HSBC report issues recommendation for Saudi Telecom

"STC has been an unpopular stock which has strongly under-performed the TASI (Tadawul All Share Index) over the past two years. Investors see their market opening to competition and are worried about STC's ability to hold its ground. But experience from other countries suggests that they are underestimating the potential in the Saudi telecoms market. What's more, unloved stocks often represent the greatest value for investors," commented Peter Hutton, Head of Research for HSBC based in Riyadh.

Kunal Bajaj, a specialist telecoms analyst for HSBC, wrote the 40-page report. It examines the impact of competition in other countries on the regional incumbents to determine the effects on market shares but also market growth.

"Over the past few years, the market has constantly underestimated mobile growth in emerging markets: for instance, Russia, Kuwait and UAE have seen growth well in excess of expectations and reported mobile penetration in these markets is comfortably above 100 per cent",

wrote Kunal.

Furthermore, demand for fixed line services has been shown to be highly elastic, with increased usage offsetting unit price declines, helping to maintain revenues especially for those such as STC able to offer bundled services.

STC has opportunities for growth from 3.50, which were launched last year, and from broadband which has a penetration at only 1% of the population. STC has missed previous opportunities to build from its domestic base to expand abroad, but has a strong balance sheet, which gives it access to lower cost debt than other telecom operators. With a present dividend yield of 9%, the market is already discounting a risk to the dividend by acquisition, but not the growth, which would be achieved.

"We believe that the recent price weakness is not supported by fundamentals, markets have overestimated the impact of competition and cash flow generation is more sustainable than generally thought," concludes the report. STC is valued at SAR 80, offering a 44% upside for investors, and is recommended as 'Overweight'.