EUR 22.09 For Business Accounts Only

ZAINKSA AB | Remain sellers as potential improvement in financial position priced-in; Hike TP by 14%

Current valuation reflects improvement in cost of financing. Zain KSA’s general assembly approved a 23% capital reduction, with the stock trading scheduled to reopen on 13 October, with a price of SAR16.3/share, implying a 2021e EV/EBITDA of 6.50x, higher than the EM peer average of 5.80x, despite its low 2020-22e EBITDA CAGR. In our view, this comes on: i) the stock’s expected upgrade to the MSCI Standard Index, on 15 October, ii) reversals of provisions, inflating EBITDA margins, and iii) the potential drop in cost of debt, post the planned capital increase. Our TP stands at SAR12.0/share, post the capital decrease. This should drop to SAR11.5/share, post the capital increase, to reflect the new number of shares, as we already account for the enhanced financing cost, offering a potential downside of 12.5%, on our figures, post the capital increase market price.
 
Raise TP by 14%; Maintain Underweight. The higher TP comes on the lower cost of debt, as a result of the SAR3.9bn refinancing of the Murabha facility and capital restructure, to 4.9% from 5.6%, and higher margins, in line with our expectation of a healthier revenue mix. We assume a 2020-25e revenue CAGR of 4.2%, mainly on data revenue growth, as Zain KSA benefits from the infrastructure sharing for the fixed BB business, and continues to expand its 5G network, growing mobile BB. This reflects a downgrade to our previous revenue estimates, as 1H20 results were negatively impacted by COVID-19 (revenue down 5.4% y-o-y), signalling lower quality of subs.  
 
Capital increase dilutive yet essential. The proposed capital increase is dilutive, in our view, yet needed to settle part of the company’s 2Q20 debt of SAR17bn. Zain KSA plans to raise SAR4.5bn in new capital, to deleverage, through issuing 1:1 450mn shares, leading to a total number of shares of 899mn and a total capital of SAR8.99bn. This has been approved by the regulatory authorities, and awaiting the general assembly’s approval, on 14 October.
 
Towers deal remains an upside, yet not a game changer. In Jul-20, the company announced that the formed joint committee with Mobily [Underweight | TP SAR19.5] has completed the request for proposal (RFP) to potential investors for a possible towers deal, yet no updates have been disclosed since then. We expect the proceeds, if any, to be used in settling part of the debt, yielding positive results, but the magnitude will depend on the terms of the deal and the leasing payments the company will bear to use the towers. Accordingly, we do not expect a major impact.