• Earnings unmoved by recent MTR cuts, elasticity could be an issue Earnings came in at SAR18.8mn, missing our estimate of SAR34.4mn and Bloomberg consensus of SAR50.4mn. We see the earnings weakness largely as a result of inelastic demand following the recent MTR cut in April 2016. Lower MTRs led to a drop in interconnection revenue and costs; this should have stimulated usage and should have thus led to higher revenue growth. While we did see an improvement in margins (beat our estimate) this was offset by weaker-than-expected revenue. There were no major restatements and reclassification of financials nor one-off charges in 2Q16 and recent quarters; yet, we believe that an earnings recovery remains some way off. We reiterate our Neutral rating on Mobily.
• Challenging sector dynamics to keep hindering growth KSA telecoms face difficult sector dynamics, in our view, including what we suspect is inelastic demand (based on our analysis of Mobily’s results) as well as the ongoing biometric verification process (fingerprint data update campaign). In addition to the already aggressive competitive environment and tough macro backdrop, we believe these factors hit Mobily’s 2Q16 revenue. Moreover, rising interest rates in KSA will likely impact earnings growth; Mobily’s finance charges for 2Q rose 15% Q-o-Q and were 22% above our estimate.
• Margins boosted by MTR cuts; cost efficiency will be in focus The gross margin in 2Q16 rose to 63.5% from 56.0% in 1Q16 and 52.9% in 2Q15, its highest level since 3Q13, and EBITDA margin recovered to 34.4%. Mobily said this reflects its ongoing cost efficiency efforts, but we attribute most of the margin expansion to the MTR cut as well as lower handset sales (which typically have low margins). Going forward we expect management to put more focus on cost efficiency to improve profitability, given how challenging it will be to accelerate revenue growth, in our view.

Omar Maher
Karim Riad