Zain Q2 net falls, insists targets achievable

UPDATE 1: Quarterly net income of $557mn down 3.6% but full year predicted 5% ahead.

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By  Rania El Gamal Published  July 26, 2008

Kuwait's Mobile Telecommunications Co (Zain) said on Saturday it would stick to its goal of 5 percent profit growth despite a 3.6 percent fall in second-quarter net profit as expansion in the Middle East and Africa begins to weigh.

The third-largest Arab telecoms company by market value, which is about to launch a $4.5 billion capital increase and start operating in Saudi Arabia, made its first quarterly profit decline in a year, according to calculations by newswire Reuters.

Zain said in a statement net income in the first half was 148 million Kuwaiti dinars ($557.2 million) without providing quarterly data, and Reuters calculated second-quarter profit of 74.7 million dinars ($281.2 million) based on previous data posted on its web site.

Global Investment House forecast a net profit of 119.6 million dinars, according to a Reuters survey last month. Zain's profit contrasts with double-digit growth rates of Emirates Telecommunications Corp (Etisalat) and Saudi Telecom (STC), the two largest regional operators, as huge investments in new markets weigh.

But Zain's mobile phone subscriptions rose 58 percent to 50.74 million in the first half, while revenues rose 17 percent to 935.8 million dinars. Core profit EBITDA or earnings before interest, tax, depreciation and amortisation, rose 11 percent to 350.2 million dinars in the first six months.

Zain, which operates in 22 countries in the Middle East and Africa, has been spending billions of dollars to expand abroad as it faces competition from Saudi Telecom about to set up Kuwait's third mobile phone company.

In Saudi Arabia alone, Zain said it had committed to date investments of more than $1.5 billion. "All those investments... are hitting the bottomline," Group Chief Communications Officer Ibrahim Adel told Reuters, adding that Zain nevertheless would stick to its 2008 guidance.

Under the forecast unveiled in April, net profit would rise by 5 percent, while EBITDA would grow by more than 25 percent this year and revenue by 15 percent, he said.

For 2009, Zain confirmed the target of boosting net profit by more than 30 percent next year when the huge investments would start to pay off, Adel added.

"We have started to reap the rewards of our recent large investments particularly in Iraq, Nigeria and Sudan... and we expect similar rewards when our operations in Saudi Arabia and Ghana commence commercial operations," Chief Executive Saad Al-Barrak said in a statement.

He gave no details. But several analysts said the mobile operator, which also 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.

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

Barrak said Zain, which wants to be among the top 10 global players by 2011, will use its 1.21 billion dinars capital hike to fund its expansion and reduce borrowing costs. Subscription will take place between August 17 and Sept 18.

In dollar terms, quarterly profit rose by 4.9 percent in the second quarter to $281 million, which Adel attributed to a 9 percent dinar appreciation since Kuwait dropped a dollar peg in May 2007. Earnings per share were 53 fils per share in the first six months, the company said without giving comparative figures.

Shares of Zain, which plunged almost 20 percent this year, were up 2.6 percent on Thursday. The stock closed at 1.580 dinars valuing the company at 6.76 billion dinars.

Despite the slide, Zain is more expensive than other rivals, trading at 15.8 times expected 2008 earnings, compared with 11.37 for rival National Mobile Telecommunications Co (Wataniya) and 13.37 for Etisalat, according to Reuters data based on Thursday's closing prices. (Reuters)

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