• Earnings miss on high operating expenses and D&A charges Zain KSA reported a loss of SAR291 million for 4Q2015, 39% above our forecast of SAR209 million. The miss was due to: i) higher than expected operating costs, namely distribution and marketing (potentially due to newly launched plans and promotions following the MTR cuts); and ii) higher-than-anticipated depreciation and amortisation (D&A) charges. It is still making a loss at an operating level and we have frequently flagged that bottom line profitability is essential to curb the ongoing erosion in shareholders’ equity, which would, in turn, help it break this vicious cycle and enhance its balance sheet profile. We are reviewing our forecasts and valuation on the stock but we reiterate our Neutral rating for now.
• Top-line slows Q-o-Q on seasonality; GPM expands on MTR cuts Top-line fell 5% Q-o-Q due to seasonality as the pilgrimage season was in 3Q2015. However, we believe annual growth (+7% Y-o-Y) was fuelled by mobile data revenue, supported by 76% Y-o-Y growth in the number of internet subscribers. We have flagged that Zain KSA and Mobily are the main beneficiaries of the MTR cuts, as they saw sequential and annual GPM expansions since the new rates were imposed. GPM was 63% versus our estimate of 60%. However, we note that this did not filter down to the EBITDA level due to rising operating expenses and D&A charges.
• Lawsuit with Mobily still ongoing The arbitration with Mobily regarding a SAR2.2 billion claim due to the services agreement entered by both companies in 2008 is still ongoing and its effect is not yet visible. The company filed an appeal against the Department of Zakat and Income Tax (DZIT) as the latter had claimed cSAR620 million, of which SAR352 million is related to Zakat differences from 2009 to 2011 and SAR267 million is related to withholding tax and a penalty delay.

Omar Maher
Karim Riad