Revenue – KWD259mn, +5% Y-o-Y, -1% Q-o-Q, +0% vs. EFGe
EBITDA margin – 32.4%, -12.4pp Y-o-Y, -3.8pp Q-o-Q, -7.1pp vs. EFGe
Net Income – KWD41mn, +7% Y-o-Y, +10% Q-o-Q, -1% vs. EFGe
 
Zain Group reported 1Q18 net income of KWD41mn, broadly in line with our estimate, and – to a certain extent surprisingly – seemed largely unaffected by the devaluation of the Sudanese currency. While we had not taken into account a considerable hit on the bottom-line from the devaluation of the SDG as we believed it would be difficult to quantify it due to the absence of visibility on exchange rates, we suspected there could be some downside to our earnings estimate this quarter as a result of the devaluation. However, looking at the Sudanese unit’s performance more closely, it appears a considerable part of the currency devaluation impact was offset by strong growth in local currency terms. As a result, revenue from Sudan was down only 22% Y-o-Y in KWD terms, about 15% short of our estimate, while it was up 26% Y-o-Y in SDG terms.
 
Group revenue came in exactly in line with our estimate at KWD259mn despite the SDG devaluation impact, mainly as a result of strong revenue growth in Kuwait that offset the impact of Sudan; Kuwait’s revenue stood at a rather high KWD96mn (+21% Y-o-Y, +18% Q-o-Q), some 19% ahead of our estimate, which we suspect was due to seasonal revenue surge from handset sales, possibly as a result of the implementation of IFRS 15. The latter was likely the reason behind the weakness in Kuwait’s EBITDA margin this quarter (27%) due to the upfront recognition of handset-related charges. Moreover, EBITDA in Sudan and Iraq also came in softer than we expected; hence, group EBITDA missed our estimate by 18% at KWD84mn (-24% Y-o-Y, -11% Q-o-Q), implying a weak margin of 32.4%. However, we believe this was mostly due to the impact of IFRS 15, which led to the upfront recognition of handset costs, while likely reducing amortisation resulting from handset costs that were previously capitalised; this would explain why net income was not impacted by lower margins, but we also suspect there may have been a one-off gain below the operating line. We are unable to determine that at the moment given the absence of financial statements. 
 
Initially, it appears to us that the results are rather acceptable considering the challenges and external factors the group is facing across most of its key operations, namely Kuwait, Sudan, and Iraq. We suspect the recent decline in share price could have been driven by investor concerns in anticipation of 1Q18 results. As such, seeing as the numbers do not appear to be significantly affected, we believe the stock could rebound from the current level, and we reiterate our Buy rating. The most important question – to us – continues to be how sustainable earnings are in 2018 considering the currency weakness in Sudan and ongoing challenges in Kuwait. Hence, we believe it is important to scrutinise the results more closely once the financial statements are availed, in order to determine whether Zain can continue to deliver the same level of quarterly earnings, primarily through stable performance at the operating level. 

Zain Group: KWD0.38 as of 10 May. 2018, Rating: Buy, TP: KWD0.49/share, MCap: USD4,928mn, ZAIN KK/ZAIN.KW