Kuwait Zain shares drop after Q2 profit disappoints

Rumours of takeover denied by company lead to short-lived surge.

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By  Ulf Laessi Published  July 27, 2008

Mobile Telecommunications Co (Zain) shares fell on Sunday after Kuwait's biggest mobile phone operator posted its first decline in quarterly profit in a year. Zain stock, the third most-heavily traded on the Kuwaiti index, bucked a gain on the benchmark, shedding 2.53 percent after the firm's second-quarter profit eased 3.6 percent. Shares of Zain had surged 5.1 percent, or 100 fils, early in the trading session after daily Al-Watan reported the company had received a takeover offer from a global investor of 2.80 dinars. The paper gave no source.

But Zain shares took a hit after the firm said it had not received any official offer to buy a stake, with investors turning their attention to a quarterly decline in profit as costs of expansion into Saudi Arabia and Africa took their toll. The stock closed at 1.54 dinars. "Zain's profits will be under pressure in the short term because of the costs of expansion in various markets, but it is set for good growth in the longer term," said Jithesh Gopi, head of research at SICO investment bank.

"When investors see a decline in profits while other companies are reporting growth and during a good macroeconomic environment, it is not taken well by the market," he said. Trading volumes in Zain hit 9.1 million shares, more than double the 90-day average, according to data from newswire Reuters.

Zain said on Saturday it was on track to boost net profit by 5 percent this year and more than 30 percent next year. But the firm could face further pressure on profits later this year as Saudi Telecom Co (STC) begins Kuwait's third mobile phone operator, said Naser Al-Nafisi, general manager at Al-Joman Centre for Economic Consultancy.

"(STC is) very aggressive even in their home country and will take market share from Zain," Al-Nafisi said. "Maybe the next quarter will be even worse... Zain is expanding but it will take time for this to pay off." Zain Saudi Arabia, an affiliate of the Kuwaiti operator, is gearing up to start the kingdom's third operator next month - another venture that is demanding investments.

Zain led a group that paid $6.1 billion for the third Saudi mobile phone licence last year. A flurry of speculation that a Saudi investor was eyeing 10 percent of Zain led investors to pile into the stock last year - a key factor behind Zain's 74 percent surge in 2007. The stock has tumbled about 22 percent this year.

"I think this is not realistic," Al-Nafisi said of Al-Watan's Sunday report, adding that some shareholders may have leaked the news to support the stock in the wake of the quarterly profit. Zain said any stake sale would be a shareholder decision.

Family-owned conglomerate Kharafi Group owns 12.5 percent of Zain, having boosted the stake this year through one of its units, according to bourse data. Kharafi Group said last year any stake sale would happen in concert with other shareholders. Kuwait's sovereign wealth fund, the Kuwait Investment Authority, holds 24.6 percent of Zain. (Reuters)

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