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Saudi Telecom -Equity Report -27-10-2016

Source: AlBilad Investment Co.

The unaudited financial statements of Saudi Telecom Company (STC) for Q3 2016 revealed net earnings of SAR 2,148 million sliding 7.5% from the corresponding quarter in 2015, but rising 15% QoQ, thus the nine-month profit hit SAR 6,388 million down 13.5% from SAR 7,384 million in 9M 2015.

The YoY slump in net profit in Q3 2016 was mainly triggered by the 7.3% decrease in gross profit to SAR 7,067 million as the cost of services escalated by SAR 1,160 million, and operating expenses mounted by SAR 120 million, however revenues leaped by SAR 603 million only. Furthermore, zakat and taxes charges increased by SAR 37 million. On the contrary, early retirement costs fell by SAR 105 million, and the loss from investment under the equity method shrank by SAR 192 million, while financing expenses dropped by SAR 45 million.

During the nine months, earnings were buffeted by the rapid growth in cost compared to revenue growth, with the cost of services edging up by SAR 2,926 million, and operating expenses rising by SAR 736 million, while revenue increased by SAR 2,243 million leading operating profit to plunge by SAR 1,419 million. The deterioration of bottom line occurred despite the non-recurring charge of SAR 395 million in 9M 2015 arising from the two-month additional
salary.

The Q3 results should significant growth in the ratio of costs and operating expense to sales, we believe that a main reason for is the high intensity of competition in the markets and the regulatory requirements such as fingerprint documentation in Saudi Arabia. In general, the company still achieves remarkable growth in its revenues. The company's net profits for Q3 2016 came in line with our estimate of SAR 2,178 million, but beat the market consensus of SAR 2,066 million, thus our valuation is maintained at SAR 68.

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