,871 25.1 6.96 3.13

2012E 21,691 10,922 7,916 36.5 5,335 24.6 7.62 4.19

2013E 22,926 11,625 8,493 37.0 5,643 24.6 8.06 4.76

2014E CAGR (%) 23,702 10.3 12,234 8.6 9,044 10.1 38.2 5,951 9.0 25.1 8.50 9.0 5.27 27.4

Farouk Miah, CFA

+966 2 690 7717 f.miah@ncbc.com

Please refer to the last page for important disclaimer

www.ncbc.com

MOBILY 11 DECEMBER 2011

NCB CAPITAL

Financials
Exhibit 7: Income Statement
In SR millions, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

Revenues % change Cost of services Gross profit Gross margin (%) Operating expenses EBITDA EBITDA margin (%) Dep. & Amortization EBIT EBIT margin (%) Interest charges, net Other income Pre-tax profit Tax (Zakat) Net income % change Net margin (%) EPS (SR)
Source: NCBC Research estimates

13,058 21.0 (5,512) 7,547 57.8 (2,710) 4,837 37.0 (1,629) 3,208 24.6 (204) 41.0 3,045 (31) 3,014 44.1 23.1 4.31

16,013 22.6 (7,230) 8,783 54.9 (2,619) 6,165 38.5 (1,810) 4,355 27.2 (146) 70.5 4,279 (67) 4,211 39.7 26.3 6.02

19,406 21.2 (9,462) 9,944 51.2 (2,728) 7,215 37.2 (2,154) 5,061 26.1 (159) 59.9 4,962 (90) 4,871 15.7 25.1 6.96

21,691 11.8 (10,768) 10,922 50.4 (3,006) 7,916 36.5 (2,374) 5,542 25.5 (171) 62.9 5,434 (99) 5,335 9.5 24.6 7.62

22,926 5.7 (11,301) 11,625 50.7 (3,132) 8,493 37.0 (2,672) 5,821 25.4 (139) 66.0 5,748 (105) 5,643 5.8 24.6 8.06

23,702 3.4 (11,468) 12,234 51.6 (3,190) 9,044 38.2 (2,939) 6,105 25.8 (112) 69.3 6,062 (110) 5,951 5.5 25.1 8.50

Exhibit 8: Balance Sheet
In SR millions, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

Cash & cash equivalents Short-term investments Other current assets Total current assets Net fixed assets License fees Goodwill Total non-current assets Total assets Short-term loans Cr. portion of long-term loans Other current liabilities Total current liabilities Long-term loan Other liabilities Total non-current liabilities Total liabilities Share capital Reserves & surplus Shareholders' funds Total equity & liabilities
Source: NCBC Research estimates

933 600 6,939 8,473 10,370 10,450 1,530 22,349 30,822 377 1,777 9,931 12,084 6,448 47 6,495 18,579 7,000 5,243 12,243 30,822

1,661 450 7,304 9,415 12,457 10,028 1,530 24,015 33,430 599 1,843 9,814 12,256 5,529 66 5,595 17,851 7,000 8,580 15,580 33,430

2,617 250 6,262 9,129 14,686 9,546 1,530 25,761 34,891 1,093 1,872 8,759 11,724 4,813 95 4,908 16,632 7,000 11,259 18,259 34,891

1,580 250 6,987 8,818 16,910 9,015 1,530 27,454 36,272 703 1,462 9,591 11,756 3,758 99 3,857 15,613 7,000 13,659 20,659 36,272

976 250 7,309 8,536 18,896 8,483 1,530 28,909 37,444 495 1,293 9,699 11,487 2,878 106 2,984 14,471 7,000 15,973 22,973 37,444

546 250 7,665 8,461 20,577 7,952 1,530 30,059 38,520 394 1,118 9,495 11,007 2,169 109 2,278 13,285 7,000 18,235 25,235 38,520

8

MOBILY 11 DECEMBER 2011

NCB CAPITAL

Exhibit 9: Cash flow Statement
In SR millions, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

Cash flow from op. (a) Cash flow from inv.(b) NOPLAT WC CAPEX Depreciation Free cash flow Cash flow from fin.(c) Net chg. in cash (a+b+c) Cash at start of the year Cash at end of the year
Source: NCBC Research estimates

4,483 (2,889) 4,286 (482) (3,387) 1,810 2,228 (1,924) (331) 1,264 933

5,606 (3,227) 4,969 (13) (3,852) 2,154 3,258 (1,651) 728 933 1,661

7,201 (3,700) 5,441 107 (4,067) 2,374 3,855 (2,545) 956 1,661 2,617

7,991 (4,067) 5,715 (214) (4,127) 2,672 4,047 (4,961) (1,037) 2,617 1,580

8,249 (4,127) 5,994 (560) (4,089) 2,939 4,284 (4,726) (604) 1,580 976

8,446 (4,089) 5,996 (411) (3,991) 3,227 4,822 (4,787) (430) 976 546

Exhibit 10: Key Ratios
Per share, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

EPS FCF per share Div per share Book value per share Valuation ratios (x) P/E P/FCF P/BV EV/sales EV/EBITDA Div yield (%) Profitability ratios (%) Gross margins Operating margin EBITDA margins Net profit margins ROE ROA Liquidity ratios Current ratio Quick Ratio Operating ratios (days) Inventory Receivables outstanding Payables outstanding Operating cycle Cash cycle
Source: NCBC Research estimates

4.3 3.2 1.3 17.5 11.8 16.0 2.9 3.2 8.6 3.3 57.8 24.6 37.0 23.1 27.4 10.4 0.7 0.7 9 153 408 162 (246)

6.0 4.7 2.0 22.3 8.5 11.0 2.3 2.5 6.5 3.9 54.9 27.2 38.5 26.3 30.3 13.1 0.8 0.7 15 131 313 146 (167)

7.0 5.5 3.1 26.1 7.3 9.3 2.0 2.0 5.4 6.1 51.2 26.1 37.2 25.1 28.8 14.3 0.8 0.7 19 79 178 98 (80)

7.6 5.8 4.2 29.5 6.7 8.8 1.7 1.8 4.9 8.2 50.4 25.5 36.5 24.6 27.4 15.0 0.8 0.7 20 78 169 98 (71)

8.1 6.1 4.8 32.8 6.3 8.3 1.6 1.7 4.5 9.3 50.7 25.4 37.0 24.6 25.9 15.3 0.7 0.7 20 77 163 97 (66)

8.5 6.9 5.3 36.0 6.0 7.4 1.4 1.6 4.2 10.3 51.6 25.8 38.2 25.1 24.7 15.7 0.8 0.7 21 78 158 99 (59)

9

TELECOM  11 DECEMBER 2011

ZAIN KSA
COMPANY UPDATE

Capital restructuring a key focus
We remain Neutral on Zain KSA with our PT falling to SR5.6. Although its financial performance indicates YoY improvement, progress towards profitability seems to be slowing with the high interest charge the key drag. The successful completion of its proposed balance sheet restructuring is key in building an investment case for Zain.  Hajj to support 4Q11, although slow progress to continue: We expect the
impact of Hajj to aide numbers in 4Q11; we expect revenues of SR2bn, up 17% YoY with net losses coming in at SR369mn, 29% lower YoY. Beyond this, we believe high financial charges will continue to hamper progress at the firm.

NEUTRAL
Target price (SR)
Current price (SR)

5.6
5.3

STOCK DETAILS
M52-week range H/L (SR) Market cap ($ mn) Shares outstanding (mn) Listed on exchanges Price perform (%) Absolute Rel. to market 1M (6.2) (6.2) 8/5 1,963 1,400 TADAWUL 3M (17.3) (18.6) SR 24.0 61.9 12M (29.5) (26.4) US$ 6.4 16.5

 Price led competition behind weak 3Q11: Off the back of management
discussions, it was acknowledged that Zain was aggressive on pricing in 3Q11. We believe this was the key reason behind the slower growth in 3Q11 – revenue increased by 8% YoY against an average of 74% in the past six quarters.

Avg daily turnover (mn) 3M 12M Reuters code Bloomberg code

 Proposed capital restructuring a key catalyst: On 27 October 2011 Zain’s
board proposed a capital restructuring program to reduce its paid-up capital from SR14bn to SR4.8bn in order to cut accumulated losses and subsequently increase it to SR10.8bn by way of a SR6bn rights issue. This should help Zain pay off some of its debts and lower its financial charges. Although the exact terms may well change, management is targeting a completion date by the end of 1Q12 for this restructuring. Successful completion of this restructuring has the potential to be a key catalyst for Zain,

7030.SE ZAINKSA AB www.sa.zain.com

VALUATION MULTIPLES
10A Reported P/E (x) Adjusted P/E (x) P/B (x) EV/EBITDA (x) Div Yield (%) NM NM 1.2 22.3 0.0 11E NM NM 1.7 7.3 0.0 12E NM NM 2.1 3.8 0.0

 Estimates lowered to reflect weaker than expected 3Q11: Our revenue
and Ebitda estimates for 2012 and 2013 have fallen by 3-12% off the back of the weaker than expected 3Q11 and ongoing high financial charges.

Source: NCBC Research estimates

 Risks remain, Neutral rating maintained:
We remain Neutral on the stock with our PT falling to SR5.6. We believe only with a successful balance sheet restructuring can the investment case for Zain KSA become plausible.
Summary Financials
SR mn Revenues Gross profit EBITDA EBITDA margin (%) Net income Net margin (%) EPS (SR) DPS (SR)
Source: Company, NCBC Research

SHARE PRICE PERFORMANCE
10 9 8 6 5 4 Dec-10 Jun-11
Zain

7,500 6,800 6,100 5,400 4,700 4,000 Dec-11
Tadawul (RHS)

2010A 5,934 2,530 331 5.6 (2,358) (39.7) (1.68) 0.00

2011E 7,012 3,590 1,007 14.4 (1,833) (26.1) (1.31) 0.00

2012E 8,033 4,370 1,925 24.0 (801) (10.0) (0.57) 0.00

2013E 8,760 4,922 2,338 26.7 (416) (4.7) (0.30) 0.00

2014E CAGR (%) 9,406 12.2 5,364 20.7 2,623 67.8 27.9 (226) NM (2.4) (0.16) NM 0.00 0.0

Source: Reuters

Please refer to the last page for important disclaimer

www.ncbc.com

ZAIN KSA 11 DECEMBER 2011

NCB CAPITAL

Financials
Exhibit 11: Income Statement
In SR millions, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

Revenues % change Cost of services Gross profit Gross margin (%) Operating expenses EBITDA EBITDA margin (%) Dep. & Amortization EBIT EBIT margin (%) Financing costs Other inc./expenses, net Pre-tax profit Tax (Zakat) Net income % change Net margin (%) EPS (SR)
Source: NCBC Research estimates

3,004 494.6 (2,127) 877 29.2 (1,950) (1,073) (35.7) (1,394) (2,467) (82.1) (634) 1 (3,099) 0 (3,099) 36.0 (103.2) (2.2)

5,934 97.5 (3,404) 2,530 42.6 (2,200) 331 5.6 (1,494) (1,164) (19.6) (1,196) 1 (2,358) 0 (2,358) (23.9) (39.7) (1.7)

7,012 18.2 (3,422) 3,590 51.2 (2,583) 1,007 14.4 (1,686) (679) (9.7) (1,154) 0 (1,833) 0 (1,833) (22.3) (26.1) (1.3)

8,033 14.6 (3,663) 4,370 54.4 (2,445) 1,925 24.0 (1,756) 169 2.1 (970) 0 (801) 0 (801) (56.3) (10.0) (0.6)

8,760 9.1 (3,838) 4,922 56.2 (2,584) 2,338 26.7 (1,823) 515 5.9 (931) 0 (416) 0 (416) (48.1) (4.7) (0.3)

9,406 7.4 (4,041) 5,364 57.0 (2,741) 2,623 27.9 (1,933) 690 7.3 (916) 0 (226) 0 (226) (45.8) (2.4) (0.2)

Exhibit 12: Balance Sheet
In SR millions, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

Cash & cash equivalents Other current assets Total current assets Net fixed assets Other assets - license fees Other assets – other licenses Total non-current assets Total assets Short-term loans Other current liabilities Total current liabilities Adv. from shareholder non-current portion Long-term loan Other liabilities Total non-current liabilities Total liabilities Share capital Reserves & surplus Shareholders' funds Total equity & liabilities
Source: NCBC Research estimates

506 1,344 1,850 3,847 22,038 95 25,980 27,830 0 6,234 6,234 3,469 9,494 10 12,973 19,208 14,000 (5,378) 8,622 27,830

702 1,900 2,603 4,298 21,060 95 25,453 28,055 2,194 5,600 7,794 3,665 9,656 17 14,132 21,926 14,000 (7,736) 6,129 28,055

284 1,582 1,866 4,495 20,047 81 24,623 26,489 0 5,036 15,187 3,936 2,256 20 7,005 22,192 14,000 (9,569) 4,297 26,489

(617) 1,668 1,051 4,826 19,034 66 23,926 24,977 0 5,144 14,885 3,525 2,256 22 6,597 21,482 14,000 (10,370) 3,495 24,977

(415) 1,787 1,372 5,133 18,032 50 23,215 24,587 0 5,167 14,908 3,525 2,256 25 6,600 21,508 14,000 (10,786) 3,079 24,587

82 1,889 1,971 5,355 17,042 32 22,429 24,400 0 5,202 14,943 3,525 2,256 29 6,603 21,547 14,000 (11,012) 2,854 24,400

11

ZAIN KSA 11 DECEMBER 2011

NCB CAPITAL

Exhibit 13: Cash flow Statement
In SR millions, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

Cash flow from op. (a) Cash flow from inv.(b) NOPLAT WC CAPEX Depreciation Free cash flow Cash flow from fin.(c) Net chg. in cash (a+b+c) Cash at start of the year Cash at end of the year
Source: NCBC Research estimates

512 (1,891) (1,164) (1,596) (1,404) 1,494 (2,670) 1,301 (78) 583 506

1,034 (308) (679) (290) (841) 1,686 (124) (530) 196 506 702

763 (855) 164 22 (1,044) 1,756 898 (326) (418) 702 284

1,950 (1,059) 501 (95) (1,095) 1,823 1,133 (1,792) (902) 284 (617)

2,246 (1,112) 671 (67) (1,129) 1,933 1,408 (931) 203 (617) (415)

2,559 (1,147) 700 (110) (1,123) 2,059 1,526 (916) 496 (415) 82

Exhibit 14: Key Ratios
Per share, unless otherwise stated
2009A 2010A 2011E 2012E 2013E 2014E

EPS FCF per share Div per share Book value per share Valuation ratios (x) P/E P/FCF P/BV EV/sales EV/EBITDA Div yield (%) Profitability ratios (%) Gross margins Operating margin EBITDA margins Net profit margins ROE ROA Liquidity ratios Current ratio Quick Ratio Operating ratios (days) Inventory Receivables outstanding Payables outstanding Operating cycle Cash cycle
Source: NCBC Research estimates

(2.2) (1.9) 0.0 6.2 NM NM 0.9 2.4 NM 0.0 29.2 (82.1) (35.7) (103.2) (30.5) (11.4) 0.3 0.3 7 122 311 129 (182)

(1.7) (0.1) 0.0 4.4 NM NM 1.2 1.2 22.3 0.0 42.6 (19.6) 5.6 (39.7) (32.0) (8.4) 0.3 0.3 3 90 226 93 (133)

(1.3) 0.6 0.0 3.1 NM 8.2 1.7 1.0 7.3 0.0 51.2 (9.7) 14.4 (26.1) (35.2) (6.7) 0.1 0.1 4 54 166 58 (108)

(0.6) 0.8 0.0 2.5 NM 6.5 2.1 0.9 3.8 0.0 54.4 2.1 24.0 (10.0) (20.6) (3.1) 0.1 0.1 4 53 156 58 (98)

(0.3) 1.0 0.0 2.2 NM 5.2 2.4 0.8 3.1 0.0 56.2 5.9 26.7 (4.7) (12.7) (1.7) 0.1 0.1 4 53 152 57 (95)

(0.2) 1.1 0.0 2.0 NM 4.8 2.6 0.8 2.8 0.0 57.0 7.3 27.9 (2.4) (7.6) (0.9) 0.1 0.1 4 52 148 56 (91)

12

KSA CEMENT SECTOR DECEMBER 2011

NCB CAPITAL

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NCBC Research website http://research.ncbc.com

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NCBC Investment Ratings OVERWEIGHT: NEUTRAL: UNDERWEIGHT: PRICE TARGET: Target price represents expected returns in excess of 15% in the next 12 months Target price represents expected returns between -10% and +15% in the next 12 months Target price represents a fall in share price exceeding 10% in the next 12 months Analysts set share price targets for individual companies based on a 12 month horizon. These share price targets are subject to a range of company specific and market risks. Target prices are based on a methodology chosen by the analyst as the best predictor of the share price over the 12 month horizon

Other Definitions NR: Not Rated. The investment rating has been suspended temporarily. Such suspension is in compliance with applicable regulations and/or in circumstances when NCB Capital is acting in an advisory capacity in a merger or strategic transaction involving the company and in certain other situations CS: Coverage Suspended. NCBC has suspended coverage of this company NC: Not covered. NCBC does not cover this company

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