EUR 23.09 For Business Accounts Only

EEC AB | Raise TP 46%, on strong operational performance, deleveraging; Upgrade to Neutral

Stock fairly captures 2020 strong operational results. Mobily’s share rose 52% since Mar-21, despite the tough macro-economic pressures, as it was one of the few operators that grew its 9M20 y-o-y top line and EBITDA to 6% and 5%, respectively, on the enterprise and fixed broadband segments. This was accompanied by an increase in total profitability, due to the refinancing that took place in 2019, cutting interest charges by 38% y-o-y in 9M20, and the market speculation on dividend distribution, which came right on the money. The stock trades on a 2021 EV/EBITDA of 5.8x, in line with the peer average, justified, in our view, despite 2020-22e EBITDA CAGR of 5%, due to the lack of catalysts. We hike our TP by 46%, as we upgrade our 2020-23e net profit expectations by an average of c98%.

Improving profitability and strong cash flow yield amid ongoing BS deleveraging. We expect Mobily to grow its revenues by a 2020-25e CAGR of 4.0%, driven primarily by the 5G and enterprise segments. Nonetheless, we forecast a net income CAGR of 27% for the same period, raising the net income margin to 14% by 2025e vs. 5.4% in 2020e. This mainly comes on the company's efforts to deleverage its balance sheet, as we forecast net debt-to-EBITDA to drop to 0.4x by 2025e (vs. the current 1.8x) amid its strong cash flow generation. We expect the free cash flow yield to record 10.4% in 2021e vs. 7.8% in 2020e.  

Upcoming dividends in line with market expectation. A potential dividend distribution was one of the main reasons for the stock to rally during 2020, in our view. This was confirmed by Mobily, when it announced, on 17 Dec-20, that the BoD recommended a DPS of SAR0.50, yielding 1.7% and implying a DPO of 50% on our expected 2020 earnings. While the yield is relatively low vs. peers, we see the company sustaining the DPO of 50%, reaching its SAR1.10 DPS by 2023e, yielding 4%, closer to the peer average.

Tower deal to have limited upside. In Jul-20, Mobily announced forming a joint committee with Zain [Underweight | TP SAR12.0], which was later declared to have completed the request for proposal (RFP) to potential investors for a possible towers deal. No updates have been disclosed since the end of Jul-20. We expect the proceeds, if any, to be used in settling part of the debt, yielding positive results, but the magnitude will depend on terms of the deal and the leasing payments, which might negatively impact margins. That said, we see a limited upside from this deal.