Mobile Telecommunications Company K.S.C.P. (ZAIN) Earnings Call Transcript & Summary

Greetings, ladies and gentlemen. Thank you for standing by. Welcome to today's Zain Group Q3 2021 Results Conference Call. [Operator Instructions] By now, you should have received the company's presentation and earnings release for the third quarter and detailed financials, which have all been uploaded on the group's website. Now without further delay, I would like to hand the call over to Mohammad Abdal, Zain Group Chief Communication Officer. Thank you. Please go ahead.

Thank you, John, and welcome, everyone, to Zain's third quarter 2021 earnings conference call. Joining us today will be Ossama Matta, our Group CFO; Mohammed Shereef, the Group Head of Finance; Iyadh Borgi, our Group Operations & Business Performance Director, along with Aram Dehyan, our group Investor Relations Director. In a moment, we'll take you through the IR presentation, which has been posted earlier today on our corporate website. And after that, we're happy to answer any questions you may have. During the call, we will be making forward-looking statements which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Please refer to our detailed cautionary statement found on Slide 2. With that, I'll now hand over the call to Ossama.

Thank you, Mohammad. Good afternoon to everyone, and thank you for joining us on today's call. Zain continues to support [indiscernible] to get another successful quarter as you see to make solid progress towards our core site strategy, digital transforming and the expansion of our 4G, 5G and FTTH networks ready for the next phase of growth. 2021 witnessed excellent growth in digital revenue across our markets with data revenue reaching over $1.6 billion, which represents 42% of consolidated revenues. Moreover, our focus on B2B solutions witnessed a 16% year-on-year growth. We continue our focus on digital strategy, of monetizing the infrastructure and the group API platform through compelling initiatives and packages for governments, businesses, IoT, smart-city sectors that attracted key clients across our footprint and gaming, entertainment, fintech, lately insuretech and eHealth services. On the 12th of October 2021 the ordinary general assembly approved distribution of an interim cash dividend of $0.10, totaling $143 million as part of the 33 fils per share annual minimum dividend policy reset in 2019. This distribution that was completed just last week represented Zain as the first premier listed entity to distribute biannual dividends. Operationally, Zain of course had an excellent performance during the third quarter, increasing their bottom line. Even more impressive is that Sudan, despite severe devaluation of the currency, had an exceptional performance in SDG terms, as well as the new [ SDG ] terms when compared to the same period in 2020. Management is taking concrete steps to mitigate the currency devaluation impact in Sudan and in Iraq, including revamping of prices and offering new digital services and packages to individual and enterprise customers to capitalize on the comprehensive 4G rollout. Now I would like to start by briefly touching upon the operational highlights of the quarter. We added customers to end at 48.4 million customers, which dropped by 1% due to the end of management agreement with touch Lebanon back in October 2020. In Lebanon, we had the last year approximately 2.3 million customers. We took many initiatives to revamp packages and prices to mitigate the FX impact in Sudan and in Iraq in response to a 19% currency devaluation in December '20, then Iraq launched a massive commercial revamp program. In Sudan, we have revamped tariffs, including international. Voice was up by 300% and data by 200% following the devaluation in currency in February 2021. On the fintech side, excellent growth in every single market, 36% growth year-on-year. Zain KSA full-fledged CITRA compliance microlending platform, Tamam, having 160,000 registered users has grown substantially over the last 9 months. Zain Cash Jordan signed an agreement with Western Union for international remittance. It also secured the approval of the Central Bank of Jordan to process credit card solutions. Zain Sudan signed an agreement with Visa to become the exclusive card issuer directly or via licensed bank. Then Bahrain, the Central Bank of Zain Bahrain endorsed our request to acquire a license to deliver a full value proposition in Bahrain. And in South Sudan, Zain partnered with M-Gurush for wallet and e-payment services across the country. Customers grew by 60% over the last 9 months to reach 325,000. On the TowerCo update, Zain KSA, we received a $807 million nonbinding offered from the PIF, which was announced last quarter. And we are currently in the process of the due diligence. Also, Zain Jordan's tower company transaction is close to finalization. We expect this in Q4 of this year. While the similar transaction with Zain Iraq is progressing, and we expect this first half of 2022. On Zain Ventures, we are excited by the recent creation of Zain Ventures, formulating Zain entrepreneurial start-up related investment under a single entity and obtaining the door to future investment opportunities in the venture capital, fintech and data calls. Zain Ventures recently invested in Pipe.com, a trading platform to accelerate their growth across Middle East. The growth of Zain eSports continues with the entity holding 16 tournaments since the beginning of the year with over 18,000 participants and attracting over 35 million social media impressions. Zain grew application program interface, which is the API platform, enabling faster deployment of digital partnerships continues to grow exponentially, offering 32 live services resulting in a robust 43% year-on-year increase in revenue and 70% year-on-year increase in API transactions per month. Moving into the third quarter financial highlights from starting at Page 15. Despite the major currency devaluation in 2 of our key markets, we reported stable revenue of $1.3 billion, while EBITDA for the quarter increased 3% compared to Q3 2020 to reach $557 million, reflecting a healthy EBITDA margin of 43%. This positive performance is mainly from increase in revenues across our operations, except Iraq and Sudan, on account of currency devaluation, cost optimization across the group and lower expected credit loss, ECL, on account of healthier acquisitions, better collection and improvement in overall macroeconomic factors. Net income for the quarter increased by 5% to reach $165 million, reflecting earnings per share of $0.04 to the dollar, or $0.11. The net income increased due to the previously mentioned factors, coupled with the significant savings in the finance cost across the group through better negotiations on the financial terms. For Q3 2021, foreign currency translation was impacted mainly due to currency devaluation in Sudan from SDG 55 to the dollars in January 2021 to SDG 439 end of September 2021. And the 19% currency devaluation in Iraq, from IQD 1,190 to the dollar to IQD 1,470, costing the group approximately $251 million in revenues on $152 million in EBITDA. Excluding the above FX translation impact, revenue growth would have been 14% and EBITDA growth would have been 27%. CapEx on Page 16. The group continued to invest at healthy levels across operations. We reached year-to-date a total of $665 million. This represents 18% of revenue on 5G rollout coupled with FTTH, 4G expansion and spectrum license fees in key markets. As you see on the slide, the majority of intangible CapEx is coming from the grant of 4G, the renewal of 2G and 3G licenses in Iraq and the renewal of the 900 megahertz license in Jordan. Our debt profile, which is on the following page, on Page 17, the group continues to maintain a healthy cash flow with total debt reducing by 2% in KWD terms compared to September 2020. And net debt to EBITDA currently stands at 2.4x. This includes leases. If we exclude leases, the net debt to EBITDA will be at 2.2x. It is worth to mention that the finance cost decreased by 26% compared to prior year due to the reduction in interest rate and better negotiations with lenders. Moving to the OpCo, which is Slide 22, we start with Kuwait. Then Kuwait remains the most profitable company within the group and maintain its market lead in terms of both value share and customer base, serving 2.3 million customers. Its market leadership in all key financial indicators is highlighted by its revenue, representing 39% of the total market revenue and 73% of the industry's net income during the 9 months 2021. Q3 was a post-COVID recovery period for the country, and the country started to open up, reflecting positively on the economy. For Q3 2021, revenue reached $263 million, which came lower by 3% compared to previous years, mainly due to the lower trading revenue due to the bulk sale of smartphones that happened in Q3 2020. Bulk sales last year was approximately KWD 4.5 million and it was sold at cost. EBITDA for quarter increased 6% due to cost optimization initiatives as well as a healthy customer acquisition, which translated into better collections and lower ECL. This resulted in net income for the quarter growing by 4% year-on-year. During the quarter, the operator witnessed in impressive growth in both 5G, mobile and broadband customers, capturing the largest 5G market share in the country. The operation invested $56 million, which represents 7% of the revenue in CapEx during the 9 months 2021. B2B segment with the government is active now in Q3 as several RFPs and tenders were released recently, and we are confident of capturing a sizable share of this. We believe that then Kuwait's leadership in 5G will continue to reap lucrative rewards from the consumer market, together with the ever-growing demand from B2B and government businesses. We go to Slide 23, which is Saudi Arabia. Zain KSA is committed to the continuous development of its network and services in order to achieve the best customer service experience for individuals, private sector and government institutions. Zain KSA continuing its 5G expansion journey with 4,765 covering 51 cities, maintaining its leading position and ever-increasing 5G customer base. For Q3 2021, revenues increased by 3% to reach $530 million, highlighted by the strong performance of B2B revenue, Yaqoot, which is Zain KSA's digital operators, and Tamam, the consumer micro financing arm. EBITDA for the quarter increased by 5% year-on-year to reach $215 million with a strong EBITDA margin of 41%, mainly due to top line performance as well as healthy acquisitions, which translated into better collections resulted in lower ECL. The CITC waiver agreements has been concluded in December 2020. If we exclude the waiver that we got last year and we compare it to this year, the growth would have been 16%. Net income for the quarter was stable year-on-year at $16 million due to one-off gains on modification of financial liability. This is the accounting term of it, and it amounts to $36 million. This is related to the MSA refinancing that happened last year. There was onetime gain that has been booked in Q3 2020, approximately $36 million. Zain KSA invested $88 million, 6% of revenues on CapEx during 9 months 2021 that supported the 19% increase in data traffic. So data revenue representing 49% of total revenues. Zain KSA witnessed a 7% growth in customers and now serves 7.5 million customers. Slide 24, which is in Iraq, I would like to start on a positive note, despite when we look at the performance of Zain Iraq is a little bit shy. To highlight the fact that we have exceeded the 1 million 4G subscribers since the launch of 4G in early 2021. As we mentioned earlier, regarding the huge impact of the unavoided currency devaluation in Iraq, it has been -- the currency has been devalued by 19% against the dollar. This has impacted the overall economy of Iraq, and it's also impacting the purchasing power in the country. It is unfortunate that factors beyond our control have impacted the operation, but the management is taking concrete steps to mitigate the impact, including revamping of prices and offering new digital services and packages to individuals, B2B customers to capitalize on the comprehensive 4G rollout. Customer base increased by 5% to reach 16.5 million customers. Zain Iraq is the largest contributor of Zain Group's total customer base. Overall, revenue impacted by 19%, due to the previously mentioned the Iraqi economic factors. Also, EBITDA for the quarter decreased by 20%. The operator invested $409 million in CapEx during 9 months. Out of which, $148 million related to the 4G license. So Zain Jordan, which is Slide 25. That remains the market leader with its customer base growing 4% year-on-year and now serving 3.7 million customers. Revenue for the quarter grew by 3% year-on-year mainly due to increase in broadband and FTTH revenue on account of increased work-from-home requirements. EBITDA grew by 20% on account of the top line performance and improved collection, maintaining a remarkable margin of 53%. Notably, net income for the quarter increased by 23%. CapEx in Jordan amounted to $207 million in 9 months 2021. CapEx was mainly spent on the renewal of the 900 megahertz, technology neutral license and fiber expansion. The 4G network customer base witnessed a 24% increase year-on-year, with the FTTH base increased over 53% in terms of the base and 97% in revenues. Zain Cash in Jordan continues to maintain its position in the market as the largest mobile financial service provider in Jordan. 370,000 mobile wallet accounts, an impressive 36% year-on-year growth. It has been rapidly expanding its portfolio to cover more services and verticals and managed to lead the processing of disbursements for the government's financial aid program with a value exceeding JOD 100 million. Notably, Zain Jordan recently received approval to offer credit solutions. In Sudan, which is Slide 26, as we mentioned earlier, on February 21, 2021, the Central Bank of Sudan revised its exchange rate policy from fixed pay to flexible managed floating rate. Accordingly, the SDG devalued from SDG 55 to SDG 439 to the dollars as of September 2021. With a leading customer market share of 49%, Zain Sudan was able to further improve its market position by reporting customer growth of 3% to reach 16.4 million customers, and this represents 34% of the total group customer base. Revenue for the quarter dropped by 19% because of the devaluation. EBITDA decreased by 6% to achieve $41 million, while net income jumped by 54% to reach $31 million. Year-to-date net income for the 9 months grew by 104% on dollar terms. Zain Sudan invested $27 million in CapEx for its 4G rollout, and this represents 11% of the 9-month revenue. Finally, which is Slide 27, Zain Bahrain. For Q3 2021, Zain Bahrain generated revenues of $41 million, up by 3% year-on-year. EBITDA for the period increased by 2% to $15 million, reflecting an EBITDA margin of 37%. Net income increased 4% to [ $4.2 million, $4.30 million. ] Data revenue with a growth of 5% represents 47% of total revenues of Zain Bahrain, and Bahrain is focused on continuing expansion of 4G and 5G infrastructure to enhance its home broadband services. Just one thing to note, that VAT is expected, the value-added tax, is expected to increase in Bahrain from 5% to 10% effective January 1, 2022. With that, I will hand over to Mohammad Abdal for Q&A. Thank you.

Thank you, Ossama. With that, John, we can move to the Q&A session. [Operator Instructions] Thank you.

[Operator Instructions] We will take our first question from Ziad Itani of Arqaam Capital.

Just a couple of questions from our end. First, looking at the Saudi subsidiary, it seems that there is still pressure on service revenue, but growth is coming in from device sales. They're up 25% in the 9 months. What's the reason behind that? And when can we expect service revenues to start to recover especially that you mentioned that there is growth coming in from the B2B segment? Here, I'm basically referring to the notes of the financial statement. This is where the figures come from. The second question is also on the ECL reversal. There's a reversal of provisions to the -- I mean we have a positive figure of KWD 2.7 million, so where is this coming from? Is it mainly the Kuwaiti market? I think there's technical difficulties because we can't hear.

Caller, if you would like to repeat your question.

Okay. I'll repeat the question. Yes. So the first question is basically on the Saudi operations. It seems that there's a strong growth coming in from device sales in the 9-month period, up 25% to KWD 46 million. What's driving this growth? And also, why are you still seeing pressure on service revenues down 4.5% year-on-year despite improved mobility in the market as well as B2B awards? And the second question is mainly on ECL. We've seen a positive figure for Q3, specifically of KWD 2.7 million, so what is the magnitude of the reversal in total? And it's attributed to which market? Is it mainly coming in from Kuwait?

Thank you for the question. Regarding the performance of Saudi, the performance mainly coming to -- the excellent performance is mainly coming from B2B and the 5G services. If we look at the details of the revenue, we see some pressure on the prepaid and some pressure also on the postpaid 4G, which been compensated by the 5G service. Now the reason on the prepaid is because of what's happened in the market in [ KSA ] sales, whether it's on the COVID and on the expat leaving, but now with the economy is opening up. And hopefully with Hajj and Umrah things will be better. And also, as I mentioned before, we have some issues on the distribution side on the prepaid, which has been fixed. So we have seen lately growth in terms of the prepaid. And we have good marketing moves happening in Q4 of this year. On the ECL, the better performance in terms of collections and better macroeconomic conditions has led to a better ECL as compared to last year. There are some of the reversals but not significant. But ECL has been, because of the better collections in Kuwait, in KSA as well as in Jordan has led to better provision [indiscernible].

Okay. So just to follow up on that point specifically, with regards to the Saudi market, so the B2B segment and the financial statement that's being considered part of trading income? If I refer, for example, to Page 17 or if you search for it, Page 19 out of 25.

B2B, it's not trading. B2B has grown significantly in Saudi. This is one of the sales revenue that is growing in Saudi. Also another one which is related to the growth in Yaqoot. Now Yaqoot has grown significantly, which is the digital operator. Iyadh, you have anything to add?

If I may add to some regarding the B2B. So your question is not with the trading revenue. However, we have, on the B2B, we have the mobile section and we have business solution and fixed section. Though both are growing, so the mobile is mainly postpaid, mobile and mobile Internet, and the business solution is all the connectivity, hosting and other business services. So on both those streams, we see a significant growth in Zain KSA.

Okay. Great. Also one more question. Actually, when it comes to the associate and JVs, you have KWD 1.9 million profit related to that. Is this mainly related to [ EnWe ] or is there anything else?

Yes. This is mainly related to the performance of [ EnWe ], and it also includes our ownership in IHS Kuwait as well.

We now move on to our next question from Madhvendra Singh of HSBC.

I would say quite a good performance given the consensus by the group. And so my first question is on Sudan and Iraq. Given the big FX depreciation in these markets, you talked about the price increases we have taken in this market. Can you please discuss about what kind of price increases have you been able to implement? Have there been enough to offset the currency depreciation in these markets? My second question is related to the FX depreciation again, given such high level of depreciation, especially in Sudan, maybe even in Iraq, have you been able to do any revaluation of the assets as well, dollar assets mainly or hard assets like in the tower and all, can they be revalued? Has there been any revaluation gains you have booked in the earnings? And thirdly, on the cash upstreaming from the major markets, can you please discuss which markets you are able to take cash out from and which markets you have been able to take any cash out? Or is there any changes likely to happen in the situation?

Thank you for your questions. Regarding the price increases in Iraq and in Sudan, We mentioned before that because of the devaluation, we immediately lost on a monthly basis approximately $14 million in revenues. We put initiatives in place to cover that approximately $12 million to $13 million. We were able to cover approximately $7 million in terms of revenues. And the reason is because of the market dynamics in Iraq, but the competition was happening with Korek as well as with Asiacell. And lately, we were the only operator in Iraq to launch CPE in the market, because it was not allowed as -- mobile operators were not allowed to issue any CPE but we prove to them that this is not a fixed; it is the mobile service. So hopefully, things will be better in Iraq in that front. But take into consideration also the pressure in the economy and what's happening in Iraq. And this is, as I mentioned in the script, it's putting a lot of pressure on the disposable income of the customers. For us, we believe that Iraq will be under pressure Q4 as well as 2022. But this will be compensated by the performance of Sudan. For example, because Sudan will have major devaluation happen, but the position of Zain Sudan in the market as well as the market and the license conditions allows us to put and increase prices faster and more significantly. And this is what happened, and the last increase happened in October, 1st of October 2021. We increased voices this year by like 300% voice services. Data services will increase by 250%. I don't see any issue in Sudan. Even if things on the devaluation continues like this, we will be able to increase prices. But of course, up to a certain limit, as the economy allows us. On the asset revaluation, we -- for Iraq, it is not considered a hyperinflationary economy. So an asset that we have are still on the historical basis and will continue to be depreciated accordingly. But when you translate to dollars, you will have a lower depreciation expense because of the devaluation of the currency. The same thing applies to Sudan. And Sudan, we are not applying high inflationary accounting. And there is a qualification by the auditors on this, because when we have our views on this as we -- country gets in and out of the hyperinflation in the past, and this happened in 2015. And this will lead to confusion with the reader and the shareholders. So the management decided that it's still not clear for us on the hyperinflation. We are still looking at it, monitoring it. We remind you something in the coming years if the company is like this, but we have not revalued the assets. But the depreciation will be lesser than last year because of the devaluation in the currency. And on the third one, I forgot your question, yes, cash of the -- cash repatriation. We don't have issues on all of our operations to repatriate cash, except in Sudan. This is the only operation that is difficult to repatriate cash. I hope I answered your question. Thank you.

[Operator Instructions] And it appears we have no questions over the audio. I'd like to turn the conference back for any additional or closing remarks.

Okay. Thank you, John. Thank you, Goldman Sachs for supporting us for this conference. Please refer to our Investor Relations site for additional updates and feel free to contact the IR team at ir.zain.com for further information. We look forward for your future participation in our full year 2021 update. Thank you for joining the call. Stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.