Zain stock jumps on earnings outlook

Shares in Kuwaiti mobile phone operator rise 5.5%, but analysts warn expansion costs may weigh on profit.

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By  Rania El Gamal Published  July 13, 2008

Shares of Kuwait's Mobile Telecommunications Co (Zain) jumped on Sunday on an upbeat earnings outlook, but analysts warned huge investments in expansion and stiff competition could weigh on profit this year.

The third-largest Arab telecom company by market value, which is embarking on a $4.5 billion capital increase, is spending billions of dollars to expand into new markets, including 14 in Africa and a new venture in Saudi Arabia.

Zain's stock, the largest in Kuwait, jumped as much as 5.5 percent on Sunday on volumes double their 90-day average after Zain CEO Saad Al-Barrak forecast 20 percent growth in first-half earnings before interest, taxes, depreciation and amortisation.

While the forecast in Al-Watan daily boosted the shares, Zain's stock has lost more than a fifth of its value this year, including a 6.1 percent decline since the start of June.

According to some analysts, Zain shares - which soared almost 74 percent last year - are still regarded as overvalued by investors. The stock closed at 1.54 dinars ($5.79) on Sunday.

"I see the risk of further downside for Zain's share price," said Omar Abu Rashed of Frankfurt-Trust, a German fund manager which sold its entire holding of Zain shares earlier this year.

Rashed, who manages a fund focusing on Gulf markets, said Zain was facing a greater competition in its biggest African markets, Sudan and Nigeria, as well as at home, where Saudi Telecom Co won a stake in a third mobile phone firm.

"Zain will see a margin squeeze," he said.

Credit Suisse, which has a price target of 2.11 dinars on the stock, said in April Zain's margins would remain under continued downward pressure due to a higher revenue contribution from Africa, where margins are lower than the Middle East.

Zain's profit-growth slowed to 2.7 percent in the first quarter, compared with rises of 15.5 percent and 10 percent at Emirates Telecommunications Corp (Etisalat) and Saudi Telecom, the two largest regional operators, respectively.

Zain, which led a group that paid $6.1 billion for the third Saudi mobile phone licence last year, is unlikely to begin reaping gains from its investments until 2009, analysts said.

The operator, in which the Kuwaiti government is the biggest shareholder, also spent $3.4 billion for Celtel in 2005 to enter sub-Saharan Africa.

"Short-term profitability will be under pressure no doubt," said Jithesh Gopi, head of research at Bahrain-based SICO.

Al-Barrak said in April he expects net profit to grow at least 5 percent this year, compared with a rise of 8.6 percent last year. The forecast is "reasonable", Gopi said.

Zain has more than doubled its investments in some of its African operations, viewing such investments as "critical to support customer growth", it said in a first-quarter earnings report.

But the longer-term benefits of holding the stock have hit the valuation of firm's shares this year. Zain shares trade at 14.6 times expected 2008 profit, according to data from newswire Reuters based on Thursday's closing price.

That compares with price-to-earnings ratios of 11.7 for stock of rival National Mobile Telecommunications Co (Wataniya), and 9.16 at Saudi Telecom.

"The continent which has the most potential going forward in the next five years is Africa, definitely," Rashed said. "But what worries me is the medium-term right now. Zain might face harder times in Africa."

As Zain's Saudi affiliate starts operations, the new revenues could turn the tables in Zain's favour next year, analysts added.

"This year will not see a significant growth on bottom line, but it should resume next year," said Simon Simonian, vice-president of research at Shuaa Capital. (Reuters)

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