Friday, June 17, 2011

What Future for Zain? A Rosy One (Part II) — The Reason: Balance Sheets Are Good


June 17, 2011

In Part I  Is the Etisalat-Zain Deal Definitively Over? it was explained that the failed Etisalat-Zain deal made sense for the Emirati company. The aim of Part II — The Reason: Balance Sheets Are Good is to provide a clear picture of Zain's markets and to analyze the company's full-year 2010 and Q1 2011 financial results. The latter, which are the latest available data, were released by the company in May.

Zain is currently operating in seven countries, of which six are located in the Middle East (Bahrain, Iraq, Jordan, Kuwait, Lebanon and Saudi Arabia) and one in Africa (Sudan). Before selling Zain Africa B.V., which operated in 15 African countries, to Bharti Airtel in June 2010 for $10.7 billion, Zain had operations in 22 countries. In five countries out of seven, the Zain Group has an ownership stake bigger than 51 percent (Kuwait, Sudan, Jordan, Iraq and Bahrain). In other words, it has management control. In Zain Saudi Arabia, the Zain Group owns a 25 percent stake while the remaining 75 percent is split between a Saudi Consortium (25 percent), the Public Pension Authority (5 percent) and free float (45 percent). Through its 25 percent, the Zain Group has the company’s management control, but Zain Saudi Arabia pays 4 percent of its annual revenue to the Zain Group for management duties. Moreover, the Zain Group nominates and appoints four members of the nine-member board of directors. In Lebanon, the Zain Group operates through the subsidiary M.T.C. Touch (no ownership), which since June 2004 has been developing one of the two G.S.M. networks thanks to management contracts renovated every time they have expired (the current contract will expire on February 1, 2012).

In five (including Lebanon) out of seven markets Zain is ranked first operator. In Saudi Arabia, it’s the third operator with a 16 percent market share, while in Bahrain it’s ranked second, but there, the three licensed operators have all similar market shares (Bahrain’s Batelco 37 percent, Kuwait’s Zain 32 percent and Saudi Arabia’s S.T.C. 31 percent). 


Kuwait, Iraq, Sudan and Jordan are the key markets for the Zain Group. Together they account for around 92 percent of the 2010 revenues. At the same time, these are the markets with the largest populations, and all with the exception of Jordan (already a mature market) have a relevant potential growth in the short to medium term.

Source: Zain’s Earning Release (2010)

Source: Zain’s Earning Release (2010)

Before analyzing the financial data it’s necessary to provide some preliminary considerations.


  • Given the Zain Group’s ownership limited to only 25 percent, Zain Saudi Arabia is considered an associate company (the Zain Group has non-controlling interests) to the Zain Group, and its revenues are not added up directly to the consolidated statement of income.
  • In the Zain Group’s statement of income 2010, Zain Saudi Arabia appeared only in two items: share of loss of associates (45,018,000 Kuwaiti dinars) and when differentiating net profits attributable to shareholders of the parent company (1,062,805,000 Kuwaiti dinars) from net profits attributable to non-controlling interests (25,013,000 Kuwaiti dinars).
  • Although Zain Saudi Arabia reported for year 2010 a $628 million net loss, part of the overall net profit of the entire Zain Group has to be passed to the 25 percent stake in Zain Saudi Arabia a percentage stake that is a non-controlling interest (associate company). And the Zain Group’s 2010 consolidated statement of income perfectly confirms this net income differentiation.

The below table shows Zain Group’s key performance indicators (K.P.I.s) for 2010.


In a nutshell, 2010 financial results show a strong increase in relations to many K.P.I.s:

  • Consolidated net profit of $3.675 billion (1.063 billion Kuwaiti dinars, 445 percent increase), which is the highest ever in the Zain Group’s history. Net profit result is impressive, but it has to be underlined that $2.653 billion (770.3 million Kuwaiti dinars) is the capital gain linked to the sale of the African assets.
  • Net profit from continuing operations amounts to $1.022 billion (293 million Kuwaiti dinars) with a 50 percent increase over 2009 net profit being $675.1 million (195 million Kuwaiti dinars).  
  • Consolidated revenue reached $4.74 billion (1.35 billion Kuwaiti dinars) with a 7 percent year-on-year increase.
  • The board of directors decided to release a $0.72 (200 Kuwaiti fils) cash dividend.
  • Customer base increased 23 percent reaching 37.24 million in the seven markets considered.

BACCI-Zain-Group’s-KPIs for-Full-Year-2010

It’s really important to understand that in 2010 the Zain Group was able to increase by around a 50 percent its net profit. Having had $675.1 million of net profit in 2009 and just after 12 months almost duplicating its net profit ($1,022 million) is quite an impressive result accomplished thanks to two primary factors: operating in very valuable countries and having developed a more efficient operational model. 

In specific, between 2009 and 2010 continuing operations increased overall their revenues by 7.02 percent (by 15 percent in Sudan, by 12 percent in Iraq and by 7 percent in Jordan. Saudi Arabia’s revenue  although not added directly to statement of income increased by 98 percent). In addition to this, the Zain Group strongly reduced its finance cost and its share of loss of associates (Zain Saudi Arabia). Moreover, the Zain Group in 2010 experienced some gain from currency revaluation.  

The consolidated statement of income, partially reported below, well explains why also not considering capital gain net profit increased by 50 percent in just one year.  


The divestiture of African operations (cashing in $10.7 billion through the sale to Bharti Airtel) was aimed at focusing the Zain Group’s operations on fewer but highly cash-generative markets. In this way, cost synergies could be implemented as the Zain Group’s C.E.O., Nabeel Bin Salamah, pointed out in his C.E.O. statement included in the Zain Group's 2010 Annual Report. The Zain Group entered the African markets in May 2005 when it purchased Celtel International, which operated at that time in 13 countries and served around 5.2 million customers (data relative to beginning 2005). Later, Zain acquired one license in Ghana and one in Nigeria, while it improved the networks in all the served countries. The Zain Group’s 2009 Annual Report showed that at the end of 2009 the Zain Group had only in Africa and excluding Sudan 42.1 million customers of which 14,777,000 in Nigeria and 1,283,000 in Ghana. All this means that if Celtel had around 5.2 million customers in 13 countries at the beginning of 2005, only five years later Zain Africa B.V. had in the same markets 26 million customers, i.e., it had obtained a 500 percent increase in the customer base without counting Nigeria or Ghana, both of which were not part of the Celtel deal.

Moreover, comparing the K.P.I.s between Zain, Etisalat and S.T.C., which are the three most relevant Middle Eastern telecom operators, shows very impressive results on the part of Zain. In general, the Kuwaiti firm with just one quarter of the customers served by Etisalat and S.T.C. has been able to obtain around 50 percent of Etisalat’s profits and 40 percent of S.T.C.’s. It’s with no doubt a very good result. Understanding the reasons behind this achievement would require additional research, but it’s possible to assume that one ingredient of the rationale apart from the profitability of the markets where the company operates is entwined with Zain’s operational efficiency, which is the cornerstone of Zain’s new way of doing business. And Chairman of the Board of Directors, Asaad Al Banwan explicitly affirmed in his Chairman’s Message included in the Zain Group's 2010 Annual Report that the Zain Group had launched comprehensive restructuring initiatives with deep changes at the level of all of its various executive departments and sectors. The aim was to align its operations with the new strategic directions (See the Zain Group's 2010 Annual Report p. 5).


At the beginning of May 2011 Zain posted very positive Q1 2011 (Q1 ended on March 31, 2011) financial results showing vigorous growth with reference to several K.P.I.s. The results underlined a year-on-year 40 percent net income increase to $251.1 million (revenues $1.163 billion) and a 20 percent increase of the served customers (in total they were 37.6 million). The above table specifies the results for Q1, 2011.


In addition to increased net income and served customers, Zain improved by 1 percent in comparison to Q1 2010 its consolidated revenues reaching $1.163. Ebitda at $529.7 million was up 10 percent than in Q1 2010 with a 46 percent margin (4 percent higher than the previous year). EBIT also increased by 10 percent reaching $379.9 million. Earnings per share were $0.06 (for Q1 2011 U.A.E.’s Etisalat paid the same amount while Saudi Arabia’s S.T.C. paid $0.13).

BACCI-Zain-Group’s-Six-Positive-Operational Successes-in-Q1-2011

From sketching some conclusions at the end of this research, it emerges that the numbers expressed by financial data confirm a positive trend for the Kuwaiti company. At least three of the markets where it operates have a huge potential still to be fully developed.  Some analysts affirm that although the numbers look fine, Zain is an expensive stock. They are cautious because they think that Zain’s shares are trading at too high a multiple compared to the rest of the sector.


The latest data as shown by the above table portray a partially different picture with Zain’s P/E and P/BV in line with the values of Etisalat and S.T.C. This readjustment followed the price reduction of Zain’s share that had been a constant trend since the last two weeks of December 2010 (on December 19, 2010, the Etisalat-Zain deal was canceled for the second time) until the end of May 2011. The chart below fully shows the movement of Zain’s share price in the last year.

ZAIN-Zain’s-Share-Price-in-the-Last Year
Zain’s Share Price in the Last Year

Summing up, the Kuwaiti company has very positive balance sheets reflecting operations and assets in very profitable markets, top-notch operational model, and relevant cash resources to be invested in future acquisitions. All these elements contribute to depicting a rosy future for the Zain Group. “Zain’s numbers don’t show management has been distracted by the takeover talk its core operations have been performing okay” said Nomura’s telecom analyst, Martin Mabbut,. In other words, the only change to be done now pertains to the shareholders’ side. In fact, after the failure of the Etisalat-Zain deal, it’s still not clear whether the consortium led by the Al-Kharafi Group, which wanted to sell a 46 percent stake in Zain, still wants to (and is able to) carry on with that project. If the answer is negative some other alternatives will have to be developed.