Kuwait Telecoms Sector

Transcription

1 31 st May 2009 Zain Initial Coverage Rating: Market Perform Wataniya Rating: Market Perform Kuwait Telecoms Sector Increased competition from new entrant Viva in Kuwait, Zain and Wataniya s home market, should impact growth and margins in this key market. However we assume Viva will be a rational competitor and this should ensure that the Kuwait market remains a cash cow for both operators, with EBITDA margins of 45% for Zain and 44% for Wataniya by the end of 2013, down from an average of 52% in We believe Zain will face increasing competition in its African markets, which should result in lower EBITDA and net income margins from these operations, due to lower ARPUs and increased depreciation and finance expenses, as a result of network roll out capex. Weakness in emerging markets currencies could also impact cost of funding dollar denominated debt and translation of earnings. For Zain we project organic EBITDA and net income growth rates declining in However, Zain stated it has earmarked US$ 5bn for future acquisitions between now and 2011, which should provide inorganic growth. However, with a net debt/equity of 94% for 2009E, funding for acquisitions remains an issue in the near term. We initiate coverage on Zain with a Market Perform rating, reflecting the 9.7% upside to our DCF derived target price of KWD With an EV/EBITDA multiple of 5.8x our 2010 estimates, we believe the current share price fully reflects the prospects of existing operations. As Wataniya has a less diversified subscriber base than Zain, the impact of competition in its home market of Kuwait will be that much greater for Wataniya. The resulting decline in net income means the stock trades on a 2010E PE of 14x, the highest of its peer group. We initiate coverage on Wataniya with a Market Perform rating, reflecting the 1% upside to our DCF derived target price of KWD Irfan Ellam irfan.ellam@almalcapital.com Office 302, Burj Dubai Square 4 Sheikh Zayed Road P. O. Box Dubai, United Arab Emirates T F Equity Data Zain Wataniya Current Price (KWD) Target Price (KWD) Upside/Downside 9.7% 0.8% 12 Month Performance -46.6% -33.4% 12 Month High (KWD) Month Low (KWD) Market Cap. (KWD bn) Div Yield 5.3% 3.2% Enterprise Value (KWD bn) RIC ZAIN.KW NMTC.KW Bloomberg ZAIN KK NMTC KK Estimates Zain Wataniya Financials 2008A 2009E 2010E 2008A 2009E 2010E Revenues (KWD mn) 2,003 2,784 2, EBITDA (KWD mn) 754 1,067 1, EBITDA Margin 37.6% 38.3% 38.0% 37% 37% 35% Net Income (KWD mn) Net Income Margin 16.1% 15.5% 13.0% EPS (KWD) Net Debt/Equity 63.9% 94.2% 70.0% 41.7% 11.6% 16.6% Interest Cover Div/Share (KWD) Div Yield 5.3% 4.6% 5.2% 3.2% 7.8% 8.6% Estimates Zain Wataniya Valuation Multiples 2008A 2009E 2010E 2008A 2009E 2010E PE EV/EBITDA P/BV BV/Share May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 ZAIN Wataniya MSCI KUWAIT Apr-09 May-09

2 Kuwait Telecoms Sector 31 st May 2009 Kuwait Telecoms Sector Overview The Kuwaiti telecoms market is characterized by high GDP per capita (US$ 46,396 for 2008E), mobile penetration of 86% for 2008 and steady fixed line penetration (18%, 2008E). Mobile services are provided by 3 operators namely Zain, Wataniya and Viva, whilst fixed line and international gateway services are provided by the Ministry of Communications. We expect mobile services to continue growing and exceeding 100% penetration in 2010 given the relatively low mobile penetration rate compared to other GCC countries, high GDP per capita and favourable population demographics. Figure 1: Kuwait Mobile Market 6,000 5,000 4,000 3,000 2,000 79% 82% 2,530 2,774 86% 3,083 96% 3, % 3, % 120% 4,330 4, % 5, % 120% 100% 80% 60% 40% 1,000 20% A 2007A 2008A 2009E 2010E 2011E 2012E 2013E 0% Subscribers Penetration Source: Zain, Wataniya, Al Mal Capital The population of Kuwait is expected to grow at 3.5% per annum and 66% of the population are expatriates which is a positive for international call revenues. The population has an average age of 27 and over 23% of the population is under the age of 15, implying strong future demand for telecom services. Figure 2: Kuwait Population Demographics 4.1% 8.5% 58.2% 14.8% 14.4% Source: United Nations, Al Mal Capital The cosy duopoly between Zain and Wataniya resulted in some of the highest mobile tariffs in the region (ARPU US$ 60, 2008YE) which have resulted in both companies 2

3 benefiting from strong EBITDA, profit and high margins. This in turn has allowed them to diversify overseas. The End of the Days of Duopoly Kuwait s mobile market was a cosy duopoly until the end of 2008 when the duopoly was ended with the launch of the third mobile network by the Kuwait Telecommunications Company (KTC). Saudi Arabia benefits from approximately 1mn roaming visitors from Kuwait every year making the third Kuwaiti mobile license attractive to Saudi based mobile operators. This led to STC acquiring a 26% stake in KTC for SAR 3.37bn in November As part of its license terms KTC launched its IPO in August 2008 aiming to float 50% of the company (250mn shares) and raise KWD 26.25mn. The IPO closed successfully and was 3 times oversubscribed. The balance of 24% of the company is held by the Kuwaiti government. STC has management control and allows it to receive annual management fees from KTC. A majority of the population is concentrated in the east of the country on 2% of the land mass implying easy network rollout and population coverage for the new entrant. KTC, operating under the brand name of Viva, aims to capture 10% market share (300,000 subscribers) in its first year of operations. Whilst we expect competition to reduce EBITDA and net profit margins for Zain and Wataniya, we expect KTC to act as a rational competitor and so allowing both Zain and Wataniya to continue to make healthy profits in their home market. Regulatory Environment The role of the telecoms regulator is currently carried out by the Ministry of Communications as there is no independent regulator in Kuwait. Current regulation is favourable for new entrants with asymmetric interconnection tariffs, national roaming, site sharing and MNP. Kuwait has, however, started the ball rolling towards the introduction of an independent telecoms regulator. In October 2008 the Ministry of Communications stated that it would set up a committee to regulate the telecoms sector as a first step. The regulator would have authority to propose bills, resolve rows between operators, determine the cost of calls and other services, protect consumers rights, and encourage investment and competition in the sector. However a timetable for the process was not disclosed. Investment Thesis Both Zain and Wataniya have benefitted from high margins and profits in their key home market of Kuwait. With STC backed Viva ending the cosy duopoly, margins will come under pressure. We believe Viva will be a rational competitor and so Kuwait should remain a cash cow for both Zain and Wataniya. With the government controlled Kuwait Investment Authority owning substantial stakes in each of the 3 mobile operators, we expect the Ministry of Communications to ensure that the operators do not undertake value destructive price competition in the Kuwaiti telecoms market. 3

4 The strong cash flow and profits generated by Zain and Wataniya have allowed both companies to expand into overseas markets. Most of these markets are characterised by lower GDP/capita and hence lower penetration than Kuwait, but are also more competitive. Whilst both operators have, for the most part, historically proved to be successful with their overseas diversification, these markets are lower margin than Kuwait and it is the overseas markets that should drive subscriber growth and hence top line growth over the medium term but this growth will put pressure on overall margins. The current economic crisis opens both companies up to emerging market currency risk, which could impact translation of earnings and the cost of funding US$ denominated debt over the short to medium term. Zain We are initiating coverage of Zain with a Market Perform rating, with a DCF derived target price of KWD 1.042, implying a 9.7% upside from the current price. Whilst we believe Zain will continue to increase gross revenues this will come at a cost, in terms of EBITDA and net income margins. We project revenues growing from KWD 2bn in 2008 to KWD 3.4bn by 2013, but EBITDA margins falling from 37.6% in 2008 to 35.2% by 2013 as a result of lower blended ARPUs due to stronger competition. Net income margins are projected to fall from 19% to 13% as a function of increased depreciation and finance costs, as a result of increased gearing to fund capex and acquisitions. Our target price is derived from the discounted cash flow to equity method. We use a cost of equity (Ke) discount rate of 14.2% for Zain and 12.2% for Wataniya, based on the Qatar sovereign 30-year rate of 6.6% as our risk-free rate, and an equity risk premium of 6% for Zain and 5% for Wataniya, adjusted for a beta of 1.3 for Zain and 1.1 for Wataniya. We use a higher equity risk premium for Zain as it has a higher number of operations in African frontier markets. Additionally we use a terminal growth rate of 3% for both companies. We have based comparable valuations on other regional operators with large operations internationally and strong cash generating businesses in their home markets. In the region, five operators fit this model: STC, Etisalat, Orascom Telecom, Zain, Wataniya and Qtel. Qtel effectively controls Wataniya through its 51% shareholding. On an EV/EBITDA basis, Zain trades at a premium to its peers, other than Wataniya. Zain trades on a 2010E EV/EBITDA of 5.8x compared to 3.5, 5.7, 4.2 and 4.5 for Etisalat, STC, Orascom Telecom and Qtel respectively. We feel that the premium is justified as it takes into account the benefits of future acquisitions. Based on increasing competition in Zain s home market and lower EBITDA and EBITDA margins in overseas markets, especially considering the impact Zain s proposed acquisition program will have on its net/debt equity position, we feel this premium is high. 4

5 Figure 3: Valuation Summary P/E EV/EBITDA 2008A 2009E 2010E 2008A 2009E 2010E Zain Wataniya Etisalat STC Orascom Telecom Qtel Average Source: Al Mal Capital Given the sensitivity of DCF models to both the terminal growth rate and the cost of equity, we have carried out a sensitivity analysis on changes to these variables for both Zain and Wataniya. Figure 4: Zain Sensitivity Analysis Terminal Growth Cost of Equity 13.0% 13.5% 14.2% 14.5% 15.0% 2.5% % % Source: Al Mal Capital Wataniya We initiate coverage of Wataniya with a Market Perform rating, reflecting the 1% upside to our DCF derived target price of KWD As with Zain our target price is derived from a DCF to equity holders and we use a cost of equity of 12.2%. Wataniya is expected to be impacted by competition in terms of revenue in its home market and by foreign exchange weakness in its overseas markets. The key driver for EBITDA should be the Algerian market. Wataniya s home market should feel the effects of competition from Viva, which should lead to lower EBITDA and EBITDA margins in this key market. Wataniya trades on a 2010E EV/EBITDA of 5.9x compared to 3.5, 5.7, 4.2 and 4.5 for Etisalat, STC, Orascom Telecom and Qtel. A 2010E EV/EBITDA of 5.9x is the highest of the peer group and higher than the peer group average of 4.9x. In the case of Orascom Telecom trading on a 2010E EV/EBITDA of 4.2x, we feel its discount to the peer group is justified by the lack of clarity over it the sale of its stake in Mobinil and how it would spend the proceeds of the sale if it were to go through. Etisalat trades on a 2010E EV/EBITDA of 3.2, lower than that of the sector average and that of Wataniya. This, together with its growth prospects, makes Etisalat our top pick amongst its peers and we believe that Wataniya is fairly priced at its current level. 5

6 Figure 5: Wataniya Sensitivity Analysis Terminal Growth Cost of Equity 11.00% 11.50% 12.22% 13.00% 13.50% 2.5% % % Source: Al Mal Capital 6

7 Zain Company Background Mobile Telecommunications Company KSC, established in 1983 in Kuwait, operates under the brand name of Zain. In April 2005 the company acquired Celtel for US$ 3.36bn, thereby gaining access to high growth African markets. Zain is an emerging market mobile telecommunications operator providing voice and data services in 23 countries, with over 63.5mn active customers as of 2008YE. Zain operates in 2 distinct geographical clusters, namely the Middle East and Africa. The Middle East markets are characterised by high GDP per capita, ARPU, penetration and lower growth whilst the African markets have low GDP per capita, ARPU, penetration and higher growth both in relative and absolute terms. Figure 6: Zain Organizational Structure Zain Middle East Africa 56.25% Bahrain 100% B. Faso Kenya 80% 65.7% Nigeria 71.67% Iraq 100% Chad 100% Madagascar 100% Sudan 96.52% Jordan 90% C. Brazzaville 100% Malawi 100% Sierra Leone 100% Kuwait 98.5% DRC 15.5% Morocco 60% Tanzania 25% KSA 90% Gabon 90% Niger 100% Uganda MC Lebanon 75% Ghana 78.88% Zambia The company s shares are listed on the Kuwait Stock Exchange and are 100% free float with the largest shareholder being the Kuwait Investment Authority with a 24.6% stake. Figure 7: Zain Shareholder Structure 24.6% Kuwait Investment Authority Al Khair 62.7% 12.7% Other Free Float 7 Source: Bloomberg, Al Mal Capital

8 Investment Positives Geographic Reach Zain s operations cover 24 countries in 2 distinct geographical clusters, giving the company strong geographic diversification. Zain s footprint covers a population of 589mn with an estimated penetration rate of 35% for YE 2008 showing there is ample opportunity for subscriber growth. The African cluster covers a population of 516mn while the Middle East cluster covers a population of 73mn. The Middle East has the higher penetration (84% for 2008E), and we expect this to growth to continue resulting in penetration of 110% by 2013, at which time Saudi and Bahrain will have limited scope for subscriber growth, with penetration rates exceeding 146%. Figure 8: GDP/Capita US$ vs Penetration - Middle East 50,000 Kuwait 45,000 40,000 35,000 30,000 Bahrain 25,000 20,000 KSA 15,000 10,000 5,000 Lebanon Iraq Jordon 0 0% 20% 40% 60% 80% 100% 120% 140% 160% Source: IMF, Al Mal Capital A majority of the future subscriber growth will come from the African cluster, which we estimate had penetration of 28% at YE2008. The penetration rate should more than double to 60% by 2013, which implies further subscriber growth beyond our forecast period. However, the profitability of this growth will be limited by affordability; both in terms of handsets and usage, as a majority of African countries have low GDP per capita. Of Zain s 16 African operations, 12 are in countries that are estimated to have GDP per capita of less than US$ 2,000 (YE2008). The exceptions are Kenya, Gabon, Madagascar and Congo Brazaville. The GDP per capita CAGR for Zain s African operations is expected to be 6.4% from 2008 to Figure 9: GDP/Capita US$ vs Penetration - Africa (ex Kenya & Gabon) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Madagascar Sudan Burkina Faso Ghana Chad Zambia DRC Uganda Tanzania Niger Malawi Sierra Leone Nigeria Congo Brazaville 0% 10% 20% 30% 40% 50% 60% 70% 8 Source: IMF, Al Mal Capital

9 We project total net adds of 190mn between 2008 and 2013 for the markets in which Zain operates, split 86% for the Africa cluster and 14% for the Middle East cluster. However, increasing competition will mean Zain will have to fight to gain its share of new subscribers and we project Zain s total mobile subscriber base to grow to 137mn subscribers by 2013, split 21% for the Middle East cluster and 79% for Africa. Nigeria, by virtue of the size of its population and subscriber growth, overtook Kuwait as the main contributor to revenue in 2008, generating US$ 1.64bn in revenues versus US$ 1.4bn from Kuwaiti operations. Nigeria, with an estimated population of over 150mn, has become the largest mobile market in Africa, overtaking South Africa. With mobile penetration of 43% as of February 2009 there is ample scope for growth in this market. The growth prospects have attracted international telecoms companies with 9 mobile operators, making it a far more competitive market than Kuwait. Given the lower margins and higher levels of competition it will overtake the Kuwaiti operation in terms of EBITDA in Figure 10: Zain Subscriber Growth Africa & Middle East 140, ,000 83,094 94, , ,000 80,000 60,000 40,000 30,971 46,208 60,374 72,788 20,000-11,687 17,327 20,843 23,566 25,600 25,552 25, A 2008A 2009E 2010E 2011E 2012E 2013E Middle East Africa Source: Zain, Al Mal Capital We project Zain revenues to grow by 39% in 2009 to KWD 2.78bn, and EBITDA to grow in line to reach KWD 1,067mn, generating net profit of KWD 430mn for the year. The revenue growth rate is expected to moderate in 2010 to 7.1%, resulting in revenue of KWD 2.98bn and EBITDA of KWD 1,132mn, with an EBITDA margin of 38% and net profits of KWD 386mn, which are10% lower than 2009 due to higher finance costs. Synergy The size and number of Zain s networks should allow the operator to capture synergy and economies of scale in several area: Roaming Zain s One Network does away with roaming charges for its subscribers who pay local home country charges when roaming Purchasing power Zain should be able to capture economies of scale when purchasing infrastructure equipment from a single vendor, thereby obtaining better discounts Resources - experienced staff can be moved to areas and countries where their operational and technical skills are in short supply and where they can add the most value. 9

10 Controlling Cost Zain s strategy to date has been predominately focused on acquiring subscribers and increasing revenues. Given the impact of the credit crisis the company announced in May 2009 another leg to its strategy Drive2011. Zain is aiming to improve its operating margin by 5% within 12 months. Whilst we applaud the move, we feel it is will be challenging in light of the proposed expansion/acquisition plans which will increase depreciation and amortization expenses. We do, however, forecast an improvement in operating margins to 24% in 2009, up from 19% in Investment Negatives Domestic Cash Cow under Attack Kuwait Telecom Company, Kuwait s third mobile operator, launched its network under the Viva brand on 4th December 2008, ending the cosy duopoly enjoyed by Zain and Wataniya. This duopoly had resulted in some of the highest ARPUs in the region, through tariff structures that included charging for international and landline incoming calls. This cosy duopoly will be challenged by STC run Viva in various ways. One of Viva s introductory offers was to allow its subscribers to make free on-net calls for 3 months. Once this offer has expired, Viva s monthly subscribers on-net calls will be free of charge after the first five minutes. Viva will also allow subscribers to choose their offpeak time from a selection of 4 periods. We expect STC will apply some of the lessons learnt in its home market of Saudi Arabia to its Kuwaiti operations. Kuwait is the key market for Zain at present, contributing 19% of total revenues but 26% of total EBITDA in With a penetration of 86% in 2008 there is still ample room for subscriber growth in the Kuwaiti market and whilst we expect Viva to be a commercially rational operator, we believe increased competition will result in lower market share and should result in revenues and ARPUs declining. Incoming call charges from fixed to mobile were abolished in December 2008 which will lower revenues from Q onwards. We project ARPUs declining from US$ 69 in 2007 to US$ 43 by 2013 and given the importance of Kuwaiti operation, having an impact on EBITDA and net profit margins at the Zain Group level. We project EBITDA margins declining to 47% in 2009 from 51% in In 2009 Nigeria should be the largest revenue generator, contributing 18% of revenue. Zain increased its stake in its Iraqi operations from 30% to 71.67%, allowing it to consolidate Iraqi operations (formerly MTC-Atheer and Iraqna) from 31 st October This means that Iraq should be the second highest contributor to revenues in 2009 at 16%, followed by Kuwait (13%) and Sudan (12%). Together Zain s four largest operations (Kuwait, Nigeria, Iraq and Sudan) should account for 59% of revenues and 66% of EBITDA in By 2013 we project Kuwait will account for 10% of revenues and 13% of EBITDA with Nigeria having become the largest market for Zain in terms of revenues (17% of revenues) and Sudan in terms of EBITDA (16% of revenues).zain s largest market in 2013 should remain Kuwait, Nigeria Iraq and Sudan, contributing 50% of revenue and 55% of EBITDA. 10

11 Figure 11: Zain Kuwait Revenue & EBITDA Evolution, US$ mn 1,600 1,400 1,200 1, ,416 1,234 1,223 1,202 1,208 1, Revenue EBITDA Source: Zain, Al Mal Capital Increasing International Competition in Africa Zain has historically benefited from economies of scale due to the size of its networks and access to international debt and equity capital markets. Some of the local competitors, especially with respect to Africa, have not enjoyed such access to capital markets which may have hampered their growth. However, there are an increasing number of well financed international telecom operators operating in Africa who are looking to increase their operational footprints such as MTN, Etisalat, Qtel, Vodafone, Millicom and Orange (part of France Telecom). The high level of competition from well financed international operators has increased the volatility of quarterly EBITDA and earnings for some of Zain s operations. Nigerian operations lost 2mn subscribers in Q resulting in a net income loss of US$ 63.2mn, whilst Zain s competitors managed to gain net adds in the quarter. Kenyan operations lost over 400,000 subscriber in Q1 2009, resulting in these operations continuing to make a loss at both the EBITDA and net income level, despite having been profitable in the past. Operations in Madagascar continue to slip in and out of profitability in 2008 and into Q despite having been profitable in Chad has moved into net losses since Q Whilst in the overall context of Zain Group, the above EBITDA and net income figures involved are reasonably small, they do help illustrate strength of competition in these markets. Africa Higher Capex, Lower Margins Whilst Africa has a low penetration rate and hence scope for subscriber growth, it is impacted by affordability and hence the ability to capture additional subscribers. Although Zain should be able to benefit from economies of scale in terms of capex spend, it will need to increase capex to further increase its geographic reach and depth of coverage of its networks. We believe the low hanging fruit has already been picked in terms of high ARPU subscribers in major population centers. Additional subscribers will be lower ARPU customers and so would impact margins at the EBITDA level, and net income level due to higher depreciation expenses and 11

12 finance costs. We project EBITDA margins for the African cluster to fall from 37.6% in 2007 to 34.3% in This contrasts to EBITDA margins of 46.1% for the Middle East cluster in 2007, which we project to decrease to 41.1% in Given the land masses that need to be covered and the need to roll out coverage away from large population centers to areas where there is lower penetration, we project Zain spending KWD 2.87bn on capex between 2008 and Acquisition Driven Growth Zain has announced that it intends to spend up to US$ 5bn on new acquisitions by Potential acquisitions announcements include: i. 3 more African countries within a year at a cost of US$ 1.5bn. It has subsequently acquired a 15.5% stake in Wana in Morocco. ii. The company has also announced the acquisition of a 56.5% stake in PalTel in Palestine. iii. It was in discussions to acquire a controlling stake in Syriatel Mobile Communications, Syria s largest mobile phone operator but has now decided to bid for a greenfield license instead. iv. Since 2008, Zain has also been considering an acquisition in India and has been in discussions with Datacom Solutions and Loop Telecom. India is one of the fastest growing mobile markets in the world, with relatively low penetration but it is also one of the most competitive. An aggressive acquisition programme makes sense given the current depressed valuations in the telecoms sector. It does however raise the question of acquisition funding and impact on net debt. Net debt to equity stood at 64% at the end of 2008, down from 99% at the end of 2007 and we project it to increase to 94% in 2009 before decreasing to 70% in Our projections do not take into account the potential acquisitions Zain may make through to 2011 and any acquisitions, we assume, would be at least partially be funded by debt thus increasing the net debt/equity ratio in the medium term. Given that Zain raised additional equity, by way of a rights issue in September 2008, we expect shareholders will have limited appetite for additional equity issues in the short to medium term. Whilst we view the price paid by Zain for its acquisition of Celtel as offering value, the same could not be said of its acquisition of the third mobile license in Saudi Arabia. The amortization expense to be incurred will act as a drag on the level profitability of Zain s Saudi operations. There will be increasing competition for any new opportunities that may arise from the international and regional players operating in Africa and the Middle East. With such an ambitious acquisition programme Zain runs the risk of over paying for acquisitions relative to the return it would be able to earn from them. We adopt a wait and see approach to new acquisitions and will determine their impact on Zain Group as and when they occur. 12

13 Balance Sheet Releveraging Zain carried out a deeply discounted rights issue, which closed in September 2008, raising KWD 1.2bn (US$ 4.49bn). The rights issue has allowed Zain to strengthen its balance sheet and net debt/equity of 64% for YE2008, down from 99% in Based on an estimated EBITDA of KWD 1,067mn for 2009 and conservative maximum debt of 3x EBITDA, this would imply a maximum debt of KWD 3.20bn versus estimated total debt of KWD 3.27bn, giving a net debt/equity of 94% for Zain has one of the highest net debt/equity ratios compared to its peers and we expect this leverage will increase further if the company acquires further licenses and operators, which we assume will be at least partially funded by debt. Limited Broadband Opportunities There are mobile broadband opportunities in both of Zain s clusters, especially in Africa, given the low rates of broadband penetration. However, we believe the opportunities in Africa will be difficult to monetize in a significant way due to the low GDP per capita in the region. Currency Risk Zain is more exposed to currency risks than its peer group by virtue of operating in a larger number of countries, and a larger proportion of these countries being frontier markets as opposed to emerging markets. Frontier markets have less developed financial markets and this may make it difficult for Zain to hedge its currency risk as there is a limited or no forward currency market in most of its markets. Four key markets saw major currency weakness against the US$ in 2008, namely Nigeria, DRC, Tanzania and Zambia with currency depreciation of 18%, 9%, 14% and 24% respectively. They continued to show further currency weakness in Q1 2009, especially the DRC and Zambia with additional depreciation of 36% and 17% respectively. We estimate these 4 markets will account for 31% of revenue in Whilst currency weakness should not be as extreme as in 2008, still we expect there to be further currency depreciation in 2009, with few exceptions such as Sudan. 13

14 Figure 12: Zain Emerging Market Currency Performance Exchange Rate, LC/US$ (Depreciation)/Appreciation % of Revenue Country Currency Dec-07 Dec A Q1 2009A 2009E 2009E Nigeria Nigerian Naira % -6% na 18% Kuwait Kuwaiti Dinar % -6% 6% 13% Sudan New Sudanese Pound % 7% na 12% Jordan Jordanian Dinar % 0% na 5% Iraq Iraqi Dinar 1, , % 0% na 16% DRC Congolese Franc % -36% na 5% Tanzania Tanzanian Shilling 1, , % -2% 1% 4% Zambia Zambian Kwacha 3, , % -17% 30% 4% Bahrain Bahraini Dinar % 0% 0% 2% Niger CFA Franc % -5% na 2% Gabon CFA Franc % -5% na 3% Congo Brazaville CFA Franc % -5% na 2% Kenya Kenyan Shilling % -2% 1% 2% Uganda Ugandan Shilling 1, , % -8% 14% 2% Burkina Faso CFA Franc % -5% na 2% Malawi Malawi Kwacha % 0% na 2% Chad CFA Franc % -5% na 2% Lebanon Lebanese Pound 1, , % 0% na 1% Madagascar Madagascar Franc na na na na na 1% Sierra Leone Sierra Leone Leone 2, , % -3% na 1% Ghana New Ghana Cedi % -11% 32% 1.4% Source: Bloomberg, Al Mal Capita 14

15 Figure 13: Zain Subscriber Growth, 000s 2007A 2008A 2009E 2010E 2011E 2012E 2013E Kuwait 1,576 1,769 1,863 2,007 2,122 2,244 2,352 Jordon 1,858 2,345 2,342 2,447 2,558 2,642 2,703 Bahrain Lebanon KSA - 2,010 2,469 4,118 5,866 6,848 7,830 Iraq 7,175 9,681 12,540 13,302 13,303 12,014 11,082 Palestine - - 1,799 2,325 2,796 3,062 3,433 Sudan 3,883 5,190 7,198 8,538 9,938 11,132 12,151 Nigeria 11,098 17,197 20,467 22,996 24,639 25,802 27,699 Tanzania 2,506 3,862 5,621 6,762 7,644 8,412 9,048 DRC 2,273 3,303 4,983 6,558 8,223 9,755 11,003 Kenya 2,104 3,079 3,215 3,560 3,965 4,313 4,601 Zambia 1,966 2,669 3,168 3,499 3,706 3,860 3,915 Uganda 1,435 2,078 3,286 4,199 4,788 5,433 5,996 C Brazaville 1,014 1,321 1,464 1,558 1,677 1,776 1,854 Burkina Faso 918 1,307 1,991 2,631 3,212 3,730 4,179 Malawi 654 1,270 1,984 2,631 3,201 3,687 4,191 Madagascar 574 1,246 2,050 2,752 3,404 4,002 4,452 Niger 666 1,111 1,932 2,746 3,608 4,407 5,016 Chad 595 1,035 1,390 1,967 2,503 2,922 3,288 Gabon ,004 1,065 1,119 1,165 1,201 Sierra Leone ,192 1,340 1,496 Ghana ,278 1,767 2,149 2,569 2,979 Morocco - - 1,254 2,168 3,384 4,349 5, A 2008A 2009E 2010E 2011E 2012E 2013E Middle East 11,687 17,327 22,588 25,894 28,414 28,649 29,301 Africa 30,971 46,208 63,092 76,392 88,353 98, ,374 Total Subscribers 42,658 63,535 85, , , , ,675 Source: Zain, Al Mal Capital Figure 14: Zain Subscriber Breakdown, 2009E Nigeria Iraq Sudan Tanzania DRC Uganda Kenya Zambia KSA Jordon Madagascar Burkina Faso Malawi Niger Kuwait Palestine C Brazaville Chad Ghana Morocco Gabon Lebanon Sierra Leone Bahrain 15 Source: Al Mal Capital

16 Figure 15: Zain Revenue Contribution, US$ mn 2007A 2008A 2009E 2010E 2011E 2012E 2013E Nigeria 1,172 1,644 1,768 1,788 1,858 1,907 2,047 Iraq - 1,295 1,505 1,532 1,487 1,316 1,214 Kuwait 1,267 1,416 1,234 1,223 1,202 1,208 1,215 Sudan ,106 1,180 1,333 1,463 1,597 Jordon DRC Tanzania Zambia Gabon Bahrain Niger C Brazaville Malawi Chad Kenya Burkina Faso Uganda Ghana Palestine Madagascar Lebanon Sierra Leone A 2008A 2009E 2010E 2011E 2012E 2013E Middle East 1,956 2,196 3,647 3,824 3,769 3,609 3,560 Africa 3,957 5,030 5,957 6,460 7,141 7,759 8,471 Total 5,912 8,522 9,604 10,283 10,910 11,368 12,031 Source: Zain, Al Mal Capital Figure 16: Zain Revenue Contribution, 2009E 2,000 1,500 1,000 1,768 1,505 1,234 1, Nigeria Iraq Kuwait Sudan Jordon DRC Tanzania Zambia Gabon Bahrain Niger C Brazaville Malawi Chad Kenya Burkina Faso Uganda Ghana Palestine Madagascar Lebanon Sierra Leone Source: Al Mal Capital 16

17 Figure 17: Zain EBITDA Contribution, US$ mn 2007A 2008A 2009E 2010E 2011E 2012E 2013E Iraq Nigeria Kuwait Sudan Jordon Zambia Tanzania DRC Niger Gabon Bahrain Malawi Burkina Faso Chad Palestine C Brazaville Madagascar Uganda Sierra Leone Lebanon Kenya 32 (25) (3) Ghana - (29) (34) Total 2,391 3,403 3,682 3,909 4,084 4,181 4, A 2008A 2009E 2010E 2011E 2012E 2013E Middle East 902 1,597 1,590 1,639 1,580 1,497 1,462 Africa 1,489 1,805 2,092 2,270 2,504 2,684 2,905 Source: Zain, Al Mal Capital Figure 18: Zain EBITDA Contribution, 2009E (50) (3) (34) Iraq Nigeria Kuwait Sudan Jordon Zambia Tanzania DRC Niger Gabon Bahrain Malawi Burkina Faso Chad Palestine C Brazaville Madagascar Uganda Sierra Leone Lebanon Kenya Ghana 17

18 Figure 19: Zain Summary Financials, US$ mn (KWD Millions) 2007A 2008A 2009E 2010E 2011E 2012E 2013E Income Statement Revenues 1,677 2,003 2,784 2,981 3,162 3,295 3,487 COGS (362) (461) (612) (656) (696) (725) (767) SG&A (624) (788) (1,104) (1,192) (1,288) (1,368) (1,469) EBITDA ,067 1,133 1,178 1,202 1,251 EBITDA Margin 41.2% 37.6% 38.3% 38.0% 37.3% 36.5% 35.9% Depreciation & Amortisation (236) (303) (379) (439) (472) (501) (528) Provisions & Goodwill Write Offs (4) (70) (8) (9) (9) (10) (10) EBIT Operating Margin 26.9% 19.0% 24.4% 23.0% 22.0% 21.0% 20.4% Net Interest (Expense) (97) (97) (112) (189) (176) (161) (143) Other Income (Expense) (29) (14) (7) 4 10 Pretax Income Zakat & Taxes (49) (63) (86) (77) (82) (86) (93) Minority Interest (22) (15) (22) (19) (21) (21) (23) Net Income Shares Outstanding (mn) 1,913 4,280 4,280 4,280 4,280 4,280 4,280 Earnings Per Share Balance Sheet Cash & Equivalents Trade & Other Receivables Inventories Loan to Associates Investment Securities Total Current Assets ,304 1,305 1,352 1,409 1,492 PP&E 1,496 2,027 2,428 2,691 2,904 3,090 3,262 Intangibles Assets 1,637 2,234 2,089 2,295 2,461 2,607 2,740 Investments in Associates Investment Securities Other Non-current Assets Total Long Term Assets 3,814 4,666 5,356 5,884 6,310 6,684 7,026 Total Assets 4,367 5,454 6,660 7,189 7,661 8,093 8,518 Due to Banks Trade & Other Payables Total Current Liabilities 1,027 1,140 1,420 1,520 1,613 1,681 1,778 Due to Banks 1,532 1,671 2,548 2,312 2,043 1,758 1,420 Deferred Tax Liabilities Other Non-Current Liabilities Total Long Term Liabilities 1,592 1,913 2,652 2,407 2,127 1,830 1,478 Total Liabilities 2,619 3,053 4,072 3,928 3,740 3,510 3,257 Shareholders' Equity 1,748 2,401 2,588 3,262 3,922 4,583 5,261 Minority Interest Total Liabilities & Shareholders' Equity 4,367 5,454 6,660 7,189 7,661 8,093 8,518 Cash Flow EBIT Depreciation & Amortisation Provisions & Goodwill Write Offs EBITDA ,067 1,133 1,178 1,202 1,251 Change in Working Capital 123 (123) (236) Other Income 20 7 (27) (12) (6) 5 9 Capex (1,056) (851) (690) (528) (425) (375) (342) Taxes & Zakat (49) (63) (86) (77) (82) (86) (93) Net Financial Expense (97) (97) (112) (189) (176) (161) (143) Increase (Decrease) in Financing (245) (281) (297) (351) Free Cash Flow (184) Dividends (124) (168) (189) (211) (236) (265) (297) Change in Cash Position (213) (30) Source: Zain, Al Mal Capital 18

19 Wataniya Company Background National Mobile Telecommunications Company is the second mobile operator in Kuwait having commenced commercial operations in December 1999, operating under the Wataniya brand name. Wataniya is a mobile telecommunications operator operating in 4 MENA countries and the Maldives, with over 10.9mn total customers as of The company also owns a license to operate as the second mobile operator in Palestine, although operations are still to be launched. Figure 20: Wataniya Organizational Structure Wataniya 100% 55.6% 71% 50% 65% 57% Wataniya (Kuwait) PTC Bravo (KSA) Nedjma (Algeria) Tunisiana (Tunisia) Wataniya (Maldives) Wataniya (Palestine) Source: Wataniya, Al Mal Capital Wataniya s shares are listed on the Kuwait Stock Exchange with a 24% free float with a controlling stake of 52.5% held by Qtel (acquired in 2007) and the Kuwait Investment Authority holding the remaining 23.5%. Figure 21: Wataniya Shareholder Structure 24.0% 23.5% 52.5% Qtel Kuwait Investment Authority Free Float Source: Bloomberg, Al Mal Capital Investment Positives Geographic Reach By year end 2008 Wataniya s GSM operations covered a population of 49mn with an estimated penetration of over 89%. As of 2008 Wataniya had 10.9mn active customers in the 5 countries in which it had operations. 19

20 Figure 22: Wataniya Group Operations 2008 Ownership Operation Customers (000s) Kuwait 100% Mobile (GSM) 1,313 Tunisia 50% GSM & WiMAX 4,256 Algeria 71% Mobile (GSM) 5,114 Saudi 56% PTT 149 Maldives 100% Mobile (GSM) ,933 Source: Wataniya, Al Mal Capital Figure 23: GDP/Capita US$ v Penetration 40,000 35,000 Kuwait 30,000 25,000 20,000 15,000 10,000 5,000 Tunisia Algeria Maldives - 74% 76% 78% 80% 82% 84% 86% 88% 90% 92% Source: IMF, Al Mal Capital Whilst Algerian and Tunisian operations have larger subscriber bases, Wataniya Kuwait is the key unit for the group in terms of revenue and EBITDA. In 2008, at a group level, Kuwait contributed 48% of revenue and 57% of EBITDA despite only accounting for 12% of subscribers. Subscriber and revenue growth should be driven by the Algerian and Tunisian operations due to demographics with both countries having young and growing populations. We expect Kuwait to remain the main contributor to revenue and EBITDA over our forecast period due to higher ARPUs relative to its other markets resulting from higher GDP/capita. Figure 24: Wataniya EBITDA Evolution % 0% 1% 2% 25% 20% 18% 57% 26% 51% Kuwait Algeria Tunisia Maldives KSA Kuwait Algeria Tunisia Maldives KSA Source: Wataniya, Al Mal Capital 20

21 Figure 25: Wataniya Subscriber Growth 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000-16,300 15,478 14,601 13,630 12,658 10,935 9, Source: Wataniya, Al Mal Capital We project the Algerian population growing from 34.8mn in 2008 to 37.5mn by Algeria has a young population, with 26% of the population under the age of 15, which bodes well for future growth. Algeria is a member of OPEC with the energy sector contributing 30% to GDP and so has benefited from high oil prices in 2007and As of 2008YE mobile penetration is estimated at 83%. Wataniya owns 71% of Nedjma in Algeria, which launched operations in August 2004 as the third operator. It has since become the number 2 operator, with a market share of 18% in 2008, with 5.11mn mobile subscribers. As of YE 2008 Nedjma s network covered over 90% of the population. The leading operator is Djezzy, a subsidiary of Orascom Telecom with a 64.7% market share, whilst the remaining market share is held by Algerian Mobile Network, the mobile subsidiary of the incumbent Algerie Telecom. Competition is expected to increase with a tender offer for 3G licenses, with 3 for the existing operations and 1 new license. Nedjma had been suffering from strong competition from Djezzy. Whilst top line revenues were growing, EBITDA margins were under pressure, declining to 11% in Q Since then Nedjma has responded with aggressive marketing which saw 2008 revenues grow 28% yoy, and EBITDA increase 61.4% yoy, with EBITDA margins improving to 28.8%. The Algerian government ruled that, due to security concerns, unregistered SIMs should be disconnected which has resulted in a slower growth rate in mobile subscribers in We expect growth rates resuming in 2009 as the operators compete to regain those customers that were disconnected in 2008, resulting in Nedjma growing revenues by 7% in 2009 to KWD 140mn and to KWD 154mn by EBITDA margins are also projected to continue improve to 33% in 2009 and to reach 37% by 2013, resulting in EBITDA of KWD 43mn (+15% YOY) in 2009 and KWD 57mn in The delay in the privatization of Algerie Telecom should also help the existing operators as it will delay the entrance of a potentially more commercially aggressive operator. Tunisia is the other country that should be a key subscriber and revenue driver for Wataniya. We project the population of Tunisia growing to 11.05mn by 2013 from 10.4mn in Tunisia, as with Algeria, has a young population, with 23% of the population under the age of 15%. Wataniya owns 50% of Tunisiana which was granted a license to provide GSM services and operate an international gateway in Tunisia in May 2002, launching commercial 21

22 operations in December The operations are a joint venture with Orascom Telecom, with an initial license term of 15 years which is renewable thereafter for a further 5 years. The other shareholders in Tunisiana are Orascom Telecom Holding with 35%, and Carthage Consortium with 15%. There are currently 2 mobile operators in Tunisia, the other operator being Tunisie Telecom, the state controlled incumbent. Tunisie Telecom was partially privatized in July 2006 with Dubai Investment Group and TECOM owning a 35% stake purchased for US$2.25bn (AED 8.26bn). In 2008 Tunisiana had over 4.2mn subscribers (+16% YOY), representing a market share of 51.1%. Tunisiana s geographical coverage stands at 75%. Mobile penetration in Tunisia stood at 80% in Competition is set to increase as the government has announced an international tender for a combined 3G mobile and fixed line license. The results of the tender are expected to be announced in June 2009, with commercial implementation in January 2010 and so far 13 European and Middle Eastern groups have expressed interest. This high level of interest we believe is a function of the scarcity of new licenses in the region. We expect the threat of potential competition to spur the existing operators to capture as many new subscribers before any new players enter the market. This we project should lead to Tunisiana adding 599,000 subscribers in The land grab will come at a cost we project ARPUs declining by 30% resulting in Wataniya s share of revenues and EBITDA decreasing by 32% and 34% respectively in Investment Negatives Viva Bye Duopoly, Hi Competition Wataniya has enjoyed a duopoly with Zain in its home market of Kuwait, resulting in some of the highest ARPUs and EBITDA margins in the region. This has changed with the entry of STC-run Kuwait Telecom Company launching operations under the Viva brand in December Whilst we believe Viva should be a rational competitor, competition should put pressure on ARPUs and EBITDA margins. The importance of Kuwait to Wataniya is illustrated by its contribution at a group level. In 2008, at a group level, Kuwait contributed 48% of revenue and 57% of EBITDA. Figure 26: Wataniya Kuwait Revenue & EBITDA Evolution Revenue EBITDA Source: Wataniya, Al Mal Capital 22

23 With competition in its home market we project marginal revenue growth for Kuwaiti operations with revenues declining to KWD 193mn in 2009 and EBITDA margins decreasing to 46% resulting in EBITDA of KWD 89mn, with further declines in margins through our forecast period to reach 44% by Saudi and Maldives Continue to be Loss Making Wataniya owns 55.6% of Bravo, a Push To Talk provider in Saudi Arabia, utilizing Motorola s Integrated Digital Enhanced Network Technology (iden) to primarily serve the Saudi enterprise segment with mobile, telephony, messaging, data and GPS location tracking services. Bravo has managed to grow revenue and subscribers but makes a loss at the EBITDA level. With competition driving down GSM mobile tariffs, ability to conference multiple users and the latest GSM handsets being GPS enabled we see limited growth for Bravo but believe its PTT functionality will continue to make it attractive to a niche market. Bravo makes a minimal contribution to Wataniya, contributing KWD 14mn in revenue (3% of total revenue for the period) and a loss of KWD 6.5mn in We project Bravo to become EBITDA positive in 2011, contributing KWD 2.1mn and at the net level in 2012, with net profits of KWD 1.6mn. Wataniya s Maldives operations continue to be loss making but, again, like Bravo, contribute a minimal amount to revenues and EBITDA. In 2008 revenues amounted to KWD 5.6mn (1% of total revenue for the period) with a net attributable loss to Wataniya of KWD 3.6mn for Subscribers for the period numbered 101,369. With a high penetration estimated at 116% for YE 2008 and a GDP/Capita of US$3,067 we see limited potential for future subscriber growth, without Wataniya gaining market share from Dhiragu, the other mobile operator in the Maldives. Whilst we believe Wataniya will be able to capture additional market share this will to a certain extent be offset by falling ARPUs. However the operations should continue to benefit from tourism and the roaming revenues in-bound tourists generate. We project Wataniya Maldives to break even in 2012, generating a modest profit of KWD 0.4mn. Currency Risk As with other GCC operators with emerging markets operations, Wataniya is exposed to currency risk. This has impacted its Algerian and Tunisian operations in 2008 with the Algerian Dinar depreciating 4% against the Kuwaiti Dinar. Both currencies have however held fairly steady against the Kuwaiti Dinar in Q and we expect this to be the case for the rest of the year. Figure 27: Wataniya Emerging Market Currency Performance Exchange Rate, LC/US$ (Depreciation)/ Appreciation % of Revenue Country Currency Dec-07 Dec A Q1 2009A 2009E 2009E Kuwait Kuwaiti Dinar % -6% 6% 47% KSA Saudi Riyal % 0% 0% 3% Algeria Algerian Dinar % -7% na 30% Tunisia Tunisian Dinar % -6% na 18% Maldives Maldives Rufiyaa % 0% na 2% Source: Bloomberg, Al Mal Capital 23

24 Figure 28: Wataniya Subscriber Breakdown, 000s 2007A 2008A 2009E 2010E 2011E 2012E 2013E Kuwait 1,198 1,314 1,406 1,496 1,559 1,637 1,701 Algeria 4,536 5,114 6,049 6,622 7,161 7,652 8,160 Tunisia 3,652 4,257 4,856 5,098 5,404 5,674 5,901 Maldives KSA Total 9,542 10,935 12,658 13,630 14,600 15,478 16,300 Growth, % 14.6% 15.8% 7.7% 7.1% 6.0% 5.3% Source: Wataniya, Al Mal Capital Figure 29: Wataniya Revenue Contribution, KWD mn 2007A 2008A 2009E 2010E 2011E 2012E 2013E Kuwait Algeria Tunisia Maldives KSA Total Growth, % 16.8% -10.8% 2.5% 1.8% 1.8% 1.4% Source: Wataniya, Al Mal Capital Figure 30: Wataniya EBITDA Contribution, KWD mn 2007A 2008A 2009E 2010E 2011E 2012E 2013E Kuwait Algeria Tunisia Maldives KSA - - (12) (9) Total Growth, % 23.8% -25.7% 4.8% 7.3% 3.1% 3.0% Source: Wataniya, Al Mal Capital 24

25 Figure 31: Summary Financials Wataniya (KWD Millions) 2007A 2008A 2009E 2010E 2011E 2012E 2013E Income Statement Revenues COGS (152) (169) (153) (161) (169) (171) (174) SG&A (116) (132) (115) (122) (129) (131) (133) EBITDA EBITDA Margin 34.4% 36.7% 36.9% 34.9% 32.9% 32.9% 32.9% Depreciation & Amortisation (68) (78) (90) (100) (100) (100) (100) EBIT Operating Margin 17.7% 20.3% 15.7% 11.9% 10.3% 10.8% 11.0% Net Interest (Expense) (15) (10) (8) (12) (13) (14) (15) Other Income (Expense) 17 (3) Pretax Income Zakat & Taxes (3) (12) (9) (7) (6) (6) (6) Minority Interest Net Income Shares Outstanding (mn) Earnings Per Share Balance Sheet Cash & Equivalents Trade & Other Receivables Inventories Investment Securities Total Current Assets PP&E Intangibles Assets Investments in Associates Investment Securities Other Non-current Assets Total Long Term Assets ,013 1,068 Total Assets ,081 1,169 1,241 1,299 Short Term Loans Current Portion of Long Term Loans Trade & Other Payables Total Current Liabilities Long Term Debt End of Service Benefits Other Non-Current Liabilities Total Long Term Liabilities Total Liabilities Shareholders' Equity Minority Interest Total Liabilities & Shareholders' Equity ,081 1,169 1,241 1,299 Cash Flow EBIT Depreciation & Amortisation EBITDA Change in Working Capital 2 19 (11) Other Income 90 (3) Capex (92) (171) (85) (87) (84) (68) (55) Taxes & Zakat (3) (12) (9) (7) (6) (6) (6) Net Financial Expense (15) (10) (8) (12) (13) (14) (15) Increase (Decrease) in Financing (79) Free Cash Flow Dividends (50) (55) (61) (67) (73) (81) (89) Change in Cash Position Source: Wataniya, Al Mal Capital 25