Mobile Telecommunication Company Saudi
Mobile Telecommunication Company Saudi Arabia - ZAIN KSA November 2017
Please read Disclaimer on the back
Zain KSA’s posts three consecutive quarters of profitability, however 3Q2017 earnings were underwhelming. Subscriber loss compensated by higher ARPU(Average Revenue per Unit). Capital adjustment to improve balance sheet position ahead of a challenging period going forward. We revise our price target to SAR 9.00, with an “Overweight” recommendation
Upside / (Downside)
48.1%
Source: Tadawul * 08th of November 2017
Key Market Data Market Cap (mn)
5341.12
YTD %
-28.0%
Shares Outstanding (mn)
583.73
52 Week (High )
11.45
52 Week (Low)
5.85 Source: Company reports, Aljazira Capital
Key Financials SARmn (unless specified)
FY15
FY16
FY17E
Revenue
6,741
6,927
7,448
Growth %
7.97%
2.75%
7.52%
Net Income
(972)
(980)
77
Growth %
NM*
NM*
NM*
(1.67)
(0.91)
0.13
EPS
Source: Company reports, Aljazira Capital , * NM: Not Meaningful
Key Ratios SARmn (unless specified)
FY15
FY16
FY17E
Gross Margin
59%
64%
67%
Net Margin
-14%
-14%
1%
P/E
NM*
NM*
46.2
P/B
1.1
1.2
1.0
EV/EBITDA (x)
9.0
7.5
5.2
Dividend Yield
0.00%
0.00%
0.00%
Source: Company reports, Aljazira Capital , * NM: Not Meaningful
Price Performance 7500
12 11
7000
10
6500
9 8
6000
7
5500
Source: Bloomberg, Aljazira Capital
Head of Research
Talha Nazar 1
1
Basis points
© All rights reserved
5
Nov 2017
Oct 2017
Sep 2017
Zain
Aug 2017
TASI
Jul 2017
6 Jun 2017
5000
Apr 2017
Valuation: Zain’s results in the last two quarters although underwhelming should be taken under the context that the company was not expected to turn profitable, in 2017, at the start of the year. However, after the first quarter profitability has taken a nose dive. The major positive for the company is the healthy YoY growth in revenues and operating income. The company faces multiple challenges on its debt front, however fresh capital injection through rights issue can alleviate that concern. For 2017 and 2018 we expect Zain to post earnings of SAR 77.0mn and 185.2mn. The company is trading at a forward PE and PB multiple of 46.2x and 0.96x, We reduce our PT to SAR 9.00/ share, and maintain our “Overweight” recommendation
9.00
May 2017
The company by the end of 9M-2017, had total outstanding loan of SAR 12bn, out of which SAR9.75bn is the Murabaha facility, SAR 2.26bn is the commercial loan. The company renegotiated its Murabaha facility in 2013. The facility was extended for 5 years ,with a grace period of 2 years, ending 31st July 2018. Under the revised terms the company had to pay 25% of the facility during the years 4 to 5 and the rest 75% on maturity. The company has partially repaid the facility as SAR 8.6bn stands as outstanding principal, hence the current portion of loans stands at SAR 9.7bn. We believe given the company’s current cash flow situation, Zain will find it hard to completely meet its debt obligation. Capital injection or a further grace period is the only ways to fulfil its debt obligation, so a lot depends on the success of the rights issue.
Target Price (SAR)
Mar 2017
Subsequent issue of right shares after capital decrease to improve balance sheet: The company has announced that it will reduce its capital from SAR 5.8bn to SAR 3.6bn to write-off its accumulated losses of SAR 2.2bn. Subsequently the company plans a rights issue worth SAR 6.0bn, targeting share capital of SAR 9.6bn. The company plans to reduce its debt obligation through the planned rights issue proceeds. Effectively cutting its debt obligation and finance cost.
6.01
Jan 2017
The company is looking to partner with local players to expand its network quickly, for that matter Zain signed a fiber optic agreement with SEC (Saudi Electricity Company) subsidiary Dawiyat to benefit from the utilities fiber optic network. The agreement will provide Zain with an existing fiber optic network, which the company can leverage to increase its foot print in the FTTH/FTTX domain.
Current Price* (SAR)
Feb 2017
The fiber optics opportunity: Zain’s KSA license, in addition to the extension was upgraded to a universal license, giving the company an opportunity to broaden its service offerings. The company might also delve into the fiber optic-internet services, along with that the company is also exploring voice services. This in our view will greatly improve the company’s earning potential, however for it to capitalize on the opportunity Zain will have to act quickly to bring its new operations to scale.
‘Overweight ’
Nov 2016
Zain 9M-2017 results were underwhelming, despite recording its first profitable 9m period since inception: Zain KSA in 9M-2017 posted earnings of SAR 56.6mn, against a loss of SAR 845.2mn in 9M-2016. The company’s operating income stood at SAR 736.7mn in 9M-2017, showing a marked improvement from a loss of SAR 142.3mn in 9M-2016. The increase in profitability can be attributed to i)Higher revenues of SAR 5.6bn in 9M-2017 as compared to SAR 5.1bn in 9M-2016, despite of a 20%YoY fall in subscriber base to 8.6mn, due to biometric registration, however ARPU showed an improvement as it stood at SAR 66.4 in 9M-2017 as compared to SAR 54.0 in 9M-2016 ; ii) higher margins of 67.6% (a jump of 405bps1), due to better cost management and lower interconnect charges; iii) Lower amortization rates, after the extension in Zain’s license from 25 years to 40 years.
Recommendation
Dec 2016
Q3-2017 investment update
+966 11 2256250 [email protected]
RESEARCH DIVISION
Head of Research
RESEARCH DIVISION
BROKERAGE AND INVESTMENT CENTERS DIVISION
Talha Nazar
Sultan Al Kadi, CAIA
Analyst
Jassim Al-Jubran
+966 11 2256250 [email protected]
+966 11 2256374 [email protected]
Analyst
Analyst
Waleed Al-jubayr
Muhanad Al-Odan
+966 11 2256146 [email protected]
+966 11 2256115 [email protected]
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment
sales
brokerage
Centers
Alaa Al-Yousef
Luay Jawad Al-Motawa
Mansour Hamad Al-shuaibi
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
+966 11 2256248 [email protected]
+966 12 6618443 [email protected]
Central Region
Sultan Ibrahim AL-Mutawa
Abdullah Al-Rahit
+966 11 2256364 [email protected]
+966 16 3617547 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
Please read Disclaimer on the back
Zain KSA’s posts three consecutive quarters of profitability, however 3Q2017 earnings were underwhelming. Subscriber loss compensated by higher ARPU(Average Revenue per Unit). Capital adjustment to improve balance sheet position ahead of a challenging period going forward. We revise our price target to SAR 9.00, with an “Overweight” recommendation
Upside / (Downside)
48.1%
Source: Tadawul * 08th of November 2017
Key Market Data Market Cap (mn)
5341.12
YTD %
-28.0%
Shares Outstanding (mn)
583.73
52 Week (High )
11.45
52 Week (Low)
5.85 Source: Company reports, Aljazira Capital
Key Financials SARmn (unless specified)
FY15
FY16
FY17E
Revenue
6,741
6,927
7,448
Growth %
7.97%
2.75%
7.52%
Net Income
(972)
(980)
77
Growth %
NM*
NM*
NM*
(1.67)
(0.91)
0.13
EPS
Source: Company reports, Aljazira Capital , * NM: Not Meaningful
Key Ratios SARmn (unless specified)
FY15
FY16
FY17E
Gross Margin
59%
64%
67%
Net Margin
-14%
-14%
1%
P/E
NM*
NM*
46.2
P/B
1.1
1.2
1.0
EV/EBITDA (x)
9.0
7.5
5.2
Dividend Yield
0.00%
0.00%
0.00%
Source: Company reports, Aljazira Capital , * NM: Not Meaningful
Price Performance 7500
12 11
7000
10
6500
9 8
6000
7
5500
Source: Bloomberg, Aljazira Capital
Head of Research
Talha Nazar 1
1
Basis points
© All rights reserved
5
Nov 2017
Oct 2017
Sep 2017
Zain
Aug 2017
TASI
Jul 2017
6 Jun 2017
5000
Apr 2017
Valuation: Zain’s results in the last two quarters although underwhelming should be taken under the context that the company was not expected to turn profitable, in 2017, at the start of the year. However, after the first quarter profitability has taken a nose dive. The major positive for the company is the healthy YoY growth in revenues and operating income. The company faces multiple challenges on its debt front, however fresh capital injection through rights issue can alleviate that concern. For 2017 and 2018 we expect Zain to post earnings of SAR 77.0mn and 185.2mn. The company is trading at a forward PE and PB multiple of 46.2x and 0.96x, We reduce our PT to SAR 9.00/ share, and maintain our “Overweight” recommendation
9.00
May 2017
The company by the end of 9M-2017, had total outstanding loan of SAR 12bn, out of which SAR9.75bn is the Murabaha facility, SAR 2.26bn is the commercial loan. The company renegotiated its Murabaha facility in 2013. The facility was extended for 5 years ,with a grace period of 2 years, ending 31st July 2018. Under the revised terms the company had to pay 25% of the facility during the years 4 to 5 and the rest 75% on maturity. The company has partially repaid the facility as SAR 8.6bn stands as outstanding principal, hence the current portion of loans stands at SAR 9.7bn. We believe given the company’s current cash flow situation, Zain will find it hard to completely meet its debt obligation. Capital injection or a further grace period is the only ways to fulfil its debt obligation, so a lot depends on the success of the rights issue.
Target Price (SAR)
Mar 2017
Subsequent issue of right shares after capital decrease to improve balance sheet: The company has announced that it will reduce its capital from SAR 5.8bn to SAR 3.6bn to write-off its accumulated losses of SAR 2.2bn. Subsequently the company plans a rights issue worth SAR 6.0bn, targeting share capital of SAR 9.6bn. The company plans to reduce its debt obligation through the planned rights issue proceeds. Effectively cutting its debt obligation and finance cost.
6.01
Jan 2017
The company is looking to partner with local players to expand its network quickly, for that matter Zain signed a fiber optic agreement with SEC (Saudi Electricity Company) subsidiary Dawiyat to benefit from the utilities fiber optic network. The agreement will provide Zain with an existing fiber optic network, which the company can leverage to increase its foot print in the FTTH/FTTX domain.
Current Price* (SAR)
Feb 2017
The fiber optics opportunity: Zain’s KSA license, in addition to the extension was upgraded to a universal license, giving the company an opportunity to broaden its service offerings. The company might also delve into the fiber optic-internet services, along with that the company is also exploring voice services. This in our view will greatly improve the company’s earning potential, however for it to capitalize on the opportunity Zain will have to act quickly to bring its new operations to scale.
‘Overweight ’
Nov 2016
Zain 9M-2017 results were underwhelming, despite recording its first profitable 9m period since inception: Zain KSA in 9M-2017 posted earnings of SAR 56.6mn, against a loss of SAR 845.2mn in 9M-2016. The company’s operating income stood at SAR 736.7mn in 9M-2017, showing a marked improvement from a loss of SAR 142.3mn in 9M-2016. The increase in profitability can be attributed to i)Higher revenues of SAR 5.6bn in 9M-2017 as compared to SAR 5.1bn in 9M-2016, despite of a 20%YoY fall in subscriber base to 8.6mn, due to biometric registration, however ARPU showed an improvement as it stood at SAR 66.4 in 9M-2017 as compared to SAR 54.0 in 9M-2016 ; ii) higher margins of 67.6% (a jump of 405bps1), due to better cost management and lower interconnect charges; iii) Lower amortization rates, after the extension in Zain’s license from 25 years to 40 years.
Recommendation
Dec 2016
Q3-2017 investment update
+966 11 2256250 [email protected]
RESEARCH DIVISION
Head of Research
RESEARCH DIVISION
BROKERAGE AND INVESTMENT CENTERS DIVISION
Talha Nazar
Sultan Al Kadi, CAIA
Analyst
Jassim Al-Jubran
+966 11 2256250 [email protected]
+966 11 2256374 [email protected]
Analyst
Analyst
Waleed Al-jubayr
Muhanad Al-Odan
+966 11 2256146 [email protected]
+966 11 2256115 [email protected]
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment
sales
brokerage
Centers
Alaa Al-Yousef
Luay Jawad Al-Motawa
Mansour Hamad Al-shuaibi
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
+966 11 2256248 [email protected]
+966 12 6618443 [email protected]
Central Region
Sultan Ibrahim AL-Mutawa
Abdullah Al-Rahit
+966 11 2256364 [email protected]
+966 16 3617547 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
