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Saudi Arabia

Zain KSA: Q4 19 review: Revenue growth offset by higher costs

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Head of Equity Research

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    SNB Capital
    5 February 2020
    Published bySNB Capital

    Zain reported a weaker-than-expected set of Q4 19 results with a net income of SAR105mn, lower than the NCBC and consensus estimates of SAR138mn and SAR131mn, respectively. This is compared to net profit of SAR399mn in Q4 18 and SAR121mn in Q3 19. We believe earnings weakness is due to higher cost of service and non-opex, which offset the impact of better-than-expected top line.

    Revenues grew 8.8% yoy (+11.0% qoq) to SAR2.23bn, reaching the highest level on record and coming +5.3% higher than our estimates. The strong growth of revenues is a key highlight as it came after a slow yoy growth of 2.9% in Q3 19, which raised concerns about the growth trajectory of Zain. We believe the growth is mainly driven by Zain’s focus on enterprise services and the launch of 5G in Q3 19, followed by an aggressive customer acquisition campaign. In comparison, STC revenues were flat yoy (-6.0% qoq).

    Gross profit came in at SAR1.47bn, coming in 6.5% lower than our estimates. Gross margin came in at 66.0%, lower than our estimates of 74.2%. This is the lowest gross margin since Q2 18. Moreover, the cost of service was reduced by SAR110mn due to reversal of royalty fees. Adjusting for that, gross margin would have been even lower at c61.0%. 

    EBITDA stood at SAR974mn, in-line with our estimates as SG&A came-in at SAR496mn lower than our estimate of SAR590mn. Depreciation expenses came-in at SAR595mn, broadly in-line with our estimates of SAR579mn. 

    EBITDA margin came in at 43.7% vs our estimates of 46.4% and 53.5% in Q4 18. EBIT stood at SAR379mn, 5.8% lower than our estimates. 

    The variance increased at the net income level due higher non-opex. We believe non-opex came-in at SAR274mn, compared to our estimate of SAR264mn which we believe is due to higher interest expense. 

    In our recent company update, we downgraded Zain to Neutral with a PT of SAR11.8. The stock key drivers going forward are 1) ICT strategy, and 2) the fast rollout of its 5G network, while the uncertainty regarding the capital restructuring is a concern. The stock is trading at 2020f PE and EV/ EBITDA of 11.4x and 3.6x, vs the peer group average of 15.6x and 6.1x, respectively.