cfa investment research challenge university of bahrain

CFA Investment Research ChallengeUniversity of Bahrain

Market Profile

Date as of: 20-02-2015Listed on Bahrain Bourse (Ticker) ZAINBH

Price range since listing BD 0.204 – BD 0.190

Floating rate 28.79%

Shares outstanding 368M

Market Capitalization (BD)

72.8M

P/E ratio 15x

Earnings Per Share (BD) 0.013

Uses of Raised Funds (IPO)1)Upgrading infrastructure.2)Expanding 4G LTE.3)Adopting nation wide fiber-optic.4)Corporate uses.

28.79%54.78

%

16.1%0.33%

Shareholder structure

Zain GroupFloating sharesShaikh AhmedShaikh Rashid

Introduction

Recommendation Business Description

Industry Analysis

Risk Analysis

Financial Analysis Valuation

BUYMovement toward data

Strong Brand name

Zain Group

Corporate social responsibility

Upside Potential by 26.3% Current

Price

BD 0.250

Recommendation

Target Price


Industry Analysis

Risk Analysis


BD 0.198

Products and Services• Postpaid• Prepaid• Broadband• Enterprise Services TRA

Market Share

35%

Business Description


Industry Analysis

Risk Analysis


Establishment

First 3G network in the region

2003

Achieved it first positive net profit

2005

First nationwide WiMAX network is launched

2007

Introduced new network from

Ericsson

Listed on Bahrain Bourse

2014


Industry Analysis

Financial Analysis Valuation Risk

Analysis

Company Milestones

Source: TRA

2007 2008 2009 2010 2011 2012 2013E0

200

400

600Telecom sector revenues (in BD million)

Macro Overview about BahrainMain economic problems:• High debt to GDP ratio of around 50% in 2014.• The global reduction in Oil prices in 2014 and Q1 of

2015.• Unsettled domestic politics.• Unemployment, mainly among the youth.

Contribution to the GDP:Although Kingdom Bahrain is oil dependent for its Country budget, the country is openly diversifying its economy.• Non- Oil 74% , including 4% to the telecom industry.• Oil 26%.

Source: CIO

Industry Analysis Contribution to GDP


Industry Analysis

Risk Analysis


Oil

Non-Oil

0% 10% 20% 30% 40% 50% 60% 70% 80%

26%

70% 4%

Cont. to GDP

Key Industry Characteristics• Power of Rivalry: Competitive and saturated industry. ( Batelco and Viva)• Power of Supplier: Companies have Low product and service differentiation. • Power of New Entrant: High entry barriers, capital-intensive and high fixed costs. • Power of Substitute: Same products and services with quite similar quality and

prices.• Power of Buyer: Moderate, consumers preferences are highly changing toward

VOIP.

Power of Supplier

Power of Rivarly

Power of BuyerPower of New Entrant

Power of Subsitute

0

5

Government backed

2010

Strong entrant since

2010


Industry Analysis

Risk Analysis


Weaknesses• Dependence on prepaid

customers.• Regulations from TRA and

any future changes.

Threats• Increased local competition.• Future technological

changes.

Strengths• Well known brand name.• Social Responsibility

activities.• Regional Partnerships• State of the art technology

Opportunities• Expand mobile networks in

The Middle East.• Expand the current 4G LTE.• Expand the infrastructure

SWOT Analysis


Industry Analysis

Risk Analysis


2008 2009 2010 2011 2012 20130

5

10

15

20

25

30

35

4035

32.2

28.426.8

21.9

9.8

1210.8 9.8 9.9

8.47.5

7.5 6.5 5.8 6.35.2

4.6

Prepaid subscribersAll subscribersPostpaid subscribers

BD p

er m

onth

Telecommunication Industry ARPU

Source: TRA


Industry Analysis

Risk Analysis


Internet

Fixed Line

Mobile

0 500000 1000000 1500000 2000000 2500000

Telecom Subscribers

2013201220112010200920082007

Growth in Data Subscribers and Revenues


Industry Analysis

Risk Analysis


Mobile Fixed Line Internet0%5%

10%15%20%25%30%35%40%45%50%

Growth of retail services revenues 2009 -2013

2009 2010 2011 2012 2013

Source: TRA

Source: TRA

Categories:1) Company Operational 2) Litigation and Regulations3) Economic 4) Public Offering

Low Medium High

Low

Med

ium

Hig

h

Impa

ct

Probability

Conflict of Interest

Distribution Channels

TRA

Parent Company

Research & Development

Client Abundance

Technological Environment

Economic Performance

(OTT) Operators

Risk Analysis


Industry Analysis

Risk Analysis


2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Mobile Interconnection Fixed Wireless Others

Financial analysis


Industry Analysis

Risk Analysis


2012A2013A

2014A2015E

2016E2017E

2018E2019E

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

0%

5%

10%

15%

20%

25%

Total Revenues Net profit margin

Revenues Growth

Net Profit Margin

2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E3,0008,000

13,00018,00023,00028,00033,00038,00043,00048,00053,00058,00063,00068,00073,00078,000

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Total Revenues EBIDA margin


Industry Analysis

Risk Analysis


-10,000

0

10,000

20,000

30,000

40,000

50,000

0

10000

20000

30000

40000

50000

60000

Total Debt cash flows

EBITDA margin Vs Total Revenues

Healthy Cash Flows


Industry Analysis

Risk Analysis


2013A 2014A 2015E 2016E 2017E 2018E 2019E0

10,000

20,000

30,000

40,000

50,000

60,000

capex Opex

Spending

0.05

0.55

1.05

1.55

Dividend per share and payout ratio

Dividends


Industry Analysis

Risk Analysis


2013A 2014A 2015E 2016E 2017E 2018E 2019E0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

-4.16333634234434E-170.050.10.150.20.250.30.350.40.450.50.550.6

Total Assets Total Equity leverage

Strong Equity Position

Valuation

Approaches used

Dividend Discount Model

Sector Comparable

Model

Discounted Cash Flow Model


Industry Analysis

Risk Analysis


Assumptions Zain Beta 0.5

Cost of Debt 2.95%

Weight of Equity 63%

Weight of Debt 37%

WACC 6.84%

Marginal Tax Rate 0%

Risk Free Rate

6.13%

Cost of equity9.12%

Risk Premium

5.97%

Growth(g)1%


Industry Analysis

Risk Analysis


Dividend Discount Model (DDM)

Discounted Cash Flow Model (DCF)

BD 0.226

BD 0.287

BD 0.250Target Price


Industry Analysis

Risk Analysis


BD 0.140 BD 0.226DDM price

BD 0.287DCF price

BD 0.416

Sector Comparable Model


Industry Analysis

Risk Analysis


Current market price

BD 0.198

Target priceBD 0.250

IPO price BD 0.190Undervalued


Industry Analysis

Risk Analysis


Conclusion

Strong Brand Name

Movement toward data

Zain Group

Corporate Social Responsibility

BUY

Thank you for your Attention

Appendices

Beta Calculation

Beta of Comparable Companies Levered Beta Debt/Equity Unlevered Beta

Zain Saudi Arabia 1.1 206% 0.4Batelco Bahrain 0.8 30% 0.6Mobily Saudi Arabia 1.0 87% 0.5DU UAE 0.7 57% 0.5Ooredoo Kuwait 0.5 16% 0.4Median 0.5

Beta

Zain Bahrain ZAINBH BI Equity 0.6 37% 0.5

Equity Risk Premium

Year Return Dividend Yield Total Return Value of 100

2011 (20.1%) 100.00

2012 (6.8%) 4.6% (2.2%) 97.79

2013 17.2% 3.9% 21.1% 118.38

2014 14.2% 4.8% 19.0% 140.88

Geometric Average Return 12.10% 12.10%

Risk Free Rate 6.133% 0.1

Risk Premium 5.97% 5.97%

Equity Risk Premium

Discounted Cash Flow Model (DCF) 2015E 2016E 2017E 2018E 2019E

EBITDA 25,197 25,017 25,084 25,183 25,281Add: depreciation 16,432 17,249 11,174 11,727 12,308 less: Net Capital expenditure -7442 -9644 -13245 -15241 -20465Less: Increase in Working capital 11605 10383 12458 3424 -4892FCFF 22,582.50 22,237.78 10,554.13 18,244.87 22,016.43 1 2 3 4 5PV discounting factor 0.9360 0.8761 0.8200 0.7676 0.7184 discounted cash flows 21,137 19,483 8,655 14,004 15,817 NPV of FCF 79,096 WACC 0.0684terminal growth 0.01Capitalization rate 0.058enterprise value 89,318 less: total debt 12637Cash 28184

equity value 104,864.61 # shares 364960price per share 0.287

Discounted Cash Flow Model (DCF)


2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020 onwards ( grow at 1% )

Div/share 0.547 0.347 0.199 0.017 0.005 0.013 0.012 0.021 0.028

PVDF 0.897 0.804 0.721 0.647 0.580

PV(Div/share) 0.005 0.011 0.008 0.014 0.016

D (1+g) 0.029

Divided by: Capitalization rate

0.095

Equals: Terminal value 0.305

PV of terminal value 0.177

TARGET PRICE/SHARE 0.226


Shares Net Income Book Value SalesZain Bahrain 2014 Total (BD 000s) 332,000 4,142 59,329 71,804

Per Share (BD) 0.012 0.179 0.216

Share Price based on ComparablesLow 0.140 0.184 0.229

Median 0.146 0.210 0.321High 0.216 0.249 0.416

Range 0.140 - 0.416

Comparables P/E P/B P/SZain Saudi Arabia N/A 1.3 1.1Batelco Bahrain 11.7 1.1 1.5Mobily Saudi Arabia 125.7 1.4 1.7DU UAE 11.2 3.0 1.9Ooredoo Kuwait 17.3 1.0 1.1Low 11.2 1.0 1.1Median 11.7 1.2 1.5High 17.3 1.4 1.9** Yellow shaded indicates excluded due to being an outlier

Sector Comparable Model

STATEMENT OF COMPREHENSIVE INCOME 2013A 2014A 2015E 2016E 2017E 2018E 2019E BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 Zain Revenues Mobile 60,974 54,877 50,486 48,467 47,498 47,023 46,552Interconnection 3,331 2,898 2,608 2,791 3,070 3,377 3,714Fixed Wireless 6,993 7,692 8,385 9,055 9,599 9,983 10,382Others 6,782 6,511 6,315 6,189 6,127 6,066 6,005Total revenues 78,081 71,804 67,795 66,502 66,293 66,448 66,654Cost of revenue -16,304 -14306 -14237 -13965 -13922 -13954 -13997Gross profit 61,777 57,498 53,558 52,537 52,372 52,494 52,657Gross profit Margin 0.79 0.80 0.79 0.79 0.79 0.79 0.79Distribution,marketing and operating expenses -24,597 -21016 -20,616 -20,551 -20,599 -20,663 -21,016General and administrative expenses -6,225 -5,152 -5,054 -5,038 -5,050 -5,066 -5,152Depreciation and amortization -24,320 -16,432 -17,249 -11,174 -11,727 -12,308 -16,432Provision for doubtful debts -1,513 -1,219 -1,113 -1,069 -1,071 -1,074 -1,219Provision for inventories -120 -281 -168 -216 -264 -312 -281Operating profit 5,002 9,457 8,337 14,324 13,783 13,234 9,457Interest income 8 30 23 15 10 7 30Other income 610 140 154 169 186 205 140other Expenses - -513 -503 -501 -502 -504 -513Gain on currency revaluation 104 156 153 152 153 153 156Finance costs -321 -475 -373 -234 -163 -115 -475Profit for the year 5,403 8,795 7,791 13,925 13,467 12,980 8,795

Statement of Comprehensive Income

STATEMENT OF FINANCIAL POSITION 2013A 2014A 2015E 2016E 2017E 2018E 2019E BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 ASSETSCurrent assets Cash and bank balances 3,156 2,974 15,109 28,184 35,773 39,011 34,449Accounts and other receivables 20,644 20,934 19,660 17,956 17,236 17,276 17,330Inventories 2,971 2,128 1,424 1,397 1,392 1,395 1,400Total current assets 26,771 26,036 36,193 47,536 54,401 57,683 53,179Non-current assets Property, plant and equipment 61,367 69,806 60,799 53,195 55,266 58,781 66,938Intangible assets 19,166 15,940 14,551 11,801 9,105 7,118 5,817Total non-current assets 80,533 85,746 75,350 64,996 64,372 65,898 72,755Total assets 107,304 111,782 111,544 112,532 118,773 123,581 125,933LIABILITIES AND EQUITY Liabilities Current liabilities Bank overdraft - - 1,120 1,420 478 14 573Accounts payable and accruals 29,166 25,669 23,031 23,781 23,707 23,762 23,836Current portion of term loans 3,286 6,961 6,511 6,511 1,949 2,205 1,946Deferred revenue 4,769 4,529 4,746 4,655 4,641 4,651 4,666Finance lease obligations - - - - - - -Total current liabilities 37,221 37,159 35,408 36,367 30,774 30,632 31,020Non-current liabilities Non-current portion of term loans 16,714 14,971 8,460 4,706 5,514 3,309 1,363

Provision for employees’ end of service benefits 330 323 208 258 252 253 253Total non-current liabilities 17,044 15,294 8,668 4,964 5,766 3,562 1,616Total liabilities 54,265 52,453 44,075 41,331 36,540 34,194 32,637Equity Share capital 32,000 36,800 36,800 36,800 36,800 36,800 36,800Share premium 100 3,032 3,032 3,032 3,032 3,032 3,032Statutory reserve 9,453 9,867 10,747 11,526 12,918 14,265 15,563Retained earnings 11,486 9,934 16,889 19,843 29,483 35,291 37,902Total equity 53,039 59,329 67,468 71,201 82,233 89,388 93,297Total liabilities and equity 107,304 111,782 111,543 112,532 118,773 123,581 125,933

Statement of Financial Position

STATEMENT OF CASH FLOWS 2013A 2014A 2015E 2016E 2017E 2018E 2019E BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 Cash flows from operating activities: Profit for the year 5,403 4,142 8,795 7,791 13,925 13,467 12,980Adjustments for: Depreciation and amortization 24,320 21,799 16,432 17,249 11,174 11,727 12,308Gain on disposal of property, plant and equipment - - - - - Insurance claim -470 - - - -

Provision for doubtful debts and slow moving inventories 1,633 1,724 1,063 1,043 1,040 1,042 1,046Finance costs 321 785 475 373 234 163 115Interest income -8 -29.0 -30 -23 -15 -10 -7Provision for employees’ end of service benefits 62 61 37 46 45 45 46(Gain )Loss on property, plant and equipment written off 65 -40 - - - - Operating profit before working capital changes 31,326 28,442 26,773 26,479 26,403 26,434 26,487(Increase) / decrease in accounts and other receivables -1,757 -1,781 -1,578 -1,705 -719 40 54(Increase) / decrease in inventories -1,496 610 -704 -27 -4 3 4(Decrease / increase in accounts payable and accruals 5,420 -3,184 -2,638 750 -75 55 74Increase / (decrease) / in deferred revenue 20 -240 217 -90 -15 11 14Cash generated from operating activities 33,513 23,847 22,070 25,407 25,590 26,544 26,633Payment of employees’ end of service benefits -5 -68 -208 -258 -252 -253 -253Net cash from operating activities 33,508 23,779 21,862 25,149 25,338 26,291 26,380Cash flow from investing activities: Purchase of property, plant and equipment -18,875 -16,919 -7,442 -9,644 -13,245 -15,241 -20,465Interest received 8 29 30 23 15 10 7Increase in intangible assets -17,321 -10,056 0 0 0 0 0proceed from sale of PPE - 3 - - - - Net cash used in investing activities -36,188 -26,943 -7,412 -9,621 -13,230 -15,231 -20,458Cash flows from financing activities: Net proceed from Issue of share - 7,732 Interest paid -291 -702 -475 -373 -234 -163 -115Dividend paid -6,368 -5,676 -1,840 -4,837 -4,285 -7,659 -10,369Term loans 20,000 1,932 2,757 0 Repayment of capital element of finance lease Net cash (used in) / from financing activities 13,341 2,982 -2,315 -2,453 -4,519 -7,822 10,484Net (decrease) / increase in cash and cash equivalents 10,661 -182 12,135 13,075 7,589 3,238 -4,562Cash and cash equivalents at beginning of the year -7,505 3,156 2,974 15,109 28,184 35,773 39,011Cash and cash equivalents at end of the year 3,156 2,974 15,109 28,184 35,773 39,011 34,449

Statement of Cash Flows

RATIO ANALYSIS 2013A 2014A 2015E 2016E 2017E 2018E 2019EEfficiency Ratios: Total Assets Turnover 0.73 0.64 0.61 0.59 0.56 0.54 0.53Fixed Assets Turnover 1.01x 0.82x 0.88x 0.99x 0.95x 0.89x 0.79xDays Accounts Receivables 96.50 106.41 105.85 98.55 94.90 94.90 94.90Days Accounts Payable 564.00 553.77 138.26 163.18 156.57 147.55 129.97Accounts Receivables Turnover 3.78 3.43 3.45 3.70 3.85 3.85 3.85Profitability Ratios: Return on Assets 5% 4% 8% 7% 12% 11% 10%Return on Equity 10% 7% 13% 11% 17% 15% 14%Net Profit Margin 7% 6% 13% 12% 21% 20% 19%Net Debt/EBITDA 57% 73% 4% -62% -111% -133% -121%Gross Profit Margin 79% 80% 79% 79% 79% 79% 79%EBITDA Margin 38% 36% 37% 38% 38% 38% 38%Liquidity Ratios: Current Ratio 0.719 0.701 1.02 1.31 1.77 1.88 1.71Cash Ratio 0.085 0.080 0.43 0.77 1.16 1.27 1.11Solvency Ratios: Total Liabilities/Equity Ratio 102% 88% 65% 58% 44% 38% 35%Long-term Debt to Total assets 16% 13% 8% 4% 5% 3% 1%Interest Coverage Ratio 102 37 53.08 -67.11 -107.08 -154.43 -220.76Per Share Data: EPS (BD) 0.169 0.013 0.02 0.02 0.04 0.04 0.04DPS (BD) 0.199 0.017 0.01 0.01 0.01 0.02 0.03Book Value Per Share (BD) 1.66 0.16 0.18 0.19 0.22 0.24 0.25

Ratio Analysis

cfa investment research challenge university of bahrain

Documents

g network

oil prices

saturated industry

telecom industry

oil dependent

non oil

power of new entrant

future changes