Equity Analysis /
Saudi Arabia

Zain KSA: Better-than-expected results on strong revenues; reiterate Overweight

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    9 May 2019
    Published by

    Zain KSA reported a net income of SAR129mn in Q1 19, compared to a loss of SAR77mn in Q1 18 and a profit of SAR399mn in Q4 18. The results were higher than the NCBC estimates of SAR114mn but lower than the consensus of SAR169mn. We believe the better than expected results are due to strong top-line growth. Zain reported a provision reversal of SAR107mn in Q1 19, as part of the expected reversal related to royalty fees of SAR1.7bn to be recorded in 2018-2020. Adjusting for that, net income came in at SAR22mn.

    Revenues grew 24.2% yoy (+2.3% qoq) to SAR2.09bn. This is 5.7% higher than our estimate. We believe the growth is driven by 1) growth in enterprise segment supported by government projects, 2) change in the client mix toward post-paid customers, 3) growth in FTTH, and 4) introduction of new services. Based on CITC Q4 18 data, mobile subscribers grew 2.8% yoy to 41.3mn reflecting a penetration rate of 127%. We believe the strong top-line growth is a positive read across for the sector.

    Gross profit came-in at SAR1.48bn, slightly higher than our estimates of SAR1.43bn driven by the positive impact of higher sales. Gross margin came in at came in at 70.7%, below our estimates of 72.0% and Q1 18 of 66.3%. The cost of service was reduced by SAR107mn due to reversal of royalty fees. Adjusting for that, gross margin would have been around 65.6%.

    EBITDA stood at SAR955mn in Q1 19, 16.2% higher than our estimates. EBITDA margin came in at 45.6% vs our estimates of 41.5% and 33.9% in Q1 18. EBIT stood at SAR382mn in Q1 19, 7.1% higher than our estimates of SAR357mn. Depreciation expense came-in at SAR573mn, 23.1% higher than our estimates of SAR466mn which is due to reclassification of operating leases from SG&A to depreciation. Therefore, SG&A expenses were lower than our estimates of SAR604 and stood at SAR525mn.

    Zain announced the revision of deal to sell its towers to IHS Holding for SAR2.52bn from SAR2.43bn. Zain also announced that it secured additional spectrum, for a period of 15 years. The license fee to be payable in equal instalments for a period of 13 years is SAR624mn, starting 2022. 

    We are Overweight on Zain with a PT of SAR11.4. We believe Zain’s turnaround story is materializing, driven by 1) reduction of royalty fees, 2) royalty fees reversal, and 3) tower sale. This will be further supported by Zain’s inclusion in EM indices.