Global Research Result Update Equity Saudi Arabia Telecommunication Sector 01 November, 2011

Strong Buy

Etihad Etisalat Company (EEC)

Market Data Bloomberg Code: Reuters Code: CMP (31 October 2011): O/S (mn) Market Cap (SAR mn): Market Cap (USD mn): P/E 2011e (x): P/Bv 2011e (x): Price Performance 1-Yr High (SAR): Low (SAR): Average Volume: (000) 1m -4.7 -6.5 3m -4.7 -2.7 56.0 43.0 1,233 12m -0.6 -1.6 EEC AB 7020.SE SAR 51.5 700.0 36,050 9,613 7.4 2.0

Target Price SAR70.0

Net profit increase by 7.6%YoY in 3Q11 Revenues increase by 16.3%YoY 4G operations launched Offers cheap valuations and increasing dividends

Profitability growth continues but at a slower pace

The company posted net profit growth of 7.6%YoY to SAR1,224mn in 3Q11. The profitability growth on a YoY basis was lower than the previous two quarters due to lower growth in sales. The net profit for 9M11 grew strongly by 23.0%YoY to SAR3,386mn.

Growth in sales subside

Sales revenue increased by 16.3%YoY in 3Q11 which is lower than the sales growth of 25.0%YoY in 1Q11 and 29.1%YoY in 2Q11. According to the press release, the company reduced its sales of low margin smart-phones to enhance EBITDA margins, which increased to 39.1% in 3Q11 from 34.0% in 2Q11. The lower sales were also attributed to lower sales of Iphone as customers withheld their purchases in anticipation of the new version. Meanwhile, data revenues increased by 7.0%QoQ in 3Q11 on the back of increase in mobile broadband subscribers to more than 6.3mn. Data revenue as a proportion of total revenue is expected to increase to 20.0% in 2011.

Absolute (%) Relative (%)

Price Volume Performance

Effective SG&A cost control

10,000
8,000 6,000 4,000

60
55 50 45

The company has managed to control SG&A costs which declined to 25.8% of sales revenue in 3Q11 from 28.1% of sales revenue in 3Q10. However, EBITDA margin for 3Q11 of 39.1% was lower than 3Q10 EBITDA margin of 41.3% for 3Q10 due to higher COS as a % of sales which increased to 46.7% in 3Q11 compared to 42.1% in 3Q10.

Dividends set to grow

Mobily announced interim dividend of SAR1.25 per share in July 2011. With the Board of Directors proposing a minimum of 40.0% dividend payout ratio for 2011, we expect the dividend for the year 2011 to be SAR3.0 per share which translates into an attractive dividend yield of 6.3%. We expect the dividends to grow further to SAR3.5 per share in 2012. With doubts over Saudi Telecom Companys ability to maintain the current stream of dividends, the dividends offered by Mobily will assume more importance going forward.

2,000
0

40
35

Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11

Stepping into the 4G arena

Mobily announced the launch of Long-Term-Evolution services also known as 4G in September 2011 which is likely to further cement its position as the leader in mobile broadband services in Saudi Arabia. The targeted areas exceed 32 cities and towns which comprise of 85% of populated areas in Saudi Arabia. With the proliferation of smart phones and tab technology, the usage of data services is likely to increase further. Etihad Etisalat Company 2011e SAR mn Earlier Estimates Revised estimates Change % Revenues 18,486 19,279 4.3% EBITDA 7,080 7,134 0.8% Net Profit 4,815 4,869 1.1%
Source: Global Research

Volume ('000)
Source: Zawya

EEC (SAR)

Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel.: (965) 22951270 Umar Faruqui Financial Analyst ufaruqui@global.com.kw Tel.: (965) 22951438 Global Investment House www.globalinv.net

Valuation update
We have increased our DCF-based fair value to SAR70.0/share from SAR68.5/share. We have also increased our net profit forecast by 1.1% to SAR4.87bn and revenue by 4.3% to SAR19.3bn in 2011. The stock is trading at 2012e P/E of 6.8x which is attractive considering the growth prospects. In addition, the expected rise in dividends will make the company attractive on a dividend yield basis. We re-iterate our Strong Buy recommendation on the stock as it offers a potential upside of 36.0%.

Global Research Saudi Arabia

Etihad Etisalat Company (EEC)

Financial Statements
(SAR mn) Revenue Revenue Growth EBITDA EBITDA growth Depreciation and amortization EBIT Financial Charges Other revenues Profit Before Taxation Taxation Net Profit Net profit growth Cash and Bank Balance Receivables and Prepayments Inventories Investments Due from related parties Other Assets Net property plant and equipment Goodwill License acquisition fee 2008 10,795 27.9% 3,794 28.7% 1,298 2,496 438 41 2,099 7.2 2,092 51.6% 1,264 3,098 108 1,050 38 1,063 8,117 1,530 10,923 2009 13,058 21.0% 4,837 27.5% 1,629 3,208 204 41 3,045 30.8 3,014 44.1% 933 5,481 132 600 69 1,256 10,370 1,530 10,450 2010 16,013 22.6% 6,165 27.5% 1,810 4,355 146 70 4,279 67.3 4,211 39.7% 1,661 5,736 297 450 23 1,249 12,457 1,530 10,028 2011e 19,279 20.4% 7,134 15.7% 2,089 5,046 162 85 4,968 99.4 4,869 15.6% 1,979 6,106 278 794 19 1,499 14,395 1,530 9,503 2012e 20,996 8.9% 7,689 7.8% 2,281 5,408 122 93 5,379 107.6 5,271 8.3% 2,238 7,018 304 913 21 1,798 16,009 1,530 8,977 2013e 21,836 4.0% 7,922 3.0% 2,416 5,506 89 102 5,519 110.4 5,409 2.6% 3,443 7,102 318 1,049 22 2,158 17,327 1,530 8,451 2014e 22,299 2.1% 8,043 1.5% 2,502 5,541 66 113 5,587 111.7 5,475 1.2% 4,894 7,088 326 1,207 22 2,590 18,367 1,530 8,031

Balance Sheet

Income Statement

Total Assets Trade & other payables Short term loans Other current liabilities Long-term debt Employee end-of-service benefits Share capital Retained Earnings Other reserves Total Shareholders Equity Total Equity & Liability Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Change in Cash Net Cash at End

27,192 4,365 1,862 4,522 6,642 46 7,000 2,407 347 9,754 27,192 3,546 (5,583) 2,586 549 1,264

30,822 6,167 377 3,552 6,448 47 7,000 4,595 649 12,243 30,822 4,246 (2,889) (1,687) (331) 933

33,430 6,198 599 3,335 5,529 66 7,000 7,510 1,070 15,580 33,430 5,470 (3,227) (1,516) 728 1,661

36,102 8,329 629 3,602 3,653 85 7,000 9,792 1,557 18,348 36,102 8,833 (3,845) (4,671) 317 1,979 37.0% 25.3% 14.0% 26.5% 1.5 31.1 0.3 18.2% 5.5 2.0 14.2% 7.0 26.2 51.5 36,050 6.3% 7.4 2.0

38,807 9,108 661 3,782 2,335 106 7,000 12,261 2,084 21,345 38,807 7,362 (3,489) (3,614) 259 2,238 36.6% 25.1% 14.1% 24.7% 1.3 44.4 0.2 16.0% 4.9 1.8 10.2% 7.5 30.5 51.5 36,050 6.8% 6.8 1.7

41,400 9,531 694 3,971 1,268 130 7,000 14,679 2,625 24,303 41,400 8,082 (3,345) (3,533) 1,205 3,443 36.3% 24.8% 13.5% 22.3% 1.0 61.6 0.1 14.7% 4.5 1.6 12.5% 7.7 34.7 51.5 36,050 7.3% 6.7 1.5

44,055 9,794 729 4,169 501 156 7,000 16,982 3,172 27,154 44,055 8,134 (3,279) (3,404) 1,451 4,894 36.1% 24.6% 12.8% 20.2% 0.7 84.0 0.1 14.0% 4.1 1.5 12.7% 7.8 38.8 51.5 36,050 7.8% 6.6 1.3

EBITDA Margin 35.1% 37.0% 38.5% Net Profit Margin 19.4% 23.1% 26.3% Return on Average Assets 8.9% 10.4% 13.1% Return on Average Equity 26.7% 24.6% 27.0% Net debt / EBITDA 3.1 2.7 2.0 Interest coverage 5.7 15.7 29.7 Debt / Equity (x) 1.0 0.7 0.5 Capex as % of sales 27.4% 25.2% 20.5% EV/EBITDA (x) 8.0 7.9 7.3 EV/Revenues (x) 2.8 2.9 2.8 FCF Yield 2.0% 2.7% 5.1% EPS (SAR) 3.0 4.3 6.0 Book Value Per Share (SAR) 13.9 17.5 22.3 Market Price (SAR) * 31.0 43.4 55.3 Market Capitalization (SAR mn) 21,700 30,380 38,675 Dividend Yield 3.2% 2.9% 5.4% P/E Ratio (x) 10.4 10.1 9.2 P/BV Ratio (x) 2.2 2.5 2.5 Source: Company Reports & Glob al Research * Market price for 2011 and sub sequent years as per closing prices on Octob er 31, 2011

November 2011

Ratio Analysis

Cash Flow

Global Research Saudi Arabia

Etihad Etisalat Company (EEC)

Disclosure
The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Etihad Etisalat Company Recommendation STRONG BUY Bloomberg Ticker EEC AB Reuters Ticker 7020.SE Price SAR 51.5 Disclosure 1,10

1.

Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year, Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition STRONG BUY Fair value of the stock is >20% from the current market price BUY Fair value of the stock is between +10% and +20% from the current market price HOLD Fair value of the stock is between +10% and -10% from the current market price SELL Fair value of the stock is < -10% from the current market price

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November - 2011

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