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Etihad Etisalat - Mobily -Equity Report -31-07-2016

Source: Aljazira Capital

Mobily: Back into profitability on the back of lower cost, However topline still weak. We update our price target with a “ Neutral” recommendation

Q2-2016 result shows signs of improvement as cost control cuts losses: Mobily in Q2-2016 posted earnings of SAR 18.8mn as compared to losses of SAR 901.0mn in Q2-2015. This is the 3rd consecutive quarter that the company showed profitability since Q4-2014. Revenues in 2Q-2016 stood at SAR 3.3bn as compared to SAR 3.6nm in 2Q-2015, depicting a fall of 7.8%YoY. However, gross margins showed an improvement to 63% in 2Q-2016 as compared to 55% in Q2-2015, the company attributed the higher margins to its efforts towards cost optimization.

Mobily’s SG&A ( Selling, Marketing, General and Administrative) cost showed a decline of 49% YoY. Whereas Depreciation and amortization expense showed an increase of 10.2%YoY

Operating margins in the same period stood at 4.4% as compared to -23% in 2Q-2015, however it should be noted that the company booked a one off doubtful provision of SAR 800mn towards Zain KSA in 2Q-2015.

The bottom line was negatively impacted by the higher finance cost, given the rise in SAIBOR(Saudi Interbank offer rate), which has risen to 2.3%(6M-SAIBOR). Finance cost in 2Q-2016 stood at SAR 141mn as compared to SAR 58mn in 2Q-2015.

Our Estimates and Valuation: Mobily in 2016 is expected to post earnings of SAR 81mn, depicting a forward PE of 260x.The return to profitability is mainly due to the lower cost as the topline is expected to show a decline of 6.3% YoY. The company faces multiple issues of which the most important is the weak top line due to the dwindling market share, non-existent FTTH
and FTTX revenues and rising finance cost. However improvement in the gross and operating margins has started to show some semblance of improved bottom line performance. We update our price target to SAR 26.4 with a“Neutral” recommendation.

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