Long-term outlook of Saudi telecom sector positive: Aljazira Cap

The long-term outlook for Saudi Arabia’s telecom sector remains positive and will offer growth opportunities in future, Aljazira Capital said in a new report on Tuesday. 

Digitization and an effective regulatory system, along with data growth, will be the key drivers of investment in the sector. In addition, a high proportion of the tech-savvy young population will drive data consumption growth. 

Saudi Telecom Co. (STC) and Mobile Telecommunication Company Saudi Arabia (Zain Saudi) are in better positions to take advantage of growth opportunities in the sector, the consultancy noted.

STC is expected to maintain its dominant market position due to sound financials and continuous investment in 5G technology.

The proposed capital restructuring of Zain Saudi will significantly improve balance sheet strength and reduce finance charges. 

However, the current market conditions will be challenging for Etihad Etisalat Co. (Mobily) to continue to invest large amounts in upgrading network infrastructure, given the company’s stressed balance sheet with high leverage.

The financial cost is also expected to continue to hurt the telecom’s bottom line, despite efforts to rationalize the operating cost, the consultancy said.

Aljazira Capital recommended “overweight” ratings to STC and Zain Saudi, setting a target price per share at SAR 97.40 and SAR 15.40, respectively. The consultancy gave a “neutral” rating to Mobily, with a target price of SAR 22.1 per share.

Meanwhile, the Saudi telecom sector is likely to face several challenges in commercializing 5G services such as transitioning from 2G, 3G and 4G networks to 5G, bearing costs of maintaining these networks until the transition is completed, availability of affordable 5G devices and empowering 5G into vertical markets such as the Internet of Things (IoT) and Artificial Intelligence (AI).

Furthermore, the outbreak of COVID-19 in the first quarter of 2020 and the subsequent preventive measures taken by the government are likely to have a mixed impact on the telecom sector. 

The suspension of Umrah pilgrimages and travel bans are expected to hit the sale of temporary SIMs, but data demand is expected to be higher during the lockdown as majority of the people are working from home.

The interest rate cut by the Saudi Arabian Monetary Authority (SAMA) to support the slowing economy is likely to benefit Mobily and Zain Saudi in terms of easing finance costs, the consultancy said.