Zain reported a stronger than expected set of Q2 22 results, with a net income of SAR134mn, increasing by 222% yoy (+66.4% qoq). This compares to the SNB Capital and consensus estimates of SAR90.0mn and SAR79.8mn, respectively. Revenue increased 16.4% yoy (+1.3% qoq) to SAR2.21bn and came in-line with our estimates of SAR2.18bn. We believe the positive variance in earnings is primarily driven by a decline in opex and lower than expected depreciation following the acquisition of Zain’s tower portfolio in February 2022. As a result, opex-to-sales stood at 21.9% vs 26.0% in Q1 22 and our estimate of 23.5%.
Revenues increased 16.4% yoy (+1.3% qoq) to SAR2.21bn and came in-line with our estimate of SAR2.18bn. This is the highest quarterly revenue since Q4 19. We believe the yoy growth in revenue is mainly driven by higher B2B, 5G revenue and the return of travelling activities following the removal of COVID-19 pandemic related restrictions.
Gross income stood at SAR1.25bn (-0.6% yoy, 1.2% yoy). Gross margins contracted by 969bps yoy to 56.7%, lower than our estimates of 57.3%. We believe the contraction in gross margins is mainly due to the growth in the lower margin B2B segment and reversal of provision released in Q2 2021.
Based on our calculations, EBITDA stood at SAR767mn, (+0.2% yoy, +6.1% qoq) and was slightly ahead of our estimates of SAR735mn. EBITDA margin stood at 34.8% vs 40.4% in Q2 21 and our estimates of 33.7%.
EBIT increased 64.4% yoy (+30.3% qoq) to SAR262mn, higher than our estimates of SAR213mn. We believe the higher than expected cost of sales was mitigated by lower opex and depreciation expenses. Depreciation stood at SAR505mn vs SAR606mn in Q2 21 and our estimate of SAR522mn. In absolute terms, opex stood at SAR484mn vs our estimate of SAR513mn. We believe the decline in opex and depreciation charges is mainly due to the acquisition of Zain’s tower portfolio in February 2022.
Net other expenses increased 8.8% yoy (+6.1% qoq) to SAR128mn vs SAR118mn in Q2 21 and our estimate of SAR122mn. We believe the variance in net non-opex is due to higher finance and zakat expenses.
Based on our last update, we are Neutral on Zain KSA with a PT of SAR13.6. We believe revenue growth and lower depreciation level are the key positives of the result while the decline in gross margin is the main concern. The stock is currently trading at 2022f P/E and EV/EBITDA of 32.5x and 6.4x, vs the peer group average of 14.3x and 6.2x respectively.