JEDDAH - The Saudi telecom sector growth is set to experience a slowdown after three years of impressive organic growth, Al Rajhi Capital in its report on the Saudi telecom sector released Monday. It noted that the maturing data growth, reduction in Haj pilgrims' quota, and potential increase in competition on account of MVNOs foraying into the market are expected to affect the pace of growth going forward. Nevertheless, on the brighter side, Al Rajhi forecast that better earnings visibility and healthy dividend payouts will continue to attract investors. "We remain Overweight on Mobily, while maintaining our Neutral ratings on STC and Zain," it noted.
The report expects the telecom sector to grow at a slightly slower pace till 2015, due to the adverse developments. With better earnings visibility and strong cash flow generation potential, "we expect dividend yields to play a key role in the performance of Mobily and STC. We remain Overweight on Mobily (revised TP of SR99.5 per share), trading at a P/E of 9.4x and an estimated dividend yield of around 6.0 percent. Our view on STC (revised TP of SR56.0 per share) has become more positive on the back of the sale of its Indonesian asset, and new strategic focus. For Zain, we remain Neutral at SR10.0 per share."
According to the latest CITC statistics on voice and broadband subscriptions, the total mobile subscriptions in KSA reached around 53.1 million, translating into a penetration of 181 percent. In contrast, the total broadband subscriptions stood at around 13.98 million, implying a penetration of 40 percent. The voice market appears saturated, growing at a modest 1 percent, while the broadband has some steam left in it, as it is still underpenetrated. Thus, all service providers have shifted their marketing focus toward attracting new broadband customers in their bid to augment their share of revenues.
Despite the increasing broadband penetration during the 12 months ended September 2013 (9M2013 and 4Q2012), the average quarterly revenue grew at a moderate 7 percent CAGR over the same period. 
The report said fierce competition and the steadily falling broadband tariffs have limited revenue growth. The sector has slowed down further in 2013, registering marginal revenue growth of only 2 percent in Q3 2013 on a y-o-y basis. The broader market is certainly slowing down with higher penetration and dipping tariffs, requiring operators to focus on how to capture each other's market share as well as initiate cost-containment measures.
Moreover, the report said in an almost saturated market driven by promotions and broadband usage, Al Rajhi expects revenue market share (RMS) as a better indicator to understand the market dynamics. 
Contrary to market perception, STC's revenue market share loss to Mobily is not severe. STC still maintains a dominant revenue share of around 58 percent in the sector. STC's market share was only lower at 53 percent, in Q3 2012, which we believe was due to the Haj season when other operators resorted to aggressive sales. Barring that, STC has performed quite well in maintaining its revenue share. 
Mobily, on the other hand, seems to have benefited from Zain's weakness. 
Zain started off well gaining incremental market share capturing an impressive 20 percent of the total revenues in Q3 2010. However, since then the company has been consistently ceding market share, and it seems that Mobily has benefited by aggressively selling prepaid connections and data packages. 
Zain's market share now averages around 10 percent and Mobily, the second biggest player has now captured 31 percent market share. In 2013, Mobily has lost its market share marginally to STC, which also explains its single digit revenue growth in 9M 2013.
STC is 'leaner and Cleaner' now, the report said. For Mobily, Al Rajhi sees "better earnings visibility and clear strategy." But Zain "still (has) a long way to go," Al Rajhi report said. 
Market will become competitive with MVNOs' arrival: We believe the entry of MVNOs, expected to happen in 2014, is broadly good for the market as it will lead to a rise in segment-based marketing and promotional activities. This, in turn, could also result in innovative schemes and limited price-based competition. "We expect STC to benefit more from the introduction of a MVNO partner as it could aggressively target some of the price-sensitive segments, where Mobily and Zain are more active."