Strategy Note /
Saudi Arabia

Zain | Q4 Update | B2B to drive growth, tower deal a key driver

  • Rising contribution from B2B

  • Tamam, a new potential

  • Tower sale deal, a key driver

SNB Capital
30 November 2022
Published bySNB Capital

We maintain our Neutral rating on Zain with a revised PT of SAR12.9. We believe the higher contribution from B2B, Tamam business will support revenues, while the tower sale deal is expected to support the company’s profitability through lower depreciation expenses. We expect the company to deliver net income CAGR of 67.0% during 2021-24f to reach SAR997mn by 2024f. The stock is currently trading at 2023f P/E and EV/EBITDA of 13.5x and 12.0x, compared to the peer group average of 13.7x and 5.8x, respectively.

 •    Rising contribution from B2B

     In line with the National Strategy for Digital Transformation, the sector as a whole has witnessed an increasing contribution from B2B and B2G due to higher demand for 5G, cloud services, AI and IoT applications. For Zain, B2B operation revenue contribution represented over 15% of Q3 22 revenue. Going forward, we expect B2B operations will continue to drive the revenue given foreseen expansion in Zain’s digital solutions and product portfolio. However, we do highlight increased B2B segment contribution will cause a drag on the margins, as these projects usually dictate lower margins as compared to Telco’s core operations.

•   Tamam, a new potential

    Tamam (Zain’s fintech division) revenue has been growing strongly. During Q3 22, the segment revenue grew over eight folds yoy to reach SAR40mn (+74% qoq). Tamam is currently only offering cash loans, but the company is planning to launch multiple products to increase its market share. Considering the high growth potential for micro lending platforms in Saudi, we project Tamam’s revenue to grow at a CAGR of 176% during 2021-24f to reach SAR328mn.

•   Tower sale deal, a key driver

     Zain is expected to complete the tower sale transaction in 18-months. The transaction is valued at SAR3.03bn for a total of 8,069 towers and is expected to result in a cash inflow of SAR2.4bn. The proceeds are expected to be used to deleverage the balance sheet, which should result in lower finance expense. In addition, the company is expected to realize a gain of SAR1.1bn, over the life of the transaction and we have assumed SAR600mn in 2023f and SAR500mn in 2024f. The lease back of the tower is expected to be less than the sale value of the assets, which is expected to lower depreciation expense. We expect the growth in 5G and decline in depreciation costs to support the earnings growth in the long-run. We project revenue and net income to grow at a 2021-24f CAGR of 8.2% and 67.0%, respectively.

•   Maintain Neutral with a revised PT of SAR12.9

    We are Neutral on Zain with a revised PT of SAR12.9. We believe B2B and Tamam provide support to the revenues, while tower deal will improve its financial position. The stock trades at 2023f P/E and EV/EBITDA of 13.5x and 12.0x compared to peer group average of 13.7x and 5.8x, respectively. Our estimates remain subject to clarity on the lease terms of the tower deal.