Moody’s Investors Service assigned A1 long term local and foreign currency issuer ratings to Saudi Telecom Company (STC), the integrated provider of telecom services which is 70% owned by the government of Saudi Arabia and 10% by related bodies. The outlook is ‘positive’. This is the first time that Moody’s has assigned ratings to STC.
Moody’s said that STC’s A1 ratings reflect the application of Moody’s methodology for Government-related issuers (GRIs) and as such combine the company’s underlying strength, or Baseline Credit Assessment (BCA), which is ranked as a “6” — equivalent to an A2 on Moody’s global scale; the A1 local currency rating of the Kingdom of Saudi Arabia ; the high level of support likely to be provided in a distress situation by the Kingdom; and Moody’s view of the high degree of dependence between STC and the Kingdom.
The Group had some 16.3 mln mobile subscribers at September 2007, giving it 69% share of the wireless segment and three quarters of total Saudi telecoms market revenues. The Group’s share of fixed line voice is 100%. Moody’s added that the BCA also factors in the favourable prospects for growth in the Saudi telecoms market overall reflecting several positive underlying dynamics even if fixed line voice revenues are expected to continue to decline in common with markets elsewhere. A growing, relatively youthful population, combined with rising mobile penetration rates and lower broadband penetration imply significant potential for continued good short to medium-term market growth in Moody’s view.
As the telecoms market is progressively liberalised STC’s market shares and pricing power will come under increasing pressure from newly licensed market entrants, although Moody’s notes that the current regulatory framework does not provide for the near term introduction of the service-based competition characteristic of more mature markets. From early 2008 STC will be competing with an additional mobile network operator, and the fixed line market is expected to see the entrance of competing operators following the award of three licenses in 2007. However, Moody΄s believes that STC should be able to offset much of the impact of the expected price erosion and market share loss through a continued focus on efficiency improvements and differentiation through service quality. Over time, a growing contribution from the Group’s overseas investments should also help underpin earnings.
Following its $3 bln investment in July to acquire an effective 25% stake in Maxis the Malaysian mobile operator, and a 51% stake in NTS, Indonesia, the Group invested $908 mln to take a 26% stake in Kuwait’s third mobile operator, and more recently announced the agreed acquisition of a 35% stake in Oger Telecom for a consideration of $2,56 bln.
Moody’s expects the Group to continue to generate strong profitability and cash flows even if there is a risk that increased competition will constrain these from the levels seen over 2004-2006 when it returned an ebitda margin of 50% and funds from operations in the region of SAR 15 billion.
