Saudi telecom operators poised for ‘normalized performance’ in Q4

After two quarters of uncertainty due to the fingerprint exercise, which saw increase in costs and cancelation of subscribers, Saudi telecom operators are likely to witness a normalized performance in Q4, say industry experts.
Unlike the last quarter, analysts expect no major one-offs this quarter. After the resolution of the arbitration between Mobily and Zain, both the companies expect no impact from the outcome on Q4 earnings. Amortization is guided to be lower as well. Post the Hajj season and cancelation of subscribers in Q3, no major shift in subscriber base for the companies is expected.
Analysts at Al-Rajhi Capital do not expect any major deviation in reported earnings from expectations. STC’s stock price has rallied sharply post our last report in October (+32 percent). Post revising estimates, analysts are now neutral on STC and Mobily. However, they remain under review on Zain post the management change.
Regulatory changes
Post the plethora of regulatory changes in the past few quarters; analysts expect Q4 to reflect more of a steady state performance. These regulatory changes (except the fingerprint exercise) are unlikely to have a material impact on the companies in the medium term. Therefore, experts say that the Q4 earnings are likely to be the new base for the companies as the sector is not likely to face any impending regulatory risk. With no major quarter-on-quarter growth in revenue, Mobily will likely see flattish net income in Q4 (cost savings and lower amortization offsetting sharp boost from zakat/other items in Q3). Zain will accelerate toward net profit breakeven with the help of new amortization schedule, while upside potential for STC (though not significant) would be from an increase in Q4 dividends above SR1/share, which is possible given the company’s strong balance sheet and cash-flow generation.
Unified license
The Communications and Information Technology Commission (CITC) provided a 15-year license extension for a fee of 5 percent of net profit (for that specific period) and also offered to change all licenses to a unified license for a meager amount of SR5 million.
Zain and Mobily stand to benefit (in accounting terms) the most from the move as they get to amortize their high license expense over a longer period of time, resulting in lower amortization costs and higher earnings (non-cash).
Moreover, the cost of the license (5 percent of net profit for that 15-year period) will also be significantly lower that what the two companies are currently charging on an annual basis. STC mentioned that there would not be a material impact on its financials.
The unified license allows Zain and Mobily to start offering fixed line services that these companies were restricted from till now (Zain: Fixed line voice and broadband, Mobily: Fixed voice and ADSL). With the unified license Mobily and Zain can look at offering triple play services, however, analysts at Al-Rajhi Capital believe this does not pose a major threat to STC’s existing businesses. According to industry experts, STC continues to enjoy a competitive advantage.
The telecom sector has witnessed significant regulatory changes in the recent past. The cut in GCC roaming rates and interconnection rates only had a marginal impact on companies.

Source: Arab News