What's down The end of Zain's African adventure may improve the company's bottom line, but its long-term outlook remains mixed.
Zain's outlook mixed beyond big cash deal
The end of Zain's African adventure may improve the company's bottom line, but its long-term outlook remains mixed. Zain expects shortly to receive US$9 billion of cash from the Indian telecommunications operator Bharti Airtel for its African assets. The transaction will also take $1.7bn worth of debt off Zain's balance sheet. Investors have reacted warmly to the deal, sending Zain's stock up about 30 per cent since February 15. Shares of Zain closed yesterday at 1.40 Kuwaiti dinars.
The result will be a leaner and more focused Zain, while Bharti will reap the fruits of Zain's expansion in Africa. With the deal all but assured, Irfan Ellam, a telecoms analyst at Al Mal Capital, does not expect Zain's shares to move much any more. He has adjusted his rating on the company's stock from "outperform" to "market perform". Mr Ellam notes that Zain is more expensive than its peers as the price-to-earnings ratio and the enterprise value-to-Ebitda (earnings before interest, taxes, depreciation, and amortisation) ratio of its shares are at a 65 per cent and 45 per cent premium, respectively, compared with its industry competition.
What's next for Zain? Analysts say the company has a choice: issue a special dividend to investors or increase its investment in new technology to maximise the returns from its existing operations in the Middle East. While either course is viable, investors looking for a growth stock should be wary of Zain. There are not many opportunities for the company to expand its business in the region. New operating licences are scarce and consolidation in the market is unlikely any time soon. Furthermore, competition in the markets where Zain operates is expected to intensify. Revenue from mobile voice services, traditionally a cash cow for telecoms companies, is declining with the emergence of low-cost internet telephone applications such as Skype and slashed phone rates.
Margins are also expected to slip as Zain will have to continue investing in expensive high-speed telecoms hardware to keep up with the pace of the industry. @Email:email@example.com