Zain Group (Zain) reported its 4Q18 preliminary headline numbers, which came in line with our estimate at the group revenue level, but beat at the EBITDA and earnings lines, mainly due to the exceptional beat from Zain KSA, following the new royalty fees structure in the country. Group EBITDA for the quarter stood at KWD195mn, some 11% ahead of our estimate, and implying a rather high margin of 47.4% vs. our estimate of 43.1%; this was largely driven by the KSA unit, where EBITDA beat our estimate by 14% on royalty cost reversals (liability payable to the government) and retroactive royalty cut starting Jan 2018. Accordingly, group earnings for the quarter beat our estimate by 10% at KWD59.4mn (+17% Q-o-Q, because of Zain KSA’s reversals mostly). Zain Group’s Board of Directors recommended a cash DPS of KWD0.030, in line with our estimate, subject to shareholders’ and regulatory approvals; this implies a pay-out ratio of 66% and a yield of 6.5%. We believe the stock is fairly valued at the current price, and reiterate our Neutral rating.

Looking at the operating breakdown, we did not see any major surprises except in KSA and Sudan. The latter’s performance in USD terms continued to disappoint, as another SGD devaluation (-39%) took place in Oct 2018, impacting 4Q18 numbers significantly; we had factored in some of this impact, but revenue still missed by 15%, while EBITDA margin weakened to 32% vs. our estimate of 39%, as EBITDA fell 52% Y-o-Y. The Jordanian unit also registered weaker-than-expected numbers, as EBITDA margin contracted to a rather weak 37% vs. our estimate of 41%, weighed down by intensifying competition and a shrinking subscriber base; management attributed the latter to the return of refugees to their homeland. Jordan’s FY18 net income fell 19% Y-o-Y. Numbers from Bahrain and Iraq were in line, with the improvement of the latter driven by strong subscriber additions and successful cost optimisation. We note that disclosed numbers imply exceptional gains from the ‘others’ segment, which may have been caused by one-off transactions or reversals, we reckon.

Omar Maher, Karim Sherif.

Zain Group: KWD0.46 as of 13 Feb. 2019, Rating: Neutral, TP: KWD0.46/share, MCap: USD6,664mn, ZAIN KK/ZAIN.KW