Zain: Telecommunications

ZAIN price & index relative performance ZAIN market ratios THE COMPANY: Zain Group is a Kuwait-based public shareholding company engaged in the provision of mobile telecoms and data services in eight MENA countries. Zain was incorporated in June 1983 and listed on the Kuwait Stock Exchange in March 1985. Zain currently ranks fourth in terms of market capitalisation in the region with $11bn. Zain reported a net profit of KD252m ($900m) in 2012, down 11% from KD285m ($1.01bn) in 2011. This decline was caused by a drop in margins as competition heated up, resulting in revenues falling 3% to KD1.28bn ($4.5bn) in 2012 from KD1.32bn ($4.7bn) in 2011, as well as unstable exchange rates in the countries where Zain operates.

Despite an increase in the number of customers to 42.7m in 2012 from 40.3m in 2011, the popularity of over-the-top applications pressured average revenue per user (ARPU) and lead to a drop in revenues. Despite this drop, in 2012 Zain maintained a strong earning before interest, taxes, depreciation and amortisation (EBITDA) margin at 44.5% versus 45% in 2011. Zain also generated the highest EBITDA margin in Kuwait at 49%, powered by the high blended ARPU of $42 and growth in the customer base. The EBITDA margin remains strong in Jordan and Iraq at 44%, though it slightly declined to 41% in Sudan and 36% in Bahrain.

Zain Iraq remained the group’s largest contributor to revenues with a 38% share in 2012, compared to 35% in 2011, on the back of a penetration rate of 83% – compared to 183% in Kuwait, 172% in Saudi Arabia, and 134% in both Jordan and Bahrain. Despite the 7% growth in customers in 2012 to account for 5% of Zain’s customer base, Kuwait’s revenue dropped 5% in 2012 and resulted in a drop in its contribution to consolidated revenues to 26% down from 27% in 2011. Zain’s market share in Kuwait currently stands at 42%, while Wataniya Telecom and Viva hold market share of 37% and 21%, respectively. Despite accounting for 29% of Zain’s customers in 2012, revenues generated from Sudan contributed only 19%. A low ARPU of $6 and a 4% drop in customers put pressure on revenues in 2012.

Net profit margins are losing momentum as evidenced in the drop from 21.5% in 2011 to 19.7% in 2012 driven by fierce competition. Margins held up in core market Kuwait, but deteriorated significantly in other markets such as Sudan. Nevertheless, Zain continues to register healthy returns to shareholders, with return on average equity improving to 13.7% in 2012, up from 12.1% in 2011, while return on average assets remained at 8.1% in 2011 and 2012.

Zain’s assets peaked at KD5.7bn ($20.3m) at the end of 2009, growing at a five-year compound annual growth rate of 54% from KD650m ($2.32bn) at the end of 2004. However, assets dropped to KD3.7bn ($13.21bn) at the end of 2010 on the back of divesting in Africa. In 2010 Zain sold its entire holding in Zain Africa BV to India-based Bharti Airtel for an enterprise value of $10.7bn. The downward trend continued after the sale of Zain Africa, taking Zain’s assets to KD2.93bn ($10.46bn) as of December 2012. Zain continues to book losses from its associated companies, a six-year trend since 2007, in which Zain booked aggregate losses of KD207m ($739.3m).

DEVELOPMENT STRATEGY: Zain remains one of the leading telecom operators in the region and has maintained relatively stable profitability since 2005, with operations spread across eight countries. With a mature local market in Kuwait that enjoys a high penetration rate of 183%, Zain has been focusing on providing new data services to maintain its revenue stream. The potential for growth in the group’s bottom line is driven by Zain Iraq. The group still has the potential to grow on the back of underserved markets, namely Iraq, supported by the company’s know-how and experience.

The initial public offering (IPO) of Zain Iraq by the end of the second quarter of 2013 will attract more investors and capital. Zain will be required to sell a 25% stake in the company, which will result in a drop of ownership to 51% should the IPO be fully subscribed. While Zain Saudi Arabia has been a burden since its incorporation, Zain’s geographic diversification should offset this.