Mobile Telecommunications Company (Zain) – Results Update Group Level Performance
In FY2007, total active customers of Zain increased to 42.50mn versus 27.04mn in FY2006, an increase of 57.2%. As of year end 2007, Zain’s African operations – through its subsidiary Celtel International – represented 64% of the company’s customer base while the operations in Middle East countries of Iraq, Sudan, Jordan, Kuwait, Lebanon and Bahrain represented the remaining customers. Zain’s African operations registered a 59% increase in customers in 2007, while the Middle Eastern operations registered a 53% increase over the same period. The company’s customer increase was driven primarily by its high growth
African operations including Nigeria, Uganda and Tanzania. In the Middle East, the operations in Iraq, Bahrain and Sudan showed solid growth.
At the end of June 2008, Zain’s group customer base increased to 50.74mn from 42.50mn at the end of 2007, registering a YTD growth of 19.4% and a YoY growth of 57.8%.
Chart 01: Country-wise Customer Segmentation - June 2008
Source: Company Repo
In FY2007, Zain reported total revenues of KD1.68bn, EBITDA of KD725.3mn and net profit of KD320.4mn as compared to our projected total revenues of KD1.66bn, EBITDA of KD716.8mn and net profit of KD335.3mn. Zain’s actual performance as compared to our projections for FY2007 showed variations (actual v/s projection) of 1.3% in total revenues, 1.2% in EBITDA, -4.4% in net profit and -4.5% in total assets.
Revenues for the 12-months of FY2007 grew to KD1.68bn, an increase of 29.3% compared to revenues of KD1.3bn reported for FY2006. EBITDA grew to KD725.3mn, an increase of 22.2%, resulting into an EBITDA margin of 43.2%. Its EBITDA margin declined from 45.8% in FY2006 to 43.2% in FY2007. Its finance cost and depreciation & amortization grew by 40.3% and 45.7% to KD123.6mn and KD236.1mn, respectively. Net profit attributable to shareholders of the parent company for FY2007 increased by 8.6% to KD320.4mn as compared to KD295mn reported for FY2006.
In 1H-2008, Zain Group’s consolidated revenues increased by 17% on y-o-y basis to reach KD936mn. Its EBITDA grew by 10.8% to KD350mn representing an EBITDA margin of 37.4%. Net profit declined from KD149mn reported in 1H-2007 to KD148mn in 1H-2008, witnessing a fall of 0.7%.
Outlook and Valuation
• Zain’s Kuwait operation will continue to witness strong growth in 2008 and 2009. However, it is likely to face more competitive pressure especially when the third operator, Saudi Telecom, will start its operations in Kuwait in 2008. Therefore, we expect that ARPU and margins are likely to come under pressure with the beginning of operations of third operator.
• Among the other Middle Eastern markets, in Jordan the company is losing its market share as well as customers and therefore revenues and margins are under pressure resulting in decline in profitability. With regard to Iraq operation, it has high growth potential and its margins are also improving. With the acquisition of Iraqna it has a substantial chunk of the market in Iraq and it will continue to drive the growth further. In Saudi though the penetration level has already crossed 100%, the market has still room for further growth, however, it will have to compete hard with the two existing players, STC and Mobily.
• In Sudan, the company is the number 1 operator but despite of growing subscriber base as well as topline, the bottomline shrank as margins are under pressure.
• In Africa the company has many high growth under penetrated markets. Nigeria is an important market in the company’s Africa portfolio. The company has achieved significant growth in customer base in Nigeria. Its market share and revenues are also going up but net profit is on decline. Apart from these, in Africa the company operates in many high growth potential markets such as Congo Brazzaville, Zambia, Tanzania, Niger, Burkina Faso, Malawi, Chad, etc., however, many of these are low-income markets.
• At the current market price of KD1.72 (Aug. 31, 2008), Zain trades at 21.6x and 16.6x of its earnings and 2.4x and 2.3x of its book value for FY2008E and FY2009E respectively. We have used Sum-Of-The-Parts (SOTP) valuation method for company’s operations in different countries. Based on consolidation of the individual country operations, our SOTP valuation estimates the fair value of Zain’s stock at KD1.766, which is 2.7% higher than the current market price of the stock. We, therefore, reiterate our “HOLD” recommendation on the stock.
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