The growing data segment and ongoing cost-cutting initiatives are the near-term drivers of Saudi Arabia’s telecom sector while the attractive dividends yield of 4.3 per cent is the sector’s key attraction, a report said.

“We expect the sector to record a revenue growth of 2 per cent in 2014 and 4.7 per cent in 2015 to reach SR82.6 billion ($22 billion),” said Iyad Ghulam, equity research analyst at NCB Capital, the GCC's leading wealth manager and Saudi Arabia’s largest asset  manager, commenting on the 3Q14 update on the Kingdom’s telecom sector.

“Valuations remain attractive for STC and Mobily supported by strong fundamentals, dividend outlook and news on opening the TASI to international investors. We remain Overweight on STC and Mobily and Neutral on Zain.

“The slowdown in the sector is a key concern. The sector top-line is expected to grow 2 per cent in 2014E and 4.7 per cent in 2015 vs 3.8 per cent in 2013. However, attractive valuation and high dividend yield compared to the market are the sector’s key strengths. Our top pick is STC, driven by its strong balance sheet, potential of higher dividends and attractive 2015E P/E of 12.0x.”

The NCB Capital report said frequent and high dividend yields are the sector’s key strength. The current dividend yield for the telecom sector is 4.3 per cent compared to around 2.6 per cent for the TASI.

Also, STC and Mobily are among few companies in the market that pays quarterly dividends. Mobily 2014E DPS stands at SR5 representing a divided yield of 5.5 per cent and a payout ratio at 59 per cent while STC's dividend yield and pay-out ratio are 4.1 per cent and 52 per cent respectively.

Data segment continues to drive the sector

“We believe growth in the sector will continue to be driven by the Data segment for the next two years,” says Iyad Ghulam. “This is supported by higher penetration of low-cost smartphones. As per CITC, the number of subscribers grew by 42.5 per cent YoY, as data penetration levels increased to 66 per cent.”

Cost optimisation is common in a maturing sector

NCB Capital’s 3Q14 update notes that, given the overall sector is moving towards maturity, companies are focusing on cost reduction initiatives. These initiatives improved EBIT margins by 232bps and 54bps at STC and Mobily, respectively, while reduced losses for Zain by 11.2 per cent YoY for 2Q14.

These measures are expected to help increase the sector’s earnings by 12 per cent YoY in 2014E, despite only 2 per cent growth in revenues, said Ghulam. – TradeArabia News Service