Presented by:

Heba Al Wazzan

Maryam Al Rayes

Mohammad Obaid Siddiqui

CFA IRC PRESENTATION BY BIBF

INVESTMENT SUMMARY

• From our valuations we derive that the targeted share price of Zain Bahrain BSC is BD .241

• This is higher than the current price of BD .185.

• Therefore, we propose a buy recommendation.

• 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.

VALUATION OVERVIEW

For our valuation, we took the weighted average of the results 2 models; the discounted free cash flow model and a multiples 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• We forecasted the Statement of Profit and other Comprehensive Income as well as the

Statement of change in financial position for five years; from 2015-2019.

• The stock value derived from this model is BD .255.

• 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 .

• We assumed a terminal value of 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.

MULTIPLES 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.

BUSINESS DESCRIPTION

HISTORY • 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.

HISTORY (CONTINUATION)• Zain Bahrain B.S.C was established on 19 th 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

HISTORY (CONTINUATION)• .n 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.

VISION• 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• Advanced network infrastructure: the company owns state-of-the-art advanced network

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

• 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.

COMPETITIVE STRENGTH (CONTINUATION)• 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.

• An 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.

CORPORATE GOVERNANCE AND BOARD OF DIRECTORS• 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.

CORPORATE GOVERNANCE AND BOARD OF DIRECTORS (CONTINUATION) • Appointment of directors and their responsibilities:

• the board consists of 6 non executive directors whom are required to meet no less than 4 times in a single financial year.

• The board is renewable every 3 years however the ministry of industry and commerce can extend the membership to no more than 6 months.

CORPORATE GOVERNANCE AND BOARD OF DIRECTORS (CONTINUATION)

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.

SHAREHOLDING STRUCTUREInterest holder Designation Nationality Pre offer Post offer

Number of shares

Percent of ownership

Number of shares

Percent of ownership

Mobile telecommunication company KSC

Shareholder Kuwaiti 20,160,000 63.00% 201,600,000 54.78%

Shaikh Ahmed Bin Ali Al Khalifa

Shareholder, director and chairman

Bahraini 5,926,000 18.52% 59,260,000 16.10%

Shaikh Rashid Abdulrahman Al Khalifa

Shareholder and director

Bahraini 120,000 0.38% 1,200,000 0.33%

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

INDUSTRY OVERVIEW

PORTER’S FIVE FORCES

PORTER’S FIVE FORCES Competitor’s Rivalry Analysis

Fixed line (moderate): Customers usually stick to the first fixed line they get, so there’s low risk in shifting to another telecommunication providers.

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.

Internet (high risk): Internet providers are even more than mobile providers, which make the competition even more intense.

PORTER’S FIVE FORCES (CONTINUATION) Buyer power (very high)

• 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.

PORTER’S FIVE FORCES (CONTINUATION) 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 31 st 2013.

The ARPU of Zain Bahrain was 7.54BD at the end of Q3 2014.

• Source: TRA

RISK ANALYSIS

OVERVIEW• 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 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.

GENERAL RISK (CONTINUATION)• 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).

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 RISK• 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 return.

FINANCIAL ANALYSIS

RATIO ANALYSIS• Analyzing the financial ratios has given us an understanding to the performance of Zain

Bahrain on the basis of historic trends.

• 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.

• We looked at the periods from 2009-2014 and prepared forecasts for 2015-2019

2009 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019FGP Mar-gin

77.38 77.007 71.296 77.84 79.19 80.076 80.6454607914137

81.1985537349027

81.7357259097489

82.2575760891522

82.764497373042

OP Mar-gin

29.7282188010665

24.0622398235863

15.8021838199971

8.71173486733847

6.40616795379158

7.31157038605092

9.71263041454117

12.0490385075725

14.3226272769062

16.5351008000737

18.6881643506283

NP Mar-gin

30.0131160230498

24.6079071128012

16.9395359707093

8.71581466824419

6.91973719598878

5.76848086457579

8.27255942764828

10.5519042705192

12.7685401633813

14.9246300995403

17.0223146299977

ROTA

29.0575071558678

23.2093210806681

14.5946127343505

6.96532011780944

4.66152240363826

4.69664167755095

6.30549456226912

7.89512808839962

9.49451715035369

11.0830255043659

12.6587159625107

ROE 43.683106966264

34.5093089302619

22.1785914631037

11.8606114442224

9.43079620656498

8.84896087916533

11.6328456369442

14.1674068352964

16.3446368017134

18.1389625570317

19.5560719383386

25.000

75.000

125.000

175.000

225.000 Profitability RatiosPe

rcen

tage

s

GP 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 including in the forecasted periods.

• The reason cited for this growth in recent years can be due to Zain’s effort to improve its customer service experience; by investing in retail shops, employing good customer care teams that can effectively provide technical support and retail experience.

OP 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.

• The OP margin does rise in our forecasted periods; from 2018 onwards.

NP 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%.

• We forecasted a continuous growth in the NP margin

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.

• From our forecasted period, ie 2015 onwards, we see a rise in the ROTA.

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.

• The ROE began to increase from the start of our forecasted periods.

2009 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019FDebt 33.481134530

314932.744752647

55234.195042283

771141.273515698

868650.571274137

031246.924370650

015245.795527541

697944.272888300

293841.887089185

029238.898834985

754135.269735091

5058Debt to Eq-uity

50.3332916066846

48.6872830545914

51.9642341101875

70.2809238285587

102.311506627199

88.4103895228303

84.4869974106022

79.4455270545249

72.1078543088181

63.6635286132653

54.487159577505

10.000

30.000

50.000

70.000

90.000

110.000

130.000

150.000

170.000

Capital Gearing RatiosPe

rcen

tage

%

DEBT RATIO• The overall changes in the debt ratio has been inconsistent; rising and falling

continuously during the historical period.

• They are on the rise from 2012-2014; possible reason being the investment to improve their customer service outlets in an attempt to improve their customer experience

• The ratio starts to decrease from the start of the forecasted period.

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.

• The ratios begin to improve from 2018, during the forecast period.

TIMES INTEREST EARNED

Times Interest Earned2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 201952.174 362.492 Nil 30.798 15.583 6.688 5.487 6.498 7.373 8.125 8.765

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.

• The figures even in the forecasted yeas remain above the minimum.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Cur-rent Ratio

1.49598909286915

1.30232786242072

0.971508841513799

0.617732866539359

0.719244512506381

0.700664711106327

0.751954368363423

0.740208925122724

0.72401342147698

0.711415653624679

0.702194137247989

Quick(acid test) ratio

1.41967088366784

1.2165042830053

0.885539580234672

0.575429662635264

0.639423981085946

0.643397292715089

0.689939706710352

0.678929560719797

0.663162483925787

0.650798150202878

0.641626540988098

0.250

0.750

1.250

1.750

2.250

2.750

3.250

Solvency RatiosR

atio

s

SOLVENCY RATIO ANALYSIS• 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 and remains so in the forecasted period

END OF PRESENTATION