Zain reported a weaker than expected set of Q3 22 results. Although net income increased by 40.8% yoy (-36.5% qoq) to SAR85.0mn, this is significantly lower than the SNB Capital and consensus estimates of SAR136mn and SAR139mn, respectively. Revenues increased by 15.3% yoy (+3.7% qoq) to SAR2.29bn and came in-line with our estimates of SAR2.24bn. We believe the negative variance in earnings is primarily driven by 1) higher opex which increased by 43.2% yoy to SAR627mn vs our estimates of SAR499mn. As a result, opex-to-sales stood at 27.4% vs 22.1% in Q3 21 and our estimates of 22.3% and 2) higher finance costs due to increase in interest rates.
Revenues increased by 15.3% yoy (+3.7% qoq) to SAR2.29bn and came in-line with our estimate of SAR2.24bn. This is the highest quarterly revenue on record. We believe the yoy growth in revenue is mainly driven by higher B2B, 5G revenue and the return of international visitors following the removal of COVID-19 pandemic related restrictions.
Gross income stood at SAR1.38bn (+10.6% yoy, 10.0% yoy). Gross margins contracted by 253bps yoy to 60.2%, but were higher than our estimates of 57.0%. We believe the contraction in gross margins is mainly due to the growth in the lower margin B2B segment.
Based on our calculations, EBITDA stood at SAR749mn, (-7.1% yoy, -2.4% qoq) and was slightly below our estimates of SAR779mn. EBITDA margin stood at 32.7% vs 40.6% in Q3 21 and our estimates of 34.8%.
EBIT grew by 30.6% yoy (-6.1% qoq) to SAR246mn, but came lower than our estimates of SAR268mn. We believe the variance was mainly due to higher opex. In absolute terms, opex stood at SAR627mn vs our estimate of SAR499mn. Depreciation expenses stood at SAR503mn vs SAR618mn in Q3 21 and our estimates of SAR511mn. We believe the decline in depreciation charges is mainly due to the acquisition of Zain’s tower portfolio in February 2022. We believe the higher opex is due cost related to launch of the new Iphone, while the related revenues would be recognized in subsequent quarter.
Net other expenses increased 25.8% yoy (+25.8% qoq) to SAR161mn vs our estimate of SAR132mn. We believe the variance in net non-opex is due to higher finance costs driven by increase in interest rates.
Based on our last update, we are Neutral on Zain KSA with a PT of SAR13.6. We believe revenue growth and lower depreciation levels are the key positives of the result while the decline in gross margin and higher opex are the major concerns. The stock is currently trading at 2023f P/E and EV/EBITDA of 28.9x and 6.7x, vs the global peer group average of 14.0x and 5.7x respectively.