Saudi Telecom Company is a telecommunications company in Saudi Arabia that offers fixed, mobile and internet services. The company’s activities aim to digitalize processes in the network and access technology in a particular region, including following the federal program Saudi Vision 2030 (STC, 2023). To achieve such goals, reliable financial growth, the right balance of assets and liabilities, and the allocation of free cash flows for the company’s development are required.
The model problems of the company are caused by the decrease in net profit, so the financing structure is not ideally optimal now. Firstly, internal processes needed to be optimized more, which led to an increase in the cost of goods sold. Secondly, technological development and the transition to 5G have significantly increased the cost of depreciation and amortization. These expenses were necessary in order to remain competitive. Since the IRR is relatively high in all three scenarios, including the worst one, and the NPV is positive. Accordingly, for investors, this company, given the specified perspective, is a reasonably reliable investment, while STC has a relatively large margin of opportunity, taking into account risks, which is shown by the IRR indicator. If this development vector is maintained, the company, in the absence of the influence of external factors, will not only maintain the revenue growth rate but also optimize costs through long-term goals of paying dividends – and, as a result, increasing investor flow – and refinancing large bank debts at a more favorable percentage.
WACC is calculated using the formula of the sum of shares products and the cost of debt and equity capital. Information about them can be found in the company’s balance sheet. The cost is determined by using the annual interest expense in the case of debt and dividing the annual dividend multiplied by the growth factor in the case of equity. The WACC thus calculated is approximately 13.9%, which is generally lower than the IRR in the standard and best-case scenarios. Accordingly, the IRR assumes an allowance of approximately 2.1% for various unforeseen risks in such outcomes. Operational issues include security, cyber attacks, government interference, and supply chain issues. Financial – credit debt management, maintaining liquidity in times of crisis, as well as currency volatility.
However, although NPV and IRR compared to WACC give reasons to invest in this company, a lot depends on management, primarily operational. It can help not only to increase the value of a company for shareholders, but also to raise profitability and achieve the planned financial goals. Firstly, STC is highly dependent on rapid technological progress: winning the competition and expanding the customer base can be achieved by constantly implementing cutting-edge developments, such as machine learning or big data analysis, or, for example, by absorbing promising startups. Secondly, the company’s geographical expansion into neighboring regions is fraught with risks of foreign exchange; however, when assessing the market, one can notice the current strength of the dollar, which is tied to the Saudi riyal currency. As a consequence, sound financial management must allocate potential gains from exchange rates and consider horizontal expansion of the enterprise. Finally, in addition to technology and innovation, a company’s environmental and social responsibility can add to its reputation and long-term sustainability, attracting investors. In addition, many environmental grants and processes have been launched at the federal level; if certain conditions are met, and specific tasks are solved in this direction, it is possible to receive certain subsidies or access to opportunities and scales at the country level. Such marketing achievements can be a good growth factor for a communication IT company.
Reference
STC. (2023). Sustainability. Web.