CFA Investment Research Challenge University of Bahrain Introduction
CFA Investment Research Challenge University of Bahrain
Introduction Shareholder structure 16. 1% Market Profile 0. 33% Date as of: 20 -02 -2015 Zain Group Listed on Bahrain Bourse (Ticker) ZAINBH Price range since listing BD 0. 204 – BD 0. 190 Floating rate 28. 79% Shares outstanding 368 M Market Capitalization (BD) P/E ratio 72. 8 M Earnings Per Share (BD) 0. 013 Recommendation Business Description Floating shares 28. 79% 54. 78% Shaikh Ahmed Shaikh Rashid Uses of Raised Funds (IPO) Uses of Raised Funds (IPO 15 x Industry Analysis 1)Upgrading infrastructure. 2)Expanding 4 G LTE. 3)Adopting nation wide fiber-optic. 4)Corporate uses. Risk Analysis Financial Analysis Valuation
Recommendation Movement toward data BUY Strong Brand name Zain Group Corporate social responsibility Upside Potential by 26. 3% Recommendation Target Price Current Price Business Description BD 0. 250 BD 0. 198 Industry Analysis Risk Analysis Financial Analysis Valuation
Business Description Products and Services • • Postpaid Prepaid Broadband Enterprise Services TRA Market Share 35% Recommendation Business Description Industry Analysis Risk Analysis Financial Analysis Valuation
Company Milestones Establishment 2003 Achieved it first positive net profit 2005 Business Description 2007 First nationwide Wi. MAX network is launched First 3 G network in the region Recommendation Introduced new network from Ericsson Industry Analysis Financial Analysis 2014 Listed on Bahrain Bourse Valuation Risk Analysis
Industry Analysis Contribution to GDP Macro Overview about Bahrain Main economic problems: • High debt to GDP ratio of around 50% in 2014. • The global reduction in Oil prices in 2014 and Q 1 of 2015. • Unsettled domestic politics. • Unemployment, mainly among the youth. Contribution to the GDP: Although Kingdom Bahrain is oil dependent for its Country budget, the country is openly diversifying its economy. • Non- Oil 74% , including 4% to the telecom industry. • Oil 26%. Recommendation Business Description 70% Non-Oil Industry Analysis Oil 4% 26% 0% 20% 40% 60% 80% Telecom sector Source: CIO Telecom sector revenues (in BD million) 600 400 2007 2008 2009 2010 2011 2012 2013 E Source: TRA Risk Analysis Financial Analysis Valuation
Key Industry Characteristics Power of Rivalry: Competitive and saturated industry. ( Batelco and Viva) Power of Supplier: Companies have Low product and service differentiation. Power of New Entrant: High entry barriers, capital-intensive and high fixed costs. Power of Substitute: Same products and services with quite similar quality and prices. • Power of Buyer: Moderate, consumers preferences are highly changing toward VOIP. • • Power of Subsitute Power of Supplier 5 4 3. 5 3 2. 5 2 1. 5 1 0. 5 0 Power of Rivarly 2010 Strong entrant since 2010 Recommendation Government backed Business Description Power of New Entrant Industry Analysis Risk Analysis Financial Analysis Power of Buyer Valuation
SWOT Analysis Strengths Weaknesses • Well known brand name. • Social Responsibility activities. • Regional Partnerships • State of the art technology • Dependence on prepaid customers. • Regulations from TRA and any future changes. Opportunities Threats • Expand mobile networks in The Middle East. • Expand the current 4 G LTE. • Expand the infrastructure Recommendation Business Description • Increased local competition. • Future technological changes. Industry Analysis Risk Analysis Financial Analysis Valuation
Telecommunication Industry ARPU 40 35 35 32. 2 28. 4 BD per month 30 26. 8 25 Prepaid subscribers 21. 9 20 All subscribers 15 12 10 7. 5 Postpaid subscribers 10. 8 9. 9 6. 5 5. 8 6. 3 5 8. 4 5. 2 9. 8 7. 5 4. 6 0 2008 2009 2010 2011 2012 2013 Source: TRA Recommendation Business Description Industry Analysis Risk Analysis Financial Analysis Valuation
Growth in Data Subscribers and Revenues Growth of retail services revenues 2009 -2013 50% 45% 40% Telecom Subscribers 35% 30% 25% Mobile 2013 2012 Fixed Line 20% 15% 10% 2011 5% 2010 0% Mobile 2009 2008 2007 Internet 0 500000 1000000 1500000 2000000 Fixed Line 2010 2011 2012 Internet 2013 Source: TRA 2500000 Source: TRA Recommendation Business Description Industry Analysis Risk Analysis Financial Analysis Valuation
Risk Analysis Medium 2) Litigation and Regulations 4) Public Offering Technological Environment TRA Distribution Channels Research & Development Conflict of Interest Parent Company Low Recommendation (OTT) Operators Client Abundance Economic Performance Low Impact High Categories: 1) Company Operational 3) Economic Business Description Medium Probability Industry Analysis High Risk Analysis Financial Analysis Valuation
Financial analysis Net Profit Margin Revenues Growth 90, 000 80, 000 70, 000 60, 000 50, 000 40, 000 30, 000 20, 000 10, 000 0 25% 90, 000 80, 000 20% 70, 000 60, 000 15% 50, 000 40, 000 10% 30, 000 20, 000 5% 10, 000 2012 A 2013 A 2014 A 2015 E 2016 E 2017 E 2018 E 2019 E Mobile Interconnection Fixed Wireless Others 0% 0 2012 A 2013 A 2014 A 2015 E 2016 E 2017 E 2018 E 2019 E Total Revenues Recommendation Business Description Industry Analysis Risk Analysis Net profit margin Financial Analysis Valuation
EBITDA margin Vs Total Revenues Healthy Cash Flows 50% 10% 5% 2012 A 2013 A 2014 A 2015 E 2016 E 2017 E 2018 E 2019 E Total Revenues Recommendation Business Description 10000 EBIDA margin Industry Analysis Total Debt Risk Analysis 16 E 20 17 E 20 18 E 20 19 E 15% 20000 20 20% 30000 15 E 25% 40000 20 30% 50000 4 A 35% 60000 20 1 40% 45, 000 40, 000 35, 000 30, 000 25, 000 20, 000 15, 000 10, 000 5, 000 0 -5, 000 -10, 000 3 A 45% 20 1 78, 000 73, 000 68, 000 63, 000 58, 000 53, 000 48, 000 43, 000 38, 000 33, 000 28, 000 23, 000 18, 000 13, 000 8, 000 3, 000 cash flows Financial Analysis Valuation 0
Spending 60, 000 50, 000 40, 000 30, 000 20, 000 10, 000 0 2013 A 2014 A 2015 E capex Recommendation Business Description Industry Analysis 2016 E 2017 E 2018 E 2019 E Opex Risk Analysis Financial Analysis Valuation
Strong Equity Position 140, 000 120, 000 100, 000 80, 000 60, 000 40, 000 20, 000 0 2013 A 2014 A Total Assets 2015 E 2016 E 2017 E Total Equity 2018 E 2019 E 0. 6 0. 55 0. 45 0. 4 0. 35 0. 3 0. 25 0. 2 0. 15 0. 1 0. 05 0 leverage Dividends Dividend per share and payout ratio 1. 8 1. 3 0. 8 0. 3 -0. 2 Recommendation Business Description 2012 A 2013 A 2014 A 2015 E 2016 E 2017 E 2018 E 2019 E DPS 0. 347 0. 199 0. 017 0. 005 0. 006 0. 005 0. 007 Industry Div Payout ratio Risk 173% 118% 44% Financial 55% 55% Valuation 77% 76% Analysis
Valuation Approaches used Dividend Discount Model Recommendation Business Description Sector Comparable Model Industry Analysis Risk Analysis Discounted Cash Flow Model Financial Analysis Valuation
Risk Free Rate Cost of equity 6. 13% 9. 12% Assumptions Zain Beta 0. 5 Cost of Debt Risk Premium 5. 97% Recommendation Business Description Growth(g) 1% Industry Analysis 2. 95% Weight of Equity 63% Weight of Debt 37% WACC 6. 84% Marginal Tax Rate Risk Analysis 0% Financial Analysis Valuation
BD 0. 226 Dividend Discount Model (DDM) Target Price BD 0. 250 BD 0. 287 Recommendation Business Description Industry Analysis Discounted Cash Flow Model (DCF) Risk Analysis Financial Analysis Valuation
Sector Comparable Model BD 0. 140 Recommendation BD 0. 226 DDM price Business Description BD 0. 287 DCF price Industry Analysis Risk Analysis BD 0. 416 Financial Analysis Valuation
Target price BD 0. 250 Current market price BD 0. 198 Recommendation Business Description Undervalued Industry Analysis Risk Analysis IPO price BD 0. 190 Financial Analysis Valuation
Conclusion Strong Brand Name BUY Movement toward data Zain Group Corporate Social Responsibility
Thank you for your Attention
Appendices
Beta Calculation Beta of Comparable Companies Levered Beta Debt/Equity Unlevered Beta Zain Saudi Arabia 1. 1 206% 0. 4 Batelco Bahrain 0. 8 30% 0. 6 Mobily Saudi Arabia 1. 0 87% 0. 5 DU UAE 0. 7 57% 0. 5 Ooredoo Kuwait 0. 5 16% 0. 4 Median 0. 5 Beta Zain Bahrain ZAINBH BI Equity 0. 6 37% 0. 5
Equity Risk Premium Year Return Dividend Yield Total Return Value of 100 2011 (20. 1%) 100. 00 2012 (6. 8%) 4. 6% (2. 2%) 97. 79 2013 17. 2% 3. 9% 21. 1% 118. 38 2014 14. 2% 4. 8% 19. 0% 140. 88 Geometric Average Return 12. 10% Risk Free Rate 6. 133% 0. 1 Risk Premium 5. 97%
Discounted Cash Flow Model (DCF) EBITDA Add: depreciation less: Net Capital expenditure Less: Increase in Working capital FCFF PV discounting factor discounted cash flows NPV of FCF WACC terminal growth Capitalization rate enterprise value less: total debt Cash Discounted Cash Flow Model (DCF) 2015 E 2016 E 2017 E 25, 197 25, 017 25, 084 16, 432 17, 249 11, 174 -7442 -9644 -13245 11605 10383 12458 22, 582. 50 22, 237. 78 10, 554. 13 1 2 3 0. 9360 0. 8761 0. 8200 21, 137 19, 483 8, 655 2018 E 25, 183 11, 727 -15241 3424 18, 244. 87 4 0. 7676 14, 004 equity value # shares price per share 2019 E 25, 281 12, 308 -20465 -4892 22, 016. 43 5 0. 7184 15, 817 79, 096 0. 0684 0. 01 0. 058 89, 318 12637 28184 104, 864. 61 364960 0. 287
Dividend Discount Model (DDM) Div/share 2011 2012 2013 2014 2015 E 2016 E 2017 E 2018 E 2019 E 2020 onwards ( grow at 1% ) 0. 547 0. 347 0. 199 0. 017 0. 005 0. 013 0. 012 0. 021 0. 028 PVDF 0. 897 0. 804 0. 721 0. 647 0. 580 PV(Div/share) 0. 005 0. 011 0. 008 0. 014 0. 016 D (1+g) 0. 029 Divided by: Capitalization rate Equals: Terminal value 0. 095 0. 305 PV of terminal value 0. 177 TARGET PRICE/SHARE 0. 226
Sector Comparable Model Comparables P/E Zain Saudi Arabia N/A Batelco Bahrain 11. 7 Mobily Saudi Arabia 125. 7 DU UAE 11. 2 Ooredoo Kuwait 17. 3 Low 11. 2 Median 11. 7 High 17. 3 ** Yellow shaded indicates excluded due to being an outlier Zain Bahrain 2014 Low Median High Range 0. 140 P/B Shares Net Income Total (BD 000 s) 332, 000 4, 142 Per Share (BD) 0. 012 Share Price based on Comparables 0. 140 0. 146 0. 216 0. 416 P/S 1. 3 1. 1 1. 4 3. 0 1. 2 1. 4 1. 1 1. 5 1. 7 1. 9 1. 1 1. 5 1. 9 Book Value 59, 329 0. 179 Sales 71, 804 0. 216 0. 184 0. 210 0. 249 0. 229 0. 321 0. 416
Statement of Comprehensive Income STATEMENT OF COMPREHENSIVE INCOME Zain Revenues Mobile Interconnection Fixed Wireless Others Total revenues Cost of revenue Gross profit Margin Distribution, marketing and operating expenses General and administrative expenses Depreciation and amortization Provision for doubtful debts Provision for inventories Operating profit Interest income Other income other Expenses Gain on currency revaluation Finance costs Profit for the year 2013 A BD ‘ 000 60, 974 3, 331 6, 993 6, 782 78, 081 -16, 304 61, 777 0. 79 -24, 597 -6, 225 -24, 320 -1, 513 -120 5, 002 8 610 104 -321 5, 403 2014 A BD ‘ 000 54, 877 2, 898 7, 692 6, 511 71, 804 -14306 57, 498 0. 80 -21016 -5, 152 -16, 432 -1, 219 -281 9, 457 30 140 -513 156 -475 8, 795 2015 E BD ‘ 000 50, 486 2, 608 8, 385 6, 315 67, 795 -14237 53, 558 0. 79 -20, 616 -5, 054 -17, 249 -1, 113 -168 8, 337 23 154 -503 153 -373 7, 791 2016 E BD ‘ 000 48, 467 2, 791 9, 055 6, 189 66, 502 -13965 52, 537 0. 79 -20, 551 -5, 038 -11, 174 -1, 069 -216 14, 324 15 169 -501 152 -234 13, 925 2017 E BD ‘ 000 47, 498 3, 070 9, 599 6, 127 66, 293 -13922 52, 372 0. 79 -20, 599 -5, 050 -11, 727 -1, 071 -264 13, 783 10 186 -502 153 -163 13, 467 2018 E BD ‘ 000 47, 023 3, 377 9, 983 6, 066 66, 448 -13954 52, 494 0. 79 -20, 663 -5, 066 -12, 308 -1, 074 -312 13, 234 7 205 -504 153 -115 12, 980 2019 E BD ‘ 000 46, 552 3, 714 10, 382 6, 005 66, 654 -13997 52, 657 0. 79 -21, 016 -5, 152 -16, 432 -1, 219 -281 9, 457 30 140 -513 156 -475 8, 795
Statement of Financial Position STATEMENT OF FINANCIAL POSITION ASSETS Current assets Cash and bank balances Accounts and other receivables Inventories Total current assets Non-current assets Property, plant and equipment Intangible assets Total non-current assets Total assets LIABILITIES AND EQUITY Liabilities Current liabilities Bank overdraft Accounts payable and accruals Current portion of term loans Deferred revenue Finance lease obligations Total current liabilities Non-current portion of term loans Provision for employees’ end of service benefits Total non-current liabilities Total liabilities Equity Share capital Share premium Statutory reserve Retained earnings Total equity 2013 A BD ‘ 000 2014 A BD ‘ 000 2015 E BD ‘ 000 2016 E BD ‘ 000 2017 E BD ‘ 000 2018 E BD ‘ 000 2019 E BD ‘ 000 3, 156 20, 644 2, 971 26, 771 61, 367 19, 166 80, 533 107, 304 29, 166 3, 286 4, 769 - 37, 221 16, 714 2, 974 20, 934 2, 128 26, 036 69, 806 15, 940 85, 746 111, 782 25, 669 6, 961 4, 529 - 37, 159 14, 971 15, 109 19, 660 1, 424 36, 193 60, 799 14, 551 75, 350 111, 544 1, 120 23, 031 6, 511 4, 746 - 35, 408 8, 460 28, 184 17, 956 1, 397 47, 536 53, 195 11, 801 64, 996 112, 532 1, 420 23, 781 6, 511 4, 655 - 36, 367 4, 706 35, 773 17, 236 1, 392 54, 401 55, 266 9, 105 64, 372 118, 773 478 23, 707 1, 949 4, 641 - 30, 774 5, 514 39, 011 17, 276 1, 395 57, 683 58, 781 7, 118 65, 898 123, 581 14 23, 762 2, 205 4, 651 - 30, 632 3, 309 34, 449 17, 330 1, 400 53, 179 66, 938 5, 817 72, 755 125, 933 573 23, 836 1, 946 4, 666 31, 020 1, 363 330 17, 044 54, 265 32, 000 100 9, 453 11, 486 53, 039 323 15, 294 52, 453 36, 800 3, 032 9, 867 9, 934 59, 329 208 8, 668 44, 075 36, 800 3, 032 10, 747 16, 889 67, 468 258 4, 964 41, 331 36, 800 3, 032 11, 526 19, 843 71, 201 252 5, 766 36, 540 36, 800 3, 032 12, 918 29, 483 82, 233 253 3, 562 34, 194 36, 800 3, 032 14, 265 35, 291 89, 388 253 1, 616 32, 637 36, 800 3, 032 15, 563 37, 902 93, 297
Statement of Cash Flows STATEMENT OF CASH FLOWS Cash flows from operating activities: Profit for the year Adjustments for: Depreciation and amortization Gain on disposal of property, plant and equipment Insurance claim 2013 A BD ‘ 000 5, 403 24, 320 - -470 2014 A BD ‘ 000 4, 142 21, 799 - 2015 E BD ‘ 000 8, 795 16, 432 - 2016 E BD ‘ 000 7, 791 17, 249 - 2017 E BD ‘ 000 13, 925 11, 174 - 2018 E BD ‘ 000 13, 467 11, 727 2019 E BD ‘ 000 12, 980 12, 308 Provision for doubtful debts and slow moving inventories Finance costs Interest income Provision for employees’ end of service benefits (Gain )Loss on property, plant and equipment written off Operating profit before working capital changes (Increase) / decrease in accounts and other receivables (Increase) / decrease in inventories (Decrease / increase in accounts payable and accruals Increase / (decrease) / in deferred revenue Cash generated from operating activities Payment of employees’ end of service benefits Net cash from operating activities Cash flow from investing activities: Purchase of property, plant and equipment Interest received Increase in intangible assets proceed from sale of PPE Net cash used in investing activities Cash flows from financing activities: Net proceed from Issue of share Interest paid Dividend paid Term loans Repayment of capital element of finance lease Net cash (used in) / from financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at beginning of the year 1, 633 321 -8 62 65 31, 326 -1, 757 -1, 496 5, 420 20 33, 513 -5 33, 508 -18, 875 8 -17, 321 - -36, 188 -291 -6, 368 20, 000 13, 341 10, 661 -7, 505 1, 724 785 -29. 0 61 -40 28, 442 -1, 781 610 -3, 184 -240 23, 847 -68 23, 779 -16, 919 29 -10, 056 3 -26, 943 7, 732 -702 -5, 676 1, 932 2, 982 -182 3, 156 1, 063 475 -30 37 26, 773 -1, 578 -704 -2, 638 217 22, 070 -208 21, 862 -7, 442 30 0 -7, 412 -475 -1, 840 -2, 315 12, 135 2, 974 1, 043 373 -23 46 26, 479 -1, 705 -27 750 -90 25, 407 -258 25, 149 -9, 644 23 0 -9, 621 -373 -4, 837 2, 757 -2, 453 13, 075 15, 109 1, 040 234 -15 45 26, 403 -719 -4 -75 -15 25, 590 -252 25, 338 -13, 245 15 0 - -13, 230 -234 -4, 285 0 -4, 519 7, 589 28, 184 1, 042 163 -10 45 26, 434 40 3 55 11 26, 544 -253 26, 291 -15, 241 10 0 -15, 231 -163 -7, 659 -7, 822 3, 238 35, 773 1, 046 115 -7 46 26, 487 54 4 74 14 26, 633 -253 26, 380 -20, 465 7 0 -20, 458 -115 -10, 369 10, 484 -4, 562 39, 011
Ratio Analysis RATIO ANALYSIS Efficiency Ratios: Total Assets Turnover Fixed Assets Turnover Days Accounts Receivables Days Accounts Payable Accounts Receivables Turnover Profitability Ratios: Return on Assets Return on Equity Net Profit Margin Net Debt/EBITDA Gross Profit Margin EBITDA Margin Liquidity Ratios: Current Ratio Cash Ratio Solvency Ratios: Total Liabilities/Equity Ratio Long-term Debt to Total assets Interest Coverage Ratio Per Share Data: EPS (BD) DPS (BD) Book Value Per Share (BD) 2013 A 0. 73 1. 01 x 96. 50 564. 00 3. 78 5% 10% 7% 57% 79% 38% 0. 719 0. 085 102% 16% 102 0. 169 0. 199 1. 66 2014 A 0. 64 0. 82 x 106. 41 553. 77 3. 43 4% 7% 6% 73% 80% 36% 0. 701 0. 080 88% 13% 37 0. 013 0. 017 0. 16 2015 E 0. 61 0. 88 x 105. 85 138. 26 3. 45 8% 13% 4% 79% 37% 1. 02 0. 43 65% 8% 53. 08 0. 02 0. 01 0. 18 2016 E 0. 59 0. 99 x 98. 55 163. 18 3. 70 7% 11% 12% -62% 79% 38% 1. 31 0. 77 58% 4% -67. 11 0. 02 0. 01 0. 19 2017 E 0. 56 0. 95 x 94. 90 156. 57 3. 85 12% 17% 21% -111% 79% 38% 1. 77 1. 16 44% 5% -107. 08 0. 04 0. 01 0. 22 2018 E 0. 54 0. 89 x 94. 90 147. 55 3. 85 11% 15% 20% -133% 79% 38% 1. 88 1. 27 38% 3% -154. 43 0. 04 0. 02 0. 24 2019 E 0. 53 0. 79 x 94. 90 129. 97 3. 85 10% 14% 19% -121% 79% 38% 1. 71 1. 11 35% 1% -220. 76 0. 04 0. 03 0. 25
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