NCB Cap remains ‘neutral’ on Zain; target price at SAR 7.6

NCB Capital maintained “neutral’’ rating on Zain Saudi Arabia, setting the price target per share at SAR 7.6, but the ongoing arbitration with Mobily, Zakat claims and financing expenses represent “key risks,” it added in an earnings review.

The telecom operator’s third quarter net losses widened by 20 percent to SAR 267 million from SAR 223 million in the year-earlier period.

“The weaker than expected top line was mitigated by lower than expected cost of revenue and Opex, resulting in record high EBITDA margins of 29.9 percent,” it added.

Zain’s number of subscribers fell 9 percent to 10.7 million after the government started applying a decision to fingerprint mobile phone subscribers. NCB Capital believes the impact of such measure was higher than estimated on the company and the sector in general.

“Gross margin came-in at 64.9 percent, slightly higher than 64.4 percent in Q2-16 and compared to our estimates of 62.1 percent. This is the highest margin on record. We believe this margin expansion is due to lower interconnection charges,’’ analysts at NCB Capital noted.

NCB Capital estimated that interest expenses increased to SAR 270 million vs SAR 228 million Q2-2016 and SAR 224 million in Q3- 2015 because of higher SAIBOR rates.

In October 2016, a royal decree amended the life of Zain KSA’s telecoms license of from 25 years to 40 years. The decree also changed the type of the license to universal from mobile only. Zain began negotiating with a subsidiary of the Saudi Electric Company to use its fiber-optic network.