Higher costs trouble Saudi telecom giant

June 27, 2013 - 3:26:30 am

DUBAI: Saudi Telecom Co (STC) is a company with a market capitalisation of $21bn but no permanent chief executive. It has spent billions of dollars to buy foreign assets, but competitive pressures may force it to focus more on domestic business.

Annual profits at Saudi Arabia’s biggest telecommunications operator have fallen 43 percent from their 2006 peak, and its part-privatisation has had only limited success in spurring it to make the cost cuts which analysts believe are needed to reverse the slide.

STC’s experience has implications for governments in the Gulf which aim to sell shares in state companies as a way to subject them to market discipline and make them more efficient.

The Saudi government has begun to privatise parts of Saudi Arabian Airlines, listing shares of its catering unit on the local stock market last year. 

But STC’s difficulties suggest the benefits of privatisation can be difficult to achieve, as companies may still find it hard to limit staff numbers, streamline operations and compete with private sector rivals.

“While revenue for the STC group is trending up, profit is trending down,” said Paul Budde, managing director of Sydney-based telecommunications consultancy BuddeCom.

“The reality is that they will have to significantly change their cost base in order to stay competitive and profitable. So far, very few telcos have been able to do this.”

The Saudi government spun off the telecommunications arm of its Ministry of Post, Telegraph and Telephone to create STC in 1998; it sold shares to the public four years later, and the company is now 84 percent owned by government institutions.

The share sale offered a chance to modernise what had been an inefficient, slow-moving fiefdom of the state.

Initial results were promising; STC nearly quadrupled its profit between 2002 and 2006. But in 2005, the government ended STC’s monopoly on mobile services in the kingdom and the company has found the going harder since then.

Profit plunged 79 percent from a year earlier in the fourth quarter of 2012, and this year has begun inauspiciously, with first-quarter profit down 39 percent because of writedowns on foreign operations and a 17 percent rise in operating expenses.

The company’s share price is down eight percent so far this year, underperforming by a big margin a 10 percent gain by Saudi Arabia’s main stock index.

According to STC’s annual report, “other costs” — largely consisting of predictable expenses such as utility bills and rent of equipment, property and vehicles — rose by more than two-thirds in 2012. 

Much of the cost problem seems linked to STC’s high staffing levels, a legacy of its state-owned past. Analysts estimate its head count at about 16,000, equating to domestic revenue of SR641,808 ($171,100) per employee in the first quarter, according to Reuters calculations. This compares with SR1.61m for each of the 3,500 workers at Etihad Etisalat  (Mobily), the country’s second biggest operator.