CFA

Institute

CFA Institute Research Challenge

Hosted by:

Local Challenge (CFA Society Bahrain, Manama, Kingdom of

Bahrain)

Team University of Bahrain

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Highlights

___________________________________________________________________

Movement toward data services - Market trends have revealed a strong consumer preference movement toward data usage as opposed to calls or SMS services. Telecommunications Regulatory Agency (TRA) reports have indicated 90% of subscribers opting for Internet services and a 65% decrease in the data service prices available locally over the last two years. As clients move toward cheaper data services, heavy investment in infrastructure setup is expected, this will have positive impact on overall revenues of Zain Bahrain in the coming year, but eventually revenues generated from data services are anticipated to compensate infrastructure expenses.

Brand name Zain is a leading innovator of mobile telecoms across the Middle East and Africa region in 2014.Zain Group has been awarded the “Best Brand” in Dubai during the annual Telecoms World Conference. Brand name of Zain Bahrain deemed to be as a main strength of the company.

Zain Group - Zain Bahrain are associated with Zain Group and profit from

their capability in the telecommunication industry, moreover Zain group subject Zain Bahrain to equipment and technology which is considered state-of-the-art, additionally the financial relationship arose from the association help to cope with opportunities.

Corporate Social responsibility - Zain Bahrain puts society in the core of its

organization goals. Its generous contribution to the society is noticeable across the Kingdom of Bahrain, where Zain E-learning Centre in University of Bahrain, providing the technological e-learning services to undergraduate students at University of Bahrain is a good example of CSR of Zain Bahrain.

Market Profile

Industry Sector, Telecommunication Industry

Date 2015-02-10

Ticker ZAINBH

Price Range (52 weeks) BD 0.204 – BD 0.190

Floating rate 28.79%

Shares outstanding 368,000,000

Market Capitalization (BD) 72,864,000

P/E ratio 15.23

Upside potential 26.3%

Earnings Per Share 0.013

Financial Highlights

2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E

BD'000

Revenues 77,021 73,533 78,081 71,804 67,795 66,502 66,293 66,448 66,654

EBITDA 28,673 27,259 29,715 25,912 25,197 25,017 25,084 25,183 25,281

Net Income 13,047 6,409 5,403 4,142 8,795 7,791 13,925 13,467 12,980

BD Per Share

EPS 0.408 0.200 0.169 0.013 0.024 0.021 0.038 0.037 0.035

DPS 0.547 0.347 0.199 0.017 0.005 0.013 0.012 0.021 0.028

EBITDA margin (%) 37.23 37.07 38.06 36.09 37.17 37.62 37.84 37.90 37.93

Source: Bahrain Bourse and UOB Student’s estimate

Recommendation

BUY Current Price BHD 0.198 Target Price BHD 0.205 (US$ 0.66)

Ticker ZainBH

Source: Company data and Student’s Estimates

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Business Description

Zain Bahrain was established as a closed joint stock in the Kingdom of Bahrain on the 19th of April 2003, and was known by the name MTC Vodafone until September 2007 when they decided to rebrand the company name to "Zain", which they found to be more acceptable and appealing to the operating region. Zain Bahrain offers a range of products and services such as Post-paid, Prepaid, Broadband, International roaming and Mobile applications. Due to the tough competition in the industry, Zain struggles to maintain their customer base and thus continues to offer lower priced packaged while increasing product features.

Telecommunication industry in the Kingdom of Bahrain is obliged to follow the TRA which is responsible for regulating and granting licenses. Zain Bahrain is one of the largest telecommunication providers present in Bahrain with 35% market share, the second largest after Batelco. Zain Bahrain is a subsidiary of Zain Group and benefit from their experience in the industry. Furthermore, Zain Group exposes Zain Bahrain to the latest equipment and technology, in addition to the mutual financial relationship which they agreed upon to assist them in capitalizing on arising opportunities. Although the relationship with Zain Group provides the aforementioned benefits, it limits Zain Bahrain’s potential for expansion outside the Kingdom, given the presence of Zain Group subsidiaries elsewhere, also Zain Group holds majority of the Company’s shares, even post the IPO, which could negatively impact the subsidiary in light to benefit to the mother company.

Main source of revenue for Zain Bahrain is mobile revenues, from both post and pre-paid voice and data packages. 78.1% of total 2013 revenues were generated from the former, while 4.3% was generated from interconnection and 9% from fixed wireless services. Zain Bahrain sustained steady growth in past years and managed to increase their earnings from Mobile and Fixed Wireless services.

The industry has shown rapid growth over the last few years, in response to the changing market trends Zain has been changing strategies in order to cope with this change in the best possible means.

Company Fundamental Strategies

Customer Experience is an essential element of Zain Bahrain’s marketing strategy. Serving clients out of 22 stores in Bahrain that operate as one stop shops while continuously boosting their brand name and advertising schemes in order to maintain their customer experience. Operational Effectiveness the company continues to enhance their current network as well as obtaining the latest technologies, in order to remain competitive in a highly dynamic market Business Growth constantly exploring new business opportunities in order to enhance the financial performance of the company and deliver alternate and additional income streams. Zain focuses on innovation, data pick up and contiguous services to achieve this. People Development a strategy wherein they focus on improving employees’ ability to deal with upcoming circumstances and stimulate maintainable growth to address the society.

Source: Company data

EMPLOYEES DISTRIBUTION BY NATIONALITY

Source: Company data

Source: Company data

EMPLOYEES HEADCOUNT

CHANGES IN THE OWNERSHIP STRUCTURE

PIRIOR IPO

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Shareholders

The IPO offered the public with 15% of the outstanding shares which are freely traded in Bahrain bourse under the ticker “ZAINBH”. Mobile Telecommunications Company K.S.C is the largest owner with 63% of shares pre-IPO and despite the decline in ownership; they still retain control with 54.78% shareholding following the IPO, Zain Shaikh Ahmed Bin Ali Al Khalifa who is another large shareholder, owning 16% of shares.

Corporate Governance

In compliance with the laws and regulations of Bahrain, audit, nomination and remuneration committees were established by the company in order to complete regulatory requirements while going public. Secondly the CBB and the Ministry of Industry and Commerce (MoIC) jointly issued the “Corporate Governance Code”, adding to that the “Commercial Companies Law” which are obligatory standards that the company has to comply with in order to remain in adherence with the Regulator’s laws.

Corporate Management

The Chairman of Board of Directors is Shaikh Ahmed Bin Ali Al Khalifa and he is the second major shareholder of Zain Bahrain. Since May 2008 the assigned General Manager Mr. Mohammed Zainalabedin who was a part of the team that established the Company.

Industry Overview and Competitive Positioning

Macro Overview

Bahrain is an oil dependent for its Country budget. Nevertheless, the country is openly diversifying its economy with its highly developed communication and transport facilities, as well as its well-known financial and insurance institutions and tourism industry as they are considered to be critical elements in the economic diversification of Bahrain. In 2013, the percentage of oil contribution to the GDP was 26% and non-oil contribution to the GDP reached to 73.9%, including the telecommunication industry that had a steady growth rate, as the average percentage of the telecommunication industry’s contribution to GDP, in years 2556 through 2513, remained stable and it’s estimated to remain at the same level or fall slightly in 2014.

Major economic problems of Bahrain would be unemployment; mainly amongst the youth, and, unsettled domestic politics, weakening the government financing and intensifying the need to diversify the path of the state’s budget. The global reduction in oil prices during 2014 and Q1 2015 has put additional pressure on the Government’s budget. Oil prices are expected to be 80$ to 85$ a barrel in 2015 and this is expected to lower GDP growth rate of Bahrain. The lower growth rate in Bahrain’s GDP is expected to contribute to slower market movement, and an adverse impact on the industry as a whole. Bahrain is also facing a very high debt-to-GDP ratio of around 50% in 2014 and estimated to reach 60% by 2016.

GROWTH IN NUMBERS OF MOBILE SUBSCRIPTIONS

Source: TRA

Source: TRA

GROWTH IN TELECOM SECTOR REVENUE

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Industry Overview

Bahrain telecommunication market is deemed to be a highly competitive market; saturated in nature according to the latest market indicators report by the country’s Telecommunications Regulatory Authority (TRA). Market constitutes mainly of major companies namely Zain Bahrain, Batelco and VIVA which are deemed to be the main players in the telecommunications market. Mobile and broadband subscribers are the main contributors to the marked recent developments in the mobile services market. As per the TRA report, the total number of mobile subscribers as of Q1 2014 was 2.21 million subscribers. On the other hand the total population was recorded at 1.1 (check) and this indicates a penetration rate of 183%. Currently it is clear that consumers are highly attracted towards texting via applications such as WhatsApp rather than SMS or MMS and to Internet calling through Viber, Skype and Tango instead replaced the need of voice call and this trend is expected to grow further in the upcoming years. The initiative of VoIP is expected to trigger further price pressure within telecommunications industry. The telecommunication industry is characterized by its high barriers to entry due to its capital-intensive nature and high fixed costs investments required.

Major competitors of Zain Bahrain

1. Batelco The first telecommunications company which has been historically dominating the telecommunications services in Bahrain. Majority of their shares are owned by Government and Semi-Government entities, this is reflected by 78% ownership.

2. VIVA VIVA has strongly increased its presence since it entered the market during 2010, with its strategy to attract as many customers as possible through the offer of “free three months of calls” and up to 95% discount on international calls. The Saudi Telecommunications Company (STC) subsidiary has been presenting unique challenges with tight strategies attracting a lot of subscribers. Its entrance to the market intensified competition further, making it even harder when the two-player market was rapidly transformed into a highly competitive three-player market.

Competitive Analysis

Power of Rivalry: The telecommunication industry deemed to be a competitive

and statured industry and the main competitors of Zain Bahrain are Batelco and

Viva.

Power of Supplier: Companies in telecom sector have low ability and less

control regarding products and services differentiation.

Power of New entrants: There are high entry barriers in the telecom industry

because it’s Capital-intensive and high fixed costs for most of the services.

Power of buyers: Is considered to be moderate as consumers preferences are

now highly attracted to VOIP.

Power of substitute: It is quite moderate, as customers will have similar

ranges of substitute in the telecom industry and can easily shift, as all competing

companies offer the same products and services with quite similar quality and

prices.

Source: UOB students estimate

SPIDER DIAGRAM OF PORTER'S FIVE FORCES MODEL

Source: TRA

MOBILE BROADBAND SUBSCRIPTIONS

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Weaknesses and Strengths

The main strength of Zain Bahrain is that it’s a very well-known brand name in Bahrain and across the Middle East, their young and colorful advertisements; social contributions to the society such as the (Zain Learning Centre in University of Bahrain) and other Social Corporate Responsibility activities allowed them grab a lot of customers’ attention, particularly the younger generation. They have advanced network infrastructure, and their partnership with many global and regional brands made them stronger, such as Apple, Blackberry, Android and etc.

Zain Bahrain on the opposite side has to deal with some weakness points, such as the regional political, social or economic instability. Also, the heavy regulations from the TRA pose an additional weakness point to them and their competitors, making the industry more regulated than others. Moreover, the prepaid customers represent the majority customers for Zain Bahrain, which can put them in risk, if customers transferred to another company especially given the strong price-based competition witnessed by the market.

Opportunities and Threats

Zain Bahrain is planning to use the net proceeds from their offering to expand its current 4G network nationwide offer transmission speed of up to 100 Mbps and 150 Mbps, as well as upgrading its network infrastructure. The main threat Zain Bahrain is facing is the interconnection risk with their direct local competitors and international ones. However, many external factors can affect Zain Bahrain negatively, such as any future technological changes, new regulations from the government, and fluctuations in the securities market which can affect their financial position on the long run.

Financial Analysis

Growth: The revenues from the telecom industry in Bahrain are anticipated to temporarily decline due to strong competition in the market and OTT messaging volume is expected to be twice as high as peer-to-peer SMS volume according to GTB (Global Telecom Business), but at the same time market is trend to move toward data usage that would compensate the further declines in ARPUs in future. Mobile revenues as a result are expected to decline by 8% in 2015 while it will not continue decreasing at the rate of 8% but on average it is expected to decrease by 2.33% till 2019, while interconnection are expected to decrease by 10% in 2015 and then remain stable in future. Fixed line revenues are expected to increase by 9% for 2015 but it will not increase by similar percentage going forward, 8% increase is expected in 2016 while in 2017 to 2019 on average of 4.6%. Temporarily declines in revenues are expected for few years but then it will increase or remain steady in future because of competitive tariffs offered by Zain Bahrain Company that caused an increase in subscriber of Fixed Wireless. Also, other revenues that constitute of broadband services and trading revenues, the former are expected to increase while the latter will temporarily decline, which indicates on average overall decrease in other revenues by circa 1.6%.

Margins: Gross profit margin from the past three years were increasing (2012 78%, 2013 79%, 2014 80%) that shows the operating expenses not much eating the company bottom lines and as compared to other telecommunication companies like Batelco, Zain Bahrain happened to show similar Gross profit margins. We expect a steady growth in the profit margin of Zain Bahrain in the coming future that will remain steady or increase. To take a deeper look on Zain Bahrain profitability the EBITDA margin is considered, which in 2012 was 37% and it reached its highest point of 38% in 2013 while fell to 36% in 2014. For 2015 and onward, EBITDA margin is

Source: Company data +UOB students estimate

Source: Company data +UOB students estimate

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estimated to either remain steady or Increase slightly, accordingly with the decrease in operating expensive

The ultimate goal of any business is to increase its net profit margins where Zain Bahrain will continue an increasing net profit margin according to our anticipation but at the same time the company competitive offering will make the net profit margin to grow in future where Zain Bahrain’s net profit margin declined in 2011, due to higher cost of higher quality services. During 2012 revenues declined because other revenues decreased by 52.9% due to a change in the company’s accounting policy for recognizing revenue from sales of equipment subsequently. However, this decrease in margins was expected to be temporary since it was because of change in accounting policy and investment in higher quality and more expensive tools to provide higher quality services like 4G LTE, WiMAX etc. Therefore we expect that net profit margin will increase or remain steady in future because higher quality services will help in retaining customers, which also can raise profit margins in the long run.

Incomes: The telecommunication sector is now characterized by high regulations that weaken the power of new entrants and high entry barriers in the telecom industry because it’s Capital-intensive and has high fixed costs for most of the services so the existing company including Zain Bahrain gaining a market share of 35% will enjoy the industry incomes and at the same time Zain Bahrain has been taking various initiatives to maintain its market shares through many means.

Cash Flow: Zain Bahrain is showing positive and increasing inflow from operating activities each year till 2013 by the same way in our anticipation the company will continue the maintain its cash flows in future. Investing activities show the maintenance of future health of the company where it records purchase of long-term investment which is positive on the long-term. The cash flow from financing activities were negative in the first two years and then it increased to be positive from 2013 to 2014, but the future performance based on our forecast show negative since we expect that Zain Bahrain will pay dividends in addition to paying off its outside financing as mentioned in their Prospectus

Balance sheet: The notable issue about the balance sheet of Zain Bahrain is it has three terms loan amounts of BD10.5 million, BD13 million and BD7.5 million with different commercial banks, the company carrying a variable interest rate of 3-months BIBOR per annum that indicates an average rate. As mostly preferred current ratio is at least 1, so current liability can be covered by current asset, while the company has only current assets to pay of 70% of current liability in 2014, which is a bit risky in terms of Company liquidity but in our anticipation the company will cover this in soon future

Valuation

Valuation methods and assumptions for Zain Bahrain

In order to a recommend positive or negative business investment, the stock valuation of Zain Bahrain was calculated by using the forecasted financial statements. Mainly three approaches were used: discounted cash flow (DCF), dividend-discount model (DDM) and the sector comparable model. The result of the analysis revealed that investors must buy at 0.250 Bahrain Fils. The assumptions used in the valuation are based on the premise that economic growth, interest rate, stability bandwagon effect and related market will facilitate the growth rate of Zain Bahrain. Covenant benchmark states that net debt to EBITDA ratio should not exceed 2.5x, Zain Bahrain

Assumptions

Risk free rate (rf) 6.13%

Risk premium 5.97%

Zain beta 0.5

Growth(g) 1%

Cost of debt 2.95%

Cost of equity 9.12%

Weight of equity 63%

Weight of debt 37%

WACC 6.84%

Marginal tax rate 0%

Source: Company data +UOB students estimate

Source: Company data +UOB students estimate

0%

4%

8%

12%

16%

20%

24%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Net profit margin

Total Revenues

Net profit Margin

Source: UOB student’s estimates and TRA

Source: Company data +UOB students estimate

Source: Company data +UOB students estimate

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records a ratio 0.74x as of 31 Dec 2014. Consequently, Zain Bahrain is capable to endure additional debt.

Risk free rate = 6.13% based on Bahrain bonds maturing in 2044. Beta of 0.5 was assigned for the systematic risk of Zain Bahrain (Appendix A). Growth rate is 1%. The dividend will be growing at this rate beyond year 2019. Equity risk premium is 5.97% based on return Bahrain all share index over the past

three years (2011-2014) (Appendix A). Cost of debt 2.95%: as the loans carry interest rate of three months BIBOR plus

2.25% Weight of Equity 63% and Weight of Debt 37%: ensuring that the debt-to-equity ratio

does not exceed 1: 0.75, as per company guidelines Marginal tax rate of 0%: no tax rate implied on corporations in Bahrain

Dividend discounted model (DDM): Target stock price = BHD 0.226

In the DDM, changeable dividends share were assumed for the coming years until 2019. From year 2020 onwards, it was assumed that dividends will grow at a terminal growth rate of 1% each year. Using a cost of equity of 9.12%, expected dividends were discounted to yield a target price of BHD 0.226 (Appendix D).

Discounted Cash Flow Model (DCF): Target stock price = BHD 0.287 In the DCF, Projected cash flows were discounted to the present value by using a weighted average cost of capital (WACC) of 6.84%.Using a terminal growth rate of 1% and a capitalization rate of 5.8%. This resulted in a share price of BHD 0.287 (Appendix D).

Sector Comparable valuation: Range of stock price = BHD 0.140- BHD

0.416

Similar telecom companies listed in Bahrain and other Gulf countries (GCC) were used as comparables. The companies are Zain Saudi Arabia, Mobily Saudi Arabia, Batelco Bahrain, DU United Arab Emirates and Ooreedo Kuwait. They were selected based on industry, region and line of business. As a result, the share ratios for price- earnings (P/E), price-book value (P/B) and price-sales (P/S) were estimated. This implied a share price in the range of BHD 5.140- BHD 0.416 which is in line with our fundamental analysis (Appendix D).

Investment Risks

Investors willing to invest in Zain-Bahrain must have to bear the systematic risk present in the Bahraini market. The market risk in Bahrain includes factors relating Bahrain’s politics, society and its economy, dependence on the Bahraini market solely, and government interference.

Company Risks

Relationship with parent company

Zain Group and Zain-Bahrain have a management contract, for a fee of 3% of annual gross revenues. Both parties have the right to dismiss this contract given that conditions are met.

Models Price DDM 0.226 DCF 0.287

TARGET PRICE/SHARE 0.250

Source: UOB student’s estimates

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Research and development cost

The company plans to continue investment. The resulting new products may not be suitably adapted to the Bahraini market. Furthermore, management may wrongly forecast the research and development costs. Failure to deal with both these risks can result in reduction of profit and additional capital expenditure.

Clientele abandons

The payment of post-paying clients is handed after the services are performed, and since some clients may fail to pay. Customers using prepaid Zain Bahrain lines can easily switch to other network provider, especially after the TRA has made it possible for consumers to switch providers without changing phone numbers. Zain-Bahrain has to make sure these customers are highly satisfied by presenting competitive packages; otherwise this will lead to downfall in operational efficiency.

Rapidly changing technological environment

Telecommunication technology is a rapidly changing. Zain-Bahrain therefore faces the risk of obsolescence of products and services as well as facing the task of introducing the advances in telecommunication technology to customers in a timely and cost sensitive manner.

Over-the-top operators

Traditional Telecommunication products like text messaging and voice calling are continuously being replaced by Internet services such as voice over Internet protocol (VoIP) and emails. Zain-Bahrain has to adapt its pricing and other marketing strategies to deal with these changes in consumer behavior. There is no guarantee that would be able to reduce costs in order to compete against over-the-top operators.

Dependence on third party distribution channels

Zain Bahrain uses third party distribution channels, where it uses local retailers and other partners to reach final consumers. The adherence of these third parties to the timely, cost effective and efficient distribution of products cannot be guaranteed.

Litigation and Regulation Risks

Telecommunication regulatory agency

The TRA can impose constraints on dominant service providers to regulate the market. If the TRA imposes new regulations or changes present ones, Zain-Bahrain's operations and financial Position may be harmed.

Economic Risks

Oil Crisis

The state budget depends heavily on oil revenues, considering Bahrain to have a high fiscal break-even oil price ($130/bbl estimated for 2014) compared to the countries of the gulf region the recent fall of oils price has led to deficit in the government budget, and this might harm Zain-Bahrain operations given the expected general slowdown in the economy as a whole.

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Risks of the Public Offering of Shares

Conflict of interest between parent company and investors

After the IPO, Zain Group will remain the majority holder of shares with ownership of 54.78% of outstanding shares. Zain Group will be having the right to nominate 5 directors to the Board of directors. The other investors will also have the same rights that are to nominate 1 director per their 10% Stake. The agenda of Zain Group may differ to the interests of the other shareholders, making room for conflicts.

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Appendices

Appendix A

SWOT Analysis Internal Strengths Weaknesses

-Strong, well-known brand name. -Advanced network infrastructure. -Strategic partnership with global and regional brands. -Social responsibility.

-Dependence on prepaid costumers. -Changing in over the top internet based telecommunication services

External Opportunities Threats -Upgrade its network infrastructure. -Expand the current 4G LTE.

-Increased local competition -Changes in regulatory. -Future technological changes. -Fluctuations in the securities market

Equity Risk Premium 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% 12.10%

Risk Free Rate 6.133% 0.1

Risk Premium 5.97% 5.97%

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

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Appendix B

Statement of Comprehensive Income

STATEMENT OF COMPREHENSIVE INCOME 2013A 2014A 2015E 2016E 2017E 2018E 2019E

BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Zain Revenues

Mobile 60,974 54,877 50,486 48,467 47,498 47,023 46,552

Interconnection 3,331 2,898 2,608 2,791 3,070 3,377 3,714

Fixed Wireless 6,993 7,692 8,385 9,055 9,599 9,983 10,382

Others 6,782 6,511 6,315 6,189 6,127 6,066 6,005

Total revenues 78,081 71,804 67,795 66,502 66,293 66,448 66,654

Cost of revenue -16,304 -14306 -14237 -13965 -13922 -13954 -13997

Gross profit 61,777 57,498 53,558 52,537 52,372 52,494 52,657

Gross profit Margin 0.79 0.80 0.79 0.79 0.79 0.79 0.79

Distribution,marketing and operating expenses -24,597 -21016 -20,616 -20,551 -20,599 -20,663 -21,016

General and administrative expenses -6,225 -5,152 -5,054 -5,038 -5,050 -5,066 -5,152

Depreciation and amortization -24,320 -16,432 -17,249 -11,174 -11,727 -12,308 -16,432

Provision for doubtful debts -1,513 -1,219 -1,113 -1,069 -1,071 -1,074 -1,219

Provision for inventories -120 -281 -168 -216 -264 -312 -281

Operating profit 5,002 9,457 8,337 14,324 13,783 13,234 9,457

Interest income 8 30 23 15 10 7 30

Other income 610 140 154 169 186 205 140

other Expenses - -513 -503 -501 -502 -504 -513

Gain on currency revaluation 104 156 153 152 153 153 156

Finance costs -321 -475 -373 -234 -163 -115 -475

Profit for the year 5,403 8,795 7,791 13,925 13,467 12,980 8,795

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Statement of Financial Position

STATEMENT OF FINANCIAL POSITION 2013A 2014A 2015E 2016E 2017E 2018E 2019E

BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

ASSETS Current assets

Cash and bank balances 3,156 2,974 15,109 28,184 35,773 39,011 34,449

Accounts and other receivables 20,644 20,934 19,660 17,956 17,236 17,276 17,330

Inventories 2,971 2,128 1,424 1,397 1,392 1,395 1,400

Total current assets 26,771 26,036 36,193 47,536 54,401 57,683 53,179

Non-current assets

Property, plant and equipment 61,367 69,806 60,799 53,195 55,266 58,781 66,938

Intangible assets 19,166 15,940 14,551 11,801 9,105 7,118 5,817

Total non-current assets 80,533 85,746 75,350 64,996 64,372 65,898 72,755

Total assets 107,304 111,782 111,544 112,532 118,773 123,581 125,933

LIABILITIES AND EQUITY

Liabilities

Current liabilities

Bank overdraft - - 1,120 1,420 478 14 573

Accounts payable and accruals 29,166 25,669 23,031 23,781 23,707 23,762 23,836

Current portion of term loans 3,286 6,961 6,511 6,511 1,949 2,205 1,946

Deferred revenue 4,769 4,529 4,746 4,655 4,641 4,651 4,666

Finance lease obligations - - - - - - -

Total current liabilities 37,221 37,159 35,408 36,367 30,774 30,632 31,020

Non-current liabilities

Non-current portion of term loans 16,714 14,971 8,460 4,706 5,514 3,309 1,363

Provision for employees’ end of

service benefits 330 323 208 258 252 253 253

Total non-current liabilities 17,044 15,294 8,668 4,964 5,766 3,562 1,616

Total liabilities 54,265 52,453 44,075 41,331 36,540 34,194 32,637

Equity

Share capital 32,000 36,800 36,800 36,800 36,800 36,800 36,800

Share premium 100 3,032 3,032 3,032 3,032 3,032 3,032

Statutory reserve 9,453 9,867 10,747 11,526 12,918 14,265 15,563

Retained earnings 11,486 9,934 16,889 19,843 29,483 35,291 37,902

Total equity 53,039 59,329 67,468 71,201 82,233 89,388 93,297

Total liabilities and equity 107,304 111,782 111,543 112,532 118,773 123,581 125,933

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Statement of Cash Flows

STATEMENT OF CASH FLOWS 2013A 2014A 2015E 2016E 2017E 2018E 2019E

BD

‘000

BD

‘000

BD

‘000

BD

‘000

BD

‘000

BD

‘000

BD

‘000

Cash flows from operating activities:

Profit for the year 5,403 4,142 8,795 7,791 13,925 13,467 12,980

Adjustments for:

Depreciation and amortization 24,320 21,799 16,432 17,249 11,174 11,727 12,308

Gain on disposal of property,

plant and equipment - - - - -

Insurance claim -470 - - - -

Provision for doubtful debts and slow moving

inventories 1,633 1,724 1,063 1,043 1,040 1,042 1,046

Finance costs 321 785 475 373 234 163 115

Interest income -8 -29.0 -30 -23 -15 -10 -7

Provision for employees’ end of service benefits 62 61 37 46 45 45 46

(Gain )Loss on property, plant and equipment

written off 65 -40 - - - -

Operating profit before working capital changes 31,326 28,442 26,773 26,479 26,403 26,434 26,487

(Increase) / decrease in accounts and other

receivables -1,757 -1,781 -1,578 -1,705 -719 40 54

(Increase) / decrease in inventories -1,496 610 -704 -27 -4 3 4

(Decrease / increase in accounts payable and

accruals 5,420 -3,184 -2,638 750 -75 55 74

Increase / (decrease) / in deferred revenue 20 -240 217 -90 -15 11 14

Cash generated from operating activities 33,513 23,847 22,070 25,407 25,590 26,544 26,633

Payment of employees’ end of service benefits -5 -68 -208 -258 -252 -253 -253

Net cash from operating activities 33,508 23,779 21,862 25,149 25,338 26,291 26,380

Cash flow from investing activities:

Purchase of property, plant and equipment -18,875 -16,919 -7,442 -9,644

-

13,245

-

15,241

-

20,465

Interest received 8 29 30 23 15 10 7

Increase in intangible assets -17,321 -10,056 0 0 0 0 0

proceed from sale of PPE - 3 - - - -

Net cash used in investing activities -36,188 -26,943 -7,412 -9,621

-

13,230

-

15,231

-

20,458

Cash flows from financing activities:

Net proceed from Issue of share - 7,732

Interest paid -291 -702 -475 -373 -234 -163 -115

Dividend paid -6,368 -5,676 -1,840 -4,837 -4,285 -7,659

-

10,369

Term loans 20,000 1,932 2,757 0

Repayment of capital element of finance lease

Net cash (used in) / from financing activities 13,341 2,982 -2,315 -2,453 -4,519 -7,822 10,484

Net (decrease) / increase in cash and cash

equivalents 10,661 -182 12,135 13,075 7,589 3,238 -4,562

Cash and cash equivalents at beginning of the year -7,505 3,156 2,974 15,109 28,184 35,773 39,011

Cash and cash equivalents at end of the year 3,156 2,974 15,109 28,184 35,773 39,011 34,449

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UNIVERSITY OF BAHRAIN

STUDENT RESEARCH

Appendix C

Ratio Analysis

RATIO ANALYSIS 2013A 2014A 2015E 2016E 2017E 2018E 2019E

Efficiency Ratios:

Total Assets Turnover 0.73 0.64 0.61 0.59 0.56 0.54 0.53

Fixed Assets Turnover 1.01x 0.82x 0.88x 0.99x 0.95x 0.89x 0.79x

Days Accounts Receivables 96.50 106.41 105.85 98.55 94.90 94.90 94.90

Days Accounts Payable 564.00 553.77 138.26 163.18 156.57 147.55 129.97

Accounts Receivables Turnover 3.78 3.43 3.45 3.70 3.85 3.85 3.85

Profitability Ratios:

Return on Assets 5% 4% 8% 7% 12% 11% 10%

Return on Equity 10% 7% 13% 11% 17% 15% 14%

Net Profit Margin 7% 6% 13% 12% 21% 20% 19%

Net Debt/EBITDA 57% 73% 4% -62% -111% -133% -121%

Gross Profit Margin 79% 80% 79% 79% 79% 79% 79%

EBITDA Margin 38% 36% 37% 38% 38% 38% 38%

Liquidity Ratios:

Current Ratio 0.719 0.701 1.02 1.31 1.77 1.88 1.71

Cash Ratio 0.085 0.080 0.43 0.77 1.16 1.27 1.11

Solvency Ratios:

Total Liabilities/Equity Ratio 102% 88% 65% 58% 44% 38% 35%

Long-term Debt to Total assets 16% 13% 8% 4% 5% 3% 1%

Interest Coverage Ratio 102 37 53.08 -67.11 -107.08 -154.43 -220.76

Per Share Data:

EPS (BD) 0.169 0.013 0.02 0.02 0.04 0.04 0.04

DPS (BD) 0.199 0.017 0.01 0.01 0.01 0.02 0.03

Book Value Per Share (BD) 1.66 0.16 0.18 0.19 0.22 0.24 0.25

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UNIVERSITY OF BAHRAIN

STUDENT RESEARCH

Appendix D

Discounted Cash Flow Model (DCF)

Discounted Cash Flow Model (DCF)

2015E 2016E 2017E 2018E 2019E

EBITDA 25,197 25,017 25,084 25,183 25,281

Add: depreciation 16,432 17,249 11,174 11,727 12,308

less: Net Capital expenditure -7442 -9644 -13245 -15241 -20465

Less: Increase in Working capital 11605 10383 12458 3424 -4892

FCFF 22,582.50 22,237.78 10,554.13 18,244.87 22,016.43

1 2 3 4 5

PV discounting factor 0.9360 0.8761 0.8200 0.7676 0.7184

discounted cash flows 21,137 19,483 8,655 14,004 15,817

NPV of FCF 79,096

WACC 0.0684

terminal growth 0.01

Capitalization rate 0.058

enterprise value 89,318

less: total debt 12637

Cash 28184

equity value 104,864.61

# shares 364960

price per share 0.287

16 | P a g e

UNIVERSITY OF BAHRAIN

STUDENT RESEARCH

Dividend Discount Model (DDM) Dividend Discount Model (DDM)

2011 2012 2013 2014 2015

E

2016

E

2017

E

2018

E

2019

E

2020 onwards ( grow at 1% )

Div/share 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

0.095

Equals: Terminal value 0.305

PV of terminal value 0.177

TARGET PRICE/SHARE 0.226

Sector Comparable Model Comparables P/E P/B P/S

Zain Saudi Arabia N/A 1.3 1.1

Batelco Bahrain 11.7 1.1 1.5

Mobily Saudi Arabia 125.7 1.4 1.7

DU UAE 11.2 3.0 1.9

Ooredoo Kuwait 17.3 1.0 1.1

Low 11.2 1.0 1.1

Median 11.7 1.2 1.5

High 17.3 1.4 1.9

** Yellow shaded indicates excluded due to being an outlier

Shares Net Income Book Value Sales

Zain Bahrain 2014 Total (BD 000s) 332,000 4,142 59,329 71,804

Per Share (BD) 0.012 0.179 0.216

Share Price based on Comparables

Low 0.140 0.184 0.229

Median 0.146 0.210 0.321

High 0.216 0.249 0.416

Range 0.140 - 0.416