CFA Investment Research - PowerPoint Presentation

CFA Investment Research C hallenge University of Bahrain

Market Profile Date as of: 20-02-2015 Listed on Bahrain Bourse (Ticker)ZAINBHPrice range since listingBD 0.204 – BD 0.190Floating rate28.79%Shares outstanding368MMarket Capitalization (BD) 72.8MP/E ratio15xEarnings Per Share (BD)0.013 Uses of Raised Funds (IPO ) 1)Upgrading infrastructure.2)Expanding 4G LTE.3)Adopting nation wide fiber-optic.4)Corporate uses. I ntroduction Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

BUY Movement toward data Strong Brand name Zain Group Corporate social responsibility Upside Potential by 26.3 % Current Price BD 0.250 Recommendation Target Price Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation BD 0.198

Products and Services PostpaidPrepaidBroadbandEnterprise Services Market Share 35% Business Description Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

Establishment F irst 3G network in the region2003 A chieved it first positive net profit 2005 F irst nationwide WiMAX network is launched 2007 Introduced new network from Ericsson Listed on Bahrain Bourse 2014 Recommendation Business Description Industry Analysis Financial Analysis V aluation Risk Analysis Company Milestones

Source : TRA Macro Overview about Bahrain Main economic problems:High debt to GDP ratio of around 50% in 2014.The global reduction in Oil prices in 2014 and Q1 of 2015.Unsettled domestic politics.Unemployment, mainly among the youth.Contribution to the GDP:Although Kingdom Bahrain is oil dependent for its Country budget, the country is openly diversifying its economy.Non- Oil 74% , including 4% to the telecom industry.Oil 26%.Source: CIOIndustry AnalysisContribution to GDP Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

Key Industry Characteristics Power of Rivalry: Competitive and saturated industry. ( Batelco and Viva)Power of Supplier: Companies have Low product and service differentiation. Power of New Entrant: High entry barriers, capital-intensive and high fixed costs. Power of Substitute: Same products and services with quite similar quality and prices.Power of Buyer: Moderate, consumers preferences are highly changing toward VOIP. Government backed 2010 Strong entrant since 2010 Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

W eaknessesDependence on prepaid customers.Regulations from TRA and any future changes. T hreats Increased local competition.Future technological changes.StrengthsWell known brand name.Social Responsibility activities.Regional PartnershipsState of the art technologyOpportunitiesExpand mobile networks in The Middle East.Expand the current 4G LTE.Expand the infrastructureSWOT Analysis Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

Telecommunication Industry ARPU Source: TRA Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

Growth in Data Subscribers and Revenues RecommendationBusiness Description I ndustry Analysis Risk Analysis Financial Analysis Valuation Source: TRA Source: TRA

Categories:1) Company Operational 2) Litigation and Regulations3) Economic 4) Public Offering Low Medium HighLowMediumHighImpactProbabilityConflict of InterestDistribution Channels TRA Parent Company Research & Development Client Abundance Technological Environment Economic Performance (OTT) Operators Risk Analysis Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

Financial analysis Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation Revenues Growth Net Profit Margin

Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation EBITDA margin Vs Total Revenues Healthy Cash Flows

Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation Spending

Dividends Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation Strong Equity Position

Valuation Approaches used Dividend Discount Model Sector Comparable Model Discounted Cash Flow Model Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

Assumptions Zain Beta 0.5 Cost of Debt2.95% Weight of Equity63% Weight of Debt37% WACC6.84% Marginal Tax Rate0% Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

Dividend Discount Model (DDM) Discounted Cash Flow Model (DCF) BD 0.226 BD 0.287 BD 0.250 Target Price Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

BD 0.140 BD 0.226 DDM price BD 0.287 DCF price BD 0.416 Sector Comparable Model Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

Current market price BD 0.198 Target price BD 0.250 IPO price BD 0.190 Undervalued Recommendation Business Description I ndustry Analysis Risk Analysis Financial Analysis Valuation

Conclusion BUY

Thank you for your Attention

Appendices

Beta Calculation Beta of Comparable Companies Levered Beta Debt/Equity Unlevered BetaZain Saudi Arabia 1.1 206% 0.4 Batelco Bahrain 0.8 30%0.6Mobily Saudi Arabia 1.0 87%0.5DU UAE 0.757%0.5Ooredoo Kuwait 0.516%0.4Median 0.5 Beta Zain BahrainZAINBH BI Equity 0.6 37% 0.5

Equity Risk Premium Year Return Dividend Yield Total ReturnValue of 1002011(20.1%)  100.002012(6.8%)4.6% (2.2%) 97.79 2013 17.2% 3.9% 21.1% 118.382014 14.2% 4.8% 19.0% 140.88 Geometric Average Return12.10% 12.10%Risk Free Rate 6.133% 0.1Risk Premium 5.97% 5.97% Equity Risk Premium

Discounted Cash Flow Model (DCF)   2015E 2016E 2017E2018E2019EEBITDA25,19725,01725,08425,18325,281Add: depreciation 16,432 17,249 11,174 11,727 12,308 less: Net Capital expenditure-7442 -9644 -13245-15241-20465Less: Increase in Working capital 1160510383124583424 -4892FCFF22,582.5022,237.78 10,554.1318,244.87 22,016.43   12345 PV discounting factor 0.9360 0.8761 0.8200 0.7676 0.7184 discounted cash flows 21,137 19,483 8,655 14,004 15,817 NPV of FCF   79,096 WACC 0.0684 terminal growth 0.01 Capitalization rate 0.058 enterprise value 89,318 less: total debt 12637 Cash 28184 equity value 104,864.61 # shares 364960 price per share 0.287   Discounted Cash Flow Model (DCF)

Dividend Discount Model (DDM)   2011 2012 201320142015E2016E2017E2018E2019E2020 onwards ( grow at 1% ) Div/share 0.547 0.3470.199 0.017 0.005 0.0130.012 0.021 0.028 PVDF     0.897 0.8040.7210.6470.580  PV(Div/share)     0.0050.0110.008 0.014 0.016   D (1+g)                   0.029 Divided by: Capitalization rate                   0.095 Equals: Terminal value                   0.305 PV of terminal value                   0.177 TARGET PRICE/SHARE                   0.226 Dividend Discount Model (DDM)

      Shares Net IncomeBook ValueSalesZain Bahrain2014Total (BD 000s)332,0004,14259,32971,804     Per Share (BD)   0.012 0.1790.216          Share Price based on Comparables Low    0.1400.1840.229Median    0.146 0.210 0.321 High       0.216 0.249 0.416               Range 0.140 - 0.416       Comparables P/E P/B P/S Zain Saudi Arabia N/A 1.3 1.1 Batelco Bahrain 11.7 1.1 1.5 Mobily Saudi Arabia 125.7 1.4 1.7 DU UAE 11.2 3.0 1.9 Ooredoo Kuwait 17.3 1.0 1.1 Low 11.2 1.0 1.1 Median 11.7 1.2 1.5 High 17.3 1.4 1.9 ** Yellow shaded indicates excluded due to being an outlier Sector Comparable Model

STATEMENT OF COMPREHENSIVE INCOME   2013A 2014A 2015E2016E2017E2018E2019E BD ‘000BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 Zain Revenues           Mobile 60,97454,87750,486 48,46747,49847,02346,552Interconnection 3,3312,8982,6082,791 3,0703,3773,714Fixed Wireless 6,993 7,692 8,385 9,055 9,599 9,983 10,382 Others 6,782 6,511 6,315 6,189 6,127 6,066 6,005 Total revenues 78,081 71,804 67,795 66,502 66,293 66,448 66,654 Cost of revenue -16,304 -14306 -14237 -13965 -13922 -13954 -13997 Gross profit 61,777 57,498 53,558 52,537 52,372 52,494 52,657 Gross profit Margin 0.79 0.80 0.79 0.79 0.79 0.79 0.79 Distribution,marketing and operating expenses -24,597 -21016 -20,616 -20,551 -20,599 -20,663 -21,016 General and administrative expenses -6,225 -5,152 -5,054 -5,038 -5,050 -5,066 -5,152 Depreciation and amortization -24,320 -16,432 -17,249 -11,174 -11,727 -12,308 -16,432 Provision for doubtful debts -1,513 -1,219 -1,113 -1,069 -1,071 -1,074 -1,219 Provision for inventories -120 -281 -168 -216 -264 -312 -281 Operating profit 5,002 9,457 8,337 14,324 13,783 13,234 9,457 Interest income 8 30 23 15 10 7 30 Other income 610 140 154 169 186 205 140 other Expenses - -513 -503 -501 -502 -504 -513 Gain on currency revaluation 104 156 153 152 153 153 156 Finance costs -321 -475 -373 -234 -163 -115 -475 Profit for the year 5,403 8,795 7,791 13,925 13,467 12,980 8,795 Statement of Comprehensive Income

STATEMENT OF FINANCIAL POSITION   2013A 2014A 2015E2016E2017E2018E2019E BD ‘000BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 ASSETS Current assets           Cash and bank balances 3,1562,97415,10928,184 35,77339,01134,449Accounts and other receivables 20,64420,93419,66017,956 17,236 17,276 17,330 Inventories 2,971 2,128 1,424 1,397 1,392 1,395 1,400 Total current assets 26,771 26,036 36,193 47,536 54,401 57,683 53,179 Non-current assets               Property, plant and equipment 61,367 69,806 60,799 53,195 55,266 58,781 66,938 Intangible assets 19,166 15,940 14,551 11,801 9,105 7,118 5,817 Total non-current assets 80,533 85,746 75,350 64,996 64,372 65,898 72,755 Total assets 107,304 111,782 111,544 112,532 118,773 123,581 125,933 LIABILITIES AND EQUITY               Liabilities               Current liabilities               Bank overdraft - - 1,120 1,420 478 14 573 Accounts payable and accruals 29,166 25,669 23,031 23,781 23,707 23,762 23,836 Current portion of term loans 3,286 6,961 6,511 6,511 1,949 2,205 1,946 Deferred revenue 4,769 4,529 4,746 4,655 4,641 4,651 4,666 Finance lease obligations - - - - - - - Total current liabilities 37,221 37,159 35,408 36,367 30,774 30,632 31,020 Non-current liabilities               Non-current portion of term loans 16,714 14,971 8,460 4,706 5,514 3,309 1,363 Provision for employees’ end of service benefits 330 323 208 258 252 253 253 Total non-current liabilities 17,044 15,294 8,668 4,964 5,766 3,562 1,616 Total liabilities 54,265 52,453 44,075 41,331 36,540 34,194 32,637 Equity               Share capital 32,000 36,800 36,800 36,800 36,800 36,800 36,800 Share premium 100 3,032 3,032 3,032 3,032 3,032 3,032 Statutory reserve 9,453 9,867 10,747 11,526 12,918 14,265 15,563 Retained earnings 11,486 9,934 16,889 19,843 29,483 35,291 37,902 Total equity 53,039 59,329 67,468 71,201 82,233 89,388 93,297 Total liabilities and equity 107,304 111,782 111,543 112,532 118,773 123,581 125,933 Statement of Financial Position

STATEMENT OF CASH FLOWS   2013A 2014A 2015E2016E2017E2018E2019E BD ‘000BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 Cash flows from operating activities:           Profit for the year 5,4034,1428,795 7,79113,92513,46712,980Adjustments for:         Depreciation and amortization 24,320 21,799 16,432 17,249 11,174 11,727 12,308 Gain on disposal of property,               plant and equipment - - - - -     Insurance claim -470 - - - -     Provision for doubtful debts and slow moving inventories 1,633 1,724 1,063 1,043 1,040 1,042 1,046 Finance costs 321 785 475 373 234 163 115 Interest income -8 -29.0 -30 -23 -15 -10 -7 Provision for employees’ end of service benefits 62 61 37 46 45 45 46 (Gain )Loss on property, plant and equipment written off 65 -40 - - - -   Operating profit before working capital changes 31,326 28,442 26,773 26,479 26,403 26,434 26,487 (Increase) / decrease in accounts and other receivables -1,757 -1,781 -1,578 -1,705 -719 40 54 (Increase) / decrease in inventories -1,496 610 -704 -27 -4 3 4 (Decrease / increase in accounts payable and accruals 5,420 -3,184 -2,638 750 -75 55 74 Increase / (decrease) / in deferred revenue 20 -240 217 -90 -15 11 14 Cash generated from operating activities 33,513 23,847 22,070 25,407 25,590 26,544 26,633 Payment of employees’ end of service benefits -5 -68 -208 -258 -252 -253 -253 Net cash from operating activities 33,508 23,779 21,862 25,149 25,338 26,291 26,380 Cash flow from investing activities:               Purchase of property, plant and equipment -18,875 -16,919 -7,442 -9,644 -13,245 -15,241 -20,465 Interest received 8 29 30 23 15 10 7 Increase in intangible assets -17,321 -10,056 0 0 0 0 0 proceed from sale of PPE - 3 - - - -   Net cash used in investing activities -36,188 -26,943 -7,412 -9,621 -13,230 -15,231 -20,458 Cash flows from financing activities:               Net proceed from Issue of share - 7,732           Interest paid -291 -702 -475 -373 -234 -163 -115 Dividend paid -6,368 -5,676 -1,840 -4,837 -4,285 -7,659 -10,369 Term loans 20,000 1,932   2,757 0     Repayment of capital element of finance lease               Net cash (used in) / from financing activities 13,341 2,982 -2,315 -2,453 -4,519 -7,822 10,484 Net (decrease) / increase in cash and cash equivalents 10,661 -182 12,135 13,075 7,589 3,238 -4,562 Cash and cash equivalents at beginning of the year -7,505 3,156 2,974 15,109 28,184 35,773 39,011 Cash and cash equivalents at end of the year 3,156 2,974 15,109 28,184 35,773 39,011 34,449 Statement of Cash Flows

RATIO ANALYSIS   2013A 2014A 2015E2016E2017E2018E2019EEfficiency Ratios:            Total Assets Turnover 0.730.640.61 0.59 0.560.540.53Fixed Assets Turnover 1.01x0.82x0.88x0.99x 0.95x0.89x0.79xDays Accounts Receivables 96.50106.41105.8598.55 94.9094.9094.90Days Accounts Payable564.00 553.77 138.26 163.18 156.57 147.55 129.97 Accounts Receivables Turnover 3.78 3.43 3.45 3.70 3.85 3.85 3.85 Profitability Ratios:               Return on Assets 5% 4% 8% 7% 12% 11% 10% Return on Equity 10% 7% 13% 11% 17% 15% 14% Net Profit Margin 7% 6% 13% 12% 21% 20% 19% Net Debt/EBITDA 57% 73% 4% -62% -111% -133% -121% Gross Profit Margin 79% 80% 79% 79% 79% 79% 79% EBITDA Margin 38% 36% 37% 38% 38% 38% 38% Liquidity Ratios:               Current Ratio 0.719 0.701 1.02 1.31 1.77 1.88 1.71 Cash Ratio 0.085 0.080 0.43 0.77 1.16 1.27 1.11 Solvency Ratios:               Total Liabilities/Equity Ratio 102% 88% 65% 58% 44% 38% 35% Long-term Debt to Total assets 16% 13% 8% 4% 5% 3% 1% Interest Coverage Ratio 102 37 53.08 -67.11 -107.08 -154.43 -220.76 Per Share Data:               EPS (BD) 0.169 0.013 0.02 0.02 0.04 0.04 0.04 DPS (BD) 0.199 0.017 0.01 0.01 0.01 0.02 0.03 Book Value Per Share (BD) 1.66 0.16 0.18 0.19 0.22 0.24 0.25 Ratio Analysis