Equity Analysis /
Saudi Arabia

Zain KSA: Q2 results: Higher opex offset by lower financial expense

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    14 July 2019
    Published by

    Zain KSA reported a broadly in-line set of Q2 19 results with a net income of SAR130mn, vs a loss of SAR38mn in Q2 18 and a profit of SAR129mn in Q1 19. The compares to NCBC Research and consensus estimates of SAR137mn and SAR128mn, respectively. We believe the higher-than-expected opex was off-set by lower-than-expected financial expense. 

    NCBC view on the results: 

    Revenues grew 11.4% yoy (-1.7% qoq) to SAR2.06bn, in line with our estimates. We believe the yoy growth is driven by: 1) growth in enterprise segment, 2) change in the client mix toward postpaid customers, 3) growth in FTTH, and 4) introduction of new services. Based on CITC Q1 19 data, mobile subscribers declined 0.9% yoy, but increased 0.8% qoq to 41.6mn. This translates into a penetration rate of 125%, the lowest level since 2010.

    Gross profit came in at SAR1.52bn, broadly in line with our estimates. Gross margin came in at 74.1%, higher than our estimates of 70.5% and 62.9% in Q2 18. The cost of service was reduced by SAR129mn due to reversal of royalty fees. Adjusting for that, gross margin would have been c67.8%.

    EBITDA stood at SAR944mn in Q2 19, lower than our estimates of SAR994mn. EBITDA margin came in at 45.9% vs our estimates of 47.3% and 33.3% in Q2 18. EBIT stood at SAR374mn in Q2 19, lower than our estimates of SAR416mn. We believe the deviation increased at the EBIT level due to higher-than-expected opex. SG&A came in at SAR580mn, higher than our estimate of SAR487mn. Depreciation expenses came in at SAR570mn, in line with our estimates. 

    The variance reduced to 4.8% at the net income level due to lower-than-expected non-opex. We believe finance expenses came-in at SAR257mn, 10.2% lower than our estimate of SAR286mn.

    Zain recently cancelled its tower sale to IHS Holding. We believe Zain could have used the deal proceeds to reduce its high debt burden. Zain’s debt stands at SAR10.2bn, with a net debt/EBITDA of 2.9x (2018). As a result, we believe that capital restructuring is more probable for the company. 

    In our last update, we upgraded Zain to Overweight with a PT of SAR11.4. Since then, the stock has rallied from SAR9.90 to the current price of SAR13.06 (+31.9%). We await the company's full financials to review our models and price target.