Equity Analysis /
Saudi Arabia

Mobily: Higher opex offset top-line growth

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    22 July 2019
    Published by

    Mobily reported a weaker than expected set of Q2 19 results with a net income of SAR37.8mn, compared with NCBC and consensus estimates of SAR74mn and SAR63mn, respectively. We believe the main reason behind the variance is higher than expected opex and other expense which offset the improvement in revenues and gross profit.

    Revenues grew 15.1% yoy (+4.1% qoq) to SAR3.33bn. This is slightly higher than our estimates of SAR3.23bn. The yoy growth is a continuation of the strong growth in the sector which started in Q4 18. Mobily attributed yoy improvement to 1) the business segment, mainly driven by government projects, 2) wholesale, 3) FTTH, and 4) higher client base. In comparison, Zain KSA reported a growth of 11.4% yoy (-1.7% qoq) in Q2 19.

    Based on CITC Q1 19 data, the number of mobile subscribers declined -0.9% yoy but increased +0.8% qoq to 41.6mn as of Q1 19. This translates into a penetration rate of 125%, the lowest level since 2010. Postpaid subscribers grew +9.8% qoq and +16.2% yoy to 14.2mn. We believe this reflects telecom operators increased focus to switch customers to postpaid lines for more earnings stability. The key highlight is the strong growth in FTTH subscribers which grew 14.1% qoq and 20% yoy to 890,000 and exceeding DSL for the first time on record. We believe the growth was driven by Mobily and Zain as they continue to expand in this segment.

    Gross profit came-in at SAR1.96bn, higher than our estimates of SAR1.86bn driven by the positive impact of higher sales and better margins. Gross margin came-in at 58.7%, slightly higher than our estimates of 57.5%. However, was lower than Q2 18 levels of 61.3%, which we believe is due to the impact of royalty fees. 

    Although gross profit was better than expected, EBITDA of SAR1.22bn in Q2 19 was lower than our estimates of SAR1.26bn. EBITDA margin came-in at 36.7% vs our estimates of 39.1% and 36.8% in Q2 18. EBIT stood at SAR261mn in Q2 19, lower than our estimates of SAR294mn which is due to higher opex. SG&A stood at SAR735mn in Q2 19 vs SAR708mn in Q2 18 and our estimates of SAR594mn.The management said that higher cost is due to seasonality (Ramadan Impact). 

    We are Underweight on Mobily, with a PT of SAR18.8. Despite the strong top-line growth, the stock is trading at an annualized PE of 89.3x for 2019f, which is significantly higher than the peer group average of 15.3x.