• Dividend cut a negative surprise, but is still an attractive yield The main negative surprise was the 25% Y-o-Y cut to the 2015 dividend to 30 fils versus last year’s 40 fils, which missed our conservative dividend estimate of 35 fils. This implies a 75% pay-out ratio, down from 80% in 2014, and is subject to regulatory and shareholders’ approval. While the dividend cut might be taken negatively by investors, we believe Zain still offers an attractive yield of 8.3% which is the highest across our MENA Telecoms coverage universe. Moreover, we expect dividends could increase in 2016, assuming a recovery in earnings. We reiterate our Buy rating on the stock as it trades at an undemanding valuation - 2016e P/E of 8.2x versus 10x for MENA Telecoms. Even if we assume zero earnings growth for 2016e, the stock would remain at a discount to MENA telecoms.
• Two key challenges: Iraq’s VAT and competition in Kuwait Zain continues to face challenging markets, particularly in Kuwait, where price-based competition remains intense, and in Iraq, where social unrest continues to affect telecom spending. The new VAT of 20% in Iraq took full effect in 4Q and negatively affected the whole economy, making it difficult for Zain to pass on half of the VAT to subscribers as planned. This is despite the ongoing improvement in the pricing environment for telecoms. Revenue in Kuwait fell 5% Y-o-Y and Q-o-Q, broadly in line with our estimate, while revenue in Iraq fell 15% Y-o-Y and 9% Q-o-Q, also in line with our expectation.
• Bottom-line under pressure from taxes and investment losses Earnings stood at KWD36 million, only a marginal 4% below our estimate, despite revenue being in line with our estimate and a better-than-expected EBITDA margin. This was due to higher-than-expected taxation (Sudan, Jordan, others) and unexpected losses on AFS investments. A strengthening USD resulted in FX losses, affecting 4Q2015 revenue negatively by USD41 million, EBITDA by USD18 million and earnings by USD5 million.

Omar Maher
Karim Riad