• Stronger-than-expected margins drive earnings beat 2Q16 earnings came in at KWD45mn, beating our estimate by 24%, despite revenue coming in exactly in line with our estimate and a KWD6.6mn FX loss. The EBITDA margin was 48.1% (+3.9pp vs. EFGe), the highest since 4Q10, driven by cost optimisation across most of the group’s core units and better monetisation of mobile data (now 23% of total group revenues). We have no visibility on the sustainability of these high margins. Overall, we believe this is a good set of numbers and is likely to act as a positive short-term catalyst for the stock. We continue to be buyers of the stock as it is trading at attractive multiples, with a FY16e P/E of 7.1x, implying a 40% discount to our MENA telecoms coverage.
• It is all about the dividend, and 1H16 earnings are encouraging While strong 2Q16 earnings may provide some ground for positive stock performance in the short to medium term, we continue to see dividends as the key driver for the stock. The strong 1H16 earnings momentum, if carried into 2H16, could lead Zain to increase dividends from the 30 fils paid in 2015. We expect a 2016 DPS of 35 fils and thus the stock offers an attractive 2016e dividend yield of 10.6%, one of the highest amongst our MENA telecoms coverage.
• Kuwait, Iraq and Bahrain still under pressure, but Sudan and Jordan outperform Revenue totalled KWD275mn, down 3% Y-o-Y and almost unchanged Q-o-Q. The annual decline in revenue was a result of: i) a 10% Y-o-Y decline in Zain Iraq’s top-line, due to the continued social unrest in the country in addition to the implementation of VAT in 3Q15; and ii) a 9% Y-o-Y decline in revenue from Bahrain, we calculate. Moreover, Kuwait’s top-line was stable Y-o-Y but fell 3% Q-o-Q, as price-based competition intensified. The Sudanese and the Jordanian units, both saw their revenues grow by 8% Y-o-Y and 7% Y-o-Y respectively, driven by strong data revenue growth.

Omar Maher
Karim Riad