Zain 04 ÙAugust 2016 PDF
August 04, 2016 Rating 12- Month Target Price
Neutral SAR 10.50
ZAIN 2Q2016 First Look
Net Loss Expands in 2Q Expected Total Return Price as on Aug-3, 2016
SAR 6.78
Upside to Target Price
54.9%
Expected Dividend Yield
0.0%
Expected Total Return
54.9%
Market Data
Zain announced its 2Q financials posting a net loss of SAR (329) million, higher than SAR (201) million last year and SAR (250) million in the preceding quarter on the back of increased spending on network infrastructure, cost of bio-metric process and rising financial charges. Revenues grew by +5% Y/Y while gross margins exceeded 64% leading gross profit over SAR 1.1 billion, highest since inception but was unable to prevent net loss from rising. We maintain our Neutral stance with a target price of SAR 10.50. We look forward to the Company curtailing its losses in the second half of the year.
Drop in subscribers SAR 11.90/5.45
52 Week H/L
SAR 3,958 million
Market Capitalization
583.73 mln
Shares Outstanding
51.84%
Free Float
4,915,381
12-Month ADTV
1-Year Price Performance
+5% Y/Y growth in revenues to SAR 1.7 billion is satisfactory at a time of major regulatory changes being experienced in the industry. Impact of reduction in termination fees by 33% has been more pronounced at the cost of service level (down -12% Y/Y) rather than revenues as Zain is a net payer of interconnect charges. Biometric verification appears to have had a minimal impact on revenues but it did manage to reduce the number of subscribers. According to the Company, subscribers dropped from 11.8 million last year to 10.8 million as of 2Q-end. ARPU managed to improve by +10% Y/Y to SAR 160 at June-end.
Gross margin at all time high Gross profit is up +17% Y/Y and +3% Q/Q to SAR 1.11 billion, in line with our forecast of SAR 1.06 billion. The Company has reported highest gross margins since inception at 64%, up from 57% last year and 62% in 1Q. A +56% Y/Y rise in distribution and marketing expenditure to SAR 698 million is much more than we were expecting, likely due to higher costs associated with bio-metric verification. Depreciation and amortization expenses are up by +11% Y/Y at SAR 480 million.
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100 90 80 70 60 50 40
Operating loss grows
30 A
S
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ZAIN
F
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TASI
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With operating expenses growing at a fast pace, Zain has faced an expanding operating loss of SAR (108) million compared to minor profit in 2Q2015 and a loss of SAR (32) million in 1Q2016. Depreciation & amortization expenses have also inched up by +11% Y/Y but remained flat compared to the previous quarter.
A
TTI
Source: Bloomberg
6M
1Y
Net Loss back to 2014 levels
2Y
10%
Financial charges have grown by +12% Y/Y to SAR (228) million as a consequence of increase in debt as well as higher interest rates. Quarterly net loss has reverted back to 2014 levels after a year of improvement in 2015. Net loss at SAR (329) million exceeds our SAR (285) million estimate and SAR (227) million Bloomberg consensus. Although the stock offers substantial upside to our SAR 10.50 target price, qualitative factors and industry developments prevent us from recommending a Buy right now. We intend to revise our full year forecasts, which may impact target price as well after taking a closer look at financials.
0% -10% -20% -30%
-40% -50% -60% -70% ZAIN
TASI
TTI
Key Financial Figures 2Q2016E (SAR mln)
Actual
RC Forecast
Revenue
1,727
1,740
Gross Profit
1,113
1,060
Net Income
(329)
(285)
EPS (SAR)
(0.56)
(0.49)
FY Dec31 (SAR mln) Revenue EBITDA Net Profit EPS (SAR) DPS (SAR)
2015A 6,741 1,629 (972)
(1.67) -
Key Financial Ratios 2016E 7,274 1,856 (862) (1.48) -
Muhammad Faisal Potrik
Faisal S Abaalkhail
[email protected] +966-11-203-6807
[email protected] +966-11-203-6812
2017E 7,778 2,192 (475) (0.81) -
FY Dec31 BVPS (SAR) ROAE ROAA EV/EBITDA P/E
2015A 7.8 -21.4% -3.7% 11.5x -
2016E 6.3 -23.4% -3.5% 10.2x -
2017E 5.5 -14.8% -2.0% 8.3x -
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
ZAIN 2Q2016 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 limited liability 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 Arabia Page 2 of 4 (“KSA”). Website: www.riyadcapital.com
Neutral SAR 10.50
ZAIN 2Q2016 First Look
Net Loss Expands in 2Q Expected Total Return Price as on Aug-3, 2016
SAR 6.78
Upside to Target Price
54.9%
Expected Dividend Yield
0.0%
Expected Total Return
54.9%
Market Data
Zain announced its 2Q financials posting a net loss of SAR (329) million, higher than SAR (201) million last year and SAR (250) million in the preceding quarter on the back of increased spending on network infrastructure, cost of bio-metric process and rising financial charges. Revenues grew by +5% Y/Y while gross margins exceeded 64% leading gross profit over SAR 1.1 billion, highest since inception but was unable to prevent net loss from rising. We maintain our Neutral stance with a target price of SAR 10.50. We look forward to the Company curtailing its losses in the second half of the year.
Drop in subscribers SAR 11.90/5.45
52 Week H/L
SAR 3,958 million
Market Capitalization
583.73 mln
Shares Outstanding
51.84%
Free Float
4,915,381
12-Month ADTV
1-Year Price Performance
+5% Y/Y growth in revenues to SAR 1.7 billion is satisfactory at a time of major regulatory changes being experienced in the industry. Impact of reduction in termination fees by 33% has been more pronounced at the cost of service level (down -12% Y/Y) rather than revenues as Zain is a net payer of interconnect charges. Biometric verification appears to have had a minimal impact on revenues but it did manage to reduce the number of subscribers. According to the Company, subscribers dropped from 11.8 million last year to 10.8 million as of 2Q-end. ARPU managed to improve by +10% Y/Y to SAR 160 at June-end.
Gross margin at all time high Gross profit is up +17% Y/Y and +3% Q/Q to SAR 1.11 billion, in line with our forecast of SAR 1.06 billion. The Company has reported highest gross margins since inception at 64%, up from 57% last year and 62% in 1Q. A +56% Y/Y rise in distribution and marketing expenditure to SAR 698 million is much more than we were expecting, likely due to higher costs associated with bio-metric verification. Depreciation and amortization expenses are up by +11% Y/Y at SAR 480 million.
110
100 90 80 70 60 50 40
Operating loss grows
30 A
S
O
N
D
J
ZAIN
F
M
A
M
TASI
J
J
With operating expenses growing at a fast pace, Zain has faced an expanding operating loss of SAR (108) million compared to minor profit in 2Q2015 and a loss of SAR (32) million in 1Q2016. Depreciation & amortization expenses have also inched up by +11% Y/Y but remained flat compared to the previous quarter.
A
TTI
Source: Bloomberg
6M
1Y
Net Loss back to 2014 levels
2Y
10%
Financial charges have grown by +12% Y/Y to SAR (228) million as a consequence of increase in debt as well as higher interest rates. Quarterly net loss has reverted back to 2014 levels after a year of improvement in 2015. Net loss at SAR (329) million exceeds our SAR (285) million estimate and SAR (227) million Bloomberg consensus. Although the stock offers substantial upside to our SAR 10.50 target price, qualitative factors and industry developments prevent us from recommending a Buy right now. We intend to revise our full year forecasts, which may impact target price as well after taking a closer look at financials.
0% -10% -20% -30%
-40% -50% -60% -70% ZAIN
TASI
TTI
Key Financial Figures 2Q2016E (SAR mln)
Actual
RC Forecast
Revenue
1,727
1,740
Gross Profit
1,113
1,060
Net Income
(329)
(285)
EPS (SAR)
(0.56)
(0.49)
FY Dec31 (SAR mln) Revenue EBITDA Net Profit EPS (SAR) DPS (SAR)
2015A 6,741 1,629 (972)
(1.67) -
Key Financial Ratios 2016E 7,274 1,856 (862) (1.48) -
Muhammad Faisal Potrik
Faisal S Abaalkhail
[email protected] +966-11-203-6807
[email protected] +966-11-203-6812
2017E 7,778 2,192 (475) (0.81) -
FY Dec31 BVPS (SAR) ROAE ROAA EV/EBITDA P/E
2015A 7.8 -21.4% -3.7% 11.5x -
2016E 6.3 -23.4% -3.5% 10.2x -
2017E 5.5 -14.8% -2.0% 8.3x -
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
ZAIN 2Q2016 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 limited liability 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 Arabia Page 2 of 4 (“KSA”). Website: www.riyadcapital.com
