cfa investment research challenge university of bahrain
TRANSCRIPT
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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
BD 0.198
Products and Services• Postpaid• Prepaid• Broadband• Enterprise Services TRA
Market Share
35%
Business Description
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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
Recommendation Business Description
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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
Internet
Fixed Line
Mobile
0 500000 1000000 1500000 2000000 2500000
Telecom Subscribers
2013201220112010200920082007
Growth in Data Subscribers and Revenues
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
-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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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%
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
Dividend Discount Model (DDM)
Discounted Cash Flow Model (DCF)
BD 0.226
BD 0.287
BD 0.250Target Price
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
BD 0.140 BD 0.226DDM price
BD 0.287DCF price
BD 0.416
Sector Comparable Model
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
Current market price
BD 0.198
Target priceBD 0.250
IPO price BD 0.190Undervalued
Recommendation Business Description
Industry Analysis
Risk Analysis
Financial Analysis Valuation
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)
Dividend Discount Model (DDM)
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
Dividend Discount Model (DDM)
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