CFA Research Challenge Zain Bahrain BSC

BIBF Student Research

ABSTRACT

Valuation of Zain Bahrain BSC

2

STUDENT RESEARCH DATE:-18/2/2015

TICKER: ZAINBH

CURRENT PRICE: .198 BD

PRICE TARGET: .241BD

RECOMMENDATION: BUY (21.17% UPSIDE)

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TABLE OF CONTENTS

Serial Number Topic Page Number

1 Business Description 4

2 Industry Overview 6

3 Investment Summary & Risk

Analysis

7

4 Valuation 10

5 Appendix #1- SOFP forecasts

#2-CSI forecasts

#3-FCFE calculation

#4-Comparables analysis

#5- Calculation of Target Price

#6- Ratio analysis

#7-Board of Directors &

shareholding structure of the

company

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4

BUSINESS DESCRIPTION Zain telecommunication is one of the leading mobile telecommunications

provider in the Middle East and North Africa.

The company began back in 1983 in Kuwait; it started as the regions first

mobile operator, which was known as MTC Mobile Telecommunications Company.

Zain has grown rapidly In both the middle east and Africa. The company operates in

Bahrain Kuwait, Iraq, Saudi Arabia, Jordan, Sudan, South Sudan; and in Lebanon as

touch (under a management contract). Zain is also listed in the Kuwait Stock

Exchange, there are no restrictions on Zain shares as the company’s capital is 100%

free float and publicly traded. The largest shareholder is the Kuwait Investment

Authority with a 24.6% stake.

Zain Bahrain B.S.C was established on 19th

of April 2003 under its previous name

MTC Vodafone Bahrain B.S.C. Zain Bahrain is a closed joint stock company with its

headquarters and operations in the country. As a leading telecommunication operator,

they offer state-of-the-art fixed and fixed mobile telecommunication services which

includes voice, video, SMS and MMS, high speed data connectivity and VAS service

to post paid and prepaid customers. With its IMTL, ISP, and NFWS license, Zain

Bahrain has the authority since 2003 to constitute a public telecommunication

network and operate a 2G and 3G telecommunication network in the county in

addition it was authorized to provide public internet service on a non exclusive basis.

The NFWS license enabled the company to offer fixed wireless services serving

residential as well as business customers. In 2004 Zain Bahrain established its own

international facilities to carry international calls. In 2006 they introduced HSDPA

service to boost their service speed, starting 2001 to 2012 they worked on upgrading

their network infrastructure. In 2013 they introduced a forth generation technology

known s 4G LTE to speed up their data offering. By the end of the same year their

mobile market share represented around 33% and their annual year revenue totaled

BHD 78081000 with a profit of BHD 5403000.

The company’s vision is “to deliver on the promise of a wonderful world;

empowering people, businesses and com munities we serve through an inspiring a

digital life style experience.” The core business is driven by delivering cutting edge

and innovative products and services focusing on four strategic pillars : 1) customer

experience 2) business growth 3) operational effectiveness and 4)people development.

Competitive strength

Advance network infrastructure: the company owns state-of-the-art advanced network

infrastructure and they currently support 2G 3G 3.5G and 4G LTE services. To

flexibly grow their subscriber base offer high-speed data connectivity and provide

enterprise solutions to corporate users.

Licenses.

Strong brand positioning and recognition: the key objective of zain Bahrain is to

convey their brain in a positive and proactive manner to differentiate them from their

competitors. They are rated number one in the Arab world for intellectual property;

number nine amongst the top 50 brands in the MENA region; number 73 by brand

finance, the global brands tracker.

Strategic partnership: they created strategic partnership such as apple, Samsung, and

blackberry to fulfill customers demand and generate efficiency throughout the

organization. One of their most crucial partnerships is with Vodafone, providing Zain

Bahrain customers with great support and Vodafone’s global footprint.

5

Diversified product portfolio Relationship with the parent company: it enables the company to benefit from the

parent company’s technical expertise and commercial know-how in the mobile

telecommunication networks.

Culture of new innovative products and services

Strong distribution network and partner relationship: it has 22 branded stores and

around 2800 point of sale enabling the company with distribution channel across the

country.

Experienced management team.

Products and services

They offer a diversified range of prepaid, post paid broad band and enterprise

services.Post paid: smart phone plans including smart plans, iPhone plans, and

blackberry plans, family share plans, hewar voice plans, post paid data, blackberry

and voice add ons, corporate plans, and signature plans. Prepaid: Easy talk.

Broadband: home broad band, 4G LTE broad band, and mobile broad band including

postpaid mobile broad band and prepaid mobile broad band. Other services:

international roaming, content services portal, self care mobile application, and Zain

wallet. Enterprise solutions: private branch exchanges, leased band width, dedicated

internet, and data center hosting.

Management and governance

Corporate governance framework: it defines and formulates the company’s

objectives, how to monitor risk, and how the performance is evaluated. Zain Bahrain

CG-Framework is base on 3 main pillars. 1) Accountability; to guarantee shareholders

rights. 2) Fairness; to ensure that all shareholders are being treated equally. 3)

Transparency; to define accurate disclosures on all matters.

Board committees

The board committee’s members have limited authority therefore they cannot replace

the whole board in their decision-making tasks.

To build an affective CG-Framework the board started to initiate two board

committees; 1) audit committee, which is responsible about financial matters risk

management and internal control of the operations . 2) nomination and remuneration

committee, which is responsible about decision making regarding the evaluation of

the boards performance.

Compensation policy

The compensation is annually approved by shareholders, the estimated amount to be

paid to all directors at the end of 2014 is BHD 252000.

For management and employees, the compensation seam is build to motivate

employees and diverse their skills. The packages may include basic salaries, fringe

benefits, bonuses and differed benefit compensation. For non Bahrainis they receive

leaving indemnity which is calculated with regards to the Bahraini law at the

termination of employment.

Employee share ownership and options

There are no stock option plans of shares scheme for neither management nor

employees and there is no plan in study to introduce such plans in the future.

However, there are no restriction or limitations for employees to subscribe for the

offered shares in the offering

6

INDUSTRY OVERVIEW

Porter’s five forces

Competitor’s Rivalry Analysis

1. Fixed line (moderate): Customers usually stick to the first fixed line

they get, so there’s low risk in shifting to another telecommunication

providers.

2. Mobile (high risk): Very high due to the fact that there are three firms

– Zain, Batelco and Viva – competing with each other by all means.

3. Internet (high risk): Internet providers are even more than mobile

providers, which make the competition even more intense.

Buyer power Buyer power is very high given the fact that customers now are well informed

about the other competitors, and can easily find information about other

telecommunication providers, making it a lot easier to compare and contrast,

and then choose one based on preference.

Supplier power (moderate)

Zain has a few companies that they get their supply for; supply for things

such as mobile towers, wires, cables, mobiles and sim cards.

Threat of substitutes (high risk)

The threat of substitutes is relatively high, but it all depends on the buyer’s

propensity to the substitute, relative prices and performance of substitutes.

Threat of new entry (moderate)

The threat of new entries in the telecommunication market in Bahrain is

moderate, due to the fact that Bahrain is a very small country and the three

already available telecommunication companies are handling the citizens just

right. In addition to that, this certain market is an oligopoly market, meaning

only a few companies can serve in it, and choosing to enter is going to come

with very high costs, and a lot of legal government barriers will block the way

or make it harder. However, the TRA is pursing liberalization to the

telecommunication market, so now it’s not as hard to enter as it was prior to

that.

Other Notes

There were about 246,000 fixed lines in Bahrain, showing a penetration rate of

19% at the end of Q3 of 2014.

The total mobile subscriptions in Bahrain was 2.41 million and a penetration

rate of 183%, at the end of Q3 in 2014.In the same period, the penetration rate

for Zain Bahrain was 185%.

The last available figure for mobile market share was 33% at Dec 31st 2013.

The ARPU of Zain Bahrain was 7.54BD at the end of Q3 2014.1

1 Source: TRA http://tra.org.bh/media/document/2014%20Telecommunications%20Markets%20Indicators%20Report%20-%20Public%20version.pdf

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INVESTMENT SUMMARY & RISK ANALYSIS

From our valuations we derive that the targeted share price of Zain Bahrain

BSC is BD .241 which is higher than the current price of BD .198. Therefore, we

propose a buy recommendation (refer to appendix #5).

Zain Bahrain BSC employs advanced technologies to provide reliable services to its

customers. The company has a history of being the first to introduce new forms to

telecom services in the country. The services that it provides are available to the entire

population of Bahrain, and offers services that are tailored to business needs as well.

The company has a significant market share of 33% in Bahrain. The company has a

strong brand positioning and recognition. They are rated number one in the Arab

world for intellectual property; number nine amongst the top 50 brands in the MENA

region; number 73 by brand finance, the global brands tracker.

We believe that the future of the company looks bright and that the prospects of

growth are good and will result in increased value for its shareholders.

Risk That Zain Bahrain Can Face

The telecommunication industry is a highly competitive industry with high

risks. The Bahraini telecommunication industry used to be a monopoly market, in

which Batelco was the only company dominating the market. Back in April 2003,

Zain entered the Bahraini market, becoming the second operator, and now has up to

748,000 subscribers.

There are four types of threats that a company competing in such market can face like

the strategic threats, compliance threats, operational threats and the financial threats.

To be specific, the strategic threats are the threats that Zain can face from

stakeholders such as customers, investors and competitors. Moving on to the

compliance threats, which are threats that Zain can face from the rules and regulations

of the country, the law, and politics. The operational threats on the other hand are the

threats that affect the system of Zain, processes and people. Finally, the financial

threats are the threats that affect the real economy and are the ones that include the

volatility of the market, inflation and interest rates.

General risk

First of all the, Zain can face risks and difficulties when converting the business

model from minutes to bytes as the usage of minutes became less than the usage of

bytes, and Zain as an operator have to shift to such strategy, as it is the demand of the

customers.

Second, since the technology cycle and trend is changing nowadays, Zain might face

difficulties in changing the mindset of their consumers. As a reaction, Zain must

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respond quickly to the behavior and expectations of their consumers, as there are

other networks in the Bahrain market that are considered to be a threat to Zain.

Third, since the Bahraini market is considered to be an emerging market, the risk

proposition is considered to be higher than the risk in the markets such as the

developed market. In which such markets create lower risks while investing in

securities in comparison to the emerging markets and are more stable allowing

businesses to practice and operate normally. Due to the market type, Zain can face

economic, social and political risks more such as the following:

General country or regional political, social or economic instability;

Acts of warfare, terrorism or civil unrest;

Specific government intervention in business operations – e.g.

protectionism for, or subsidizing, competing businesses; and

Changes in regulatory environment (which may result in difficulties in

obtaining new permits and consents for the Company’s operations or

renewing existing ones).

Accordingly, all Applicants are urged to consult with their own legal and

financial advisors before making an investment in the Shares, and

Applicants should exercise particular care in evaluating the risks involved

and must consider those risks in deciding whether an investment in the

Shares is appropriate. 2

Risk Related To The Company

Zain Bahrain operates in the Bahraini market and generates the revenue from this

market, and it is expected that the market will remain to generate the majority of

Zain’s revenue. Thus the growth of the company depends mainly on the Bahraini

economy, on their ability to attract new customers, on updating their existing

networks and services and launch new services.

When the Bahraini economy go through a downturn, Zain Bahrain’s operations would

get affected and their financial conditions too. Applications available nowadays such

as Whatsapp and Viber has became the preferences of many customers, in which such

applications are affecting the usage of traditional communication such as sms and

phone calls. Such shift affects the erosion in the voice and text message revenue

streams of traditional telecommunication of Zain Bahrain. In addition to that, Zain

Bahrain’s success is depending on how successful the marketing department in

attracting various consumers as there are two other companies competing in the same

market. Prices and products should be considered with precautions, the product and

pricing strategies of their competitors should be analyzed and studied in depth, the

affect of new entrants like a new telecommunication company on the performance of

Zain and the shift in consumer preferences and changes in economic, political and

social conditions in Bahrain. These points affect the performance of the company as

they can enhance the performance of Zain enabling it to be the pioneer

telecommunication company in the Bahraini market.

2 Source: 108 ZAIN BAHRAIN B.S.C.(c) PROSPECTUS

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Financing Risk

According to Zain, “The Company may not generate or obtain funds sufficient to

make the necessary or desirable capital expenditure and other investments required to

grow its business. The telecommunications industry is characterized by substantial

amounts of capital and other long-term expenditures, including those relating to the

development and acquisition of new networks and the expansion or improvement of

existing networks. In the past, Zain Bahrain has financed these expenditures through a

variety of means, including internally generated cash flows, external borrowings and

capital contributions. In the future, Zain Bahrain expects to utilize a combination of

these sources to meet its financing requirements”

Funding and financing the operations of Zain depend on many factors such as Zain’s

future financial condition, general economic and capital markets conditions, interest

rates, credit availability from banks or lenders, investor confidence in Zain, applicable

provisions of securities laws and political and economic conditions.

Economic risks

The contribution of the oil sector to Bahrain’s GDP continues to be substantial despite

the Government’s successful and continuous diversification policies. Fluctuations in

oil prices, in particular material declines in such prices, could have a direct adverse

impact on the Bahraini economy and the economic activity. Such impact may

adversely affect companies operating in Bahrain, including the Company.

Investment Risk

Regarding the IPO, it was mentioned in Zain Bahrain’s website that “The Parent

Company will hold the largest shareholding block (201,600,000 shares out of

368,000,000 or 54.78% equity) in Zain Bahrain post IPO and with its significant

shareholding and Management Agreement may influence the outcome of important

decisions relating to the Company’s business.” The prices of the shares will be

volatile, as it will depend on the fluctuations in the securities market, such

fluctuations might have a positive or a negative impact on Zain’s investment.

Moving on, Zain can face investment risks when going public (IPO), as there might

be lack of confidence by the public in the return of the investment, in which they

might find it difficult to have faith in the return they will receive per share. This is due

to the competition between the three-telecommunication companies operating in the

Bahraini market. Zain must show the general public their commitment in growth and

the development of their technology and consumer products to certify the fact that

they will invest the money efficiently and gain retur

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Valuation

For our valuation, we took the weighted average of the results 2 models; the

discounted free cash flow model and a comparables analysis model. The stock value

that we derived as a result was BD .241. Here we explain the basis of our valuations.

Free cash flow to equity

For forecasting the Free Cash Flow to Equity, we forecasted the Statement of Profit

and other Comprehensive Income as well as the Statement of change in financial

position for five years. The stock value derived from this model is BD .255. Here we

discuss the rates applied in this model:-

1. The WACC of 9.5% used in the discounting of the free cash flow to Equity

was the mid-level domestic WACC provided by the TRA 3

.

2. We assumed a terminal value of 3%.

3. The revenue growth rate was assumed to be 5%. This was based on historical

growth rates; they rose and fell in the 5 years preceding 2014 and so assuming

5% in our opinion is a safe assumption. Also, the fact that we even assume

that there would be growth in revenues in because the company has used

almost all the proceeds from its recent IPO in financing the expansion of their

network and the upgrading of their existing infrastructure which, rationally,

would increase their revenues in the long run.

4. Other rates used in the forecasting the line items were assumed by primarily

looking at the historical trends.

Refer to appendix for the SOFP and SOCI forecasts as well as the FCFE calculation.

Comparable analysis

We used regional companies for this analysis, some being listed on the stock

exchange like Zain Bahrain BSC and others which have similar size. We used Price to

Equity and Price to Book Value for this valuation. The stock value derived from this

valuation model is BD .2266.

Refer to appendix for comparables valuation.

3 Source : TRA

http://www.tra.org.bh/media/document/MCD02130182013CostofCapitalDeterminationfinal.pdf

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Appendix

#1- SOFP forecasts

Balance sheet

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

ASSETS X1000 X1000 X1000 X1000 X1000 X1000 X1000 X1000 X1000 X1000 X1000

Current assets

Cash and bank balances 19,740 18,097 5,238 1,766 3,156 2,974 3,033 3,233 3,126 3,054 3,021

Accounts and other receivables 25,035 19,111 21,554 19,930 20,644 20,934 21352.68 21779.734 22215.328 22659.635 23112.83

Inventories 2,407 2,625 2,601 1,595 2,971 2,128 2191.84 2257.5952 2325.3231 2395.0827 2466.94

Total current assets 47,182 39,833 29,393 23,291 26,771 26,036 26,577 27,270 27,667 28,109 28600.62

Non-current assets

Property, plant and equipment 41,139 46,309 49,848 53,310 61,367 69,806 73296.3 76961.115 80809.171 84849.629 89092.11075

Intangible assets (Note1) 7,754 8,096 10,155 15,412 19,166 15,940 16258.8 16583.976 16915.656 17253.969 17599.048

Total non-current assets 48,893 54,405 60,003 68,722 80,533 85,746 89555.1 93545.091 97724.826 102103.6 106691.1588

Total assets 96,075 94,238 89,396 92,013 107,304 111,782 116,133 120,815 125,391 130,213 135,292

LIABILITIES AND EQUITY

Liabilities

Current l iabilities

Bank overdraft 0 0 839 9,271 0 0

Accounts payable and accruals 24,450 26,442 25,466 23,684 29,166 25,669 26952.45 28300.073 29715.076 31200.83 32760.87143

Current portion of term loans 2,585 0 0 0 3,286 6961 3500.1333 3258.2472 2793.0689 2149.3724 1314.904805

Deferred revenue 4,377 4,144 3,950 4,749 4,769 4,529 4891.32 5282.6256 5705.2356 6161.6545 6654.58686

Finance lease obligations 127 0 0 0 0 0

Total current liabilities 31,539 30,586 30,255 37,704 37,221 37,159 35343.903 36840.945 38213.381 39511.857 40730.36309

Non-current l iabilities

Non-current portion of term loans 311 0 0 0 16,714 14971 17500.667 16291.236 13965.345 10746.862 6574.524024

Provision for employees’ end of service benefits 317 272 314 273 330 323 339.15 356.1075 373.91288 392.60852 412.2389447

Total non-current liabilities 628 272 314 273 17,044 15,294 17839.817 16647.343 14339.258 11139.471 6986.762968

Total liabilities 32,167 30,858 30,569 37,977 54,265 52,453 53183.72 53488.289 52552.638 50651.327 47717.12606

Equity

Share capital 32,000 32,000 32,000 32,000 32,000 36,800 36,800 36,800 36,800 36,800 36,800

Share premium 100 100 100 100 100 3032 3032 3032 3032 3032 3032

Statutory reserve 4,781 6,968 8,272 8,913 9,453 9,867 10064.34 10265.627 10470.939 10680.358 10893.96529

Treasury shares 0 0 0 0 0 -305

Treasury shares reserve 0 0 0 0 0 1

Retained earnings 27,027 24,312 18,455 13,023 11,486 9,934 13,053 17,229 22,536 29,049 36,849

Total equity 63,908 63,380 58,827 54,036 53,039 59,329 62,949 67,327 72,839 79,561 87,575

Total liabilities and equity 96,075 94,238 89,396 92,013 107,304 111,782 116,133 120,815 125,391 130,213 135,292

forecastsHistorical figures

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#2- Statement of Comprehensive Income forcasts

Statement of Comprehensive Income Growth

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

X1000 X1000 X1000 X1000 X1000 X1000 X1000 X1000 X1000 X1000 X1000

Revenue 93,016 88,882 77,021 73,533 78,081 71,804 75394.2 79163.91 83122.11 87278.21 91642.12 5.00%

Cost of revenue -21,038 -20,437 -22,108 -16,250 -16,304 -14,306 -14592.1 -14884 -15181.6 -15485.3 -15795 2.00%

Gross profit 71,978 68,445 54,913 57,283 61,777 57,498 60802.08 64279.95 67940.46 71792.94 75847.14

Distribution, marketing and operating expenses -26,152 -25,309 -20,286 -22,100 -24,597 -22,958 -23417.2 -23885.5 -24363.2 -24850.5 -25347.5 2.00%

General and administrative expenses -7,312 -7,255 -4,601 -6,492 -6,225 -5,767 -5853.51 -5941.31 -6030.43 -6120.88 -6212.7 1.50%

Depreciation and amortisation -10,450 -14,175 -15,770 -20,877 -24,320 -21,799 -22453 -23126.6 -23820.4 -24535 -25271 3.00%

Provision for doubtful debts -388 -295 -2,013 -1,336 -1,513 -1,491 -1513.37 -1536.07 -1559.11 -1582.49 -1606.23 1.50%

Provision for inventories -24 -24 -72 -72 -120 -233 -242.32 -252.013 -262.093 -272.577 -283.48 4.00%

Operating profit 27,652 21,387 12,171 6,406 5,002 5,250 7322.76 9538.499 11905.27 14431.54 17126.23

Interest income 343 287 144 27 8 29 30.45 31.9725 33.57113 35.24968 37.01217 5.00%

Other income 297 31 489 8 610 127 152.4 182.88 219.456 263.3472 316.0166 20.00%

Other expenses -543 0 0 0 0 0

Gain on currency revaluation 155 226 243 176 104 64 65.92 67.8976 69.93453 72.03256 74.19354 3.00%

Finance costs -530 -59 0 -208 -321 -785 -1334.5 -1467.95 -1614.75 -1776.22 -1953.84 10.00%

Profit for the year 27,917 21,872 13,047 6,409 5,403 4,142 6237.03 8353.3 10613.48 13025.95 15599.61

Total comprehensive income for the year 27,917 21,872 13,047 6,409 5,403 4,142 6237.03 8353.3 10613.48 13025.95 15599.61

Pre-IPO EPS 0.872 0.684 0.408 0.200 0.169 0.113

Post-IPO EPS Equivalent 0.087 0.068 0.041 0.020 0.017 0.013 0.017 0.023 0.029 0.035 0.042

Growth -0.21653 -0.40348 -0.50878 -0.15697 -0.23339

Post-IPO EPS Equivalent Adjusted for the fine 0.014641

-3118.52 -4176.65 -5306.74 -6512.97 -7799.81 Dividends

Historical Figures Forecasts

14

#3- FCFE calculation

2015 2016 2017 2018 2019

x1000 x1000 x1000 x1000 x1000

6,237.00 8,353.00 10,613.00 13,026.00 15,600.00

22,453.00 23,127.00 23,820.00 24,535.00 25,271.00

1,755.68 1,788.08 1,821.20 1,855.07 1,889.71

1,334.50 1,467.95 1,614.75 1,776.22 1,953.84

(30.45) (31.97) (33.57) (35.25) (37.01)

Loss on property, plant and equipment written off

31,750.00 34,704.00 37,836.00 41,157.00 44,677.00

(1,932.00) (1,963.00) (1,995.00) (2,072.00) (2,059.00)

(306.00) (318.00) (330.00) (342.00) (355.00)

1,283.00 1,348.00 1,415.00 1,486.00 1,560.00

362.00 391.00 423.00 456.00 493.00

31,157.00 34,162.00 37,349.00 40,730.00 44,315.00

16.15 16.96 17.81 18.70 19.63

31,173.15 34,178.96 37,366.81 40,748.70 44,334.63

(25,943.00) (26,791.00) (27,668.00) (28,575.00) (29,513.00)

30.45 31.97 33.57 35.25 37.01

(319.00) (325.00) (332.00) (338.00) (345.00)

(26,231.55) (27,084.03) (27,966.43) (28,877.75) (29,820.99)

- - - - -

304.00 - - - -

(1,334.50) (1,467.95) (1,614.75) (1,776.22) (1,953.84)

(2,921.00) (3,975.00) (5,101.00) (6,304.00) (7,586.00)

(931.00) (1,451.00) (2,791.00) (3,862.00) (5,007.00)

(4,882.50) (6,893.95) (9,506.75) (11,942.22) (14,546.84)

59.10 200.98 (106.37) (71.27) (33.20)

2,974.00 3,033.00 3,233.00 3,126.01 3,054.25

3,033.10 3,233.98 3,126.63 3,054.74 3,021.05

Period

Net (decrease) / increase in cash and cash equivalents

Cash and cash equivalents at beginning of the year

Cash and cash equivalents at end of the year

Net payment for treasury shares

Interest paid

Dividend paid

Term loans

Repayment of capital element of finance lease

Net cash (used in) / from financing activities

Interest received

Increase in intangible assets

Proceed from sale of property, plant and Equipment

Net cash used in investing activities

Cash flows from financing activities:

Net proceeds from issue of shares

Cash Flow

Cash generated from operating activities

Payment of employees’ end of service benefits

Net cash from operating activities

Cash flow from investing activities:

Purchase of property, plant and equipment

(Increase) / decrease in accounts and other receivables

(Increase) / decrease in inventories

(Decrease / increase in accounts payable and accruals

Increase / (decrease) / in deferred revenue

Interest income

Finance costs

Provision for doubtful debts and slow moving inventories

Provision for employees’ end of service benefits

Operating profit before working capital changes

Insurance claim

Gain on disposal of property, plant and equipment

Depreciation and amortisation

Adjustments for:

Profit for the year

Cash flows from operating activities:

Valuation

Period 2015E 2016E 2017E 2018E 2019E Terminal

FCFE 4,011 5,643 6,610 8,008 9,507 9791.84569

= 103072

Discount rate 9.5% 1.095 1.199025 1.312932 1.437661 1.574239

3662.68 4706.339173 5034.167 5570.172 71513.09

= 90486.4

Stock Value= 0.255

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#4- Comparables Analysis

Company P/E P/B

STC 12 2.18

Du 10.7 3.18

Etisalat 10.7 2.15

Wataneya 11.2 0.93

Zain Kuwait 12 1.43

VIVA Kuwait 9.8 7.89

Oridoo 14.1 1.47

OmanTel 10.5 2.43

Batelco 11.8 1.03

Average 11.42222 1.66

Zain Bahrain 17.5 1.22

Zain EPS - Excluding

the fine Zain BV

0.0127 0.185

0.145 0.308

Stock Value= 0.241

16

#5- Calculation of Target Price

Model Price Weightage Result

DCF 0.255 50% 0.127

comparables 0.226 50% 0.113

W. Avg. 0.241

17

#6 Ratio analysis

Zain ratio analysis Analyzing the financial ratios has given us an understanding to the performance of Zain Bahrain on the basis of historic trends. For our research, understanding these past fluctuations in ratios has been a crucial factor in deciding the rates at which we forecast the growth over a 5 year period for the business. For our ratio analysis, we looked at the historical trends from 2009 up to 2014. One by one, we have explained the different financial ratios.

Profitability ratios:-

Gross profit margin:- From 2009 to 2011, we see that the GP margin is decreasing; going down sharply during 2011. After that we see a sharp rise from 2011 to 2012 and from that point till 2014 we see the margin increases consistently.

Periods 2009 2010 2011 2012 2013 2014

Gross profit Margin 77.382 77.007 71.296 77.840 79.119 80.076

Operating profit margin:- From 2009 to 2013, we see that the OP margin is decreasing; going down sharply during 2012. The decline in the OP margin stops at 2013, after which we see it rising during 2014. The operating profit margin has been above the global average of 15.09% till 2011 and after that the margin has decreased below that average.

Periods 2009 2010 2011 2012 2013 2014

operating profit

margin 29.728 24.062 15.802 8.712 6.406 7.312

0

50

100

150

200

250

2009 2010 2011 2012 2013 2014

ROE

ROTA

NP Margin

OP Margin

GP Margin

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Net profit margin:- We see a consistent fall in the NP margin from 2009-2014. However, the margin has always been above the global average of 5.24%.

Periods 2009 2010 2011 2012 2013 2014

Net profit Margin 30.013 24.608 16.940 8.716 6.920 5.768

Return on Total Assets:- Here also we see a consistent decline in the ratios. However, we see that the ratios of 2013 and 2014 remain equal and we interpret that this could be a turning point.

periods 2009 2010 2011 2012 2013 2014

Return on Total

Assets 29.058 23.209 14.595 6.965 4.662 4.697

Return on Equity:- We see a consistent fall in the ROE from 2009-2014. The ROE has, however been higher than the global average of 8.84% always and in 2014 the figure equaled the global average.

Periods 2009 2010 2011 2012 2013 2014

Return on Equity 43.683 34.509 22.179 11.861 9.431 8.849

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Capital Gearing ratios:-

Debt ratio:- The overall changes in the debt ratio has been inconsistent; rising and falling continuously.

Periods 2009 2010 2011 2012 2013 2014

debt ratio 2.987 3.054 2.924 2.423 1.977 2.131 Debt to equity ratio:- The overall changes in the debt to equity ratio have been inconsistent; rising and falling continuously. From the debt to equity ratios, we see that from 2009 to 2011 the company’s leverage was below the global average of 66.59%. However, we see that the leverage had gone above the global average during 2012 and continued to worsen over the following two years.

Periods 2009 2010 2011 2012 2013 2014

debt to equity ratio 50.333 48.687 51.964 70.281 102.312 88.410

Times interest earned:- We see that the ratio increased sharply in 2010 and there were no finance costs in 2011. After 2011, we see the ratio decreasing consistently. The company’s interest cover has decreased after 2011 but nevertheless; it is still above the accepted minimum of 1.5.

Periods 2009 2010 2011 2012 2013 2014

times interst earned 52.174 362.492 nil 30.798 15.583 6.688

0.000

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

2009 2010 2011 2012 2013 2014

Debt

Debt to Equity

Times interest earned

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Efficiency ratios:-

Inventory turnover ratio:- Over the period between 2009 to 2014, we see that the inventory t/o ratio has never been consistent; rising and falling throughout the 5 year period.

Periods 2009 2010 2011 2012 2013 2014

Inventory t/o ratio 8.740 7.786 8.500 10.188 5.488 6.723

Accounts receivable turnover ratio:- Same as the inventory t/o ratio; we see that the accounts receivable t/o ratio has never been consistent; rising and falling throughout the 5 year period.

Periods 2009 2010 2011 2012 2013 2014

a/r turnover ratio 3.715 4.651 3.575 3.690 3.782 3.430

0.000

2.000

4.000

6.000

8.000

10.000

12.000

2009 2010 2011 2012 2013 2014

Inventory t/o

Accounts receivable t/o

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Solvency ratios:-

Current ratio:- The current ratio, over the 5 year period has been falling consistently.

Periods 2009 2010 2011 2012 2013 2014

Current Ratio 1.496 1.302 0.972 0.618 0.719 0.701

Quick ratio:- Over the 5 year period, the quick ratio had been declining from 2009-2012. The ratio starts to increase from 2013 and continues to do so in 2014.

Periods 2009 2010 2011 2012 2013 2014

Quick (Acid Test)

Ratio 1.420 1.217 0.886 0.575 0.639 0.643

Based on these ratios the company has been exposed to liquidity risks from 2011 onwards and the risk has only increased from that point onwards, although the quick ratio of 2014 suggests that there could be an improvement in the liquidity of the company from that point on; nevertheless it’s still below 1.

0.000

0.200

0.400

0.600

0.800

1.000

1.200

1.400

1.600

2009 2010 2011 2012 2013 2014

Current Ratio

Quick(acid test) ratio

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#7- Board of Directors

Name Designation Status

Shaikh Ahmed Bin Ali Al

Khalifa

Chairman Chairman of the board of

DHL international Bahrain

WLL, DHL aviation WLL,

and MENA aerospace

enterprises WLL

Mr Asaad Ahmed Al-Banwan Deputy chairman Member of the board of

directors of several

regional and international

companies, vice chairman

kazma sports club

Shaikh Rashid Abdulrahman Al

Khalifa

Director Managing director Mi’mar

architecture and

engineering, registered

member of the COEPP, the

American institute of

architects and the

American planning

association.

Mr Waleed A. M. Al -Roudan Director Represent the KIA on the

boards of companies,

board member of the

parent company, chairman

of the board EK holding

and member of the

supreme commission.

Mr Jamal Shaker Al Kazemi Director Board member of the

parent company, CEO and

chairman of Shakir al

Kazemi and sons,

chairman of Al Arabi

sporting club, board

member of al ahli united

bank, and vice chaireman

of Marsa Alam Holding

Company

Ms Shaikha Khalid Al-Bahar Director CEO and board member of

National Bank Of Kuwait,

chairman of NBK,

Lebanon, Al-assema

realestate co, Kuwait and

the audit comitte of

international Bank of

Qatar, board member of

International Bank of

Qatar, National Bank of

Kuwait international,

terkish bank, NBK global

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Shareholding Structure of Zain Bahrain BSC

asset management LTD,

Intra Investment Co.SAL,

Lebanon and a member of

the board of trustees of the

Kuwait University collage

of business administration