First Yearly Net Profit
January 25, 2018 Rating 12- Month Target Price
Buy SAR 12.00
ZAIN COMPANY 4Q2017 First Look
First Yearly Net Profit Expected Total Return Price as on Jan-24, 2018
SAR 7.19
Upside to Target Price
66.9%
Expected Dividend Yield
0.0%
Expected Total Return
66.9%
Market Data SAR 11.45/5.85
52 Week H/L
SAR 4,197 million
Market Capitalization Shares Outstanding
583.73
Free Float
51.84%
12-Month ADTV
3,323,032
Blomberg Code
ZAINKSA
Zain missed market expectations by reporting a net loss of SAR (45) million, better than SAR (135) million last year but reversing a SAR 3 million profit in 3Q. We forecasted a SAR 2 million net income while market consensus was higher at SAR 10 million. We attribute this deviation to the shrinking market size, which has affected all telecom operators and led to -5% Y/Y lower revenues for Zain. Furthermore, promotions and discount activities during 4Q has negatively impacted margins. Gross profit has decreased by -1% Y/Y and -8% Q/Q due to lower revenues and higher cost of sales leaving the gross margin at 66%, 200bps lower Q/Q; better than peers. Operating expenses have decreased by -8% Y/Y and -3% Q/Q, in-line with revenue reduction. The Company registered a net loss of SAR (45) million on restricted revenues and lower margins. Zain can be proud of the inaugural SAR 12 million in net income for 2017, could have been much higher had 4Q been better. We have recently reduced our target price from SAR 14.00 to SAR 12.00 in our Saudi Equities Outlook note on tweaking of assumptions. However, we maintain a Buy recommendation on the stock and expect finalization of restructuring process to be a potential trigger for price movement.
Revenues down -5% Y/Y We believe that market has shrunk in 4Q due to multiple factors including VoIP as well as a decline in the number of subscribers in the market Y/Y. This has led to reduction in Zain’s revenue by -5% on both Y/Y and Q/Q basis to SAR 1.7 billion, missing our estimate of SAR 1.8 billion. We expected higher revenues assuming better packages would attract new customers and anticipated higher data revenues.
1-Year Price Performance 140 130
120
Gross margins decline 200bps Q/Q
110 100
90 80
70 J
F
M
A
M J ZAIN
J
A
S
O N TASI
D
J
Source: Bloomberg
Gross profit came down -1% Y/Y to SAR 1.1 billion and -8% Q/Q as gross margins contracted from 68% in 3Q to 66% in 4Q. Discount and promotional activities have reduced the profitability of the services provided (offering more services at the same price) and contributing to this decline. However, gross margins are still ahead of peers. Going forward, since promotions have been stopped by all operators since the beginning of the year, this should enhance margins.
Net loss in 4Q 6M
1Y
Operating profit has reached SAR 166 million in 4Q, up +90% Y/Y but -27% lower Q/Q as operating expenses have dropped -8% Y/Y. Although Zain illustrated an improvement in operational profit on yearly basis, it is important to continue to optimize costs in order to post a positive bottom-line and minimize the effect of revenue fluctuation. Surprisingly, the Company posted a net loss of SAR (45) million versus market expectations of a profit due to lower revenues and shrinking margins. Notably, Zain has posted its first ever full year net profit in 2017. Although we have recently decreased our target price from SAR 14.00 to SAR 12.00, we remain bullish on the stock with a Buy recommendation.
2Y
10% 5%
0% -5%
-10% -15%
-20% -25% Zain
Fig in SAR mln MlnMMln Sales
TASI
RC Est. Estimates 1,825
Actuals
1,716
Gross Profit
1,241
1,133
Net Income
2.0
(45)
EPS (SAR)
0.00
(0.08)
Key Financial Figures FY Dec31 (SAR mln) 2016A Sales 6,927 Gross Profit 4,401 EBITDA 1,795 Net Profit (980) EPS (SAR) (1.68) *preliminary announced data
Key Financial Ratios 2017E 7,306* 4,913* 2,517 12* 0.02*
Muhammad Faisal Potrik
Fahad K. Alasgah
[email protected] +966-11-203-6807
[email protected] +966-11-203-6805
2018E 7,919 5,147 2,737 195 0.33
FY Dec31 Gross Margin EBIT Margin Net Margin EV/EBITDA P/FCF
2016A 63.5% (0.8)% (14.1)% 10.4x 6.3x
2017E 67.24% 32.8% 0.16% 5.51x 2.8x
2018E 65.0% 12.4% 2.5% 6.7x 2.2x
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
ZAIN COMPANY 4Q2017 First Look
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi closed joint stock company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Page 2 of 4 Arabia (“KSA”). Website: www.riyadcapital.com
Buy SAR 12.00
ZAIN COMPANY 4Q2017 First Look
First Yearly Net Profit Expected Total Return Price as on Jan-24, 2018
SAR 7.19
Upside to Target Price
66.9%
Expected Dividend Yield
0.0%
Expected Total Return
66.9%
Market Data SAR 11.45/5.85
52 Week H/L
SAR 4,197 million
Market Capitalization Shares Outstanding
583.73
Free Float
51.84%
12-Month ADTV
3,323,032
Blomberg Code
ZAINKSA
Zain missed market expectations by reporting a net loss of SAR (45) million, better than SAR (135) million last year but reversing a SAR 3 million profit in 3Q. We forecasted a SAR 2 million net income while market consensus was higher at SAR 10 million. We attribute this deviation to the shrinking market size, which has affected all telecom operators and led to -5% Y/Y lower revenues for Zain. Furthermore, promotions and discount activities during 4Q has negatively impacted margins. Gross profit has decreased by -1% Y/Y and -8% Q/Q due to lower revenues and higher cost of sales leaving the gross margin at 66%, 200bps lower Q/Q; better than peers. Operating expenses have decreased by -8% Y/Y and -3% Q/Q, in-line with revenue reduction. The Company registered a net loss of SAR (45) million on restricted revenues and lower margins. Zain can be proud of the inaugural SAR 12 million in net income for 2017, could have been much higher had 4Q been better. We have recently reduced our target price from SAR 14.00 to SAR 12.00 in our Saudi Equities Outlook note on tweaking of assumptions. However, we maintain a Buy recommendation on the stock and expect finalization of restructuring process to be a potential trigger for price movement.
Revenues down -5% Y/Y We believe that market has shrunk in 4Q due to multiple factors including VoIP as well as a decline in the number of subscribers in the market Y/Y. This has led to reduction in Zain’s revenue by -5% on both Y/Y and Q/Q basis to SAR 1.7 billion, missing our estimate of SAR 1.8 billion. We expected higher revenues assuming better packages would attract new customers and anticipated higher data revenues.
1-Year Price Performance 140 130
120
Gross margins decline 200bps Q/Q
110 100
90 80
70 J
F
M
A
M J ZAIN
J
A
S
O N TASI
D
J
Source: Bloomberg
Gross profit came down -1% Y/Y to SAR 1.1 billion and -8% Q/Q as gross margins contracted from 68% in 3Q to 66% in 4Q. Discount and promotional activities have reduced the profitability of the services provided (offering more services at the same price) and contributing to this decline. However, gross margins are still ahead of peers. Going forward, since promotions have been stopped by all operators since the beginning of the year, this should enhance margins.
Net loss in 4Q 6M
1Y
Operating profit has reached SAR 166 million in 4Q, up +90% Y/Y but -27% lower Q/Q as operating expenses have dropped -8% Y/Y. Although Zain illustrated an improvement in operational profit on yearly basis, it is important to continue to optimize costs in order to post a positive bottom-line and minimize the effect of revenue fluctuation. Surprisingly, the Company posted a net loss of SAR (45) million versus market expectations of a profit due to lower revenues and shrinking margins. Notably, Zain has posted its first ever full year net profit in 2017. Although we have recently decreased our target price from SAR 14.00 to SAR 12.00, we remain bullish on the stock with a Buy recommendation.
2Y
10% 5%
0% -5%
-10% -15%
-20% -25% Zain
Fig in SAR mln MlnMMln Sales
TASI
RC Est. Estimates 1,825
Actuals
1,716
Gross Profit
1,241
1,133
Net Income
2.0
(45)
EPS (SAR)
0.00
(0.08)
Key Financial Figures FY Dec31 (SAR mln) 2016A Sales 6,927 Gross Profit 4,401 EBITDA 1,795 Net Profit (980) EPS (SAR) (1.68) *preliminary announced data
Key Financial Ratios 2017E 7,306* 4,913* 2,517 12* 0.02*
Muhammad Faisal Potrik
Fahad K. Alasgah
[email protected] +966-11-203-6807
[email protected] +966-11-203-6805
2018E 7,919 5,147 2,737 195 0.33
FY Dec31 Gross Margin EBIT Margin Net Margin EV/EBITDA P/FCF
2016A 63.5% (0.8)% (14.1)% 10.4x 6.3x
2017E 67.24% 32.8% 0.16% 5.51x 2.8x
2018E 65.0% 12.4% 2.5% 6.7x 2.2x
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
ZAIN COMPANY 4Q2017 First Look
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi closed joint stock company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Page 2 of 4 Arabia (“KSA”). Website: www.riyadcapital.com
