Moody's assigns A1 ratings to Saudi Telecom Company

The outlook is positive. This is the first time that Moody's has assigned ratings to STC.

Moody's said that STC's A1 ratings reflect the application of Moody's methodology for Government-related issuers (GRIs) and as such combine the following factors: (i) the company's underlying strength, or Baseline Credit Assessment (BCA), which is ranked as a "6" -- equivalent to an A2 on Moody's global scale; (ii) the A1 local currency rating of the Kingdom of Saudi Arabia ; (iii) the high level of support likely to be provided in a distress situation by the Kingdom; and (iv) Moody's view of the high degree of dependence between STC and the Kingdom.

Moody's said that STC's BCA of 6 reflects its strong business risk profile based upon its position as the long-standing dominant telecommunications provider in Saudi Arabia. The Group had some 16.3 million mobile subscribers at September 2007, giving it 69% share of the wireless segment which itself represents roughly three quarters of total Saudi telecoms market revenues. The Group's share of fixed line voice is 100%, reflecting that until recently it has enjoyed a monopoly as the only licensed fixed line service provider.

Moody's added that the BCA also factors in the favourable prospects for growth in the Saudi telecoms market overall reflecting several positive underlying dynamics even if fixed line voice revenues are expected to continue to decline in common with markets elsewhere. A growing, relatively youthful population, combined with rising mobile penetration rates, and lower broadband penetration imply significant potential for continued good short to medium-term market growth in Moody's view.

More cautiously the BCA takes account that as the telecoms market is progressively liberalised STC's market shares and pricing power will come under increasing pressure from newly licensed market entrants, although Moody's notes that the current regulatory framework does not provide for the near term introduction of the service-based competition characteristic of more mature markets. From early 2008 STC will be competing with an additional mobile network operator, and the fixed line market is expected to see the entrance of competing operators for the first time following the award of three licenses in 2007.

However, Moody´s believes that STC should be able to offset much of the impact of the expected price erosion and market share loss through a continued focus on efficiency improvements and differentiation through service quality. Over time, a growing contribution from the Group's overseas investments should also help underpin earnings.

The BCA of 6 also takes account of the Group's strategy for growth and cost efficiencies, including its stated intent to diversify with the aim of generating as much as 10% of revenues from outside its domestic markets by 2010. Following its $3bn investment in July to acquire an effective 25% stake in Maxis the Malaysian mobile operator, and a 51% stake in NTS, Indonesia, the Group has taken further significant steps in this direction.

In December 2007 it invested $908m to take a 26% stake in Kuwait's third mobile operator, and more recently announced the agreed acquisition of a 35% stake in Oger Telecom for a consideration of $2,560m. While acknowledging the opportunities for growth from such a strategy, diversification beyond domestic markets also implies incremental execution and event risk in Moody's view.

Moody's added that the BCA of 6 factors in STC's solid financial risk profile, which itself reflects good profitability, low borrowings and a conservative financial policy. Moody's expects the Group to continue to generate strong profitability and cash flows even if there is a risk that increased competition will constrain these from the levels seen over 2004-2006 when it returned an ebitda margin of approximately 50% and funds from operations in the region of SR15bn.

Notwithstanding a high dividend pay-out ratio and capital investment of 10%-15% of turnover the Group reported relatively low net debt of approximately SR6bn at end-2007, although this will rise upon completion of the Oger Telecom investment. Moody's added that following the substantial acquisitions of recent months, the BCA of 6 incorporates some residual headroom for further investments. However, in the event that STC were to make further acquisitions in accordance with its strategy, Moody's assumes that these would be calibrated so as to maintain leverage towards the lower end of the communicated 1x-2x Debt/ebitda range, in accordance with the Group's financial policy.

Incorporated by Royal Decree as a Saudi Joint Stock Company in 1998, STC was partially privatised in 2002 and is currently controlled by three major Government and related shareholders which hold in aggregate approximately 80% of the equity capital, including the Public Investment Fund Saudi Arabia, which holds 70%.

Moody's ascribes strong support from the Government to STC based upon a combination of factors, including significant ownership which is not expected to reduce substantially in the medium-term, the Government's close involvement in the strategic direction of the Group through its appointment of six of the nine board directors (four are appointed directly and two indirectly by the GOSI and Public Pension Fund), and the importance of STC as an agent of modernisation in the Saudi economy and society. The high dependence factor reflects the close relationship between STC and the Government, and Moody's view that each is exposed to a very similar degree to any negative impact of potential political and economic shocks.

The positive outlook on STC's A1 rating reflects the positive outlook on the Kingdom of Saudi Arabia's A1 rating which, if it were to be raised from the current A1 level, would, on the basis of current GRI assumptions, cause STC's rating also to be raised.

Headquartered in Riyadh, Saudi Arabia, Saudi Telecom Company is the dominant telecommunications services provider within, to and from the Kingdom of Saudi Arabia, and generated consolidated group revenues of SR34.5bn revenues in 2007.