Problems at Mobily came to a head last November when the company restated profits for 2013 and the first half of 2014, cutting them by 1.43bn riyals combined. In January, it posted a shock fourth-quarter loss of 2.28bn riyals.

Reuters/Dubai


An accounting scandal at Saudi Arabia’s Mobily is set to constrain dividend payouts from the former stock market darling for the next few years and make investors more picky about companies in the kingdom.
Analysts who met acting Mobily chief executive Serkan Okandan a month ago came away with the impression that the company would not pay a dividend this year and make only modest payouts from 2016.
“Mobily needs to determine its dividend policy based on both operating free cash flows and net profit—this is a usual practice in telcos,” Okandan told Reuters by e-mail this month.
Problems at Mobily came to a head last November when the company restated profits for 2013 and the first half of 2014, cutting them by 1.43bn riyals ($381mn) combined. In January, it posted a shock fourth-quarter loss of 2.28bn riyals.
The timing is sensitive as Riyadh is preparing to open its stock market, the largest Arab bourse, to direct investment by foreigners this year.
The Saudi market has a reputation among fund managers as one of the best regulated in the Middle East, on a par with many emerging markets around the world.
But Mobily is the sort of company that would have been expected to attract a sizeable chunk of foreign money. So its fall from grace may give foreign investors pause for thought.
“The earnings restatement will weigh heavily on investor sentiment towards all Saudi companies because Mobily was considered a blue chip,” said Daniel Broby, chief executive of British-based Gemfonds, an emerging market fund specialist. “Restatements happen, but the number of accounting areas that were addressed is where the cause for concern lies.”
Mobily’s rise was remarkable. It turned profitable in 2006, a year after launching operations, and annual profits soared 854% between then and 2013. Dividends jumped by a similar margin, propelling its shares to an eight-year high of 98.25 riyals last May.
But the bumper payouts masked balance sheet weakness—receivables swelled to $2.7bn by last June as Mobily struggled to collect revenues which it had booked.
At the same time, the company’s borrowing surged, apparently to bolster dividend payouts and bridge a cash flow shortfall caused by delays in collecting revenues.
Facing a regulatory probe, the firm suspended CEO Khalid al-Kaf last November. Okandan, who had joined as Kaf’s deputy a month earlier and has a mandate to remain at the helm at least until end-March.
Okandan is also chief financial officer of Abu Dhabi-listed Etisalat, which owns 27.5% of Mobily and received 1.91bn dirhams ($520mn) in dividends from its affiliate for 2012-13 combined.
Mobily appears to have little option but to rethink its dividend policy.
After meeting Okandan, brokerage EFG Hermes predicted late last month that Mobily would not issue dividends for 2015 and pay an annual total of 2 riyals per share from 2016 on.
For the first half of 2014 - before its earnings shock—Mobily announced dividends totalling 2.5 riyals; in total for 2013, it paid 4.8 and for 2012, 4.15.
“Management said historical dividend payout levels were based on overstated earnings figures and were not related to actual free cash flow,” EFG wrote.
The problems have sent Mobily’s stock tumbling. Yesterday’s price of 35.30 riyals per share means around $13bn has been wiped off Mobily’s market value since May. The firm, Saudi Arabi’s second largest telecoms company, blamed the earnings restatements on “accounting errors”, mainly hasty booking of revenue from wholesale broadband leases and mobile promotional campaigns.
Meanwhile, Mobily accrued about 18.3bn riyals of borrowings from 2012 to the third quarter of 2014, which are due to be repaid in 2017-2024.
This lifted the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) to 3.55, Reuters data shows. That compares with ratios for Dubai’s du and Vodafone Qatar, which are also single-country operators, of 0.77 and 1.82.
Okandan, however, insisted Mobily’s level of borrowing was not a concern. “There are many global telco companies having similar or higher net debt to EBITDA ratios,” he said. “The liquidity available...is abundant. This ratio is easily manageable.”