SAUDI ARABIA TELECOM SECTOR

Transcription

1 SAUDI ARABIA TELECOM SECTOR Mobile Additions Peak CONTENTS SAUDI TELECOM COMPANY 3 MOBILY 7 ZAIN KSA 10 CITC Discloses Active Subs for The First Time: We introduce some changes to mobile subscribers forecasts after the Saudi telecom regulator, CITC, indicated for the first time in its annual report the number of active mobile subscribers in 2008 being c18% lower than total reported subscribers for Accordingly, we changed our estimates for 2009 and we now estimate the Saudi mobile market ended 2009 with 37.6 million active subscribers (versus our previous estimate of 39.1 million), implying active net additions of 7.8 million (+36% Y-o-Y) and a penetration rate of 148%. No impact on our valuation from CITC s disclosure. Market Share Trends Remain in Line: Zain KSA pushed its market share to 13% from 5% in 2008, mainly at the expense of Saudi Telecom Company (STC), which ended the year with a 48% market share, down from 54%. Mobily remained rather stable, at a 40% market share. Subscriber Forecasts - No Major Changes: We forecast active net additions to drop by 30% in 2010 and to remain at around the 1 million-level over the medium term. We forecast the medium-term penetration to hover around the mid-170% level. We do not expect Zain KSA to exceed a 20% market share. We also forecast a medium-term market share of 38% for Mobily and 43% for STC. Regulator to Enforce Ban on Free Incoming Roaming: Saudi Arabia s telecom regulator announced a few weeks ago that it will start enforcing a 13 month-old rule that bans mobile operators from offering free international roaming on incoming calls. We believe the main reason behind this decision is the surfacing of a substantial number of Saudi SIM cards in other countries of the region (media reports the presence of 500,000 Saudi SIM cards in Egypt). We have previously highlighted the emergence of this trend soon after Zain KSA introduced its One Network concept, as expats living in Saudi Arabia would send SIM cards to relatives in their home countries to benefit from Saudi operators roaming offers. Operators See Ban as Negative; Impact on Valuation Will Be Minimal: Prior to the CITC decision, all three Saudi operators offered free international roaming on incoming calls at different levels. The service was mainly introduced under Zain KSA's One Network" and was followed by Mobily s Tejwaly, a roaming agreement with operators in 56 countries that allows all Mobily subscribers to receive local and international calls at local rates. STC offers this service on a smaller scale to its premium subscribers. Media reports were mixed with regards to operators' stances. However, it is clear that operators were unsatisfied with the decision, as we believe that despite the loss of revenue, this service was an important marketing tool for the companies, particularly in a period of intense competition for market share. SECTOR NOTE Companies Analysed in this Report Nadine Ghobrial nghobrial@efg-hermes.com Marise Ananian mananian@efg-hermes.com Price Rec. FV P/E (x) EV/EBITDA (x) Div. Yield Company (SAR) (SAR) 2009a 2010e 2011e 2009a 2010e 2011e 2009a STC 44.2 Buy % Mobily 47.6 Buy % Zain KSA 9.85 Neutral 9.18 N/M N/M N/M N/M N/M % *Prices as of 03 March

2 MOBILE ADDITIONS PEAK SAUDI ARABIA TELECOM SECTOR SAUDI MOBILE MARKET INDICATORS Figure 1: Saudi Mobile Market Forecasts (2009a e) In million, unless otherwise stated 2009a 2010e 2011e 2012e 2013e 2014e 2015e Population Addressable Mkt % of Population 144% 147% 150% 152% 155% 157% 159% New Additions Total Subscribers Penetration to Addressable 102% 112% 115% 116% 114% 112% 110% Penetration Rate 148% 165% 173% 176% 176% 175% 174% STC STC Active Subs STC Share of Additions 22% 31% 31% 33% 33% 33% 33% STC Market Share 48% 45% 44% 44% 44% 43% 43% Mobily Mobily Active Subs Mobily Share of Additions 37% 31% 33% 33% 33% 33% 33% Mobily Market Share 40% 39% 38% 38% 38% 38% 38% Zain Saudi Arabia Zain KSA Active Subs Zain KSA Share of Additions 41% 39% 36% 33% 33% 33% 33% Zain KSA Market Share 13% 16% 17% 18% 19% 19% 19% Source: Companies, EFG Hermes estimates 2

3 SAUDI TELECOM COMPANY - MARGINS STILL A CONCERN Current Price* : SAR 44.2 Fair Value (FV): SAR 66.6 Rating: Buy Cutting Fair Value but Maintaining our Buy Rating: After downgrading our forecasts for margin following 4Q2009 disappointing numbers, our FV for the stock drops 10% to SAR66.6/share from our previous SAR73.5/share. Nevertheless, we still maintain our Buy rating, given the cheap multiples the stock is currently trading at. While we believe in the long term fundamentals of the stock which is relatively cheap trading on a 2010e P/E 9.7x and EV/EBITDA of 5.5x and offering relatively high FCF yield of 10.0% and a dividend yield of 6.8%, we do not believe that short term performance will be strong in the absence of catalysts and as margin remaining an area of concern. 4Q Revenue in Line, Capital Gain boosts Earnings: STC s 4Q2009 revenue came in line with our forecast. The operating margin significantly missed our estimate, while net profit was boosted by a oneoff capital gain. The company reported flat 4Q2009 consolidated revenue of SAR13.0 billion (+0.5% Q-o-Q; +5.7% Y-o-Y), in line with our forecast. The company indicated that c71% of its revenue came from the Saudi operation. STC s 4Q2009 net profit increased to SAR2.9 billion (+22.4% Q-o-Q; +152% Y-o-Y), 28% ahead of our estimate; 4Q2009 earnings were boosted by a one-off capital gain of SAR687 million, that we were not taking into account, from the proceeds of the IPO of a stake in Maxis Malaysia in November Excluding the one-off gain, earnings would have been in line with forecast. Operating Margins - Remain an Area of Concern: EBITDA margin for 4Q2009 came in at 36.7%, a level previously unseen at STC, including in 4Q2008, the height of the financial crisis, where STC recorded a 36.9% margin. We have previously highlighted our concern with regards to the significant pressure STC is facing at the operating margins level which is adding negative sentiment to the stock, in our view. We believe the main reason behind the pressure on margin is the more competitive landscape in both the Saudi market and the emerging markets subsidiaries. We would, however, like management to provide more colour with regards to this issue, as it is not clear in which market the margin was mostly hurt. Change in Forecasts: We trim our forecasts following 4Q2009 results. While we did not introduce major changes to our revenue forecasts (FY2010e revenue SAR51.2 billion, down 3% from previous forecast), the main adjustments to our forecasts were at the level of the EBITDA margin. STC's FY2009 margin came in at 40.6%, and in light of the current competitive environment we do not believe the company will be able to significantly improve margins beyond this point. Accordingly, we forecast a FY2010e margin of 40.0%, which should drop to the high-30% over our forecast period. December Year End 2009a 2010e 2011e 2012e Operating Income 12,814 12,029 12,087 11,961 Net Attrib. Income 10,863 9,113 9,627 9,581 ROE 25.8% 19.8% 19.8% 19.1% EPS (SAR) Earnings Growth -1.59% % 5.65% -0.49% P/E (Attrib.) (x) DPS (SAR) Dividend Yield 6.8% 6.8% 7.9% 9.0% BVPS (SAR) P/BV (x) CFPS (Operating CF) (SAR) P/CF (x) EV / EBITDA** (x) EV / Sub** (x) 2,540 2,174 1,858 1,646 Net Debt (Cash) 23,581 20,099 17,179 14,113 Figures in SAR million, unless otherwise stated **Proportionate Price (SAR) TASI (Rebased) 03-Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-10 Estimate Changes 2009a 2010e 2011e (SAR mn) Old New Old New Revenue 50,780 52,851 51,207 53,631 52,618 EBITDA 20,613 21,927 20,489 22,214 21,089 EBITDA Margin 40.6% 41.5% 40.0% 41.4% 40.1% Net Attrib. Income 10,863 10,377 9,113 10,890 9,627 Stock Data Last Dividend Date SAR0.75 on 31 Oct 09 Mkt. Cap. / Shares (mn) SAR88,400 / 2,000 Local Av. Monthly Liqd. SAR789.5 mn 52-Week High / Low SAR56.75 / Bloomberg / Reuters STC AB / 7010.SE Est. Free Float 16.4% 3

4 SAUDI TELECOM COMPANY 4Q2009 RESULTS Figure 2: STC 4Q2009 Income Statement Highlights In SAR million unless otherwise stated 4Q08a 1Q09a 2Q09a 3Q09a 4Q09a Q-o-Q Y-o-Y 4Q09e Var. Wireless Revenue 7,926 8,226 8,124 8,799 9, % 14.4% 8, % Wireline Revenue* 4,376 3,917 4,550 4,135 3, % -10.2% 4, % Total Revenue 12,302 12,143 12,674 12,934 12, % 5.7% 13, % Gov't Charges (1,384) (1,389) (1,414) (1,424) (1,437) (1,489) Access Charges (1,832) (1,303) (1,928) (2,073) (2,167) (2,020) Employee Costs (1,890) (1,665) (1,842) (1,560) (1,706) (1,780) Admin. & Mark. Exp. (2,022) (1,598) (1,774) (2,174) (2,066) (1,817) Repairs & Main. Exp. (629) (577) (580) (611) (855) (627) EBITDA 4,545 5,611 5,136 5,092 4, % 4.9% 5, % EBITDA Margin 36.9% 46.2% 40.5% 39.4% 36.7% 40.5% Dep. & Am. (1,747) (1,774) (1,907) (1,980) (2,180) (2,047) EBIT 2,798 3,836 3,228 3,112 2, % -7.5% 3, % EBIT Margin 22.7% 31.6% 25.5% 24.1% 19.9% 24.8% Cost of Manpower (59) (150) (444) (214) (3) (150) Imp. Program Net Commissions** 188 (267) (239) (287) (230) (335) Others 96 (61) (112) (139) 825 (40) FX (2,024) (695) 1, (48) PBMI 998 2,665 3,460 2,688 3,269 2,654 Minority Interest (239) (22) (65) (181) PBT 1,321 2,708 3,221 2,666 3,204 2,473 Provision for Zakat (87) (103) (73) (89) (69) (62) Provision for Taxes (69) (117) (158) (174) (193) (113) Net Income 1,166 2,488 2,990 2,403 2, % 152.4% 2, % EPS (SAR) DPS (SAR) *Includes data revenue **Interest expense for previous quarters estimated based on reported EBITDA figure Source: STC, EFG Hermes estimates

5 SAUDI TELECOM COMPANY FINANCIAL STATEMENTS Income Statement (December Year End) In SAR million, unless otherwise stated Revenue Saudi 36,739 36,067 36,103 36,522 37,122 Maxis 3,022 3,983 4,300 5,278 6,150 Oger Telecom 7,686 10,260 10,068 9,916 9,801 Kuwait Bahrain Total 47,469 50,780 51,207 52,618 54,136 Consolidated EBITDA 21,742 20,613 20,489 21,089 21,461 EBITDA Margin 45.8% 40.6% 40.0% 40.1% 39.6% Depreciation and Amortisation (6,407) (7,799) (8,460) (9,002) (9,500) Net Operating Profit 15,335 12,814 12,029 12,087 11,961 NOP (EBIT) Margin 32.3% 25.2% 23.5% 23.0% 22.1% Cost of Manpower imp. Program (675) (811) (500) - - Net Interest Income (Expense) 69 (1,023) (1,083) (1,013) (804) Others (394) FX Gains (Losses) (2,293) Earnings before MI and Taxes 12,043 12,131 10,459 11,089 11,175 Zakat (376) (335) (271) (275) (261) Taxes (456) (642) (608) (660) (681) Earnings before MI 11,211 11,154 9,581 10,154 10,233 Minority Interest (173) (290) (468) (526) (653) Net Profit 11,038 10,863 9,113 9,627 9,581 Source: STC, EFG Hermes estimates Balance Sheet (December Year End) In SAR million, unless otherwise stated Cash & Cash Equivalents 8,062 7,710 7,583 7,093 6,601 Accounts Receivable 8,120 11,461 11,223 11,533 11,865 Inventory Prepayments and other CA 1,987 2,782 2,837 2,894 2,952 Total Current Assets 18,947 22,663 22,493 22,401 22,342 Net PP&E 44,382 52,737 54,380 54,593 53,531 Intangible Assets 14,473 15,313 14,474 13,964 13,515 Goodwill 17,222 13,908 13,908 13,908 13,908 Invests. (Equity Method) 2,452 2,533 2,533 2,533 2,533 Other Non-current Assets 2,287 2,433 2,457 2,482 2,507 Total Assets 99, , , , ,337 CPLTD 3,905 8,579 7,396 6,865 5,752 Accounts Payable 6,649 7,657 7,925 8,223 8,631 Dividends Payable Other Payables 4,278 4,762 4,905 5,052 5,204 Accrued Expenses 5,762 6,205 6,515 6,841 7,183 Deferred Revenue-current 2,248 2,081 2,048 2,105 2,165 Total Current Liabilities 22,899 29,341 28,846 29,142 28,992 Long-Term Debt 28,081 22,712 20,287 17,407 14,962 Emp. End of Service Benefits 2,738 2,844 2,844 2,844 2,844 Other Long-term Payables 3,482 3,858 3,974 4,093 4,216 Total Liabilities 57,200 58,755 55,951 53,487 51,014 Minority Interest 5,107 8,798 8,330 7,804 7,151 Net Worth 37,638 42,035 45,964 48,591 50,172 Source: STC, EFG Hermes estimates 5

6 SAUDI TELECOM COMPANY Cash Flow Statement (December Year End) In SAR million, unless otherwise stated COPAT 20,235 18,826 19,110 20,153 20,519 Change Working Investment (640) (2,300) Cash Flow Post Chg in WI 19,595 16,526 19,842 20,583 21,047 Capex (16,477) (16,155) (10,103) (9,215) (8,438) Investments & Other Intang. (17,739) 3, Free Cash Flow (14,620) 3,965 9,935 11,535 12,781 Net Financing 18,407 (695) (3,609) (3,411) (3,558) Dividends, Intr. & Othr. (3,160) (3,622) (6,453) (8,613) (9,716) Change in Cash 626 (352) (127) (489) (492) Source: STC, EFG Hermes estimates

7 ETIHAD ETISALAT (MOBILY) - TRIMMING FORECASTS; MAINTAIN BUY Current Price* : SAR 47.6 Fair Value (FV): SAR 67.6 Rating: Buy FV up to SAR67.6, Maintain Buy: Our FV for the stock inched up 3.3% to SAR67.6/share, mainly on the back of higher revenue and margins. While Mobily appears somewhat expensive relative to peers on a multiples basis (2010e P/E 9.5x; 2010e EV/EBITDA 7.3x), we still believe this is justified by its growth potential. Our FV currently offers 42% upside potential, and we therefore maintain our Buy rating. The company announced a total cash dividend distribution of SAR875 million for FY2009, translating into DPS of SAR1.25. This implies a dividend payout ratio of 29%, up from 24% in FY2008, and a dividend yield of 2.6% based on yesterday s closing price. 4Q2009 Results - Revenue Misses Our Forecast; Margin Compensates: Overall, 4Q2009 was a good quarter, exceeding our estimates at the EBITDA margin and earnings level, bearing in mind that the generally strong Hajj season was impacted in 2009 by H1N1 fears, which led to lower pilgrim numbers (2.5 million). We suspect that this is the main reason why the revenue figure missed our estimate. Total revenue for 4Q2009 missed our forecast by 4.1% at SAR3,537 million, almost flat on a Q-o-Q basis, and up 14% Y-o-Y. The EBITDA margin, however, was significantly higher than our forecast at 43.0% (4Q2009e: 39.5%; 3Q2009a: 36.4%), which we attribute to seasonality. EBITDA for 4Q2009 grew a healthy 22% Y-o-Y and 19% Q-o-Q to SAR1,520 million, 4.3% higher than our estimate. Earnings exceeded the SAR1 billion level for the first time, coming in at SAR1,052 million (+30% Q-o-Q, +35% Y-o-Y) on a stronger EBITDA margin. Data and Broadband: Mobily s mobile broadband subscribers (HSPA) exceeded 1 million by end-2009, adding 700,000 subscribers during the year. The company s press release again highlighted Mobily s focus on these high-margin segments, which contributed 14% of total revenue from 9% in the previous year. According to Mobily, the company s FY2009 mobile broadband revenue surged 159%. Change in Our Forecasts - Revenue, Margin and Capex Up: We update our model following Mobily s results. The main highlight is the capex, which came in at SAR3.4 billion for FY2009 higher than our forecast of SAR2.6 billion. We have, therefore, increased our capex forecasts going forward, seeing that the company is intent on investing aggressively in both its 3.5G and WiMAX networks. We also increased our revenue forecasts on the assumption that the continued investments in networks should translate into higher revenue streams from data and broadband. We increased our FY2010 revenue estimate by 5% to SAR14.8 bn, our EBITDA estimate to SAR5.6 bn (margin 37.9%), and earnings estimate to SAR3.5 bn. December Year End 2009a 2010e 2011e 2012e Operating Income 3,207 3,772 4,080 4,561 Net Attrib. Income 3,013 3,513 3,749 4,219 ROE 24.6% 24.2% 22.7% 22.6% EPS Earnings Growth 37.8% 16.6% 6.7% 12.6% P/E (Attrib.) (x) DPS (SAR) Dividend Yield 2.6% 3.7% 5.3% 6.3% BVPS (SAR) P/BV (x) CFPS (Operating CF) P/CF (x) EV/EBITDA (x) EV/Sub(x) 2,746 2,470 2,317 2,228 Net Debt (Cash) 7,663 6,310 5,329 3,994 Figures in SAR million, unless otherwise stated Price (SAR) TASI (Rebased) 03-Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-10 Estimate Changes 2009a 2010e 2011e (SAR mn) Old New Old New Revenue 13,058 14,043 14,800 14,853 15,945 EBITDA 4,836 5,132 5,608 5,587 6,134 EBITDA Margin 37.0% 36.5% 37.9% 37.6% 38.5% Net Attrib. Income 3,013 3,032 3,513 3,225 3,749 *Prices as of 03 March 2010 Stock Data: Last Dividend Date SAR0.75 on 22 Mar 09 Mkt. Cap. / Shares (mn) SAR33,320 / 700 Av. Monthly Liqd.(mn) SAR Week High / Low SAR47.4 / 32.8 Bloomberg / Reuters EEC AB / 7020.SE Est. Free Float 40% 7

8 ETIHAD ETISALAT (MOBILY) 4Q2009 RESULTS Figure 3: Mobily Quarterly Income Statement Highlights 4Q08a 1Q09a 2Q09a 3Q09a 4Q09a Q-o-Q Y-o-Y 4Q09e Var. Revenue 3,110 2,810 3,199 3,511 3,537 1% 14% 3, % Cost of Sales (1,292) (1,194) (1,366) (1,529) (1,423) (1,494) Gross Profit 1,818 1,617 1,833 1,982 2,115 7% 16% 2, % Selling & Marketing Costs (284) (346) (248) (230) (268) (295) General & Admin. Costs (289) (362) (455) (474) (326) (443) EBITDA 1, ,130 1,278 1,520 19% 22% 1, % EBITDA Margin 40.0% 32.3% 35.3% 36.4% 43.0% 39.5% Dep. & Am. (364) (375) (403) (416) (435) (432) EBIT ,085 26% 23% 1, % EBIT Margin 28.3% 19.0% 22.7% 24.6% 30.7% 27.8% Financing Expense (121) (75) (49) (40) (40) (40) Other Income PBT , Provision for Zakat (1) (1) (15) (16) 1 (25) Net Income ,052 30% 35% % Source: Mobily, EFG Hermes estimates

9 ETIHAD ETISALAT (MOBILY) FINANCIAL STATEMENTS Income Statement (December Year End) Total Revenue 10,794 13,058 14,800 15,945 17,134 Cost of Services (4,679) (5,512) (6,295) (6,692) (7,177) Selling & Marketing (816) (1,093) (1,223) (1,324) (1,397) G&A (1,411) (1,618) (1,674) (1,795) (1,859) EBITDA 3,889 4,836 5,608 6,134 6,702 EBITDA Margin 36.0% 37.0% 37.9% 38.5% 39.1% Dep. & Am. (1,298) (1,629) (1,836) (2,054) (2,141) EBIT 2,591 3,207 3,772 4,080 4,561 EBIT Margin 24% 25% 25% 26% 27% Financing Costs (438) (204) (230) (297) (297) Other Income Earnings before Zakat 2,194 3,044 3,584 3,825 4,305 Zakat (7) (31) (72) (77) (86) Net Profit 2,186 3,013 3,513 3,749 4,219 Source: Mobily, EFG Hermes estimates Balance Sheet (December Year End) Cash & Cash Equivalents 1, ,682 3,175 1,193 Short Term Investments 1, Accounts Receivables 3,098 5,481 5,596 6,029 6,478 Inventory Other Current Assets 1,102 1,431 1,567 1,718 1,882 Total Current Assets 6,621 8,577 9,588 11,663 10,294 PP&E (Net) 8,118 10,370 12,401 14,088 15,509 Intangibles 10,923 10,450 9,928 9,406 8,884 Goodwill 1,530 1,530 1,530 1,530 1,530 Total Assets 27,192 30,927 33,446 36,687 36,218 CPLTD / Short Term Debts 3,148 2,148 2,987 3,817 1,187 Total Payable 4,365 6,167 6,822 7,476 8,129 Other Current Liabilities 3,236 3,874 4,053 4,126 4,200 Total Current Liabilities 10,748 12,190 13,862 15,419 13,516 Emp. End of Service Long-term Financing 6,642 6,448 5,004 4,687 4,000 Total Liabilities 17,437 18,684 18,915 20,157 17,570 Net Worth 9,764 12,243 14,531 16,530 18,649 Source: Mobily, EFG Hermes estimates Cash Flow Statement (December Year End) COPAT 3,881 4,805 5,536 6,057 6,616 Change in WI 685 (296) (54) (129) (73) Cashflow Post Chg in WI 4,566 4,509 5,483 5,929 6,542 Capex & Investments (4,549) (3,320) (3,302) (3,178) (2,999) Free Cash Flow 18 1,189 2,181 2,751 3,544 Change in Equity 2, Loans 867 (1,194) (604) 513 (3,317) Dividends Paid (525) (875) (613) (1,488) (1,925) Interest and other (418) (204) (228) (294) (294) Change in Cash 1,941 (1,083) 736 1,482 (1,993) Source: Mobily, EFG Hermes estimates 9

10 ZAIN KSA - LOWER FV; BALANCE SHEET STILL A HEADACHE Current Price* : SAR 9.85 Fair Value (FV): SAR 9.18 Rating: Neutral Maintain Neutral Rating; FV falls to SAR9.18/share: Despite increasing our revenue forecasts and bringing forward our EBITDA and earnings breakeven points, our updated model yields a lower FV of SAR9.18/share, down 26%. The FV drop is mainly due to: i) higher capex forecasts, and ii) higher cost of debt on Zain KSA s substantial debt. Given the stock s 7% downside potential from current levels, we maintain our Neutral recommendation. It is important to note that the company remains a start-up in early stages of growth, and therefore actual results might turn out significantly different than forecasted. 4Q2009 Results - Weaker than Our Forecasts: Zain KSA s 4Q2009 revenue came in at SAR895 million, 6.0% below our estimated SAR953 million (+8% Q-o-Q, +111% Y-o-Y). This brings total FY2009 revenue to SAR3.0 billion. Gross profit for 4Q2009 missed our forecast by 17.6%, coming in at SAR356 million (+46% Q-o-Q). This implies an improving gross profit margin of 39.7% (3Q2009: 29.4%; 4Q2008: 7.3%), but lower than our forecasted 45.3%; 4Q2009 s EBITDA margin came in at -7.7%, slightly better than our -8.7% estimate. Zain KSA indicated that it has reached EBITDA breakeven in November and December on the back of lower operating expenses, particularly national roaming. The company s 4Q2009 net loss came in at SAR657 million (3Q2009: SAR820 million net loss; 4Q2008: SAR930 million net loss) versus our net loss estimate of SAR618 million, bringing the company s FY2009 net loss to SAR3.0 billion. Change in Forecasts: We have increased our revenue forecasts for the company; we are now forecasting revenue of SAR4.4 billion in FY2010 (12% higher than previous forecast), a 47% increase Y-o-Y, and a positive EBITDA of SAR252 million, translating into a margin of 5.7%. We were previously forecasting an EBITDA breakeven in 2011; however, we now bring the breakeven point one year forward to 2010, given that the company was able to breakeven in the last two months of We are now forecasting a breakeven on the earnings level in 2015 versus our earlier forecast of searnings breakeven in Update on Leverage: We remain uncomfortable with regards to the company s high debt levels. Zain KSA ended 2009 with net debt of SAR11.9 billion and a cash balance of SAR506 million. We have argued in mid-2009 that Zain KSA s balance sheet is overstretched and that it would need to raise a substantial amount of equity, possibly through a rights issue, before end CEO Al Barrak confirmed that the company is indeed seeking a capital increase and intends to convert some of its debt into equity (USD577 million shareholders loan) before end The company also released a statement saying that a rights issue is one of the options it is considering to improve liquidity. December Year End 2009a 2010e 2011e 2012e Operating Income (2,438) (1,156) (563) 50 Net Attrib. Income (3,071) (1,830) (1,309) (825) ROE -35.6% -26.9% -23.9% -17.7% EPS (SAR) (2.19) (1.31) (0.93) (0.59) Earnings Growth N/M N/M N/M N/M P/E (Attrib.) (x) N/M N/M N/M N/M DPS (SAR) Dividend Yield 0.0% 0.0% 0.0% 0.0% BVPS (SAR) P/BV (x) CFPS (Operating CF) (0.10) 0.69 P/CF (x) (99.4) 14.3 EV / EBITDA (x) N/M N/M EV / Sub (x) 5,215 3,629 3,103 2,853 Net Debt (Cash) ** 11,902 12,499 14,750 15,905 Figures in SAR million, unless otherwise stated **Debt includes vendor financing facilities Price (SAR) TASI (Rebased) 03-Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-10 Estimate Changes 2009a 2010e 2011e (SAR mn) Old New Old New Revenue 3,004 3,945 4,413 4,701 5,567 EBITDA (1,047) (291) EBITDA Margin -34.9% -7.4% 5.7% 7.1% 15.7% Net Attrib. Income (3,071) (2,205) (1,830) (1,777) (1,309) *Prices as at 03 March 2010 Stock Data: Last Dividend Date N/A Mkt. Cap. / Shares (mn) SAR13,790 / 1,400 Av. Monthly Liqd.(mn) SAR2, Week High / Low SAR13.25 / 9.50 Bloomberg / Reuters ZAINKSA AB / 7030.SE Est. Free Float 45.0% 10

11 ZAIN KSA 4Q2009 RESULTS Figure 4: Zain KSA Quarterly Income Statement Highlights 4Q08a 1Q09a 2Q09a 3Q09a 4Q09a Q-o-Q Y-o-Y 4Q09e Var. Total Revenue % 111% % COGS (436) (569) (583) (540) (522) Gross Profit % 1,047% % Gross Profit Margin 7.3% 25.1% 18.9% 29.4% 39.7% 45.3% Dist. & Marketing Costs (369) (411) (454) (340) (429) G&A Costs (107) (95) (88) (85) (86) EBITDA (330) (373) (299) (69) (83) EBITDA Margin -56.7% -53.2% -36.3% -7.7% -8.7% Dep. & Am. (326) (333) (369) (366) (375) EBIT (783) (656) (706) (668) (435) (458) Net Financing Expense (110) (150) (152) (221) (160) PBT (765) (856) (820) (657) (618) Provision for Zakat Net Income (930) (765) (856) (820) (657) (618) EPS (SAR) (0.66) (0.55) (0.61) (0.59) (0.47) (0.44) Source: Zain KSA, EFG Hermes estimates

12 ZAIN KSA FINANCIAL STATEMENTS Income Statement (December Year End) Revenue 505 3,004 4,413 5,567 6,696 COGS (489) (2,101) (2,325) (2,852) (3,294) Gross Profit ,088 2,715 3,402 GP Margin 3.2% 30.1% 47.3% 48.8% 50.8% Dist. & Marketing Costs (1,021) (1,574) (1,533) (1,508) (1,519) General & Admin. Costs (260) (376) (303) (331) (361) EBITDA (1,265) (1,047) ,522 EBITDA Margin % -34.9% 5.7% 15.7% 22.7% Depreciation & Amortisation (435) (1,391) (1,407) (1,439) (1,473) EBIT (1,700) (2,438) (1,156) (563) 50 Net Financing Expense (226) (634) (684) (766) (914) Earnings before Zakat (2,279) (3,071) (1,830) (1,309) (825) Zakat Net Income (2,279) (3,071) (1,830) (1,309) (825) Source: Zain KSA, EFG Hermes estimates Balance Sheet (December Year End) Cash ,164 1,095 A/R 318 1, ,220 1,468 Inventory Other CA Total Current Assets 1,182 1,850 1,499 2,772 2,969 PP&E (Net) 2,409 3,847 5,083 5,952 6,669 Intangibles (Net) 23,075 22,133 21,192 20,251 19,309 Total Assets 26,665 27,831 27,774 28,975 28,947 A/P 414 1,815 1,593 1,953 2,256 Vendor Financing 1,848 2, CPLTD 9,164-9, Shareholders Loans - CP ,914 - Other CL 1,350 2,822 2,963 3,111 3,267 Total Current Liabilities 13,090 6,789 14,306 7,979 6,023 Vendor Financing - - 3,750 2,500 1,750 Shareholders Loans 1,849 2,914 2,914-4,000 Murabaha Agreement - 9,494-13,000 12,500 Employee End of Service Total Liabilities 14,944 19,208 20,981 23,491 24,288 Share Capital 14,000 14,000 14,000 14,000 14,000 Retained Earnings (2,278) (5,378) (7,207) (8,516) (9,341) Net Worth 11,722 8,622 6,793 5,484 4,659 Source: Zain KSA, EFG Hermes estimates 12

13 ZAIN KSA Cash Flow Statement COPAT (1,265) (1,047) ,522 Change in WI 3,013 2,432 1,526 (1,015) (557) Cash Flow Post Chg in WI 1,748 1,385 1,778 (139) 965 Capex and Investments (25,226) (1,887) (1,702) (1,368) (1,248) Free Cash Flow (23,479) (503) 77 (1,506) (283) Net Financing 25,328 1, ,250 1,086 Interest and Others (574) (627) (673) (744) (872) Change in Cash 1,275 (50) (340) 999 (69) Source: Zain KSA, EFG Hermes estimates

14 EGYPT SALES TEAM Local call center Int l call center cc-hsb@efg-hermes.com UAE SALES TEAM call center uaerequests@efg-hermes.com KSA SALES TEAM call center RiyadhCallCenter@efg-hermes.com RiyadhTraders@efg-hermes.com RESEARCH MANAGEMENT Cairo General UAE General efgresearch@efg-hermes.com Head of Western Institutional Sales Mohamed Ebeid mebeid@efg-hermes.com Western Institutional Sales Julian Bruce jbruce@efg-hermes.com Deputy Head of Gulf Sales Ahmed Sharawy asharawy@efg-hermes.com Head of Research Wael Ziada wziada@efg-hermes.com Local Institutional Sales Amr El Khamissy amrk@efg-hermes.com Head of GCC Institutional Sales Amro Diab adiab@efg-hermes.com Head of Publ. and Distribution Rasha Samir rsamir@efg-hermes.com Gulf HNW Sales Chahir Hosni chosni@efg-hermes.com UAE Retail Sales Reham Tawfik rtawfik@efg-hermes.com DISCLOSURES We, Nadine Ghobrial and Marise Ananian, hereby certify that the views expressed in this document accurately reflect our personal views about the securities and companies that are the subject of this report. We also certify that neither we nor our spouses or dependants (if relevant) hold a beneficial interest in the securities that are traded in the Tadawul stock exchange. EFG Hermes Holding SAE hereby certifies that neither it nor any of its subsidiaries owns any of the securities that are the subject of this report. Funds managed by EFG Hermes Holding SAE and its subsidiaries (together and separately, "EFG Hermes") for third parties may own the securities that are the subject of this report. EFG Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. The authors of this report may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which they have no discretion. The Investment Banking division of EFG Hermes may be in the process of soliciting or executing fee earning mandates for companies that are either the subject of this report or are mentioned in this report.. DISCLAIMER This Research has been sent to you as a client of one of the entities in the EFG Hermes group. This Research must not be considered as advice nor be acted upon by you unless you have considered it in conjunction with additional advice from an EFG Hermes entity with which you have a client agreement. Our investment recommendations take into account both risk and expected return. We base our long-term fair value estimate on a fundamental analysis of the company's future prospects, after having taken perceived risk into consideration. We have conducted extensive research to arrive at our investment recommendations and fair value estimates for the company or companies mentioned in this report. Although the information in this report has been obtained from sources that EFG Hermes believes to be reliable, we have not independently verified such information and it may not be accurate or complete. EFG Hermes does not represent or warrant, either expressly or implied, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by EFG Hermes or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connection therewith. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This research report is prepared for general circulation to the clients of EFG Hermes and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any security. It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.

15 GUIDE TO ANALYSIS EFG Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and regional economic environment. Effective 16 December 2009, EFG Hermes changed its investment rating approach to a three-tier, long-term rating approach, taking total return potential together with any applicable dividend yield into consideration. In special situations, EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the corresponding fair value. For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms: Rating Potential Upside (Downside)% Buy Above 15% Neutral (10%) and 15% Sell Below (10%) EFG Hermes policy is to update research reports when appropriate based on material changes in a company s financial performance, the sector outlook, the general economic outlook, or any other changes which could impact the analyst s outlook or rating for the company. Share price volatility may cause a stock to move outside of the longer-term rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stock immediately. However, if a stock has been outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged to review the rating. COPYRIGHT AND CONFIDENTIALITY No part of this document may be reproduced without the written permission of EFG Hermes. The information within this research report must not be disclosed to any other person if and until EFG Hermes has made the information publicly available. CONTACTS AND STATEMENTS Background research prepared by EFG Hermes UAE Limited. Report prepared by EFG Hermes Holding SAE (main office), 58 Tahrir Street, Dokki, Egypt 12311, Tel Fax which has an issued capital of EGP 1,939,320,000. Reviewed and approved by EFG Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number , and EFG Hermes UAE Limited, which is regulated by the DFSA and has its address at Level 6, The Gate, DIFC, Dubai, UAE. The information in this document is directed only at institutional investors. If you are not an institutional investor you must not act on it. Bloomberg: EFGH Reuters pages: EFGS.HRMS.EFGI.HFISMCAP.HFIDOM efghermes.com