We remain Neutral on Mobily with a PT of SAR42.0. Higher contribution from Enterprise business and growth in religious tourism are expected to support the topline, while the progress in Etisalat offer is expected to be the key stock driver in the short-term. We expect net income to record a CAGR of 12.8% in 2021-24f to reach SAR1.54bn by 2024f. The stock is trading at 2022f P/E and EV/EBITDA of 22.9x and 6.7x, compared to the peer group average of 27.9x and 6.9x, respectively.
Etisalat offer, the main driver going forward
Mobily announced that it has been approached by Emirates Telecommunications Group (Etisalat, E&) to discuss increasing its stake in Mobily to 50% from c28%. Etisalat tender offer is at SAR47/share, reflecting a transaction size of SAR7.96bn. This values the company at SAR36.0bn, reflecting a 2022f EV/EBITDA and P/E of 8.0x and 27.9x, respectively. We believe through the controlling stake in Mobily, Etisalat is looking to tap into the growth potential of the Enterprise business market. This sits well with Etisalat's strategy, which targets growth through expanding its international and Enterprise solution footprints. We believe the progress in the deal will be the main stock driver going forward.
Enterprise business and religious tourism to support top line
Mobily's overall revenue has seen a rising contribution from the business segment, where the Enterprise Solution revenue grew by a CAGR of 23.1% during 2017-2021. This is compared to 3.3% for Consumer business and 6.9% for total revenues. We expect Enterprise Solution to continue to drive the top line growth on the back of the public and private sector's ongoing drive toward digitization. Moreover, the removal of COVID-19 restrictions is expected to support the growth in religious tourism. Accordingly, we expect revenues to grow at a CAGR of 3.4% during 2021-24f. Net income is expected to grow by a CAGR of 12.8% in 2021-2024f to SAR1.54bn by 2024f.
Deleveraging and declining cost of debt
Improving financial performance and lower capex improved Mobily's cash position to SAR2.1bn by the end of 2021, resulting in a declining net debt position. Despite the relatively stable debt levels, the cost of debt in 2021 stood at SAR505mn vs SAR561mn and SAR930mn in 2020 and 2019, respectively. We believe this reflects Mobily's ability to secure better rates as its financial position improves. Going forward, we expect D/E to decline gradually to 79.3% in 2024f, reflecting a total debt of SAR13.5bn (Net debt/EBITDA of 1.1x).
Remain Neutral with a PT of SAR42.0
We maintain our Neutral rating on Mobily with a PT of SAR42.0. We believe improving contribution from Enterprise business and a higher influx of pilgrims will support the topline and margins, while the progress in Etisalat deal will be the key stock driver. The stock trades at 2022f PE and EV/EBITDA of 22.9x and 6.7x, as compared to peer group average of 29.1x and 6.9x, respectively.