• Earnings miss on one-offs and weaker-than-expected margins STC’s 4Q2015 earnings fell short of our estimate by 27% on i) weaker-than-expected EBITDA margin, due to high operating expenses; ii) SAR136 million early-retirement-programme one-off charge; iii) SAR80 million loss on the sale/disposal of PP&E. We suspect that the EBITDA margin for the quarter was affected by weak GPM due to the recently-announced MTR cuts by the regulator. We flag that STC is a net interconnect gainer due to its market leadership, and any cut to MTRs should impact it, as opposed to Mobily and Zain KSA, which saw an expansion in their GPMs. However, we believe revenue growth, if sustained, should make up for margin weakness.
• Local operation drives top-line growth Despite the disappointing bottom-line performance, we believe revenue growth remains healthy. STC’s top-line for the quarter has beaten our estimate by 7% and grew 12% Y-o-Y and 3% Q-o-Q. The top-line growth was attributed mainly to i) strong growth in 4G data revenues; ii) 30% Y-o-Y increase in the FTTH customer base; iii) 21% Y-o-Y increase in the fixed broadband customer base; and iv) 16% annual increase in the Enterprise Business Unit overall revenues, driven by a 20% increase in the business sector data service revenue. Revenues from international operations grew 8% Y-o-Y.
• SAR1.00/share, in line with new dividend policy In line with the company’s recently-announced dividend policy, whereby the company will distribute a minimum of SAR1.00/share each quarter for the coming three years, the board has recommended the distribution of SAR1.00/share, bringing the total dividend for the year to SAR4.00/share and implying a yield of 7%.

Omar Maher
Karim Riad