• Earnings miss on higher-than-expected net finance costs Earnings came in at KWD9.1mn, missing our estimate by 13%, despite revenue and EBITDA margin both being in line with our estimates. The earnings miss was mostly due to high net financing costs, which we suspect could have been driven by an increase in interest rates or refinancing of loans at higher interest rates. Nevertheless, we reiterate our Buy rating on the stock as it is trading at attractive yields and multiples with a 2016e EV/EBITDA of 3.5x versus 5.6x for our MENA telecoms coverage.
• Kuwaiti operation weaker than expected The Kuwaiti unit lost some momentum in 2Q16 following six quarters of quarterly revenue growth; revenue was flat at KWD50mn (+6.9% Y-o-Y, +0.4% Q-o-Q). The EBITDA margin was disappointing at a low 22.1% vs. our estimate of 28.7%; we had expected it to start focusing on cost efficiency in conjunction with a more rational competitive behaviour. We are slightly concerned about the Kuwaiti operation’s ability to expand margins back to normal levels as we believe it will maintain aggressive marketing and pricing policies to attract high-value customers that were lost during its network modernisation. We also believe the visibility for a return to normal margin and profit levels is low. The unit recorded a loss of KWD0.3mn in 2Q, which may have been caused by a non-operating item.
• Algeria still tough; Tunisia picks up despite macro challenges The Algerian operation continues to be impacted by strong competition and a depreciating DZD. The unit has been adopting an aggressive strategy in pricing its 3G data services and was the first operator to launch the 4G service. This will likely add pressure on margins in 3Q16. Tunisia managed to grow its revenue by 6% Q-o-Q despite a depreciating TND and a challenging macroeconomic environment; this revenue jump led to a spike in the EBITDA margin to 39.5% versus our estimate of 32.2%, but we are sceptical about the sustainability of these high margins.

Omar Maher
Karim Riad