Equity Research General Update - GulfBase.comof growth for the company. We forecast KSA’s...

Equity Research General Update

• WecontinuetofavorMobilyasapureplayonSaudiArabia’stelecommarket,amorestableandresilienteconomyintheregion.WebelievethatMobily’smanagementisfocusedontheKSAopportunity,andwillnotpursueinternationalexpansioninthenearfuture.

• Mobilyisnolongerreliantonasinglelineofbusiness,havingestablishedthefoundationtotransitionfromapureplaymobileoperatortoanintegratedtelecomservicesprovider.Inlessthantwoyears,Mobilyhascapturedmorethan20%shareofthekingdom’sbroadbandsubscriberswith300,000usersin2008.Weestimatethatdatarevenuecontributedtoapproximately10%oftotalrevenuein2008.Broadbandserviceswillrepresentthenextlegofgrowthforthecompany.WeforecastKSA’sbroadbandsubscriberstomorethantriplefrom1.4mnin2008surpassingthe4mnmarkin2012.

• FollowingtheentryofZain,SaudiArabia’smobilesectorhasbecomemorecompetitive.Sofar,Mobilywithitsstrategicallycalculatedpromotionshasmanagedtolurenewmobilesubscribersaswellasmaintainitsexistingoneswithoutsacrificingmargins.WebelieveKSA’smobilemarkethasroomtogrowtowardsa145%activepenetrationrateby2010from124%in2008.

• WemaintainourBUYrecommendationandreviseourfairvaluetargettoSAR43.00–basedontheaverageoftwovaluationmethods:DCFandpeermultiples.Ourtargetpricesuggestsatotalreturnupsideof21.5%tothestock'smostrecentclosingprice,factoringinexpecteddividendofSAR1.00persharefor2009.OurupdatedDCFderivedfairvalueisSAR47.20.OurtargetpriceisatadiscounttoourDCFvaluation,andimpliesaP/Eof12.3xon2009Eearnings.TheappliedP/EisatapremiumtotheaveragemultiplesintheMENA/emergingmarketstelecomuniverse.WebelieveMobilywarrantsahighermultiplebecauseofitstrackrecordasagrowthcompanysincetheIPO.OurtargetP/Eisbackedbyourforecastof14.2%compoundannualgrowthinearningsforthenextthreeyears.

April 6th, 2009

Etihad Etisalat (Mobily) (7020.SE)Broadband opportunity materializing!

Current Price: SAR 36.20 Country: Saudi Arabia

Fair value Target: SAR 43.00 Sector: Telecom Services

Recommendation: BUY Exchange: Saudi Stock Exchange (Tadawul)

Year Net Profit (SAR mn)

EPS (SAR)

EBITDA reported (SAR mn)

BV (SAR mn)

EV/EBITDA adj. (X)

P/E (X)

P/BV (X)

Dec-11E 3,111 4.44 5,158 15,830 4.9 8.1 1.6

Dec-10E 2,801 4.00 4,890 13,768 5.1 9.0 1.8

Dec-09E 2,438 3.48 4,450 11,668 5.6 10.4 2.2

Dec-08 2,092 2.99 3,794 9,754 6.6 12.1 2.6

52-Week range (SAR) 22.55 - 49.14

Number of shares ('000) 700,000

Free Float (%) 48%

Market cap (SAR mn) 25,340

Market cap (USD mn) 6,756

Div Yld. 2009E (%) 2.8%

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Mobily (SAR) adjusted for corporate actions SC KSA index rebased

Mobily stock performance vs. SC KSA Index

Sector Coverage TeamSimon Simonian, CFA+9714 3199 763ssimonian@shuaacapital.com

Jessica Estefane+9714 3199 834jestefane@shuaacapital.com

April6th,2009 2

Etihad Etisalat (Mobily)

Contents

INVESTMENT THESIS .................................................................3

SAUDI MOBILE MARKET UPDATE .................................................4

INTENSIVE PROMOTIONS SINCE AUGUST 2008 ................................................................................................ 4

MARKET SHARE UPDATE ..................................................................................................................................... 4

ROBUST GROWTH FOR KSA MOBILE SECTOR IN 2008 ..................................................................................... 5

IPHONE 3G: ANOTHER MARKETING INITIATIVE ................................................................................................ 6

BROADBAND OPPORTUNITY…MATERIALIZING! ..........................7

KSA BROADBAND MARKET UPDATE .................................................................................................................. 7

THE CASE FOR THE BROADBAND OPPORTUNITY IN SAUDI ARABIA............................................................... 8

MORE COMPETITION EXPECTED IN BROADBAND............................................................................................. 9

FINANCIAL ANALYSIS AND FORECAST ........................................11

CAN MOBILY MARGINS EXPAND IN AN INCREASINGLY COMPETITIVE ENVIRONMENT? ............................ 12

CAPEX UPDATE................................................................................................................................................... 13

FREE CASH FLOW ............................................................................................................................................... 14

DIVIDENDS ......................................................................................................................................................... 14

RIGHTS ISSUE STRENGTHENS BALANCE SHEET.............................................................................................. 14

VALUATION: TARGET FAIR VALUE REVISED TO SAR 43.00 .............15

UPDATE ON POTENTIAL CATALYSTS / DEVELOPMENTS ................................................................................. 16

APPENDIX ..............................................................................17

MOBILY: OWNERSHIP STRUCTURE UPDATE .................................................................................................... 17

FINANCIALS ...........................................................................18

April6th,2009 3

Etihad Etisalat (Mobily)

Investment thesisMobilyhasproventobeoneofthemostsuccessfulgreenfieldtelecomoperationsintheMENAregion.Inlessthanthreeyears,thecompanyhasbecomeasolidnumbertwoplayerinSaudiArabia’smobilemarket,commandingapproximately28%revenuesharein2008.Mobilyisbranchingoutfromapureplaymobileoperatortoanintegratedtelecomservicesproviderinthekingdom.Broadbandserviceswillrepresentthenextlegofgrowth,asbroadbandpenetration,at5.3%ofthepopulationin2008,remainslow.Mobilylaunchedthewirelessbroadbandservice(HSPA)inQ207,andinlessthantwoyearscapturedmorethan20%marketshareofthebroadbandsegmentwith300,000subscribersat2008-end.

CompetitionhasbecomemoreintensewiththeentryofZain,thethirdmobileoperator.Sofar,Mobilywithitsstrategicallycalculatedpromotionshasmanagedtolurenewmobilesubscribersaswellasmaintainitsexistingoneswithoutsacrificingmargins.

Net profit forecast: largely unchanged from a year agoWeincreasedourrevenueforecastsfor2009and2010by10%and14%respectivelyfactoringinhigherbroadbanddatacontribution.Overall,ournetprofitforecastsfor2009and2010remainlargelyunchanged.Toreflectmoreintensivepromotions,beyondourinitialexpectations,bythethreeplayerstogainormaintainmarketshare,werevisedlowerourlongtermEBITDAmarginassumptions.Thiscombinedwithfine-tuninginitemsbelowtheEBITDAline,notablyaccountingforhigherdepreciationandamortizationexpenses,leadsustorevisedownwardournetprofitestimatesfor2009and2010by1%and3%.

Valuation – new target price of SAR 43.00WerevisedourtargetpricetoSAR43.00frompreviouslySAR58.50(SAR78.00pre-rightsissue).Ournewtargetpriceisbasedona70%-30%weightforDCFandpeervaluation,respectively.

OurnewDCF-derivedfairvalueofSAR47.20reflectsprincipallyahigherdiscountrateappliedtoourDCF.WerevisedourWACCto10.8%frompreviously9.4%.

OurrevisedtargetpriceimpliesaP/Eof12.3xon2009Eearnings,whichrepresentsapremiumtotheaverageP/EmultiplesintheMENA/emergingmarketstelecomuniverse.WebelieveMobilywarrantsahighermultiplebecauseof1)itsestablishedtrackrecordasagrowthcompanysincetheIPOin2004,2)strongmanagementexecution,and3)ourtargetP/Eisbackedbyourforecastof14.2%compoundannualgrowthinearningsforthenextthreeyears.

April6th,2009 4

Etihad Etisalat (Mobily)

Saudi mobile market updateIntensive promotions since August 2008

TheSaudimobilemarkethasprovedtobeanythingbutabenigncompetitiveenvironmentsincetheentryofZain.FromthebeginninginAugust08,Zainlaunchedwithanaggressivecampaign,‘Onemonthonus,onemonthonyou’,offeringthefirst500,000subscriberstheequivalentof50%lifetimediscountcombinedwiththebenefitsofthe‘OneNetwork’concept.

MobilyreactedsoonafterwardswithaSeptemberpromotionofferingsubscribers60%discountafterthethirdminuteforon-netlocalcallsandallinternationalcalls.InOctober,MobilylaunchedTejwaliserviceasaresponsetoZain’s‘OneNetwork’,offeringfreeincomingcallsin56countries,includingUAE(mandatoryroamingwithEtisalatrequiredtoreceivefreeincomingcalls),Egypt(againmandatoryroamingwithEtisalatMisr),Bahrain,Jordan,Switzerland,andFrance–allkeydestinationsforSaudis.TejwalialsoincludesSudan,whichispartofZain’s‘OneNetwork’.Earlier,inAugust,STChadannouncedanalliancewith30globaltelecomoperatorstoofferdiscountsoninternationalroaming.BothMobilyandSTCretaliatedsothatthe‘OneNetwork’nolongerbecomesadifferentiatorforthenewentrant.

AtthebeginningofNovember,STCintroducedaone-monthpromotionofferingfreecallsafterthefifthminuteforon-netlocalcallandallinternationalcalls.InresponsetoSTC’soffer,Mobilyreplaced,inmid-November,the60%discountpromotionafterthethirdminutewithanewonebyoffering50%discountstartingthefirstsecondforon-netlocalcallsandallinternationalcalls.Thispromotionwasforthreeweeks,andendedatthestartoftheHajjseason.

Insummary,followingZain’saggressivecommerciallaunch,MobilyandSTCreactedquicklywithgenerouspromotionstosendamessagetothenewentrant.Bythesametoken,bothSTCandMobilysignalledtheirintentiontocontainZain’smarketshareprogression.

Webelievemorepromotionsareinstorefor2009,leadingtoARPUpressure.However,asdiscussedinourMarch30th2008reportonMobily(‘Revisiting the contender...still a growth story’),theminutesofuse(MoU)arerelativelylowinthekingdomcomparedtoneighbouringGCCcountries.Hence,weexpectapositiveelasticityeffecttosomewhatoffsetthedeclineinratesperminutewithanincreaseinminutesofuse.

Market share update

Giventhelackofdisclosure,ithasbeendifficulttotrackonaquarterlybasissubscribermarketshareevolutionfortheSaudimobilesector.SaudiTelecomreported19mnactivemobilesubscribersattheendof2008.STCswitchedtoactivemobilesubscriberreportingasoflastyear.Mobilyindicatedthatclosingmobilesubscriptionsincreasedto14.8mninDecember08,from11.1mnayearago.ZainSaudiArabiareported2.0mnsubscribersattheendof08.

Basedonourestimates,Mobilycaptured35%shareofSaudiactivemobilesubscribersattheendof2008.

April6th,2009 5

Etihad Etisalat (Mobily)

Active subscriber share of Saudi mobile market (Dec. 2008E)

Source: SHUAA Capital estimates

Althoughrevenuebreakdownpersegmentisnotavailable,weareabletogaugerevenuemarketshareforSTCandMobilyfromreportedrevenues.WeestimatethatSTCcapturedapproximately71%revenueshareoftheSaudimobilemarket.Mobilycontinuedtogainrevenueshareofthemobilemarket,reachingcloseto28%,upfrom26%revenuesharein2007–albeitataslowerpacethanpreviousyears.

Revenue share of Saudi mobile market

Source: SHUAA Capital estimates

Robust growth for KSA mobile sector in 2008

It’sworthmentioningthatSaudimobilesegment’sgrowthpickedup,accordingtoourestimates,to16%in2008from15%in2007.

Saudi Arabia mobile sector vs. Mobily: annual revenue growth 2002-2008E

% Annual revenue growth 2002 2003 2004 2005 2006 2007 2008E

KSA mobile sector 62% 37% 18% 20% 20% 15% 16%

Mobily 251% 45% 28%Source: Company reports, SHUAA Capital estimates

Zain6%

Mobily35%

STC59%

7%21% 26% 28%

93%79% 74% 71%

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April6th,2009 6

Etihad Etisalat (Mobily)

Have we reached maturity?WeexpectSaudiArabia’smobilesectorrevenuegrowthtodeceleratein2009,whilestillachievinglowdoubledigitgrowth.

WeestimatethatSaudimobilepenetrationhasreachedapproximately124%in2008basedonactivesubscribers.NotethathumanpenetrationislowerduetomultipleSIMcardownership.Webelievethemarkethasroomtogrowtowardsa145%activemobilepenetrationrateby2010.

iPhone 3G: Another marketing initiative

MobilylaunchedtheiPhone3GinthekingdominFebruary09.Webelievethishastwopositiveimplicationsforthecompany:

1. Sustainsitsimageasaninnovativecompanyconstantlybringingnewproductstomarket.Asareminder,MobilywasfirsttolaunchtheBlackberryservice(Sep.06)andHSPA3.5Gmobilebroadband(Jun.07)inthekingdom.

2. iPhone3GshouldallowMobilytoattractnewhighARPUcustomersfromthecompetition.

April6th,2009 7

Etihad Etisalat (Mobily)

Broadband opportunity…materializing!KSA broadband market update

BroadbandInternetstartedtogaintractioninSaudiArabiaonlyasof2007.Sincethen,growthhasbeentremendous,withbroadbandpenetrationrisingfrom1%ofthepopulationin2006to3%in2007,and5.3%in2008.Totalbroadbandsubscribers(fixed+mobile)inthekingdomreached1.4mnattheendof2008.

Saudi Arabia: Broadband subscriber mix and penetration

Source: CITC, Company reports, SHUAA Capital estimates (LHS)

Intheresidentialsegment,accordingtoourestimates,broadbandpenetrationdoubledfrom10%in2007to20%ofhouseholdsin2008.

Saudi Arabia: Broadband penetration of households

Source: CITC, SHUAA Capital estimates

HSPA subscribers blow through the roof!2008wastheyearoftheboomofmobilebroadbandinthekingdom.Mobily’sprogressinthebroadbandsegmentlastyearwasaheadofourexpectations.Inourmodel,wewereforecastingmobilebroadbandsubscribers(HSPA)todoublefrom100,000in2007to200,000in2008.MobilyreportedthatHSPAsubscribersreached300,000attheendof2008.

From solid number two in mobile… to number two in broadbandLessthantwoyearsafterenteringthebroadbandsegment,inMay2007,Mobilyhascapturedmorethan20%shareoftotalbroadbandsubscribers(fixed+mobile)inthekingdom.Fromapureplaymobileoperator,MobilyisontracktobecomeasolidnumbertwoplayerinthebroadbanddatasegmentinSaudiArabia.Ontheotherhand,SaudiTelecomremainsthedominantplayer.AftertriplingitsDSLsubscribersin2007from200,000to600,000,STCaddedanother400,000subscribersin2008,matchingthenetadditionsofthepreviousyear.STCended2008withonemillionDSLsubscribers.

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April6th,2009 8

Etihad Etisalat (Mobily)

A comprehensive broadband strategyUptillnow,Mobily’ssuccessinbroadbanddatasegmenthasbeenthroughthe‘MobilyConnect’HSPAmobilebroadbandoffering.WiththeacquisitionofBayanatAl-OulaandZajilInternationalTelecomin2008,thecompanyisdevelopingamorecomprehensivebroadbandproductoffering:

Fixed WiMAX:followingtheacquisitionofBayanatAl-Oula,MobilyintegratedtoitsdistributionnetworkWiMAXbroadband,afixedhigh-speedInternetserviceforthehomeoratwork.Itispositionedasacomplimentaryofferingto‘MobilyConnect’–whichprovidestheadvantageofthemobilityfeature.TheresidentialWiMAXproductismarketedas‘broadband@home’offeringaspeedofupto2MbpsforamonthlyfeeofSAR200(USD53.3).

FTTP:Mobilyisselectivelydeployingfiber-to-the-premise(FTTP),extendingthenationalfiberbackboneinmetropolitanareas.WebelieveMobilywilltargetthebusinesssectorwithFTTP.

The case for the broadband opportunity in Saudi Arabia

Penetration remains relatively low.Asindicatedearlier,broadbandpenetrationhasreachedc.5%ofpopulationin2008–alevelstillwellbelowthatofOECDcountries.Residentialhigh-speedInternetpenetrationremainsrelativelylowat20%ofhouseholdsin2008.Assuch,weanticipatecontinuedstronggrowthinthebroadbandsegmentoverthenextfewyears.Weexpectthenumberofbroadbandsubscriberstomorethantriplefrom1.4mnin2008exceedingthe4mnmarkin2012.

A young population.SaudiArabiahasaveryfavourabledemographicprofile.51%ofthepopulationislessthan25yearsold,andapproximatelyone-thirdislessthan15yearsold.Thecountryhas5mnstudents,andhasrelativelylimitedentertainmentvenues(e.g.:nomovietheatres).Allthisbodeswellforbroadbandadoption.

High potential for corporate sector Internet service.In2007,theCommunicationandInformationTechnologyCommission(CITC)mandatedNielsontoconductasurveyoftheSaudiPCandInternetmarket.Accordingtothestudy,PCpenetrationwas76%andbroadbandpenetrationat36%amongprivatecorporationsinthekingdom.Itisworthmentioningthat66%ofsmallbusinesseswereusingcomputersin2007.Broadbandpenetrationwasthelowestamongsmallbusinessesat22%,withalargenumberrelyingonadial-upservicetoconnecttotheinternet.Wenotethatevenamongcorporationsusingbroadband,the256kb/secand512kb/secspeedconnectionswerethemostpopularatthattime.

Saudi private sector: PC and Broadband penetration (2007)

Source: CITC, Nielson survey, SHUAA Capital

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April6th,2009 9

Etihad Etisalat (Mobily)

PC affordability improving.Whatadifferenceayearcanmake?Historically,arelativelylowPCpenetrationinSaudiArabia,at21%ofthepopulationin2007,hasbeenconsideredabarrierforlongtermbroadbandadoption.Withtheriseofthelowpricednetbookssincelastyear,whosesalesaregainingtractioninthekingdom,thebarriersforPCownershiparefalling.Netbooks’retailpriceinSaudiArabiaisstartingfromSAR1,300(USD346).

More competition expected in broadband

MobilylaunchedinDec.08apromotiontargetedtostudentsbybundlinginapackagea‘Connect’USBmodem,aSIMcard,anASUS‘Eee’laptop,andadatasubscriptionplan.ThepromotioncoincidedwiththebacktoschoolseasoninSaudiArabia.Differentpackagesareavailable:1GB,5GB,andunlimiteddataplan,combinedwithaonemonth,6-month,or12-monthcontract.Forinstance,thebundle(USBmodem+SIMcard+ASUSnetbook)includingaonemonthunlimitedmobiledatasubscriptionisofferedatSAR1,985(USD529).

Mobily: mobile broadband subscription bundle with netbook

Source: Mobily

STC reactsWebelieveDSLremainsthepriorityinSTC’sbroadbandstrategy.ItsmarketingeffortshavebeenfocusedonpromotingtheDSLservice.However,theincumbentrecentlyreactedtoMobily’smobilebroadbandsuccess.OnFeb.17,STCannouncedajoint-promotionwithJarirBookstore,offeringafreeone-monthmobiledatasubscriptionandaSIMcardwiththepurchaseofalaptop.InMarch,STCalsoloweredthemonthlyfeefortheunlimitedmobilebroadbandsubscriptionfromSAR450toSAR350–matchingMobily’smonthlyrate.

STC: DSL packages pricing

Afaq DSL Shamil (Access+Internet Service)

Connection SpeedMonthly

Fee (SAR)March 08

MonthlyFee (USD)March 08

MonthlyFee (SAR)March 09

MonthlyFee (USD)March 09

% ChangeYoY

up to 256 Kbps 180 48 99 26 -45%

up to 512 Kbps 270 72 199 53 -26%

up to 1 Mbps 350 93 211 56 -40%

up to 2 Mbps 590 157 222 59 -62%

up to 4 Mbps 790 211 244 65 -69%

up to 8 Mbps 890 237 n/a n/a

up to 10 Mbps 960 256 n/a n/a

DSL Max (8 to 20 Mbps) n/a n/a 555 148

Installation fee 300 80 300 80Source: STC

Duringthesamemonth,STCalsoslashedthemonthlyfeefortheDSLservice,inouropinion,inorderto1)pricetheservicemorecompetitivelywithMobily’s‘Broadband@Home’WiMAXserviceaswellwiththe‘Connect’mobilebroadbandservice,and2)pre-emptthecommerciallaunchofthenewentrantAtheebTelecom.Havingsurpassedtheonemillionsubscribermark,STCisclearlyleveragingonitseconomiesofscale.

April6th,2009 10

Etihad Etisalat (Mobily)

STC: Evolution of monthly subscription fee for 1 Mbps DSL package

Source: Company reports

New entrants in broadband: time to market is key!Onanothernote,inFebruary08,threenewfixedlicenseswereawardedtoAtheebTelecom,IntegratedTelecom,andOpticalCommunications.InMarch08,ZainSaudiArabiacompletedanoversubscribedIPO.ThethreenewfixedlicensedcompanieswereexpectedtofollowsuitwiththeirrespectiveIPOspriortotheendof2008,withsomeofthemannouncingtheirplantocommerciallylaunchoperationsinQ408.Givenmarketconditions,theIPOprocesswasdelayedaswellasthecommerciallaunch.

AtheebTelecomtooktheleadbycompletingaSAR300mnIPOinFebruary09–thefirstIPOonTadawulsinceAugust2008–andintendstocommerciallylaunchitsoperationsinH109withWiMAXunderthe‘GO’brand.Accordingtothedecree,thenewfixedlicenseholdersmustlisttheirsharespriortocommencingoperations.InDecember08,anexecutiveofOpticalCommunicationsindicatedtothemediathatthecommerciallaunchhasbeenpostponeduntil2010.

Webelievetimetomarketiskeyandthemorethecommerciallaunchisdelayed,thelessattractivewillbethewindowofopportunitytothenewentrants.SaudiTelecomisaggressivelyupgradingitsnetworktoextendthecoverageofDSLservicesaswellasfibretothepremise(FTTP)inmajorcities.Asdiscussedearlier,Mobilyisalsoexpandinginthebroadbandsectorvia1)HSPA-basedwirelessbroadband,2)fixed-WiMAX,and3)FTTPinselectareas.

Execution riskWhenthecompanylaunched‘MobilyConnect’wirelessbroadbandserviceinmid-2007,itattractedalotofinterestnotonlyduetothemobilityfeatureoftheproduct,butalsobecauseofpent-updemandandalackofalternative,asSTC’sDSLservicewasnotavailableinallareasofthekingdom.Theoverwhelmingsuccessof‘Connect’inthefirstyearputpressureontheavailablebandwidth.Initialsubscriberswerewillingtotolerateathroughputsignificantlylowerthanthetheoretical7.2Mbpsinadditiontoperiodsofservicedowntime.However,withSTCaggressivelypursuingtheupgradeofitsfixedinfrastructure,andtheentryofathirdplayer(AtheebTelecom‘GO’),theconsumerwillincreasinglyhavealternativesinthenearfuture.

ExecutionbecomescriticalforMobily:henceitsambitiousCapexprogramin2008-2009.ThecompanyrecentlylaunchedHSUPA(HighSpeedUplinkPacketAccess)inmajorcitiesenhancingthespeedofdatauploadtoupto2Mbps.MobilyhasbeeninvestingtoensurethatitsHSPAnetworkcanmeetsubscriberdemand.Asareminder,Mobilylaunchedin2007theMiddleEast’sfirst‘allyoucaneat’unlimiteddatabroadbandpackage.Broadbandusagegrewby500%to20terabytes(20,000gigabyte)dailyattheendof2008from4terabytesin2007–anindicatorofSaudi’sthirstforinternetconnectivity.ThishasmadeMobily’s3Gnetworkoneofthebusiestnotonlyintheregion,butintheworld.

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April6th,2009 11

Etihad Etisalat (Mobily)

Financial analysis and forecast

FollowingthereleaseofMobily’sFY2008results,wearerevisitingourforecasts.

SinceQ208,thecompanyhasconsistentlybeatenourandconsensusestimateseveryquarter.MobilyachievedanetprofitofSAR2,092mnin2008,up52%YoY,and17%highertoouroriginalforecastof1,788mninMarch08.

Mobily: Summary P&L

Y/E Dec. 31 2005 2006 2007 2008A 2009E 2010E

Revenue 1,662 5,841 8,440 10,795 12,372 13,444

% growth 251% 45% 28% 15% 9%

EBITDA reported (113) 2,001 2,947 3,794 4,450 4,890

% margin -6.8% 34.3% 34.9% 35.1% 36.0% 36.4%

% growth 47% 29% 17% 10%

Adjusted EBITDA (pre-tax) (67) 2,445 3,895 5,001 5,827 6,379

% margin -4.0% 41.9% 46.1% 46.3% 47.1% 47.5%

% growth 59% 28% 17% 9%

Net Income (1,167) 700 1,380 2,092 2,438 2,801

% margin 12.0% 16.3% 19.4% 19.7% 20.8%

% growth 97% 52% 17% 15%Source: Company reports, SHUAA Capital estimates

Overall,ournetprofitforecastsfor2009and2010remainlargelyunchanged.Wefine-tunedourestimatesfor2009,2010andbeyondtoreflect:

Higher broadband data contribution.Weincreasedourrevenueforecastsfor2009and2010by10%and14%respectively.

Increased competition in the mobile sector was expected with the entry of Zain. Howevertoreflectmoreintensivepromotionsbythethreeplayerstogainormaintainmarketsharebeyondourinitialexpectations,werevisedlowerourlongtermEBITDAmarginassumptions.Thiscombinedwithfine-tuninginitemsbelowtheEBITDAline,notablyaccountingforhigherdepreciationandamortizationexpenses,leadsustorevisedownwardournetprofitestimatesfor2009and2010by1%and3%.

April6th,2009 12

Etihad Etisalat (Mobily)

Mobily: forecast update

SAR mn 2009E 2010E 2011E

New estimates:

Revenue 12,372 13,444 14,076

EBITDA reported 4,450 4,890 5,158

Net Income 2,438 2,801 3,111

Old estimates:

Revenue 11,219 11,829 12,341

EBITDA reported 4,203 4,483 4,714

Net Income 2,457 2,879 3,238

% Change (New vs. Old)

Revenue 10% 14% 14%

EBITDA reported 6% 9% 9%

Net Income -0.8% -2.7% -3.9%Source: SHUAA Capital estimates

SHUAA Capital estimates versus consensusSincethecompanyreportedoutstandingQ408andFY2008results,analystforecastshavebeenrevisedupwards.Thisbeingsaid,atthistime,ournetincomeprojectionsfor2009and2010arerespectively4%and5%aboveconsensus.

Mobily: SHUAA estimates vs. consensus

Revenue EBITDA Net Income

2009E 2010E 2009E 2010E 2009E 2010E

Consensus 12,003 12,862 4,312 4,750 2,349 2,662

SHUAA Capital 12,372 13,444 4,450 4,890 2,438 2,801

% difference 3% 5% 3% 3% 4% 5%Source: Reuters, Bloomberg, Zawya, SHUAA Capital estimates

Can Mobily margins expand in an increasingly competitive environment?

Asdiscussedabove,werevisedlowerourlongtermEBITDAmarginassumptionsforMobilytotakeintoaccountmoreintensivepromotionsbyalltelecomplayers.OurrevisedmodelcallsforanEBITDAmarginof36.6%in2011,upfrom35.1%realizedin2008.Weprefertobeconservativeatthistime.Previously,wewerefactoringmarginexpansionto38.2%in2011.Insummary,weexpectthecompanytoimproveitsEBITDAmargininthenextfewyears,however,ataslowerpace.Inparticular,weseeroomformarginenhancementin2009andthereafterforthefollowingreasons:1)savingsfrominternationalgateway,2)completionofnationalfiberbackbone,3)growingcontributionofhighermargindatasegment,4)enhancednetworkcapacityutilizationfromwholesaleagreementwithZainandAtheebTelecom.

April6th,2009 13

Etihad Etisalat (Mobily)

Factors that will have positive / negative impact on margins in 2009

Source: SHUAA Capital

Capex update

Timetomarketisimportant,andthecompanyhasbeeninvestingheavilytoseizetheopportunityparticularlyinthebroadbanddataarea.Currently,Mobily’s2GGSMnetworkcovers96%ofthekingdom’spopulation,andits3.5Gnetworkapproximately70%.ThisexplainsthewhoppingCapexofSAR3,061mnin2008or28%ofsales,upfromSAR2,148mnin2007.

In2009and2010,weexpecttheoperatorto:1)completetheupgrade/expansionofitsmobilenetwork;2)expandandenhanceHSPAcoverage;3)completetheconstructionofthenationalfiberbackbonea.k.a.theSaudiNationalFiberNetwork(SNFN)byQ209;4)investinWiMAXnetwork;5)selectivelyroll-outfiber-to-the-premise(FTTP)technologyinmetroareas;6)investinthe‘E-Cable’project,theinternationalsubmarine/terrestrialcable(UAE-KSA-Egypt-France)inpartnershipwithEtisalatUAEandEtisalatMisrEgypt.

Mobily: Capex forecast 2009-11E

SAR million 2007A 2008A 2009E 2010E 2011E

Capex 2,148 3,061 2,700 2,500 2,150

Capex as a % of sales 25.5% 28.4% 21.8% 18.6% 15.3%Source: Company reports, SHUAA Capital estimates

+

-

- Savings from International Gateway- Positive impact of completion of National Fiber Backbone

in H2 09 - Increasing contribution of (higher margin) broadband data to

revenue mix- Improved network capacity utilization from exclusive

national roaming agreement with Zain

2009EEBITDA margin

-Increased promotions to protect market share-Declining ARPU

April6th,2009 14

Etihad Etisalat (Mobily)

Free cash flow

Despiteheavycapexinvestments,weexpectamarkedimprovementinFCFgenerationasof2009.WeforecastMobily’sfreecashflowtojumpfromSAR485mnin2008toSAR1,500mnthisyear.BasedonourFCFforecastfor2009and2010,MobilysharesarecurrentlytradingataFCFyieldofrespectively5.9%and8.4%.

SAR million 2007A 2008A 2009E 2010E 2011E

FCF (21) 485 1,500 2,136 2,845

FCF / share (0.03) 0.69 2.14 3.05 4.06

FCF yield % (at today's price) neg. 1.9% 5.9% 8.4% 11.2%

Dividend 250 525 700 1,050 1,400

Dividend / share 0.36 0.75 1.00 1.50 2.00

Dividend yield % (at today's price) 1.0% 2.1% 2.8% 4.1% 5.5%

Net debt 8,220 7,476 6,501 5,065 3,270

Net debt / EBITDA reported 2.8x 2.0x 1.5x 1.0x 0.6x

Net debt / adjusted EBITDA (pre-tax) 2.1x 1.5x 1.1x 0.8x 0.5xSource: Company reports, SHUAA Capital estimates

Dividends

Mobilyinstitutedadividendasof2007.For2008,thedividendmorethandoubledfromSAR0.36/share(adjustedforrightsissue)to0.75pershare.Weassumedagradualincreaseinpayout.WeforecastthedividendtodoubletoSAR1.50/sharefor2010.WeexpectMobilytotransitionfromagrowthstorytohighdividendyieldstockinthenextfewyears.

Rights issue strengthens balance sheet

AsatDec.31,2008,MobilyhadatotaldebtofSAR9.8bnandcashof2.3bn.MobilystrengtheneditsbalancesheetwithaSAR2.0bnrightsissuecompletedinNovember2008.

Thecompany’slong-termdebtwasSAR7.9bnattheendof2008(includingacurrentportionof1.3bn).Thedebtisrepayableinsemi-annualinstalments.ThematurityisDecember2012,withafinalballoonpaymentof33%oftheloanatmaturity.Mobilyfinancedthisdebtin2007atanattractiverate.Managementisguidingforacostofdebtof5.5%.Wenotethatbasedonourcalculations,costofdebtwaslessthan5%in2008.

MobilyalsohadshorttermloansofSAR1.86bnonitsbalancesheetattheendof2008.Thisdebtincorporatesa12-monthloanofSAR1.5bnobtainedinmid-April2008tofinancetheacquisitionofBayanatAl-Oula,andisextendableforaperiodof6-month,i.e.untilOctober2009.Thecompanyannounceditsintentiontorefinancethisdebt.

Insummary,withthecashonhandandexpectedcashflowfromoperationthisyear,debtrefinancingisnotatrisk.Thebalancesheetisingoodshapeposttherightsissue.Netdebttopre-taxEBITDA2008is1.5x.Foranappletoapplecomparisonwithinternationalpeers,wearecalculatingnetdebttoEBITDAratiobyadjustingMobily’sreportedEBITDAbeforegovernmentroyalty,whichistheequivalenttoincometaxes.Notethatouradjustedpre-taxEBITDAexcludesonlygovernmentrevenueshare,butnotthelicensefees.

WeforecastMobily’snetdebtto(pre-tax)EBITDAratiotodeclinefrom1.5xin2008to1.1xand0.8xattheendof2009and2010,respectively.

April6th,2009 15

Etihad Etisalat (Mobily)

Valuation: Target fair value revised to SAR 43.00WereiterateourBUYrecommendationwitharevisedtargetpriceofSAR43.00frompreviouslySAR58.50(SAR78.00pre-rightsissue).Ourrevisedtargetfairvaluesuggestsa18.8%upsidefromthecurrentshareprice.TakingintoaccountSAR1.00persharedividendestimatefor2009,expectedtotalreturnis21.5%fromthecurrentprice.

Ournewtargetpriceisbasedona70%-30%weightforDCFandpeervaluation,respectively.Thetablebelowsummarizesournewtargetprice:

Valuation method SAR / share Weight SAR / share

DCF 47.2 70% 33.0

Relative valuation (P/E & EV/EBITDA) 33.1 30% 9.9

Weighted average target price 43.0 Source: SHUAA Capital

OurnewDCF-derivedfairvaluereflectsprincipallyahigherdiscountrateappliedtoourDCF.WerevisedourWACCto10.8%frompreviously9.4%.Wealsorevisedslightlydownwardournetprofit/cashflowforecasts(discussedearlier).Finally,werevisedupwardourCapexforecasts.

Current assumptions Previous assumptions

Risk free rate 6.0% 4.3%

Equity risk premium 5.0% 5.0%

Cost of equity 11.6% 10.3%

WACC 10.84% 9.4%

Terminal growth 2.5% 2.5%

What multiples does our new target fair value imply?WecrosschecktheimpliedmultiplesonournewtargetfairvalueofSAR43.00.OurrevisedtargetpriceimpliesaP/Eof12.3xonour2009EPSestimate,andanEV/EBITDAmultipleof6.4xonour2009(pre-tax)EBITDAforecast.Webelievethatthesemultiplesarereasonabledespitethattheyrepresentaslightpremiumtopeervaluationmetrics,asregional/emergingmarketsmobileplayersarecurrentlytradingat8xto11x2009EEPSand4xto6x2009EEBITDA.Howeverwebelievethatthispremiumisjustifiedgiventhefuturegrowthexpectations-ourmodelcallsforacompoundannualearningsgrowthof14.2%forthenextthreeyears(2008-2011E).

April6th,2009 16

Etihad Etisalat (Mobily)

Update on potential catalysts / developments

Mobily: A strategic asset for EtisalatMobilyisastrategicoperationforEtisalat.Whilenospecifictimetablehasbeendisclosed,EtisalathasindicatedinthepastthatitwouldbeinterestedtoincreaseitsstakeinMobily.However,undercurrentSaudiregulation,aminimum40%freefloatmustremainintact.Etisalatcanincreaseitssharebyacquiringapproximately8%onthefreemarket,neverthelessitcanonlyachieveacontrollingstakeof51%ifotherfoundingshareholdersofMobilyaresellers.

Potential royalty cut…most likely deferredGiventhecurrenteconomicsituationcombinedwiththesteepdeclineinoilprices,webelievethattheSaudigovernmentwilldeferanydecisionrelatedtorevisingtheroyaltyratechargedtotelecomoperators.Hence,apreviouslyanticipatedcutingovernmentrevenuesharefrom15%to10%formobileservices,followingtheentryofthethirdoperator,hasbeenpostponedto2010orlater.

Dismissing the prospect for a full fledged 4th mobile licenseContrarytorecentmediareports,wedon’texpectafourthfullfledgedmobilelicenseinSaudiArabia.Withactivemobilepenetrationalreadyhigh,estimatedat124%in2008,andheadingnorthof140%,wedon’tbelievetheCommunicationsandInformationTechnologyCommission(CITC),SaudiArabia’stelecomregulator,willawardafourthlicensetoafacilities-basedoperator.Theonlypossibility,inourview,istheissuanceofaMVNO(MobileVirtualNetworkOperator)license.However,webelievetheCITC,beforeconsideringawardingsuchlicense,willtakeitstimetowatchtheevolvingdynamicsofthe‘newthreeplayers’market.Asareminder,ZainSAonlyrecentlypaidUSD6.1bnforthethirdlicense.

April6th,2009 17

Etihad Etisalat (Mobily)

AppendixMobily: Ownership structure update

FollowingtheSAR2.0bnrightsissue,completedinNovember2008,Etisalat’sstakeinMobilyincreasedslightlyfrom26.25%to27.459%.Mobily’sfreefloatiscurrentlyestimatedat48%,upfrom40%asofApril2008,andfrom20%priortothat.

Mobily: Ownership structure post rights issue

Source: Tadawul, Shuaa Capital

Etisalat27.5%

Free Float48.0%

General Organization for

Social Insurance 11.2%

Saudi Investors 13.3%

April6th,2009 18

Etihad Etisalat (Mobily)

Financials

Consolidated Balance Sheet (SAR millions)

Year to December 2005 2006 2007 2008 2009E 2010E 2011E 2012E

Assets

Property and equipment, net 2,757 3,848 5,479 8,117 9,760 11,131 12,112 12,924

License acquisition fees 12,314 11,800 11,287 10,923 10,397 9,875 9,353 8,830

Goodwill 0 0 0 1,530 1,530 1,530 1,530 1,530

Investment 0 0 2 0 0 0 0 0

Total Non-Current Assets 15,071 15,648 16,767 20,570 21,687 22,535 22,995 23,284

Inventories 32 38 69 108 108 108 108 108

Accounts receivable, net 167 734 1,460 3,098 3,687 4,126 4,457 4,581

Other current assets / Prepaid exp. 783 717 810 1,063 1,063 1,063 1,063 1,063

Cash and bank balances 185 548 703 1,264 2,278 2,704 2,202 586

Short-term investments 0 0 0 1,050 0 0 0 0

Due from a related party 0 5 71 38 38 38 38 38

Total Current Assets 1,167 2,041 3,113 6,621 7,175 8,039 7,868 6,376

Total Assets 16,238 17,689 19,881 27,192 28,861 30,574 30,863 29,660

Capital and reserves

Total Equity 3,833 4,533 5,913 9,754 11,668 13,768 15,830 17,896

Liabilities

LT loan 0 0 7,912 6,642 7,769 5,472 1,878 1,878Provisions for employees' end of service benefits

3 13 26 46 67 90 114 139

Founding shareholder's loan 1,600 1,600 0 0 0 0 0 0

Total Non-Current Liabilities 1,603 1,613 7,939 6,688 7,836 5,562 1,992 2,017

Accounts payable 909 2,526 3,142 4,365 5,111 5,711 6,211 6,511

Short term borrowing 7,348 7,840 0 1,862 0 0 0 0

Due to related parties 193 179 111 78 78 78 78 78

Current portion of long-term loan 0 0 1,011 1,286 1,011 2,297 3,594 0

Other current Liabilities + Accrued expenses 2352 998 1,765 3,157 3,157 3,157 3,157 3,157

Total Current Liabilities 10,802 11,543 6,029 10,749 9,357 11,244 13,041 9,747

Total Liabilities 12,405 13,156 13,968 17,437 17,194 16,806 15,033 11,764

Total Equity and Liabilities 16,238 17,689 19,881 27,192 28,861 30,574 30,863 29,660

April6th,2009 19

Etihad Etisalat (Mobily)

Consolidated Income Statement (SAR millions)

Year to December 2005 2006 2007 2008 2009E 2010E 2011E 2012E

Total service revenue 1,662 5,841 8,440 10,795 12,372 13,444 14,076 14,673

Cost of providing services 967 2,680 3,779 4,773 5,409 5,848 6,106 6,351

Gross Margin 694 3,160 4,662 6,021 6,963 7,596 7,970 8,323

Selling & marketing expenses 274 365 641 816 935 1,016 1,050 1,080

General & administrative expenses 533 795 1,073 1,411 1,577 1,690 1,762 1,830

EBITDA reported (after tax) (113) 2,001 2,947 3,794 4,450 4,890 5,158 5,413

Depreciation & amortization 739 845 1,031 1,298 1,580 1,651 1,690 1,711

EBIT (852) 1,156 1,916 2,496 2,871 3,238 3,467 3,702

Financing costs & other income, net 315 455 513 397 395 380 291 160

Income before Zakat (1,167) 700 1,404 2,099 2,475 2,858 3,177 3,542

Zakat 0 0 24 7 37 57 65 76

Net profit (1,167) 700 1,380 2,092 2,438 2,801 3,111 3,466

EPS (1.67) 1.00 1.97 2.99 3.48 4.00 4.44 4.95

Avg shares O/S (000) 700 700 700 700 700 700 700 700

Key Ratios

Year to December 2006 2007 2008 2009E 2010E 2011E 2012E

Growth

Revenues 251% 45% 28% 15% 9% 5% 4%

EBITDA reported 1874% 47% 29% 17% 10% 5% 5%

Net profit 160% 97% 52% 17% 15% 11% 11%

Equity 18% 30% 65% 20% 18% 15% 13%

Total assets 9% 12% 37% 6% 6% 1% -4%

Leverage

Net interest coverage (x) 4.4 5.7 9.6 11.3 12.9 17.8 --

Debt / Equity (x) 1.7 1.5 1.0 0.8 0.6 0.3 0.1

Debt / Market Cap (x) 0.31 0.35 0.39 0.35 0.31 0.22 0.07

Net Debt / Market Cap (x) 0.29 0.32 0.30 0.26 0.20 -- --

Margins & Profitability

Gross margin 41.8% 55.2% 55.8% 56.3% 56.5% 56.6% 56.7%

Selling and marketing expenses/ Revenue 6.3% 7.6% 7.6% 7.6% 7.6% 7.5% 7.4%

G&A / Revenue 11.5% 12.7% 13.1% 12.8% 12.6% 12.5% 12.5%

EBITDA (after-tax) margin 34.3% 34.9% 35.1% 36.0% 36.4% 36.6% 36.9%

Net profit margin 12.0% 16.3% 19.4% 19.7% 20.8% 22.1% 23.6%

ROE 16.7% 26.4% 26.7% 22.8% 22.0% 21.0% 20.6%

ROA 4.1% 7.3% 8.9% 8.7% 9.4% 10.1% 11.5%

Valuation

Y/E Number of shares ('000) 700,000 700,000 700,000 700,000 700,000 700,000 700,000

EPS (SAR) 1.00 1.97 2.99 3.48 4.00 4.44 4.95

DPS (SAR) 0 0.36 0.75 1.00 1.50 2.00 2.50

BVPS (SAR) 6.48 8.45 13.93 16.67 19.67 22.61 25.57

Share price 36.20 36.20 36.20 36.20 36.20 36.20 36.20

P/E (x) 36.2 18.4 12.1 10.4 9.0 8.1 7.3

P/BV (x) 5.6 4.3 2.6 2.2 1.8 1.6 1.4

EV / EBITDA adj. pre-tax (x) 13.4 8.4 6.6 5.6 5.1 4.9 4.7

Dividend yield 0.0% 1.0% 2.1% 2.8% 4.1% 5.5% 6.9%

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April6th,2009 21

Etihad Etisalat (Mobily)

Research

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