Measured approach

STC Group started its international expansion later than some of its regional peers, but the Saudi incumbent is poised to reap the rewards of its recent investments.

Tags: Saudi ArabiaSaudi Telecom Company
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Measured approach
By  Roger Field Published  March 15, 2011

On the surface, STC Group’s most recent set of financial results appeared to typify the fortunes of most incumbent telecom operators that have seen their home markets eroded by tough competition.

In its Q4 2010 results, STC posted a 23% decline in net profit to SR2.29 billion ($610.7 million). STC’s operating profit rose 15% to SAR3.03 billion, but its full-year net income declined by 13% to SAR9.4 billion.

However, the results were generally in line with analyst expectations, and as STC said in its results statement, the sudden fall was also related to a one-off gain in Q4 2009, which resulted from the listing of STC’s Malaysian joint venture, Maxis Group. STC also said that its 2010 profit fell due to an increase in costs related to capital investments in Saudi Arabia and abroad.

STC’s explanation of the results appears to hold some weight. The operator has certainly faced some significant costs after launching mobile operations from scratch in Kuwait at the end of 2008, and in Bahrain in March 2010.

“The dip in the home market was a top-line dip,” says Ghassan Hasbani, CEO, international, STC. “If you look at the bottom-line issue, there is not a dip.”

“The cost efficiency programmes that have been run at STC have actually brought a positive impact on the financials so it has been a positive story, not a negative story.
“The question is one of net income. If you look at the size of STC and the dividend and payout ratio and you look at the scale of infrastructure it has globally, we are more skewed towards investments in long-term growth markets, so this is where the money is still going.”

Hasbani insists that the positive impact of international operations on profitability will take some time, possibly two to three years. However, STC’s international forays in the past few years, which have seen the telco gain a presence in India, Indonesia, Malaysia, Turkey and South Africa, as well as Kuwait and Bahrain, are already having a positive effect on revenues.

“The positive income in terms of total revenue growth is there already. It is already pushing revenues significantly,” he says. “Most of the investments have already gone into the ground, so it now is a time of incremental capacity and sweating the assets,” he adds.

Bahrain and Kuwait

And two of the main assets that STC is busy nurturing are its mobile operations in Kuwait and Bahrain.

STC acquired Bahrain’s third mobile licence back in March 2009, for about $240 million, and launched operations last March. Hasbani says the operation has “proven a good success” in its first year of operations.

Hasbani describes the situation in the highly penetrated Bahraini market, where Viva competes with Batelco and Zain, as being a “value war”.

Despite a mobile penetration rate of well-above 100% and a population of little more than 1 million people, Hasbani insists that Viva has significant growth potential.

“If you look at our pricing structure, it is not extremely low, but it is at the right level with the benefits that you get out of it, because we don’t have any legacy systems on the network. We were able to create a lot of value and we are still creating a lot of innovative products and services and packages that offer a lot of value for the money that you pay for them,” he says.

At the beginning of February, Viva Bahrain secured funds for infrastructure expansion and general costs after it signed a $280 million financing agreement with HSBC Bahrain and Samba, a Saudi Arabian bank. Hasbani says the agreement represented a “very good deal” and that by arranging most of the agreement in dollars, Viva Bahrain was able to secure a low interest rate.

“We are deploying infrastructure anyway, and Viva is still in growth mode so it is effectively being used to fund the entire operation.

“This is a long term funding so it will help the company until the cash situation is sustainable and self sufficient, so we don’t envisage any further major funding rounds beyond this,” he adds.

Meanwhile, Viva Kuwait also remains in “growth mode” and is expected to become profitable in 2010, according to Hasbani.

“We already have a good traction on subscriber and revenue growth. Kuwait and Bahrain are similar stories, with steady growth and a good cost management approach, because they are both lean, small operations,” he says.

Across its operations, Hasbani says that “promised new revenue streams” are also starting to emerge from “phenomenal” broadband growth.

“We have been investing in broadband, DSL and fibre and now we are starting to reap the benefits where we are experiencing actual growth on revenues in this sector. That is significant and is starting to compensate for certain diminishing revenues on traditional services,” he says.

Market dynamics

In terms of further opportunities in the Middle East, Hasbani points to Syria, where STC is one of five companies bidding for the country’s third mobile licence, which is understood to have a reserve price of EUR90 million ($122.7m).

Speaking generally about opportunities in the region’s telecom sector, Hasbani says further acquisition targets are likely to present themselves in 2011, as some larger private investors seek to cash in on the rising value of telecom assets.

“As long as they [PIs] are at the end of the cycle and they see this [telecoms] as the only sector they can exit at a good price, then we will see more of them exiting to cover other sectors that they have invested in,” he says.

“I see that happening in the next couple of years – with large PI owners of telecom assets. There is also more appetite to come into the sector and invest in telecoms, and we are seeing large PI groups eyeing up telecoms again because […] it is the only thing they can sell to others.

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