Global Research Investment Update Equity – Kuwait Telecommunication Sector 15 May, 2014

BUY

Mobile Telecommunications Co. (Zain)

Target Price KWD0.765

Market Data Bloomberg Code: Reuters Code: CMP (15 May 2014): O/S (mn) Market Cap (KWD mn): Market Cap (USD mn): P/E 2014e (x): P/Bv 2014e (x):

ZAIN KK ZAIN.KW KWD0.660 3,881.8 2,853 10,128 11.2 1.5

Price Performance 1-Yr High (KWD): Low (KWD): Average Volume (000):

Absolute (%) Relative (%)

0.730 0.620 1,630 1m -7.1 -5.5

Price Volume Performance

3m -4.4 -9.8

12m -9.7 -15.3

   

Revenue and EBITDA forecast revised favorably Revenue growth from operations in Kuwait & Iraq Iraqi cabinet approves 3G; lawsuit filed against Zain Iraq Upgraded to BUY from HOLD

We upgrade our Zain recommendation to BUY from HOLD as we believe the company turnaround is progressing, leaving the worst behind. Operations in Kuwait have posted robust growth while revenues from its Sudan operations have rebounded in KWD terms and developments on the 3G front will allow Zain to capitalize on the data market in Iraq. Given that Kuwait’s weight in the MSCI Frontier Market index will increase, it is expected that Zain will be amongst the beneficiaries of new flows. 3G spectrum in Iraq expected in 2014 The Iraqi cabinet approved the use of 3G frequencies by telecom operators in Iraq in principle yet did not provide additional details. We expect the process to conclude this year and have incorporated the estimated license price of USD307mn into our model for 2014. Iraq data revenues contributed only 4.0% to the total revenue in 1Q14 (compared to 31.0% in Kuwait and 24.0% in Jordan) reflecting the potential for growth in this segment. Iraq operations to drive Capex spending Capex spending is expected to stay high at an estimated 16.0% of sales in 2014. Operations in Iraq are also expected to account for the bulk of the expenditure (approximately 44.0% of total capex in 2014) as the company launches its 3G network and expands into the Kurdistan region. This figure excludes the cost of license/spectrum for provision of 3G services in Iraq. If the estimated cost of USD307mn is included, the capex to sales ratio will increase to 22.7% in 2014. The company will also launch a 4G network in Jordan at an expected cost of approximately USD100mn that mostly will be incurred in 2014. Zain Group increases its stake to 63.0% in Zain Bahrain Zain Group increased its stake in Zain Bahrain to 63.0% from 56.25% in its effort to retain a majority control of the subsidiary, given the forthcoming IPO where the shareholders of Zain Bahrain will float 15.0% of their holdings on a proportional basis to meet regulatory requirements. According to media reports, the share sale will likely take place at the end of June 2014.

Source: Zawya

Valuation increased to KWD0.765 per share We have upgraded our fair value to KWD0.765 per share from KWD0.720 per share in light of the revised forecasts. The stock’s 2014e P/E of 11.2x is currently at a discount to the GCC telecom industry average P/E of 12.0x. The company also boasts an attractive dividend yield of 7.6%, which is higher than the average GCC telecom industry yield of 5.3% and is higher than Kuwait stock Exchange companies’ average yield of 2.4%. The stock at its current price of KWD0.660 offers potential upside of 15.9% and accordingly we upgrade our recommendation to BUY on the stock.

Umar Faruqui, CFA, ACCA

Investment indicators

Manager Research [email protected] Tel.: (965) 22951438 Global Investment House www.globalinv.net

Revenues (KWDmn) EBITDA (KWDmn) Net Profit attr. to parent (KWDmn) Dividend Yield P/E (x) EV/EBITDA

2012 1,282 571 252 6.4% 12.0 6.9

2013 1,240 538 216 7.2% 12.4 6.7

2014e 1,266 554 230 7.6% 11.2 6.4

2015e 1,292 568 249 7.6% 10.3 6.2

2016e 1,310 576 266 7.6% 9.6 5.9

2017e 1,322 581 276 7.6% 9.3 5.6

Source: Company reports & Global Research

Please see penultimate page for additional important disclosures. Global Investment House (“Global”) is a foreign broker-dealer unregistered in the USA. Global research is prepared by research analysts who are not registered in the USA. Global research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Cadwyn Point Partners LLC, an SEC registered and FINRA-member broker-dealer.

Global Research – Kuwait

Mobile Telecommunications Co. (Zain)

Revision to estimates We have increased our forecasted revenue and EBITDA for Zain. The increase in estimates is largely due to better than expected performance in Kuwait. The company is reaping the benefits of being the first mover in the 4G LTE domain. We believe that Zain being the market leader is likely to dictate the market direction and competitive dynamics with competition likely to be higher between second and third operators. On the other hand, we have decreased our net profit estimates during the forecast period as we have become more conservative on our bottom-line estimates for Zain KSA. KWDmn

Earlier Estimates 2014e 2015e 1,223 1,245 530 540 242 262

Revenue EBITDA Net Profit KWDmn

Change 2015e 3.8% 5.3% -5.0%

2014e 3.5% 4.5% -5.0%

Revenue EBITDA Net Profit

Revised estimates 2014e 2015e 1,266 1,292 554 568 230 249

2016e 1,265 547 285

2016e 1,310 576 266

2016e 3.6% 5.2% -6.7%

Source: Global Research

Possible catalysts and risks to valuation With UAE and Qatar scheduled for upgrading to emerging market status in May 2014, the weight of Kuwait in the MSCI Frontier index is likely to increase and hence the flow of funds towards large-cap stocks including Zain will likely also increase. In addition, a successful IPO in Bahrain and favorable developments on acquisition of 3G spectrum in Iraq will further enhance the valuation and add to the attraction of the stock. There are risks which may impact the stock price including a lawsuit for USD4.5bn pertaining to Zain’s acquisition of Iraqna from Orascom Telecom back in December 2007 by Korek Telecom, one of the bidders at the time of the Iraqna acquisition. Currently Zain Iraq is required by order of the Iraqi courts to transfer its revenue related to subscribers of Iraqna to a separate bank account until the case is resolved. The management of Zain believes that they will overcome this hurdle and have a strong case against the accusation that Zain’s takeover of Iraqna prevented the complainant from buying Iraqna and causing it a loss of USD4.5bn. We note that any unanticipated delay or higher cost for the expected 3G license/spectrum will have a material impact on our company valuation. 1Q14 performance of major operations Kuwait 1Q14 group revenues increased by 4.1%YoY to KWD311.1mn driven by 8.8% growth in Kuwait operation revenues to KWD88.2mn. Revenue growth was supported by a 7.6%YoY increase in mobile subscribers to 2.53mn in Kuwait. The Kuwait operations have performed well in an intense competitive environment as Zain had the first mover advantage in the 4GLTE arena. The company has also managed to leverage its brand image through attractive promotions and packages. Sudan Revenues from the Sudan operations increased by 3.7%YoY to KWD45.0mn in 1Q14. This is the first YoY increase in quarterly revenues after a decline in the previous five quarters. The previous five quarters were adversely affected by sharp devaluation of the Sudanese currency against the USD. (53.4% devaluation from 30 June 2012 to 1 March 2014) Iraq Revenue in Iraq witnessed modest growth of 2.4% to KWD121.8mn. The company has managed to capture a significant market share in the Arabic North of around 40.0% in 1Q14 according to the management and is expanding into Kurdistan. Mobile customers in Iraq increased strongly by 17.9%YoY to 15.9mn. However, competitive conditions led to a decline in ARPU to USD9.0 in 1Q14 compared to USD10.0 in 1Q13. Quarterly financials (KWD mn)

1Q13

4Q13

1Q14

YoY

QoQ

Sales Revenue

299.0

315.3

311.1

4.1%

-1.3%

EBITDA

126.6

138.8

132.2

4.4%

-4.7%

52.0

50.8

55.9

7.5%

10.0%

42.4%

44.0%

42.5%

Net Profit (attr. to parent) EBITDA Margin (%)

-

-

Source: Company Reports & Global Research

May - 2014

2

Global Research – Kuwait

Mobile Telecommunications Co. (Zain)

Group EBITDA margin remains stable 1Q14 group EBITDA margin increased slightly to 42.5% compared to 42.4% in 1Q13. EBITDA margin increased to 48.7% from 47.2% in Kuwait which is not surprising considering the growth in data revenues. EBITDA margin in Iraq increased slightly to 38.8% from 38.5%. Meanwhile, EBITDA margin in Sudan operations declined sharply to 39.2% from 42.6%. EBITDA margins declined in Sudan as a significant portion of direct expenses are denominated in foreign currency.

May - 2014

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Global Research – Kuwait

Mobile Telecommunications Co. (Zain)

Financial Statements

Income Statement

(KWD mn)

2011

2012

2013

2014e

2015e

2016e

2017e

1,322 -2.2% 600 -2.5% (171) 430 (27) (26) 377 (59) 318 (33) 285 -73.2%

1,282 -3.0% 571 -4.9% (193) 378 (26) (18) 334 (53) 280 (28) 252 -11.5%

1,240 -3.3% 538 -5.8% (195) 343 (24) (49) 270 (26) 244 (27) 216 -14.2%

1,266 2.1% 554 3.0% (200) 354 (28) (42) 285 (27) 258 (28) 230 6.1%

1,292 2.1% 568 2.5% (210) 358 (21) (31) 306 (29) 277 (28) 249 8.4%

1,310 1.4% 576 1.4% (217) 359 (16) (19) 324 (31) 294 (28) 266 6.6%

1,322 0.9% 581 0.9% (225) 356 (11) (9) 336 (32) 304 (28) 276 4.0%

405 333 21 6 765

303 319 12 3 636

399 350 15 2 766

348 326 18 3 694

268 334 21 3 626

317 339 25 4 685

404 342 30 5 780

Net property, plant and equipment Intangible assets Investments in JVs & associates & other investments Other non-current assets Total Fixed Assets

796 1,256 126 345 2,523

699 998 301 297 2,295

735 994 265 337 2,331

806 1,010 285 349 2,450

819 940 307 356 2,422

819 870 331 363 2,384

809 800 358 371 2,338

Total Assets

3,287

2,931

3,097

3,145

3,048

3,068

3,118

507 314 226 35 125

535 271 381 33 120

543 198 557 35 143

585 222 460 51 171

553 178 351 56 199

590 142 265 62 227

626 114 1 191 68 255

431 516 1,133 2,080 3,287

432 490 669 1,591 2,931

432 509 679 1,621 3,097

432 545 679 1,656 3,145

432 600 679 1,711 3,048

432 671 679 1,783 3,068

432 754 679 1,865 3,119

326 95 (489) (67) 405

488 (377) (257) (147) 303

466 (218) (155) 94 399

516 (315) (252) (51) 348

433 (178) (335) (81) 268

521 (174) (298) 49 317

535 (175) (274) 87 404

45.4% 21.5% 9.1% 12.1% 0.2 21.9 0.3 23.7% 7.1 3.2 73 536 0.900 3,877 7.2% 12.3 1.7

44.5% 19.7% 9.0% 13.7% 0.6 21.6 0.4 14.8% 6.9 3.1 65 410 0.780 3,366 6.4% 12.0 1.9

43.4% 17.5% 8.1% 13.5% 0.7 22.8 0.5 18.3% 6.7 2.9 56 417 0.690 2,983 7.2% 12.4 1.7

43.8% 18.1% 8.3% 14.0% 0.6 20.1 0.4 22.7% 6.4 2.8 59 427 0.660 2,853 7.6% 11.2 1.5

44.0% 19.3% 8.9% 14.8% 0.5 27.0 0.3 11.8% 6.2 2.7 64 441 0.660 2,853 7.6% 10.3 1.5

44.0% 20.3% 9.6% 15.2% 0.2 36.3 0.2 11.2% 5.9 2.6 68 459 0.660 2,853 7.6% 9.6 1.4

44.0% 20.9% 9.8% 15.1% -0.2 50.7 0.2 11.0% 5.6 2.5 71 480 0.660 2,853 7.6% 9.3 1.4

Revenue Revenue Growth EBITDA EBITDA growth Depreciation and amortization EBIT Financial Charges Other revenues Profit Before Taxation Taxation Net Profit for the year Profit / (loss) from discontinued operations Non-controlling interest Profit attributable to equity holders Net profit growth

Balance Sheet

Cash and Bank Balance Receivables and Prepayments Inventories Other current assets Total Current Assets

Accounts payable & accruals Short term borrowings Other current liabilities Long-term debt Other non-current liabilities Non-controlling interests

Cash Flow

Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Change in Cash Net Cash at End

Ratio Analysis

Share capital Retained Earnings Other reserves Total Shareholders Equity Total Equity & Liability

EBITDA Margin Net Profit Margin Return on Average Assets Return on Average Equity Net debt / EBITDA (x) Interest coverage (x) Debt / Equity (x) Capex as % of sales EV/EBITDA (x) EV/Revenues (x) EPS (fils) Book Value Per Share (fils) Market Price (KWD) * Market Capitalization (KWD mn) Dividend Yield P/E Ratio (x) P/BV Ratio (x)

Source: Company Reports & Global Research * Market price for 2014 and subsequent years as per closing prices on 15 May, 2014

May - 2014

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Global Research – Kuwait

Mobile Telecommunications Co. (Zain)

Disclosure The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research have been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Mobile Telecommunications Co.

Recommendation BUY

Bloomberg Ticker ZAIN KK

Reuters Ticker ZAIN.KW

Price KWD0.660

Disclosure 1,10

1.

Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year, Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition STRONG BUY Fair value of the stock is >20% from the current market price BUY Fair value of the stock is between +10% and +20% from the current market price HOLD Fair value of the stock is between +10% and -10% from the current market price SELL Fair value of the stock is < -10% from the current market price

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May - 2014

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Global Research – Kuwait

Mobile Telecommunications Co. (Zain)

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May - 2014

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