Mobily reported a weaker than expected set of Q3 19 results with a net income of SAR51mn, compared with NCBC and consensus estimates of SAR74mn and SAR68mn, respectively. Revenues, gross profit and EBITDA were in line with our estimates. Accordingly, we believe the main reason behind the variance is higher than expected depreciation expense.
- Revenues grew 14.4% yoy (+2.2% qoq) to SAR3.40bn. This is in-line with our estimates of SAR3.42bn. Mobily reported a double digit yoy growth since Q4 18 supported by a higher subscriber base, growth in business revenues, wholesale and FTTH. It is worth noting that Hajj season occurred during Q3 19 where the number of pilgrims grew by 5.0% to 2.49mn.
- During Q3 19, Zain officially launched 5G services with 2,000 towers across 20 cities, to be the leading 5G operator in Saudi offering the service at reasonable prices. We believe this will put pressure on Mobily and STC to launch the services as soon as possible. Any delay could have a major impact on operators’ market share.
- Based on CITC Q2 19 data, the number of mobile subscribers declined -3.6% yoy (flat qoq). This translates to a penetration rate of 124%, the lowest level since 2010. Post-paid subscribers grew +26.0% yoy (+7.2% qoq) to 15.2mn. We believe this reflects telecom operators increased focus to switch customers to post-paid lines for more earnings stability. The key highlight is the strong growth in FTTH subscribers which grew 7.4% qoq to 956,000 and exceeding DSL.
- Gross profit came-in at SAR2.0bn, in-line with our estimates. Gross margin came-in at 59.2%, slightly higher than our estimates of 58.4%, but in-line with Q3 18 margins. We believe the company’s ability to maintain its margin despite expanding its wholesale and corporate segments is a key positive.
- EBITDA and EBITDA margins stood at SAR1.3bn and 37.5% in Q3 19, in-line with our estimates. However, the variance at the EBIT was 11% which is due to higher than expected deprecation. Depreciation expense stood at SAR1,015mn in Q3 19, higher than our estimates of SAR972mn. This is the highest level since Q4 18 and higher than the past 10 quarters average SAR935mn. We believe this is due to catch-up depreciation expense.
- 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 88x for 2019f, which is significantly higher than the peer group average of 13.3x.