Key Stock Data Sector Telecom Reuters Code 7010.SE Bloomberg Code STC AB Equity Net Out. Shares (bn) 2.00 Market Cap (SAR bn) 100.500 Market Cap (USD bn) 26.785 Avg. 12m Vol. (‘000) 1,159.17 Volatility (30 day) 33.172 Volatility (180 day) 41.371

Executive SummarySaudi Telecom Company, better known as STC, commenced operations in 1998 as the first mobile operator in Saudi Arabia. It is Saudi’s leading telecommunications service provider and the biggest in the entire Middle East in terms of market capitalisation. The company provides fixed-line, mobile, Internet, data and other telecommunications services directly and through its subsidiaries. STC’s total subscriber’s base stood at approximately 19.1 million at the end of 2008. Revenue widens 15% in 1H09 During 1H09, STC’s revenue increased 14.9% to SAR 24.82 billion as against SAR 21.61 billion a year ago. STC’s CoS increased 14.6% during first half of 2009. Subsequently, as a percentage of revenue, it stood constant at 29% in 1H09. The company’s gross profit rose 15.0% to SAR 17.63 billion compared to SAR 15.33 billion. Administrative & marketing (A&M) expenses rose 77.5% to SAR 3.37 billion during 1H09. The company’s operating profits decreased to SAR 7.06 billion, down 10.7% from SAR 7.91 billion in 1H08. Other expenses amounted to SAR 0.94 billion from SAR 0.50 billion. Subsequently, net profit went down 20.3% to SAR 5.48 billion and margins stood at 22.1% compared to 31.8% in 1H08. Annualised adjusted EPS fell to SAR 5.48 per share from SAR 6.87 per share. However, RoAA fell from 16.0% to 10.7%, on lower profits, while RoAE dropped from 37.1% to 28.4%. Outlook STC continues to benefit from its wide presence across Saudi Arabia. With an ever-increasing customer base of over 19.10 million, it is the leading mobile service provider in the country. The company has presence in fixed line, broadband as well as mobile services, and is aggressively concentrating on promotions and services, thereby accelerating its growth in the country and beyond. To achieve higher growth, STC is actively looking at acquisition opportunities in regions that exhibit high growth potential and synergies. In order to expand beyond national boundaries, STC purchased 25% stake in Maxis Communications, Malaysia’s biggest mobile operator and 51% stake in its Indonesian firm Binariang GSM, Maxis’ biggest shareholder. STC gained access into the Indonesian and Indian markets by entering into the deal. Further, it expanded into Kuwaiti telecom market and also purchased 35% stake in Oger Telecom, which operates in Turkey and South Africa. On the other hand, competition in Saudi is likely to intensify with the third mobile operator strengthening its presence. As a result, we expect ARPU’s and margins to remain under pressure. To determine the value of the company, we have used the DCF valuation method. Currently, STC is trading at a P/E multiple of 8.27x and 8.00x on 2009E and 2010E earnings respectively, and at a P/B multiple of 2.50x and 2.35x for the same period. While the Tadawul Index posted a YTD gain of 20.3%, STC witnessed a YTD gain of 2.3%. Considering the above factors, we revise our earlier Fair Value per share for STC downwards to SAR 60.08 from SAR 71.54 (September 03, 2008). Despite this, the stock exhibits a 19.6% upside from its closing price of SAR 50.25 (as of July 29, 2009). Therefore, we maintain our earlier OVERWEIGHT recommendation for Saudi Telecom Company. SAR Billion 2007A 2008A 2009E 2010E 2011E Total Revenue 34.5 47.5 50.5 52.4 53.6 EBITDA 16.7 20.3 21.5 22.2 22.6 EBITDA Margin (%) 48.5 42.8 42.6 42.4 42.2 Net Profit 12.0 11.0 12.2 12.6 12.7 Net Profit Margin (%) 34.9 23.3 24.0 24.0 23.8 Adjusted EPS (SAR) 6.01 5.52 6.08 6.28 6.37 Total Assets 68.8 99.8 108.3 111.0 112.4 RoAE (%) 34.3 30.0 31.2 30.3 29.6

OVERWEIGHT

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Saudi Telecom Company (7010.SE)

CMP SAR 50.25 Target SAR 60.08 Potential Upside 19.6%

MSCI GCC Index 397.52 Saudi Tadawul 5,778.14

Stock Performance (%) 52 week high / low (SAR) 68.25 / 33.80

1M 3M 12M Absolute (%) 0 1.93 -26.37 Relative (%) -3.90 -0.77 11.79

Shareholding Pattern (%)

Public Investment Fund 70.00 General Organization for Social Insurance - Saudi Arabia 6.90 Public Pension Agency 6.60 Public 16.50

STC and Tadawul Movement

Background Saudi Telecom Co. (STC) started its business as Saudi Arabia’s sole telecommunications operator in 1998. It is Saudi’s leading telecommunications service provider and the biggest in the entire Middle East in terms of market capitalisation. The company provides fixed-line, mobile, Internet, data and other telecommunications services directly and through its subsidiaries. By the end of 2002, the government offered 30% of the company’s stock in an initial public offering, to partly privatise STC, and now trades on the Saudi Stock Market (Tadawul), with 83.5% stake with government and rest is held with the public. The company has operations across 9 countries. The telco’s business operations are channelised through five units: Al Hatif, which includes landline services, card phones, public telephones, prepaid card services, and business services; Al Jawal, which offers a range of mobile services; Saudi Net, an internet service provider (ISP); STC Online for electronic bill-payment services; and Saudi Data, a provider of data solutions. Since its inception, STC has witnessed rapid subscriber growth; it had an acclaimed start with about 600,000 customers in the first year of its business and was efficient in meeting the requirements of 6 million subscribers in less than 2 years of its operations. Its mobile and fixed-line subscribers stood at 19.1 million and 4.00 million respectively, by the end of 2008. STC controls more than half of the Saudi mobile market. The company enjoyed monopoly in fixed-line operations in the country till April 2007 when the industry regulator - Communications & Information Technology Commission (CITC) - awarded licenses to three consortia, one led by Hong Kong’s PCCW, another by Bahrain’s Batelco and the third by the US’ Verizon Communications, to provide fixed-line services in the country. Further, the entry of UAE-based Etisalat into the Saudi mobile market in May 2005 has challenged STC’s entrenchment in this segment as well. In March 2007, Zain Group (Kuwait) was awarded a third mobile license. To achieve higher growth, STC is actively looking at acquisition opportunities in regions that exhibit high growth potential and synergies. In 2007, STC purchased 25% stake in Maxis Communications, Malaysia’s biggest mobile operator and a 51% stake in its Indonesian unit for USD 3 billion, from Binariang GSM, Maxis’ biggest shareholder. The partnership also includes SAR 3.4 billion contract to be invested in future expansion plans of Aircel Company in India. Further, in December 2007, it acquired a 26% stake in the Kuwaiti Telecom Company for SAR 3.42 billion, and in April 2008 it purchased a 35% stake in Oger Telecom Ltd, which operates in Turkey and South Africa, for SAR 9.6 billion. In order to stave-off competition in the mobile segment and to expand its subscriber base in other operating segments, STC has instituted a price-cutting strategy and is offering attractive services such as higher-speed broadband digital subscriber line (DSL) service, 3.5G technology, hot-line services, among others. During July 2008, STC was awarded ‘The King Abdulaziz Quality Award’ by the Saudi Arabian Standards Organization, which is the most prestigious award in the country. During the same month, it also won the ‘Transparency Award’ from BMG Financial Advisors as recognition of its continuous and transparent communications with regional and international financial analysts, financial research companies and investors, both within and outside the Gulf. Further in May 2008, it won the ‘The Telecommunications Company of the Year for 2008’. The award was presented in recognition of its comprehensive coverage of Al Jawal which covers more than 98% of the inhabited land area in addition to the provision of new and innovative services coupled with its strategy to meet the continuous development of technology in the telecommunications sector in the region. It is the first telecom company in the region to obtain Standard & Poor’s Ratings ‘A+’ long-term and ‘A1’ from Moody’s.

Largest mobile company in Saudi Arabia Business operations channelised through five units STC holds close to 53% market share in 2008 Saudi telecom on an expansion spree

Business Model Board of Directors • Chaired by Dr. Mohammed Bin Suleiman Al Jasser

• Mr. Mohammed Bin Abdullah Al Kharashi

• Mr. Mohammed Bin Saleh Al Dahham

• Mr. Ibrahim Bin Ali Al Hassan

• Mr. Hamad Bin Suleiman Al Qasoumi

• Mr. Abdulaziz Bin Habdan Al Habdan

• Mr. Mohammed Bin Omran Al Omran

• Mr. Abdulrahman Bin Abdulaziz Mazi

• Mr. Khaled Bin Abdulrahman Al Rajhi

Source: STC Saudi Arabia’s real GDP is forecast to contract 0.9% in 2009

Subsidiaries/Associates/Affiliates of STC STC has a number of subsidiaries, associates, affiliates and strategic investments.

SUBSIDIARIES/ASSOCIATES/AFFILIATES/INVESTMENTS COUNTRY % SHARE

Arabian Internet & Communications Services Company Saudi Arabia 100.00 PT Natrindo Telepon Seluler (NTS) (direct 7% and indirect via Maxis Group 44%) Indonesia 51.00 Tejari Saudi Arabia Saudi Arabia 50.00 Arab Submarine Cables Company Saudi Arabia 47.10 Arab Satellite Communications Organization Saudi Arabia 36.66 Oger Telecom UAE 35.00 Kuwait Telecom Company Kuwait 26.00 Binariang GSM Holding Malaysia 25.00 Maxis Group (via Binariang GSM Holding) Malaysia 25.00

Source: Zawya Industry Scenario In the wake of the recent financial turmoil and subsequent economic slowdown, the International Monetary Fund (IMF) expects the GCC countries to grow at 1.3% in 2009, before recovering to 4.2% as the economic scenario improves by 2010. However, during the earlier years, with the high oil prices and subsequent economic development, the GCC region registered a growth rate of 5.4% in 2007 and 6.4% in 2008. On the other hand, unlike the expected positive growth of the GCC region, Saudi Arabia’s real GDP is forecast to contract 0.9% in 2009 before recovering to a growth rate of 2.9% in 2010. The real GDP grew at an average 4.4% over the period 2004-2008, on the back of high oil prices and subsequent economic development. Rapid credit growth and increased leverage witnessed during the booming economy in turn exposed the GCC banks to a global and domestic downturn.

Growth initiatives directed at continuing expansion plans both locally and internationally

STC

Focus on growth and value with its wide range of products and services

It is investing heavily in networks and has sovereign backing with government being a major shareholder

More stress on technological innovations form an integral part of the company’s growth initiatives

Saudi Arabia’s nominal GDP grew 22% YoY to SAR 1,754 billion in 2008 Global mobile subscribers cross 4 billion mark Growth driven by rising disposable income, young population and liberalisation

As per preliminary estimates, Saudi Arabia’s nominal GDP advanced 22.0% YoY to reach SAR 1,753.50 billion in 2008 from SAR 1,437.68 billion in 2007, driven by soaring oil prices during the first half of the year. Average oil prices jumped to USD 95.0 per barrel in 2008 from USD 67.6 per barrel in 2007. However, in light of the current financial turmoil and economic slowdown along with falling oil prices, the IMF forecasts a 22.3% decline in nominal GDP in 2009. However, a reversal in the trend is expected as the economic growth is likely to be 13.3% in 2010.

Saudi Arabia's Nominal GDP

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14.0%

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Oil to GDP Non-oil to GDP

Source: SAMA, Central Department of Statistics & Information Telecom Market Telecommunications is one of the fastest growing sectors in the world. According to the United Nations International Telecommunications Union (ITU)’s March 2009 update, there were around 4 billion mobile subscribers worldwide, with over 100% penetration in some of the more mature markets. The overall value of the telecom industry stood at USD 3.5 trillion as of end 2008 and is expected to register steady growth. Since the turn of the century, the growth of mobile cellular subscribers has been impressive, with CAGR growth averaging 23.2% between 2003 and 2008. Starting from a meager 12% in 2000, mobile penetration is expected to surpass the 60% mark by the end of 2009. The fast-emerging BRIC (Brazil, Russia, India and China) economies are driving substantial growth in the cellular subscriber base, with these nations alone accounting for over 1.3 billion by 2008-end. China crossed the 624 million mark by the end of January 2009 representing the world’s largest mobile market, while India had over 376 million mobile subscribers by the end of February 2009, though with a relatively low penetration rate. The mobile segment makes up more than 90% of all telephone subscribers across Africa - higher than any other continent. Meanwhile, according to Market Intelligence & Consulting Institute, worldwide mobile phone subscriber base is likely to grow at a compounded annual growth rate (CAGR) of 6.5% between 2008 and 2013 to reach 5.28 billion. With this, the worldwide mobile phone subscriber penetration rate will jump to 74.3% by 2013 from the current 57.3% in 2008. The region’s telecommunication sector is one of the fastest-growing non-oil sectors. However, there is a disparity in the economic growth across the countries due to differences in geographical area and size of the population. The growth in the region has been fuelled by strong economic fundamentals, increasing disposable income, a young population, and government reforms aimed at liberalising and diversifying the economies away from oil. The dynamic mobile market in the region already enjoys high penetration rates, but continues to register high growth. This is mostly due to recent competitive activity, with a second or third operator entering a market or new investors buying stakes in an existing operator. The result is a drop in tariffs and improvement in services, which ultimately benefits the end consumer. Multi-SIM ownership is common as subscribers aim to maximise special offers and deals. Several large players have established their presence by either acquiring new licenses, or buying into existing operators in the Middle East, Africa and West Asia regions. This increase in pan-regional competition will be a significant factor for higher growth in future. Telecom sector liberalisation has led to a rapid increase in the number of operators over the years; specifically mobile sector to tap the growing market in the MENA region. Subsequently, the competition has intensified. But still some markets are lagging behind and need to come up with appropriate policies to tap the potential.

MENA mobile penetration rate offers greater growth opportunities as against matured markets Telco’s moving from licensing to consolidation to drive further growth

Number of Mobile Operators in the MENA Region

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Source: Global Insights The MENA region registered the world’s highest 5-year growth during 2003-08. Cellular subscribers grew at a CAGR of 41.5% as compared to the worldwide average of 23.2%. Meanwhile, the GCC region registered a 5-year growth in cellular subscribers at a CAGR of 33.1% during the same period. The major Middle Eastern markets have matured fast to reach penetration rates higher than 100%, which are comparable to developed markets in Europe and Far East. Countries like Egypt, Iraq and Iran that are still below the 100% penetration mark are also expected to witness intense subscriber growth during the next 3-4 years, implying further opportunities for regional telecom players.

Mobile Penetration

10.0%35.0%60.0%85.0%

110.0%135.0%160.0%185.0%210.0%

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Qatar

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Jordan

Tunisia

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Libya

Morocco

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lebanon

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Palestine

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World

Scope for Value-added & other

High-Growth Regions

Source: ITU, Taib Research Since the opening up of the Arab mobile market 15 years ago, the telecommunications sector in the region has emerged as a goldmine for operators and investors, both within the region and beyond. The focus however is gradually moving away from investments in green-field expansions to more acquisitions and inorganic growth. The limited green-field opportunities available in the region are driving license prices up to prohibitive levels. This has forced existing players to consider acquisitions as a means to accomplish their growth strategies. The decline in ARPU is due to increasing competition in the region and price reductions as several large players have established their presence either by acquiring new licenses, or buying into existing operators. Over the past few years leading operators, like Zain (presence in 22 countries), Etisalat (18 countries), Qtel (17 countries), Orascom (11 countries) and STC (8 countries), have expanded aggressively, primarily via acquisitions. According to AT Kearney, on a global scale, Etisalat and STC are amongst the first MENA based companies approaching the global top-10 in terms of market capitalization.

The liberalisation of the telecom sector in the region has made fixed line phones obsolete as more customers opt for mobile services. Fixed-line services have traditionally been provided by government-owned monopolies and penetration rates have been low, reflecting large household sizes further accentuated by mobile substitution. This coupled with the availability of affordable handsets and relaxation in regulations has allowed a second or a third operator to enter the market triggering a drop in calling rates and introduction of value-added services. Fixed line licenses are being made more attractive by clubbing WiMAX licenses that facilitate wireless broadband services. According to Informa Telecom & Media, WiMAX growth is expected to touch 4.45 million by 2012 as the business is witnessing significant growth in internet, fixed-line and pay-TV services. Broadband services are increasingly hogging the limelight alongside mobile telephony as more licenses are being issued for wireless broadband and mobile broadband enabled networks. The GCC (excluding Kuwait) has a low broadband penetration rate of average 5.64%. The number of wireless broadband subscribers in the Arab countries has reached 200 million during 2008 and is expected to hit 240 million by the end of 2009. Internet usage has been the rapidly growing across the MENA region, with users rising 77.97 million from 39.41 million in 2007 & 29.73 million in 2006. Internet users in the GCC countries rose 11.9% to 12.12 million from 10.83 million users in 2007.

Internet Penetration

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Saudi arabia

Kuwait

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SyriaOman

Tunisia

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LibyaYemen

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Scope for Internet growth

Source: ITU, Taib Research The focus of the industry is now shifting towards the development of next-generation 3G and 4G technologies. Increased competition and technological innovations have pushed telecom’s convergence with the media sector and present opportunities to drive higher and newer revenues streams. Advanced high-speed Next Generation Networks (NGN) facilitating converged services introduced mobile content providers to the markets. HSPA networks have allowed mobile broadband to pave way for players in the banking and advertising space taking advantage of the mobile internet with high speed download and upload of data on the highly personalised mobile device. The telecom sector is less vulnerable to the global recession compared to other sectors. The sector is seen as a driver of the economy and therefore policy makers are driving investments and reform more than ever before by supporting broadband infrastructure deployment, encourage investments and reduce government ownership, while increasing government support. The region is continuously experiencing growth led by liberalisation and is expected to continue in the coming years.

Growth opportunity for broadband segments in the region Companies expected to face competition in a nearly saturated mobile market

Saudi Telecom Market Snapshot With a population of 25 million comprised mostly of high net worth individuals and an annual economic growth of 6% (over the past 3 years), Saudi Arabia retains its position as the third biggest mobile market in the MENA region. At the same time, the Saudi Arabian telecom market commands the largest market share in the GCC region, and has been growing robustly in the recent years, as seen from a 10-fold increase in its GSM market, from 2.5 million in 2001 to over 36 million by end of 2008, thereby registering a CAGR of 46% annually.

Saudi Telecom Market -Penetration

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Sector reveneues Mobile Fixed line Broadband Internet

Source: CITC

Saudi Arabia is estimated to have a total subscriber base of 36.15 million customers by the end of 2008 as opposed to 7.24 million at the end of 2003, translating into a CAGR growth of 37.9% in 2003-08. The country’s mobile penetration rate was 143.5%, compared to 116% as of end 2007, higher than the world average of 59.3%. Saudi Arabia’s mobile network coverage exceeded 97% of the population as per 2008 numbers. Working landlines reached more than 4.1 million with a penetration rate of about 16.5% to population and 68.4% to households, favorably with the average teledensity in the Arab World (11%) and the developed countries (13.5%). During the recent years, there has been a shift of customers from landline to mobile throughout the GCC region, mainly due to advantages such as portability, cheap handsets and increasing number of operators offering better deals. In addition, internet services have also witnessed growth with users exceeding 7.2 million by end of 2008, thereby raising internet users in the GCC’s most populated country to 28.6%.

Currently, there are three players in the market - Saudi Telecom, Mobily and Zain Saudi. The entry of Zain Saudi in August 2008 has put pressure on the existing telecom operators. In 2007, the STC held a market share of 61.1%, while Mobily had a market share of 39.9%. But by the end of 2008, Zain captured 5.6% of the market share within five months of starting the operations. Meanwhile, STC share declined to 53.2%, Mobily’s market share continues to expand with 41.2% in 2008. Competition between the existing STC and Mobily is strong, with operators intensifying promotions and offers and coming up with aggressive advertising campaigns. Broadband subscription of the country has grown from 64,000 in 2005 to over 1.33 million at the end of 2008, representing a CAGR of around 175% and over 20-fold increase in the 3-year period. Saudi Arabia’s broadband penetration rate stood at around 5.3% of population and household broadband penetration stood at around 23% by the end of 2008. This is double the household penetration of the preceding year. The number of Internet users grew from around 1 million in 2001 to an estimated 7.7 million at the end of 2008, a CAGR growth of around 34%. Internet penetration stood around 31% of the population in 2008 higher than the world average of 23% and 14% of Arab countries. This rapid growth is attributed to increased public awareness; growth in availability of broadband services; decreasing cost of personal computers and Internet access; and enhanced usefulness of the Internet brought about through increased availability of local content, of Arabic language sites; of e-services such as online banking, e-commerce and e-government applications.

Third biggest mobile market in the MENA region STC losing market share due to increased competition Broadband subscriptions increase twenty-fold

Country’s mobile revenue expected to grow 11%, and penetration to reach 150% in 2009 Revenues rise 38% to SAR 47.5 billion in 2008 Adjusted EPS fell to SAR 5.52 from SAR 6.01

According to industry experts, the country’s mobile revenues is expected to grow at 11% in 2009 compared with 18% in 2008, whereas the penetration is expected to reach 150% in 2009. Moreover, the country’s mobile subscribers are expected to increase 17% to 42 million however; the ARPU can register a decline of 9% in the year. Since the commercial launch of Zain Saudi last August, the mobile market in the country has become extremely competitive as operators have adopted aggressive offers, value added services and promotions to differentiate themselves. Zain Saudi expects to complete its own network by mid 2010. Fixed line segment is also expected to see some fireworks in the coming years as Etihad Atheeb and a consortium led by Bahrain’s Batelco, prospective players to launch services in 2009. The two other consortiums are led by Hong-Kong’s PCCW and US’ Verizon. Verizon announced 2010 as a date for start of its operations. The entry of the three players is expected to boost penetration rate far above the market’s current addressable size. The opportunities in telecommunications industry in the region are still very active, as companies continue to strike several investments, partnership and expansion deals to show that they are more resilient than other industries. Financial Performance – FY 2008 Revenues STC sales registered a healthy 37.8% growth to reach a record SAR 47.47 billion compared to SAR 34.46 billion in 2007. This increase can be attributed to the rise in population and increase in usage fees. The company’s revenue from usage stood at SAR 36.69 billion, a 30.7% increase from SAR 28.07 billion, while subscription fees rose 72.7% to SAR 9.88 billion. However, activation fees fell 8.6% to SAR 0.45 billion compared to SAR 0.50 billion in 2007. Also, revenues from other services increased 157.9% to SAR 0.45 billion in 2008 compared to SAR 0.17 billion in 2007. The company had a subscriber base of 19.1 million, up 9.4% from 17.3 million last year, representing about approximately 53% market share in the country. STC’s broadband customers grew to 1.0 million in 2008 from 0.60 million a year ago. Expenses STC’s CoS increased 25.2% to SAR 13.80 billion from SAR 11.02 billion in 2007. The increase in cost was due to a 38.5% increase in access charges and 14.9% rise in government charges. Further, as a percentage of revenues, CoS decreased 292 bps to 29.1% in 2008 from 32.0% in 2007. The company’s A&M expenses nearly tripled to SAR 7.19 billion, due to a rise in advertisement, rent and financing commission. As a percentage of revenues, A&M expenses increased to 15.2% from 7.1% in 2007. Depreciation and amortisation expenses increased 56.3% to SAR 6.41 billion in 2008. Profitability The company’s gross profit increased 43.7% to SAR 33.67 billion, due to higher sales. Gross profit margin expanded to 70.9% from 68.0% in 2007. Operating expenses increased 53.7%, also as a percentage of revenue it rose to 70.7% from 63.4% in 2007. Further, the company’s profit from operations rose 10.2%. On the contrary, net profit attributable to equity shareholders declined 8.2% to SAR 11.04 billion from SAR 12.02 billion in 2007, due to a SAR 2.29 billion foreign exchange translation loss. Accordingly, net profit margin also contracted 1,164 bps to 23.3% in 2008 from 34.9% a year ago and adjusted EPS fell to SAR 5.52 from SAR 6.01 in 2007. Subsequently, RoAA decreased from 20.9% to 13.1% and RoAE fell from 34.3% to 30.0%.

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Chart Gallery

Size of the Company The salient features of the balance sheet are:

The share of current assets in the total assets base increased to 19.3% in 1H09 from 17.9% in the previous year, led by a 23.9% jump in accounts receivables. Accounts receivables, which accounted for 9.4% of the total assets base (7.7% in 1H08), increased to SAR 9.85 billion compared to SAR 7.95 billion. Inventories jumped 13.1% YoY to SAR 0.77 billion in 1H09. On the other hand, prepayments & other assets decreased 3.0% to SAR 2.25 billion from SAR 2.32 billion a year ago. Cash and cash equivalents declined 3.0% to SAR 7.31billion taking its share in total assets to 7.0% (7.3% in 1H08).

The share of non-current assets in the total assets decreased to 80.7% in 1H09 from 82.1% in

1H08. Property, plant & equipment (PPE) increased 12.8% to SAR 50.48 billion from SAR 44.76 billion in the last year, led by acquisitions. Equity method and other investments rose 2.5% to SAR 2.5 billion, while its share in total assets remained flat. However, intangible assets decreased 7.3% to SAR 29.47 billion and other non-current assets fell 62.3% to SAR 2.15 billion a year ago.

Total assets base expanded marginal 1.5% to SAR 104.79 billion. Assets turnover ratio fell to

0.49 from 0.50 in 1H08, reflecting the company’s higher asset base.

The company’s current liabilities spiked 16.5% to SAR 26.27 billion with its share in total assets rising from 21.8% in 1H08 to 25.1% in 1H09. This was led by an 85.2% increase in current portion of borrowings and 20.0% rise in accounts payables to SAR 7.14 billion and SAR 6.66 billion in 1H09, respectively.

During 1H09, non-current liabilities decreased 13.1% to SAR 32.18 billion with its share in total

assets falling to 30.7% from 35.9% in 1H08. Long-term loan declined 13.3% to SAR 25.53 billion and other payables decreased 17.3% to SAR 3.80 billion in 1H09.

STC’s shareholders’ equity increased 3.3% to SAR 39.51 billion due to 15.2% increase in

statutory reserve and 13.8% increase in retained earnings. Retained earnings stood at SAR 11.71 billion, up from SAR 10.29 billion in 1H08. The adjusted book value per share (BVPS) rose to SAR 19.76 compared to SAR 19.12 in 1H08. The shareholders’ equity to total asset ratio rose to 0.38 in 1H09 compared to 0.37 in the previous year.

Financial Performance Analysis – 1H09 For the six months ended June 2009, Saudi Telecom reported a 14.9% increase in revenue to reach SAR 24.82 billion as against SAR 21.61 billion in the same period of the last year. The company also witnessed a 14.6% increase in CoS during first half of 2009. Subsequently, it as a percentage of revenue stood same at 29.0% in 1H09. The company’s gross profit rose 15.0% to SAR 17.63 billion compared to SAR 15.33 billion in the same period of the last year. However, gross profit margin remained intact at 71.0% in 1H09. A&M expenses rose 77.5% to SAR 3.37 billion during the first half of 2009. The company’s operating profit decreased to SAR 7.06 billion, down 10.7% from SAR 7.91 billion in 1H08. Other expenses amounted to SAR 0.94 billion from SAR 0.50 billion. Subsequently, net profit went down 20.3% to SAR 5.48 billion and margins stood at 22.1% compared to 31.8% in 1H08. Annualised adjusted EPS fell to SAR 5.48 per share from SAR 6.87 per share. However, RoAA fell from 16.0% to 10.7%, on lower profits, while RoAE dropped from 37.1% to 28.4%.

Total assets base expanded 1.5% in 1H09 First half revenues increase 15% to SAR 25 billion

Working Capital Snapshot SAR ’000 2007A 2008A 1H08A 1H09A

Total Current Assets 13,977,435 18,946,396 18,483,272 20,181,997 Cash and cash equivalents 7,618,128 8,061,169 7,534,176 7,309,766 Accounts receivable, net 4,972,988 8,120,037 7,948,416 9,851,183 Accounts Receivable days 47 50 55 66 Prepayments and A current assets 1,018,644 1,986,991 2,322,343 2,253,647 Inventories 367675 778199 678337 767401 Inventory turnover days 9 15 15 20 Total Current Liabilities 17,219,660 22,898,835 22,542,881 26,270,554 Accounts payable 3,082,080 6,648,722 5,548,590 6,656,437 Accounts Payable days 83 129 126 169 Other payables 6,217,303 4,334,601 4,951,515 4,601,151 Accrued expenses 5,586,722 5,762,320 6,241,531 5,830,650 Deferred revenues – current 1,773,107 2,248,478 1,944,364 2,038,946 Borrowings - current 560,448 3,904,714 3,856,881 7,143,370 Net Core Working Capital 2,258,583 2,249,514 3,078,163 3,962,147 Average Core Working Capital Cycle (Days) -28 -63 -56 -83 Net Current Assets -3,242,225 -3,952,439 -4,059,609 -6,088,557 Average Working Capital Cycle (Days) 3 -28 -31 -37 Source: STC

Peer Comparison In order to do a peer comparison, we have taken comparable companies as Etihad Etisalat (Mobily), Emirates Telecom Corporation (Etisalat), and Saudi Telecom Company (STC).

Mobily Etisalat STC 2008 1H09 2008 1H09 2008 1H09 Ratios: Total Assets Turnover Ratio (x) 0.46 0.47 0.49 0.46 0.56 0.49 EBITDA Margin 35.1% 33.9% 30.8% 36.3% 42.8% 43.3% Net Profit Margin 19.4% 19.2% 30.7% 31.1% 23.3% 22.1% RoAE 26.7% 22.9% 32.6% 29.2% 30.0% 28.4% RoAA 8.9% 8.3% 15.1% 14.2% 13.1% 10.7% Market Indicators: Adj. EPS (USD) 0.80 0.88 0.33 0.35 1.47 1.46 P/E (x) 12.75 11.54 8.42 7.94 9.11 9.17 Adj. BVPS (USD) 3.71 3.96 1.10 1.28 5.02 5.27 P/BV (x) 2.73 2.57 2.51 2.16 2.67 2.54 Current Market Capitalisation (USD Million) 7108 7108 19856 19856 26786 26786

(USD Millions) Sales 2,877 1,603 7,686 4,014 12651.75 6617.84

% YoY change 27.8% 23.7% 23.1% 9.5% 37.7% 14.7% EBITDA 1,011 544 2,364 1,456 5413.23 2865.80 % YoY change 17.1% 29.1% 5.1% 31.7% 21.4% 0.3% Net Profit 558 308 2,359 1,250 2941.86 1460.79 % YoY change 51.5% 49.0% 18.8% -10.3% -8.3% -20.4% Total Assets 7247 7581 16900 18308 26589.06 27943.28 % YoY change 36.7% 23.1% 18.4% 12.6% 44.9% 1.4% Shareholders' Equity 2600 2769 7908 9208 10031.44 10536.66 % YoY change 64.8% 61.1% 20.7% 16.0% 4.8% 3.2%

Source: STC, Zawya

More focus on inorganic growth Expanding operations in Bahrain

New Projects and Strategies Saudi Telecom is now set to focus on more expansion opportunities after revenues generated by its acquisitions abroad exceeded initial targets. The company has entered into an agreement with Cisco to supply WebExTM web and audio collaboration technology to businesses throughout the Kingdom of Saudi Arabia with an aim to have a major impact on improving productivity, lowering cost and further reducing boundaries that facilitate business and education. The company launched a 3-month offer in which it will double the speed of its Internet Protocol-Virtual Private Network (IP-VPN) service that will be made available to customers with internet speeds from 64 Kb/s up to 2.5 Gb/s. The network is compatible with all communication technologies available in the country such as Fiber Optics, WiMax and VSAT, and customers will be able to benefit from other applications like video conferencing and prioritizing data processing according to application importance and type. The company also signed an agreement with Dilithium to provide mobile video solutions to its customer base. Along with its inorganic growth strategy the company is also focusing on the real estate development. Recently the company signed agreements with two real estate companies. The agreements will help the company in the implementation of telecommunications infrastructure services that will transform its real estate development plans into model districts. In order to implement telecommunication infrastructure around the country, STC, till date has signed 170 agreements to develop model districts covering a total area of more than 51 million square meters. The Saudi Industrial Property Authority (Modon) launched a project to convert 10 industrial parks in the country into smart industrial cities, which will be implemented by Saudi Telecom. The projects are expected to boost production in the industrial parks by 25%, cut costs by 10% and reduce products delivery time by 30%. The project aims to set up a high-speed telecommunications infrastructure for more than 2,500 factories. In line with its expansion plans the company won a bid for Bahrain’s third mobile-phone license, paying USD 230 million and was the only bidder. STC plans to start operations in Bahrain in the second half of 2009 and aims to acquire a 20% market share over the next 10 years from the two existing operators Zain and Batelco. Saudi Telecom recently was awarded the “Best Wholesaler of the Year in the Middle East” in the annual telecommunications awards.

Risks and Concerns:

Continued expansion into highly penetrated (approximately 140%) Saudi Arabian market in the context of increased competition may not yield expected benefits.

Entry of third mobile operator, Zain KSA, would further intensify the competition in the future.

Valuation Methodology: We have used DCF valuation method to arrive at the fair value of STC, as discussed below: Assumptions:

(i) Risk free Rate (Rf) of 3.25%, equivalent to 12-months average yield on 10 year US T-bill.

(ii) Unlevered Beta of 0.77 (iii) A terminal growth rate of 2.0%

Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 10.37% and a WACC of 8.79%.

SWOT Analysis

Cost of Equity: 10.37% WACC: 8.79%

THREATS

Intensified competition on account of entry of third player in market and expansion initiatives taken by regional players Highly competitive market may reduce future earnings

OPPORTUNITIES

Expected rise in the population in the region Expected growth in the economy over the long run Diversification of the economy

WEAKNESS

Rising leverage level may impact the company’s performance Major business revenue coming from Saudi Arabia, which already has a high mobile penetration rate

STRENGTHS

Saudi Arabia’s largest telecom operator Well-established company with presence in 9 countries Wide geographical reach within the country gives access to customer base, thereby increasing penetration Major player in the broadband market Diversified portfolio of services

DCF Calculations DCF Valuation (FCFF Model)

(in SAR ’000) 2009E 2010E 2011E 2012E 2013E Operating Profit (EBIT) 6,584,857 13,989,234 14,117,282 14,325,194 14,497,792 Income Tax 455,131 966,906 975,757 990,127 1,002,057 Effective Tax Rate 6.9% 6.9% 6.9% 6.9% 6.9% NOPAT 6,129,726 13,022,328 13,141,525 13,335,067 13,495,735 Add: Depreciation and Amortisation 4,204,823 8,222,334 8,498,024 8,869,270 9,358,151 Less: Capex 6,197,768 13,042,856 11,071,499 12,380,124 14,224,720 Less: Change in Net Working Capital 385,346 -301,914 -155,343 -276,336 -306,170 Operating Free Cash Flows to Firm (OFCFF) 3,751,435 8,503,719 10,723,393 10,100,549 8,935,337 Non-Operating Income 1,514,610 1,813,754 1,909,056 2,022,484 2,147,177 Tax on Non-Operating Income 104,687 125,363 131,950 139,790 148,408 Add: Non-Operating Cash Flows (After Tax Non-Operating Income) 1,409,924 1,688,391 1,777,106 1,882,694 1,998,769 Free Cash Flow to Firm (FCFF) 5,161,358 10,192,111 12,500,499 11,983,243 10,934,106 WACC (Ko) 8.79% 8.79% 8.79% 8.79% 8.79% Present Value / Discount Factor @ 0.9587 0.8813 0.8100 0.7446 0.6844 Long-Term Growth Rate (g) 2.00% Terminal Multiple [(1 + g) / (WACC - g)] 15.02 Nominal Terminal Value [(FCFF * (1 + g)) / (WACC - g)] 164,192,032 Present Value of Free Cash Flows 4,948,396 8,981,844 10,125,808 8,922,317 7,483,202

Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 40,461,568Terminal Value: Residual Cash Flow (FCFF of 2013E) 10,934,106 WACC 8.79% Long-Term/Terminal Growth Rate (g) 2.00% Divided by Capitalisation Rate (WACC - g) 6.79%Equals Nominal Terminal Value 164,192,032 Implied Multiple of 2013E EBITDA 6.88 Times PV/Discount Factor 0.68Present Value of Terminal/Residual Value 112,371,527 Enterprise Value 152,833,095 Implied Multiple of 2013E EBITDA 6.41 Less: Market Value of Long-term Debts 32,670,939Less: Market Value of Preferred Shares 0Add: Surplus Cash and Investments 0Equity Value 120,162,156Net shares outstanding (‘000) 2,000,000Fair Value Per Share (SAR) 60.08

* figures in SAR ’000 unless specified Sensitivity Analysis We have prepared a sensitivity analysis table, showing the probable nominal terminal value, discounted terminal value and enterprise value, given different growth rate assumptions and the WACC. The shaded area represents the most probable outcomes.

Sensitivity Analysis of Nominal Terminal Value (SAR ’000)

Discount Factor

Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00%

6.79% 190,649,900 209,694,111 232,712,052 261,092,322 296,955,8007.79% 162,582,306 176,369,804 192,537,523 211,760,063 234,993,5438.79% 141,718,432 152,184,799 164,192,032 178,107,437 194,425,1469.79% 125,600,377 133,832,758 143,121,585 153,684,157 165,801,757

10.79% 112,774,232 119,430,566 119,430,566 135,151,307 144,524,737

Sensitivity Analysis of Discounted Terminal Value (SAR ’000) Discount

Factor Long-Term Growth Rate

1.00% 1.50% 2.00% 2.50% 3.00% 6.79% 141,841,297 156,009,968 173,135,047 194,249,636 220,931,6447.79% 115,991,011 125,827,419 137,361,947 151,075,874 167,651,3238.79% 96,990,801 104,153,887 112,371,527 121,895,104 133,062,7949.79% 82,492,303 87,899,198 93,999,949 100,937,276 108,895,921

10.79% 71,107,067 75,304,058 79,978,385 85,216,392 91,126,582

Sensitivity Analysis of Enterprise Value (SAR ’000) Discount

Factor Long-Term Growth Rate

1.00% 1.50% 2.00% 2.50% 3.00% 6.79% 184,333,550 198,502,221 215,627,300 236,741,889 263,423,8977.79% 157,447,831 167,284,239 178,818,767 192,532,693 209,108,1438.79% 137,452,369 144,615,455 152,833,095 162,356,672 173,524,3639.79% 121,996,796 127,403,691 133,504,442 140,441,770 148,400,414

10.79% 109,690,777 113,887,767 118,562,095 123,800,101 129,710,291 Investment Opinion The telecommunications sector, in the GCC in particular and the wider MENA region in general, is witnessing unprecedented growth as a result of liberalization. Saudi Arabia is the largest telecom market across the GCC region, and continuously growing despite ever-increasing competition in the domestic market. STC continues to benefit from its wide presence across the country. With an ever-increasing customer base of over 19.10 million, it is continuously adding subscribers. The company also looks focused to capitalise the opportunity to expand its presence outside Saudi Arabia and has done aggressive acquisitions to expand its operations in the growing market. Continuing its aggressive expansion drive, STC purchased stakes in Maxis Communications, thereby gaining access into Indonesian and Indian markets by entering into the deal. It expanded into Kuwaiti telecom market and also purchased stake in Oger Telecom, which operates in Turkey and South Africa. The country’s mobile revenue is expected to grow at 11% in 2009, whereas the penetration is expected to cross 150% mark in 2009. Moreover, the country’s mobile subscribers are expected to increase 17% to 42 million. This provides ample opportunity for the telecommunication market in the Middle East. On the other hand, competition in Saudi is expected to remain intense as the third mobile operator continues to increase its market share. As a result, we expect average revenue per user and margins to remain under pressure. Meanwhile, we also believe that falling tariffs will be partially offset by extra revenues generated from leasing of the network to the new entrant. However, we believe that the company’s entry into high-growth markets such as India and Indonesia, and its innovative products and services would enable it to endure these challenges. Currently, STC is trading at a P/E multiple of 8.27x and 8.00x on 2009E and 2010E earnings respectively, and at a P/B multiple of 2.50x and 2.35x for the same period. While the Tadawul Index posted a YTD gain of 20.3%, STC witnessed a YTD gain of 2.3%. Considering the above factors, we revise our earlier Fair Value per share for STC downwards to SAR 60.08 from SAR 71.54 (September 03, 2008). Despite this revision, the stock exhibits a 19.6% upside from its closing price of SAR 50.25 (as of July 29, 2009). Therefore, we maintain our earlier OVERWEIGHT recommendation for Saudi Telecom Company.

Fair Value: SAR 60.08 Investment Opinion: OVERWEIGHT

Financial Statements

Consolidated Balance Sheet (in SAR ’000) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Current Assets Cash and cash equivalents 7,618,128 8,061,169 7,534,176 7,309,766 8,891,718 8,488,762 8,388,360 Accounts receivable, net 4,972,988 8,120,037 7,948,416 9,851,183 9,756,012 9,968,169 10,124,053 Prepayments and A current assets 1,018,644 1,986,991 2,322,343 2,253,647 2,156,117 2,322,049 2,462,924 Inventories 367,675 778,199 678,337 767,401 817,040 815,252 809,702 Total Current Assets 13,977,435 18,946,396 18,483,272 20,181,997 21,620,887 21,594,232 21,785,039 Non-Current Assets Property, plant and equipment 34,369,297 44,381,539 44,759,465 50,482,608 52,359,134 57,263,461 60,353,731 Intangible assets, net 13,855,574 31,695,114 31,794,742 29,470,312 28,914,578 26,435,801 24,222,395 Equity method and other investments 2,404,389 2,451,736 2,436,192 2,497,610 2,768,673 2,950,208 3,098,793 Other non-current assets 4,204,551 2,287,350 5,718,084 2,154,789 2,590,295 2,767,286 2,913,627 Total Non-Current Assets 54,833,811 80,815,739 84,708,483 84,605,319 86,632,681 89,416,756 90,588,547 Total Assets 68,811,246 99,762,135 103,191,755 104,787,316 108,253,568 111,010,987 112,373,585 LIABILITIES AND EQUITY Liabilities Current Liabilities Accounts payable 3,082,080 6,648,722 5,548,590 6,656,437 6,923,139 7,147,487 7,281,438 Other payables 6,217,303 4,334,601 4,951,515 4,601,151 4,920,055 5,156,389 5,332,055 Accrued expenses 5,586,722 5,762,320 6,241,531 5,830,650 6,361,044 6,578,577 6,715,512 Deferred revenues – current 1,773,107 2,248,478 1,944,364 2,038,946 2,393,712 2,480,976 2,591,625 Borrowings - current 560,448 3,904,714 3,856,881 7,143,370 6,838,397 6,457,529 5,974,924 Total Current Liabilities 17,219,660 22,898,835 22,542,881 26,270,554 27,436,348 27,820,958 27,895,554 Non-Current Liabilities Borrowings 13,019,303 28,081,220 29,433,157 25,527,569 26,765,329 25,891,157 25,772,353 Employees’ end of service benefits 1,932,297 2,738,025 2,998,856 2,847,967 2,938,811 3,154,321 3,385,635 Other payables 748,104 3,482,178 4,602,328 3,804,907 3,995,077 4,152,344 4,259,499 Total Non-Current Liabilities 15,699,704 34,301,423 37,034,341 32,180,443 33,699,217 33,197,822 33,417,487 Total Liabilities 32,919,364 57,200,258 59,577,222 58,450,997 61,135,565 61,018,780 61,313,041 Equity Share Capital 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 Statutory reserve 7,020,710 8,233,141 7,630,990 8,787,435 9,567,957 10,947,378 12,347,600 Retained earnings 8,658,704 9,783,301 10,287,549 11,709,170 11,600,510 12,779,198 12,126,452 Financial statements` translation differences 196,839 -378,464 326,944 -984,120 -984,120 -984,120 -984,120 Equity attributable to equity holders 35,876,253 37,637,978 38,245,483 39,512,485 40,184,347 42,742,457 43,489,932 Minority Interest 15,629 4,923,899 5,369,050 6,823,834 6,933,656 7,249,751 7,570,612 Total Liabilities and Equity 68,811,246 99,762,135 103,191,755 104,787,316 108,253,568 111,010,987 112,373,585

Consolidated Income Statement (in SAR ’000) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Operating Revenues 34,457,807 47,469,368 21,605,169 24,816,904 50,535,526 52,377,815 53,582,591 Operating Expenses Government charges -4,825,002 -5,541,955 -2,650,729 -2,803,301 -5,834,227 -6,104,531 -6,298,528 Access charges -4,426,666 -6,130,577 -2,646,859 -3,230,744 -6,400,227 -6,581,171 -6,678,966 Employee costs -4,274,597 -6,164,272 -2,736,357 -3,506,705 -6,360,295 -6,539,783 -6,636,627 Depreciation and amortization -4,098,287 -6,407,514 -2,781,935 -3,681,868 -7,886,691 -8,222,334 -8,498,024 Administrative and marketing expenses -2,442,472 -7,194,289 -1,899,743 -3,372,170 -8,038,002 -8,435,785 -8,736,987 Repairs and maintenance -1,772,882 -2,127,821 -976,175 -1,157,221 -2,366,333 -2,504,976 -2,616,177 Total operating expenses -21,839,906 -33,566,428 -13,691,798 -17,752,009 -36,885,774 -38,388,580 -39,465,309 Operating Income 12,617,901 13,902,940 7,913,371 7,064,895 13,649,752 13,989,234 14,117,282 Other Income and Expenses Cost of early retirement program -547,580 -675,000 -375,112 -593,520 -769,135 -823,363 -869,093 Finance costs 0 0 -607,071 -690,656 -1,259,193 -1,213,305 -1,184,806 Commissions 333,145 1,501,375 245,623 184,813 1,699,423 1,813,754 1,909,056 Other, net 42,747 -2,686,961 234,226 159,704 62,049 63,792 66,221 Other income and expenses, net -171,688 -1,860,586 -502,334 -939,659 -266,856 -159,122 -78,622 Net Income before Minority interest, Zakat and Tax 12,446,213 12,042,354 7,411,037 6,125,236 13,382,896 13,830,112 14,038,660 Provision for Zakat -384,631 -375,513 -190,065 -176,629 -417,315 -431,260 -437,763 Provision for Tax -42,020 -456,829 -194,236 -274,589 -507,683 -524,648 -532,559 Net Income before Minority interests 12,019,562 11,210,012 7,026,736 5,674,018 12,457,899 12,874,204 13,068,337 Minority interest 2,171 -172,166 -157,585 -196,052 -305,874 -316,095 -320,861 Net Income 12,021,733 11,037,846 6,869,151 5,477,966 12,152,025 12,558,109 12,747,476

Consolidated Cash Flow Statement (in SAR ’000) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E OPERATING ACTIVITIES Net income 12,021,733 11,037,846 6,869,151 5,477,966 12,152,025 12,558,109 12,747,476 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortisation 4,098,287 6,407,514 2,781,935 3,681,868 7,886,691 8,222,334 8,498,024 Doubtful debts expense 523,055 913,992 257,781 492,463 948,012 973,612 993,900 Earnings from investments accounted for under the equity method -30,561 -45,456 -26,791 -27,920 -51,332 -54,698 -57,453 Losses on sale/disposal of property, plant and equipment 15,868 419,551 -1,565 117,234 117,234 0 0 Losses on disposal/sale of other investments 3,375 0 0 0 0 0 0 Changes in: Accounts receivable -1,557,404 -4,061,041 -3,233,209 -2,223,609 -1,936,795 -611,895 -627,315 Prepayments and other current assets -470,997 -1,378,871 -1,614,361 -255,858 -207,967 2,082 -203,727 Other non-current assets -3,443,132 1,928,765 -1,515,769 132,561 -603,766 -376,859 -382,056 Accounts payable 1,122,143 3,566,642 2,466,510 7,715 274,417 224,347 133,952 Other payables 4,116,092 1,046,521 2,654,684 587,089 797,533 193,733 47,104 Accrued expenses 1,837,445 175,598 654,809 68,330 297,903 217,533 136,935 Deferred revenues 192,750 332,157 89,468 -209,532 145,234 87,264 110,649 Employees’ end of service benefits 111,895 805,728 1,066,559 109,942 200,786 215,510 231,314 Net cash provided by operating activities 18,540,549 21,148,946 10,449,202 7,958,249 20,019,975 21,651,072 21,628,803 Cash flows from investing activities Capital expenditures -8,334,770 -16,278,076 -13,195,141 -9,669,256 -15,867,024 -13,042,856 -11,071,499 Short-term investments 5,599,000 0 0 0 0 0 0 Intangible assets, net -12,846,116 -19,234,731 -17,939,089 1,176,909 2,479,715 2,278,908 1,977,690 Equity method and other investments -1,371,703 -29,839 -2,776 0 -316,937 -181,534 -148,586 Dividends received from investments accounted for under the equity method 17,224 16,384 0 5,917 5,917 0 0 Proceeds from sale of property, plant and equipment 17,389 57,839 24,603 189,648 189,648 0 0 Net cash used in investing activities -16,918,976 -35,468,423 -31,112,403 -8,296,782 -13,508,682 -10,945,482 -9,242,394 Cash flows from financing activities Dividends paid -10,508,146 -8,551,934 -4,484,459 -2,997,810 -9,000,000 -10,000,000 -12,000,000 Borrowings, net 13,579,751 18,406,182 19,710,287 685,005 1,309,499 -1,424,641 -807,673 Minority interest 15,629 4,908,270 5,353,421 1,899,935 2,009,757 316,095 320,861 Net cash provided by financing activities 3,087,234 14,762,518 20,579,249 -412,870 -5,680,744 -11,108,546 -12,486,811 Net increase in cash and cash equivalents 4,708,807 443,041 -83,952 -751,403 830,549 -402,956 -100,403 Cash and cash equivalents at beginning of year 2,909,321 7,618,128 7,618,128 8,061,169 8,061,169 8,891,718 8,488,762 Cash and cash equivalents at end of year 7,618,128 8,061,169 7,534,176 7,309,766 8,891,718 8,488,762 8,388,360

Common – Size Statements

Common-Size Consolidated Balance Sheet 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Current Assets Cash and cash equivalents 11.1% 8.1% 7.3% 7.0% 8.2% 7.6% 7.5% Accounts receivable, net 7.2% 8.1% 7.7% 9.4% 9.0% 9.0% 9.0% Prepayments and A current assets 1.5% 2.0% 2.3% 2.2% 2.0% 2.1% 2.2% Inventories 0.5% 0.8% 0.7% 0.7% 0.8% 0.7% 0.7% Total Current Assets 20.3% 19.0% 17.9% 19.3% 20.0% 19.5% 19.4% Non-Current Assets Property, plant and equipment, net 49.9% 44.5% 43.4% 48.2% 48.4% 51.6% 53.7% Intangible assets, net 20.1% 31.8% 30.8% 28.1% 26.7% 23.8% 21.6% Equity method and other investments 3.5% 2.5% 2.4% 2.4% 2.6% 2.7% 2.8% Other non-current assets 6.1% 2.3% 5.5% 2.1% 2.4% 2.5% 2.6% Total Non-Current Assets 79.7% 81.0% 82.1% 80.7% 80.0% 80.5% 80.6% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES AND EQUITY Liabilities Current Liabilities Accounts payable 4.5% 6.7% 5.4% 6.4% 6.4% 6.4% 6.5% Other payables 9.0% 4.3% 4.8% 4.4% 4.5% 4.6% 4.7% Accrued expenses 8.1% 5.8% 6.0% 5.6% 5.9% 5.9% 6.0% Deferred revenues – current 2.6% 2.3% 1.9% 1.9% 2.2% 2.2% 2.3% Borrowings - current 0.8% 3.9% 3.7% 6.8% 6.3% 5.8% 5.3% Total Current Liabilities 25.0% 23.0% 21.8% 25.1% 25.3% 25.1% 24.8% Non-Current Liabilities Borrowings 18.9% 28.1% 28.5% 24.4% 24.7% 23.3% 22.9% Employees’ end of service benefits 2.8% 2.7% 2.9% 2.7% 2.7% 2.8% 3.0% Other payables 1.1% 3.5% 4.5% 3.6% 3.7% 3.7% 3.8% Total Non-Current Liabilities 22.8% 34.4% 35.9% 30.7% 31.1% 29.9% 29.7% Total Liabilities 47.8% 57.3% 57.7% 55.8% 56.5% 55.0% 54.6% Equity Authorized, issued and outstanding shares 29.1% 20.0% 19.4% 19.1% 18.5% 18.0% 17.8% Statutory reserve 10.2% 8.3% 7.4% 8.4% 8.8% 9.9% 11.0% Retained earnings 12.6% 9.8% 10.0% 11.2% 10.7% 11.5% 10.8% Financial statements` translation differences 0.3% -0.4% 0.3% -0.9% -0.9% -0.9% -0.9% Equity attributable to equity holders 52.1% 37.7% 37.1% 37.7% 37.1% 38.5% 38.7% Minority Interest 0.0% 4.9% 5.2% 6.5% 6.4% 6.5% 6.7% Total Liabilities and Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Common-Size Consolidated Income Statement 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Operating Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating Expenses Government charges -14.0% -11.7% -12.3% -11.3% -11.5% -11.7% -11.8% Access charges -12.8% -12.9% -12.3% -13.0% -12.7% -12.6% -12.5% Employee costs -12.4% -13.0% -12.7% -14.1% -12.6% -12.5% -12.4% Depreciation and amortization -11.9% -13.5% -12.9% -14.8% -15.6% -15.7% -15.9% Administrative and marketing expenses -7.1% -15.2% -8.8% -13.6% -15.9% -16.1% -16.3% Repairs and maintenance -5.1% -4.5% -4.5% -4.7% -4.7% -4.8% -4.9% Total operating expenses -63.4% -70.7% -63.4% -71.5% -73.0% -73.3% -73.7% Operating Income 36.6% 29.3% 36.6% 28.5% 27.0% 26.7% 26.3% Other Income and Expenses Cost of early retirement program -1.6% -1.4% -1.7% -2.4% -1.5% -1.6% -1.6% Finance costs 0.0% 0.0% -2.8% -2.8% -2.5% -2.3% -2.2% Commissions 1.0% 3.2% 1.1% 0.7% 3.4% 3.5% 3.6% Other, net 0.1% -5.7% 1.1% 0.6% 0.1% 0.1% 0.1% Other income and expenses, net -0.5% -3.9% -2.3% -3.8% -0.5% -0.3% -0.1% Net Income before Minority interest, Zakat and Tax 36.1% 25.4% 34.3% 24.7% 26.5% 26.4% 26.2% Provision for Zakat -1.1% -0.8% -0.9% -0.7% -0.8% -0.8% -0.8% Provision for Tax -0.1% -1.0% -0.9% -1.1% -1.0% -1.0% -1.0% Net Income before Minority interests 34.9% 23.6% 32.5% 22.9% 24.7% 24.6% 24.4% Minority interest 0.0% -0.4% -0.7% -0.8% -0.6% -0.6% -0.6% Net Income 34.9% 23.3% 31.8% 22.1% 24.0% 24.0% 23.8%

Financial Ratios

2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Liquidity Ratios: Current Ratio (x) 0.81 0.83 0.82 0.77 0.79 0.78 0.78 Quick Ratio (x) 0.79 0.79 0.79 0.74 0.71 0.75 0.75 Inventory Conversion Period (Days) 8.56 15.15 15.21 19.61 36.68 35.70 19.02 Average Collection Period (Days) 47.20 50.34 54.57 66.08 64.56 68.72 68.43 Length of Operating Cycle (Days) 55.76 65.49 69.79 85.69 101.23 104.42 87.45 Average Payment Period (Days) 83.47 128.68 125.53 168.83 169.64 169.04 168.87 Length of Cash Cycle (Days) -27.70 -63.19 -55.74 -83.14 -68.41 -64.62 -81.42

Activity Ratios: Debtors Turnover Ratio (x) 7.73 7.25 6.69* 5.52* 5.65 5.31 5.33 Creditors' Turnover Ratio (x) 4.37 2.84 2.91* 2.16* 2.15 2.16 2.16

Total Assets Turnover Ratio (x) 0.60 0.56 0.50* 0.49* 0.49 0.48 0.48 Equity Turnover Ratio (x) 0.98 1.29 1.17* 1.29* 1.30 1.26 1.24

Profitability Ratios: Gross Profit Margin (GPM) (%) 68.0 70.9 71.0 71.0 71.1 71.0 70.9 EBITDA Margin (%) 48.5 42.8 49.5 43.3 42.6 42.4 42.2 Operating Profit Margin (OPM) (%) 36.6 29.3 36.6 28.5 27.0 26.7 26.3 Net Profit Margin (NPM) (%) 34.9 23.3 31.8% 22.1 24.0 24.0 23.8 Return on Average Equity (RoAE) (%) 34.3 30.0 37.1* 28.4* 31.2 30.3 29.6 Return on Average Assets (RoAA) (%) 20.9 13.1 16.0* 10.7* 11.7 11.5 11.4 Leverage Ratios: Debt to Equity (D/E) Ratio (x) 0.38 0.85 0.87 0.83 0.84 0.76 0.73 Shareholders' Equity to Total Assets Ratio (x) 0.52 0.38 0.37 0.38 0.37 0.39 0.39 Total Liabilities to Total Assets Ratio (x) 0.48 0.57 0.58 0.56 0.56 0.55 0.55 Current Liabilities to Equity Ratio (x) 0.48 0.61 0.59 0.66 0.68 0.65 0.64 Growth Rates: % YoY Growth in Revenue 6.4 37.8 36.3 14.9 6.5 3.6 2.3 % YoY Growth in Operating Profit -0.2 10.2 18.9 -10.7 -1.8 2.5 0.9 % YoY Growth in EBITDA 1.4 21.5 25.6 0.5 6.0 3.1 1.8 % YoY Growth in Net Profit -6.1 -8.2 18.0 -20.3 10.1 3.3 1.5 % YoY Growth in Total Assets 49.2 45.0 118.8 1.5 8.5 2.5 1.2 % YoY Growth in Shareholders' Equity 5.0 4.9 10.9 3.3 6.8 6.4 1.7 Ratios used for Valuation: Adj. EPS (SAR) 6.01 5.52 6.87* 5.48* 6.08 6.28 6.37 Adj. BVPS (SAR) 17.94 18.82 19.12 19.76 20.09 21.37 21.74 P/E Ratio (x) 8.36 9.11 7.32 9.17 8.27 8.00 7.88 P/BV Ratio (x) 2.80 2.67 2.63 2.54 2.50 2.35 2.31 Current Market Price (SAR) 50.25 50.25 50.25 50.25 50.25 50.25 50.25

* Annualised

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