Share Analysis: Zain Group

The Company

Zain Group is a Kuwait-based public shareholding company, which was incorporated in June 1983 and listed on the Kuwait Stock Exchange (KSE) in March 1985. It is currently the fifth-largest telecoms operator in the GCC and the third-largest company on the KSE, with a market cap of KD2.8bn ($9.85bn).

After selling most of its African operations in 2010 and scaling down operations from 23 countries to eight countries, Zain updated its strategy. The company shifted its focus from increasing subscriber count to growing the company in terms of revenue and profitability by adding new services and delivery systems. Results in 2013 were one of the key factors in determining the effectiveness of the relatively new management’s direction and strategies. The company reported 3.3% and 14.2% declines in revenues and net profits at the group level to record at KD1.24bn ($4.36bn) and KD216.4m ($760.88m), respectively, despite an 8% y-o-y increase in its customer base to 46.1m. In terms of US dollars, the revenue decline was even steeper at 4.5% and 15.3%, respectively. The largest impact came from the Kuwaiti market, which reported a 7.4% decline in net profit due to an increase in capex, leading to higher depreciation and amortisation expenses. The impact of currency translation, stemming from the devaluation of the Sudanese pound by around 30% against the dollar during the year, also affected revenue and net profits in 2013 by $419m and $147.2m, respectively. Zain registers healthy returns to shareholders with ROAE that declined marginally to 13.2% in 2013 from 13.7% in 2012 while ROAA declined to 7.2% in 2013 from 8.1% in 2012 due to higher long-term capex investments.

By region, Iraq accounted for the largest share of total revenues at 41% (followed by Kuwait at 28% and Sudan at 14%) on the back of a penetration rate of 89%, compared to corresponding penetration rates of 198% and 170% for Kuwait and Bahrain, 161% in Saudi Arabia and 142% in Jordan. Despite a large drop in revenue, the company reported a marginal decline in reported EBITDA at $1.9bn resulting in an EBITDA margin of 43.4%, a decline of 110 bps over 2012 levels. The EBITDA margin declined across the board, except for Bahrain, due to higher operating expenses and forex impact. Kuwait reported a slight decline in its EBITDA margin at 48.4% (2012: 49.2%) as the marginal increase in revenue was offset by higher operating expenses related to LTE deployment. The introduction of mobile number portability in Kuwait had no impact on the overall subscriber count, which in turn increased to 2.5m customers in 2013 as compared to 2.3m customers in 2012. Zain’s market share in Kuwait currently stands at 39%, while Wataniya Telecom and Viva hold market shares of 29% and 32%, respectively. In Iraq, revenues increased by 1% to $1.7bn on the back of a 15.9% increase in its customer base, resulting in a market share of 49%. EBITDA margins declined significantly to 41% (2012: 44.2%) due to regulatory charges and higher operating expenses relating to expansion.

Zain KSA, in which the Zain Group holds a 37% equity stake, continues to face intense competition as well as a change in market structure with the recent change in labour law. However, reported losses declined in 2013 to $440m from $467m in 2012 led by higher revenues resulting from a 13% increase in the subscriber base, representing a 15% market share, and higher data revenues. The company aims to break even in this operation and start generating positive profits from 2016.

Development Strategy

For future growth, the company aims to drive higher mobile data, especially in markets with high market penetration, with accelerated deployment of evolved high-speed packet access and long-term evolution networks and offering value-added services in collaboration with OTT players.

Moreover, Zain is currently exploring the inorganic route in addition to looking for investment opportunities within the region. Zain Iraq is also looking to expand its presence, and aims to offer 3G data services to its Iraqi customers by participating in the upcoming 3G auctions. To fund such an expansion the company has been preparing for a future listing on the Iraqi bourse.