We maintain our Neutral rating on STC with a revised PT of SAR94.8 (from SAR78.1 earlier). Strong revenue growth and the extension of the dividend policy are the key stock drivers. However, we believe these factors are reflected in the current price. STC is trading at 2019f PE and EV/EBITDA of 18.9x and 10.6x respectively, higher than the peer group average of 14x and 5.9x. The stock is expected to continue to trade at a premium over the short term, driven by the inclusion to Emerging Market indices.
Top-line to grow 4.2% in 2019f: We expect STC revenues to grow by 4.2% in 2019f to SAR54.2bn. We expect the growth to be driven by higher prices, FTTH growth and new services (such as STC Pay). This is expected to be in-line with Mobily (4.5% yoy) and Zain (4.2% yoy). Based on CITC Q4 18 data, mobile subscribers grew 2.8% yoy to 41.3mn reflecting a penetration rate of 127%. The growth in revenues along with lower non-operating expenses are expected to support a 7.3% growth in net income in 2019f. In 2020f, net income is expected to grow by 8.6% yoy to SAR12.6bn, due to higher revenues and gains of SAR750mn from the sale of Careem.
An overview of the royalty fee revision: Saudi telecom operators (STC, Mobily and Zain) signed agreements with the Ministry of Finance, the Ministry of Communication and Information Technology and CITC to settle the outstanding dispute related to royalty fees between 2009 to 2017. The settlement amount also included the amounts paid in 9M 18. The agreements aim to support the telecommunications sector and to stimulate investment in infrastructure, in-line with Vision 2030. Accordingly, royalties will be unified at a rate of 10% of revenues vs 15% for voice, 8% for data and 10% for landline revenues previously. In return, companies will invest in their networks over the next 3 years. We note that the specific details are not disclosed.
Royalty fees impact is limited: The impact of change in royalty fee vary across companies. Zain is expected to be the main beneficiary with a cost reduction of SAR293mn/annually and a provision reversal of SAR1.7bn over 3 years. Mobily’s costs will increase by SAR450-600mn/annually as royalty fees used to be calculated at a rate of 7%. For STC, the amount was not announced and the management indicated that the revision in fees will not impact the financials, which we believe is due to better cost controls. Based on 2018 financials, service fees were SAR3.7bn (7.2% of sales) vs SAR3.4bn in 2017 (7.8% of sales).